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EX-32.1 - EXHIBIT 32.1 - Nuverra Environmental Solutions, Inc.nesc_20170331xex321.htm
EX-31.2 - EXHIBIT 31.2 - Nuverra Environmental Solutions, Inc.nesc_20170331xex312.htm
EX-31.1 - EXHIBIT 31.1 - Nuverra Environmental Solutions, Inc.nesc_20170331xex311.htm



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: March 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 001-33816
__________________________________
nesimagea06.jpg
__________________________________
Delaware
26-0287117
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
14624 N. Scottsdale Rd., Suite 300, Scottsdale, Arizona 85254
(602) 903-7802
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
__________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
x
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x
The number of shares outstanding of the registrant’s common stock as of April 30, 2017 was 150,940,973.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 

2


Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q ("Quarterly Report") contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the “Exchange Act.” These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:
the expected timing and benefits of our restructuring under chapter 11 of the United States Bankruptcy Code to improve our long-term capital structure;
our ability to continue operations without interruption throughout the chapter 11 proceeding;
our ability to continue to meet the needs of our employees, customers, and vendors;
our ability to successfully consummate the restructuring transactions;
our limited liquidity to meet debt obligations and operating needs;
future financial performance and growth targets or expectations;
market and industry trends and developments, including the prolonged decline in oil and natural gas prices; and
the potential benefits of our completed and any future merger, acquisition, disposition, restructuring, and financing transactions.
You can identify these and other forward-looking statements by the use of words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “might,” “will,” “should,” “would,” “could,” “potential,” “future,” “continue,” “ongoing,” “forecast,” “project,” “target” or similar expressions, and variations or negatives of these words.
These forward-looking statements are based on information available to us as of the date of this Quarterly Report and our current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. Future performance cannot be ensured, and actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include, among others:
risks and uncertainties associated with the restructuring process, including our inability to obtain confirmation of a plan under chapter 11 of the United States Bankruptcy Code;

failure to successfully consummate the restructuring to improve our liquidity and long-term capital structure, and to address our debt service obligations;

failure to timely satisfy certain conditions and milestones under the restructuring support agreement and the plan or reorganization;

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

difficulties encountered in restructuring our debt in the chapter 11 bankruptcy proceeding, including our ability to obtain approval of the bankruptcy court with respect to motions or other requests made to the bankruptcy court, including maintaining strategic control as debtor-in-possession;

the bankruptcy court's rulings in our chapter 11 cases and the outcome of our chapter 11 cases in general;

risks associated with third-party motions in our chapter 11 cases, which may interfere with our ability to develop and consummate our prepackaged plan of reorganization;

the effects of the restructuring on the Company and the interests of various constituents, including the holders of our common stock and notes;

the length of time that the Company will operate under chapter 11 protection and the availability of financing during the pendency of the proceedings;

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the potential adverse effects of the chapter 11 proceedings on our liquidity, results of operations, and business prospects;

increased advisory costs to execute a reorganization;

risks of successfully consummating the restructuring within the time frames or on the terms contemplated;

the ability to successfully execute our restructuring plan and consummate the bankruptcy proceeding;

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

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

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

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

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

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

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

difficulties in successfully executing our growth initiatives, including difficulties in permitting, financing and constructing pipelines and waste treatment assets and in structuring economically viable agreements with potential customers, joint venture partners, financing sources and other parties;
our ability to attract, motivate and retain key executives and qualified employees in key areas of our business;
fluctuations in prices, transportation costs and demand for commodities such as oil and natural gas;
risks associated with the operation, construction and development of saltwater disposal wells, solids and liquids treatment and transportation assets, landfills and pipelines, including access to additional locations and rights-of-way, environmental remediation obligations, unscheduled delays or inefficiencies and reductions in volume due to micro- and macro-economic factors or the availability of less expensive alternatives;
risks associated with new technologies and the impact on our business;
the effects of competition in the markets in which we operate, including the adverse impact of competitive product announcements or new entrants into our markets and transfers of resources by competitors into our markets;
changes in economic conditions in the markets in which we operate or in the world generally, including as a result of political uncertainty;
reduced demand for our services due to regulatory or other influences related to extraction methods such as hydraulic fracturing, shifts in production among shale areas in which we operate or into shale areas in which we do not currently have operations or the loss of key customers;

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the impact of changes in laws and regulation on waste management and disposal activities, including those impacting the delivery, storage, collection, transportation, treatment and disposal of waste products, as well as the use or reuse of recycled or treated products or byproducts;
control of costs and expenses;
present and possible future claims, litigation or enforcement actions or investigations;
natural disasters, such as hurricanes, earthquakes and floods, or acts of terrorism, or extreme weather conditions, that may impact our business locations, assets, including wells or pipelines, distribution channels, or which otherwise disrupt our or our customers’ operations or the markets we serve;
the threat or occurrence of international armed conflict;
the unknown future impact on our business from legislation and governmental rulemaking, including the Affordable Care Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules to be promulgated thereunder;
risks involving developments in environmental or other governmental laws and regulations in the markets in which we operate and our ability to effectively respond to those developments including laws and regulations relating to oil and natural gas extraction businesses, particularly relating to water usage, and the disposal, transportation and treatment of liquid and solid wastes; and
other risks identified in this Quarterly Report or referenced from time to time in our filings with the United States Securities and Exchange Commission.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.

 

5


PART I—FINANCIAL INFORMATION
Item  1. Financial Statements.

NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
March 31,
 
December 31,
 
2017
 
2016
 
 
 
 
Assets
 
 
 
Cash and cash equivalents
$
191

 
$
994

Restricted cash
1,341

 
1,420

Accounts receivable, net of allowance for doubtful accounts of $2.1 and $1.7 million at March 31, 2017 and December 31, 2016, respectively
23,479

 
23,795

Inventories
4,120

 
2,464

Prepaid expenses and other receivables
5,449

 
3,516

Other current assets
167

 
107

Assets held for sale
1,688

 
1,182

Total current assets
36,435

 
33,478

Property, plant and equipment, net of accumulated depreciation of $160.4 and $148.9 million at March 31, 2017 and December 31, 2016, respectively
279,070

 
294,179

Equity investments
67

 
73

Intangibles, net
13,788

 
14,310

Other assets
440

 
564

Total assets
$
329,800

 
$
342,604

Liabilities and Shareholders' Deficit
 
 
 
Accounts payable
$
6,286

 
$
4,047

Accrued liabilities
22,861

 
18,787

Current portion of long-term debt
483,175

 
465,835

Derivative warrant liability
5,916

 
4,298

Total current liabilities
518,238

 
492,967

Deferred income taxes
495

 
495

Long-term debt
3,618

 
5,956

Long-term contingent consideration
8,500

 
8,500

Other long-term liabilities
3,670

 
3,752

Total liabilities
534,521

 
511,670

Commitments and contingencies

 

Shareholders' deficit:
 
 
 
   Common stock
152

 
152

   Additional paid-in capital
1,408,176

 
1,407,867

   Treasury stock
(19,809
)
 
(19,807
)
   Accumulated deficit
(1,593,240
)
 
(1,557,278
)
Total shareholders' deficit
(204,721
)
 
(169,066
)
Total liabilities and shareholders' deficit
$
329,800

 
$
342,604

The accompanying notes are an integral part of these statements.
 

6


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

 
Three Months Ended
 
March 31,
 
2017
 
2016
Revenue:
 
 
 
Non-rental revenue
$
35,418

 
$
44,026

Rental revenue
3,805

 
2,949

Total revenue
39,223

 
46,975

Costs and expenses:
 
 
 
Direct operating expenses
34,289

 
38,617

General and administrative expenses
12,359

 
7,452

Depreciation and amortization
12,871

 
15,845

Total costs and expenses
59,519

 
61,914

Operating loss
(20,296
)
 
(14,939
)
Interest expense, net
(14,208
)
 
(12,045
)
Other (expense) income, net
(1,458
)
 
158

Loss on extinguishment of debt

 
(390
)
Loss from continuing operations before income taxes
(35,962
)
 
(27,216
)
Income tax expense

 
(55
)
Loss from continuing operations
(35,962
)
 
(27,271
)
Income from discontinued operations, net of income taxes

 
55

Net loss attributable to common shareholders
$
(35,962
)
 
$
(27,216
)
 
 
 
 
Net loss per common share attributable to common shareholders:
 
 
 
Basic and diluted loss from continuing operations
$
(0.24
)
 
$
(0.98
)
Basic and diluted income from discontinued operations

 

Net loss per basic and diluted common share
$
(0.24
)
 
$
(0.98
)
 
 
 
 
Weighted average shares outstanding used in computing net loss per basic and diluted common share
150,934

 
27,907

The accompanying notes are an integral part of these statements.


7


NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(35,962
)
 
$
(27,216
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
   Gain on the sale of TFI

 
(55
)
   Depreciation and amortization of intangible assets
12,871

 
15,845

   Amortization of debt issuance costs, net
1,756

 
1,157

   Accrued interest added to debt principal
6,340

 

   Stock-based compensation
309

 
368

   Loss (gain) on disposal of property, plant and equipment
49

 
(1,057
)
   Bad debt expense
778

 
217

   Change in fair value of derivative warrant liability
1,618

 

   Loss on extinguishment of debt

 
390

   Deferred income taxes

 
25

   Other, net
56

 
(88
)
   Changes in operating assets and liabilities:
 
 
 
      Accounts receivable
(462
)
 
11,114

      Prepaid expenses and other receivables
(433
)
 
(634
)
      Accounts payable and accrued liabilities
5,872

 
4,924

      Other assets and liabilities, net
(78
)
 
(2,425
)
Net cash (used in) provided by operating activities
(7,286
)
 
2,565

Cash flows from investing activities:
 
 
 
   Proceeds from the sale of property, plant and equipment
371

 
1,449

   Purchases of property, plant and equipment
(1,029
)
 
(1,421
)
   Change in restricted cash
79

 
(200
)
Net cash used in investing activities
(579
)
 
(172
)
Cash flows from financing activities:
 
 
 
   Proceeds from revolving credit facility
48,536

 
12,409

   Payments on revolving credit facility
(40,006
)
 
(51,968
)
   Payments for debt issuance costs

 
(426
)
   Payments on vehicle financing and other financing activities
(1,468
)
 
(1,687
)
Net cash provided by (used in) financing activities
7,062

 
(41,672
)
Net decrease in cash and cash equivalents
(803
)
 
(39,279
)
Cash and cash equivalents - beginning of period
994

 
39,309

Cash and cash equivalents - end of period
191

 
30

Less: cash and cash equivalents of discontinued operations - end of period

 

Cash and cash equivalents of continuing operations - end of period
$
191

 
$
30

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
   Cash paid for interest
$
733

 
$
928

   Cash paid for taxes, net
59

 
2


The accompanying notes are an integral part of these statements.
 

8


NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements of Nuverra Environmental Solutions, Inc. and its subsidiaries (collectively, “Nuverra,” the “Company,” “we,” “us,” or “our”) are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). Our condensed consolidated balance sheet as of December 31, 2016, included herein, has been derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (or "GAAP"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on April 14, 2017.
All dollar and share amounts in the footnote tabular presentations are in thousands, except per share amounts and unless otherwise noted. Unless stated otherwise, any reference to statement of operations items in these accompanying condensed consolidated financial statements refers to results from continuing operations.
Risks and Uncertainties
On May 1, 2017, the Company and its subsidiaries (collectively with the Company, the “Nuverra Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to pursue prepackaged plans of reorganization (together, the “Plan”). The Nuverra Parties’ chapter 11 cases are being jointly administered under the caption In re Nuverra Environmental Solutions, Inc., et al. (Case Nos. 17-10949 through 17-10962). No trustee has been appointed, and the Nuverra Parties will continue to operate the businesses as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. We expect to continue our operations without interruption during the pendency of the chapter 11 cases, but there can be no assurances.

The subsidiary Debtors in the chapter 11 Cases are Heckmann Water Resources Corporation, Heckmann Water Resources (CVR) Inc., 1960 Well Services, LLC, HEK Water Solutions, LLC, Appalachian Water Services, LLC, Badlands Power Fuels, LLC (a Delaware limited liability company), Badlands Power Fuels LLC (a North Dakota limited liability company), Landtech Enterprises, L.L.C., Badlands Leasing, LLC, Ideal Oilfield Disposal, LLC, Nuverra Total Solutions, LLC, NES Water Solutions, LLC and Heckmann Woods Cross, LLC.

On May 2, 2017 to assure ordinary course operations, the Bankruptcy Court entered an interim order (the "DIP Order") approving on an interim basis a variety of “first day” motions seeking various relief and authorizing the Nuverra Parties to maintain their operations in the ordinary course. The DIP Order, among other things, authorized the Nuverra Parties to (i) enter into, execute, and deliver the DIP Revolving Facility (as defined below) and the DIP Term Loan Agreement (as defined below), and (ii) borrow, on an interim basis, $2.5 million under the DIP Term Loan Agreement, $10.0 million under the DIP Revolving Facility in the aggregate, and $7.5 million under the DIP Term Loan Agreement in the aggregate (including the $2.5 million initial advance made on May 3, 2017) during the interim period before the Bankruptcy Court considers entry of the DIP Order on a final basis. The Bankruptcy Court set a hearing for May 31, 2017 to consider approval of the DIP Order on a final basis.

In connection with the filing of the chapter 11 cases, on May 3, 2017, following the authorization of the Bankruptcy Court, the Company, as borrower, the lenders party thereto (the “DIP Revolving Facility Lenders”), Wells Fargo Bank, National Association, as administrative agent, and other agents party thereto, closed a Debtor-in-Possession Credit Agreement (the “DIP Revolving Facility”), dated as of April 30, 2017, pursuant to which the DIP Revolving Facility Lenders agreed to provide the Company a secured revolving credit facility up to a maximum amount of $31.5 million to, among other things, refinance obligations under the Company's prepetition asset-based lending facility (the "ABL Facility") and finance the ongoing general corporate needs of the Nuverra Parties during the course of the chapter 11 proceedings. The DIP Revolving Facility is subject to the Bankruptcy Court's approval of the DIP Order on a final basis.

In addition to the DIP Revolving Facility and in connection with the filing of the chapter 11 cases, on May 3, 2017, following the authorization of the Bankruptcy Court, the Company, as borrower, the lenders party thereto (the “DIP Term Loan Agreement Lenders”), and Wilmington Savings Fund Society, FSB, as administrative agent, closed a Debtor-in-Possession Term Loan Credit Agreement (the “DIP Term Loan Agreement”), dated as of April 30, 2017, pursuant to which the DIP Term Loan Lenders agreed to provide the Company with an initial term loan in the amount of $2.5 million and subsequent term loans not to exceed

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$12.5 million in the aggregate to, among other things, finance the ongoing general corporate needs of the Nuverra Parties during the course of the chapter 11 proceedings. The DIP Term Loan Lenders made the initial term loan on May 3, 2017, which the Company is using for general corporate purposes. The DIP Term Loan Agreement is subject to the Bankruptcy Court's approval of the DIP Order on a final basis.

See below and Note 17 on “Subsequent Events” for a further discussion on the Plan, the DIP Revolving Facility, and the DIP Term Loan Agreement.

Going Concern

Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the condensed consolidated financial statements, we had an accumulated deficit at March 31, 2017 and December 31, 2016, and a net loss for the three months ended March 31, 2017 and 2016. These factors, coupled with our large outstanding debt balance, raise substantial doubt about our ability to continue as a going concern.

In order to address our liquidity issues and provide for a restructuring of our indebtedness to improve our long-term capital structure, we entered into a Restructuring Support Agreement with holders (the "Supporting Noteholders") of 100% of the existing Term Loan Debt and approximately 86% of our 12.5%/10.0% Senior Secured Second Lien Notes due 2021 (the "2021 Notes") on April 9, 2017, which was further amended on April 20, 2017 and April 28, 2017 (the "Restructuring Support Agreement"). Under the Restructuring Support Agreement, the Supporting Noteholders have agreed, subject to certain terms and conditions, to support a financial restructuring of Nuverra (the “Restructuring”) pursuant to the Plan in a case commenced under chapter 11 of the United States Bankruptcy Code. Among other terms and conditions, the Restructuring Support Agreement provided for interim financing to us prior to the filing of the Plan, debtor in possession financing of $44.0 million, a $150.0 million rights offering following confirmation of the Plan and, if necessary, exit financing to fund required disbursements under the Plan. We anticipate that the Restructuring will provide us with sufficient liquidity to continue our operations; however, there can be no assurances to that effect.

We commenced the chapter 11 cases on May 1, 2017 to restructure our debt, address our liquidity, and improve our long term capital structure. However, there can be no assurances that the Restructuring will occur or be successful. In addition, we continue to focus on our cost management initiatives while operating our business. If the Restructuring is unsuccessful, our cash position will not be sufficient to support our daily operations. While we anticipate successful consummation of the Restructuring will generate sufficient revenue and reduce costs to sustain operations through the downturn, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to consummate the Restructuring and to generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. We currently do not have enough liquidity, including cash on hand, to service the debt, pay-down debt to avoid covenant violations and fund day-to-day operations. See Note 17 on "Subsequent Events" for further discussion.

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

Recently Adopted Accounting Pronouncements

We adopted the guidance in ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09") as of January 1, 2017 when it became effective. Under the new standard, income tax benefits and deficiencies are recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.  Additionally, excess tax benefits are recognized regardless of whether the benefit reduces taxes payable in the current period and are classified along with other income tax cash flows as an operating activity.  Upon adopting ASU 2016-09, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. We have selected to make an entity wide accounting policy election to continue to estimate the number of awards that are expected to vest. We have adopted the other provisions of the new guidance on a prospective basis, except when the modified retrospective transition method was specifically required. The adoption of this guidance has not had a significant impact on our condensed consolidated financial statements.


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

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

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

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

Note 3 - Earnings Per Common Share
Basic and diluted loss per common share from continuing operations, basic and diluted loss per common share from discontinued operations and net loss per basic and diluted common share have been computed using the weighted average number of shares of common stock outstanding during the period.
For the three months ended March 31, 2017 and 2016, no shares of common stock underlying stock options, restricted stock, or warrants were included in the computation of diluted earnings per common share ("EPS") from continuing operations because the inclusion of such shares would be anti-dilutive based on the net losses from continuing operations reported for those periods. As of March 31, 2017, there were approximately 25.9 million potentially dilutive shares of common stock underlying stock options, restricted stock, and warrants that were excluded from the computation of diluted EPS. Accordingly, for the

11


three month periods ended March 31, 2017 and 2016, no shares of common stock underlying stock options, restricted stock, or warrants were included in the computations of diluted EPS from income from discontinued operations or diluted EPS from net loss per common share, because such shares were excluded from the computation of diluted EPS from continuing operations for those periods.
The following table presents the calculation of basic and diluted net loss per common share:
 
Three Months Ended
 
March 31,
 
2017
 
2016
Numerator:
 
 
 
Loss from continuing operations
$
(35,962
)
 
$
(27,271
)
Gain from discontinued operations

 
55

Net loss attributable to common shareholders
$
(35,962
)
 
$
(27,216
)
 
 
 
 
Denominator:
 
 
 
Weighted average shares—basic
150,934

 
27,907

Common stock equivalents

 

Weighted average shares—diluted
150,934

 
27,907

 
 
 
 
Net loss per common share attributable to common shareholders:
 
 
 
Basic and diluted loss from continuing operations
$
(0.24
)
 
$
(0.98
)
Basic and diluted gain from discontinued operations

 

Net loss per basic and diluted common share
$
(0.24
)
 
$
(0.98
)
 
 
 
 
Anti-dilutive stock-based awards excluded
361

 
706

Note 4 - Intangible Assets
Intangible assets consist of the following:
 
March 31, 2017
 
December 31, 2016
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
Customer relationships
$
11,731

 
$
(8,453
)
 
$
3,278

 
5.5
 
$
11,731

 
$
(8,229
)
 
$
3,502

 
5.7
Disposal permits
1,269

 
(652
)
 
617

 
4.0
 
1,269

 
(612
)
 
657

 
4.1
Customer contracts
17,352

 
(7,459
)
 
9,893

 
9.5
 
17,352

 
(7,201
)
 
10,151

 
9.8
 
$
30,352

 
$
(16,564
)
 
$
13,788

 
8.3
 
$
30,352

 
$
(16,042
)
 
$
14,310

 
8.5
The remaining weighted average useful lives shown are calculated based on the net book value and remaining amortization period of each respective intangible asset.
Note 5 - 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;

12


Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value on a recurring basis and the fair value hierarchy of the valuation techniques we utilized to determine such fair value included significant unobservable inputs (Level 3) and were as follows:
 
Fair Value
As of March 31, 2017
 
Liabilities:
 
   Derivative warrant liability
5,916

   Contingent consideration
8,500

 
 
As of December 31, 2016
 
Liabilities:
 
   Derivative warrant liability
4,298

   Contingent consideration
8,500

Derivative Warrant Liability
Our derivative warrant liability is adjusted to reflect the estimated fair value at each quarter end, with any decrease or increase in the estimated fair value recorded in "Other income, net" in the condensed consolidated statements of operations. We used Level 3 inputs for the valuation methodology of the derivative liabilities. The estimated fair values were computed using a Monte Carlo simulation model. The key inputs in determining our derivative warrant liability included 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 as of March 31, 2017 and December 31, 2016.
 
 
Three Months Ended
 
Year Ended
 
 
March 31, 2017
 
December 31, 2016
Balance at beginning of period
 
$
4,298

 
$

Issuance of warrants
 

 
7,838

Exercise of warrants
 

 
(229
)
Adjustments to estimated fair value
 
1,618

 
(3,311
)
Balance at end of period
 
$
5,916

 
$
4,298

Contingent Consideration
We are liable for certain contingent consideration payments in connection with the performance of various acquisitions. The fair values of the contingent consideration obligations were determined using a probability-weighted income approach at the acquisition date and are revalued at each reporting date or more frequently if circumstances dictate based on changes in the discount periods and rates, changes in the timing and amount of the revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the performance measurements upon which the obligations are based.
As we have previously determined that it would be unlikely that the required permits and certificates necessary for the issuance of a second special waste disposal permit to Ideal Oilfield Disposal, LLC would be issued within one year, we have presented the $8.5 million contingent consideration liability related to the Ideal Oilfield Disposal, LLC acquisition as "Long-term contingent consideration" in the condensed consolidated balance sheet as of March 31, 2017. Changes to the fair value of contingent consideration are recorded as "Other income, net" in the condensed consolidated statements of operations. The fair value measurement is based on significant inputs not observable in the market, which are referred to as Level 3 inputs.

13


Changes to contingent consideration obligations during the three months ended March 31, 2017 and the year ended December 31, 2016 were as follows:
 
Three Months Ended
 
Year Ended
 
March 31, 2017
 
December 31, 2016
Balance at beginning of period
$
8,500

 
$
8,628

Cash payments

 

Changes in fair value of contingent consideration, net

 
(128
)
Balance at end of period
$
8,500

 
$
8,500

Less: current portion

 

Long-term contingent consideration
$
8,500

 
$
8,500

Note 6 - Accrued Liabilities
Accrued liabilities consisted of the following at March 31, 2017 and December 31, 2016:
 
March 31, 2017
 
December 31, 2016
Accrued payroll and employee benefits
$
1,582

 
$
2,432

Accrued insurance
2,721

 
3,887

Accrued legal and environmental costs
1,781

 
3,570

Accrued taxes
1,249

 
1,458

Accrued interest
9,989

 
4,699

Accrued operating costs
4,003

 
1,255

Accrued other
1,536

 
1,486

Total accrued liabilities
$
22,861

 
$
18,787

Note 7 - Debt
Debt consisted of the following at March 31, 2017 and December 31, 2016:
 
 
 
 
 
March 31, 2017
 
December 31, 2016
 
Interest Rate
 
Maturity Date
 
Unamortized Debt Issuance Costs
 
Fair Value of Debt (g)
 
Carrying Value of Debt
 
Carrying Value of Debt
ABL Facility (a)
6.35%
 
Mar. 2017
 
$

 
$
31,209

 
$
31,209

 
$
22,679

2018 Notes (b)
9.875%
 
Apr. 2018
 
428

 
3,841

 
40,436

 
40,436

2021 Notes (c)
10.00%
 
Apr. 2021
 
5,104

 
80,908

 
355,640

 
351,294

Term Loan (d)
13.00%
 
Apr. 2018
 
2,464

 
62,705

 
62,705

 
60,711

Vehicle financings (e)
7.06%
 
Various
 

 
6,502

 
6,502

 
7,699

Note payable (f)
4.25%
 
Apr. 2019
 

 
4,351

 
4,351

 
4,778

Total debt
 
 
 
 
$
7,996

 
$
189,516

 
500,843

 
487,597

Original issue discount and premium for 2018 Notes
 
 
 
(22
)
 
(27
)
Original issue discount and premium for 2021 Notes
 
 
 
(265
)
 
(282
)
Debt issuance costs presented with debt
 
 
 
 
 
(7,996
)
 
(8,998
)
Debt discount for issuance of warrants (h)
 
 
 
 
 
(5,767
)
 
(6,499
)
Total debt, net
 
 
 
 
 
 
 
 
486,793

 
471,791

Less: current portion of long-term debt (i)
 
 
 
(483,175
)
 
(465,835
)
Long-term debt
 
 
 
 
 
 
 
 
$
3,618

 
$
5,956

_____________________

14


(a)
The interest rate presented represents the interest rate on the $40.0 million asset-based revolving credit facility (the "ABL Facility") at March 31, 2017.
(b)
The interest rate presented represents the coupon rate on our 2018 Notes, excluding the effects of deferred financing costs, original issue discounts and original issue premiums. Including the impact of these items, the effective interest rate on the 2018 Notes is approximately 11.0%. Interest payments are due semi-annually on April 15 and October 15 of each year.
(c)
The interest rate presented represents the current coupon rate on our 2021 Notes, excluding the effects of deferred financing costs, original issue discounts and original issue premiums. Including the impact of these items, the effective interest rate on the 2021 Notes is approximately 12.4%. Interest is paid in kind semi-annually by increasing the principal amount payable and due at maturity and/or in cash as follows: interest payable on October 15, 2016 will be paid in kind at an annual rate of 12.5%; interest payable after October 15, 2016 but on or before April 15, 2018 will be paid at a rate of 10% with 50% in kind and 50% in cash; interest payable after April 15, 2018 will be paid in cash at a rate of 10% until maturity.
(d)
The Term Loan accrues interest at a rate of 13% compounded monthly and which is paid in kind by increasing the principal amount payable thereunder. Principal including the paid in kind interest is due April 15, 2018.
(e)
Vehicle financings consist of capital lease arrangements related to fleet purchases with a weighted-average annual interest rate of approximately 7.06%, which mature in varying installments between 2017 and 2020. Capital lease obligations were $6.5 million and $7.7 million at March 31, 2017 and December 31, 2016, respectively.
(f)
The note payable balance as of March 31, 2017 represents the remaining amount due from acquiring the remaining interest of our former partner in Appalachian Water Services, LLC ("AWS") in 2015. Principal and interest payments are due in equal quarterly installments through April 2019. The terms of the note payable provide that upon becoming insolvent, declaring bankruptcy, or failing to meet the payment terms thereunder, all remaining outstanding balances become immediately due and payable. As a result of our chapter 11 filing on May 1, 2017, as discussed in further detail in Note 17, we have presented the entire note payable balance in current portion of long-term debt in the consolidated balance sheet as of March 31, 2017.
(g)
The estimated fair value of our 2018 Notes and our 2021 Notes is based on reported trading prices as of March 31, 2017. Our ABL Facility, Term Loan, note payable and vehicle financings bear interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value.
(h)
The debt discount for issuance of warrants represents the initial fair value of the warrants issued in connection with the debt restructuring that occurred during the year ended December 31, 2016, which is amortized through interest expense over the terms of the new 2021 Notes and the Term Loan. As described further in Note 8, these warrants are accounted for as derivative liabilities.
(i)
As the scheduled maturity date of the ABL Facility was March 31, 2017, the carrying value of the ABL Facility is presented in current portion of long-term debt in the consolidated balance sheet as of March 31, 2017 and December 31, 2016. Further, due to the default of the ABL Facility as of March 31, 2017, and the resulting cross-default of the 2018 Notes, 2021 Notes and Term Loan, these items are also included in current portion of long-term debt as of March 31, 2017 and December 31, 2016. Finally, the principal payments due within one year for the vehicle financings and note payable are also included in current portion of long-term debt as of March 31, 2017 and December 31, 2016.
For a discussion of material changes and developments in our debt and its principal terms, see our discussion below in addition to the discussion in Note 17 on "Subsequent Events."
Indebtedness
We are highly leveraged and a substantial portion of our liquidity needs result from debt service requirements and from funding our costs of operations and capital expenditures. As of March 31, 2017, we had $500.8 million of indebtedness outstanding, consisting of $40.4 million of 9.875% Senior Notes due 2018 (the "2018 Notes"), $355.6 million of 2021 Notes, $62.7 million under a term loan (the "Term Loan"), $31.2 million under the ABL Facility, and $10.9 million of capital leases for vehicle financings and a note payable for the purchase of the remaining interest in AWS.
Default Under Debt Instruments
The maturity date of our ABL Facility occurred on March 31, 2017, and, as a result, all commitments under the ABL Facility have been terminated, the lenders under the ABL Facility have no obligation to provide additional loans or otherwise extend credit under the ABL Facility, and all obligations under the ABL Facility are due and payable. As we have not repaid all

15


outstanding obligations under the ABL Facility, we are in default under the ABL Facility and the lenders under the ABL Facility are entitled to exercise their rights and remedies. In addition, the default under the ABL Facility constituted an event of cross default under the Term Loan and the indentures governing our 2018 Notes and 2021 Notes. We do not have sufficient liquidity to repay the obligations under the ABL Facility, Term Loan, or indentures governing our 2018 Notes and 2021 Notes. In addition, the filing of the Plan constituted an event of default that accelerated the Company’s obligations under the ABL Facility, Term Loan, indenture governing the 2018 Notes, indenture governing the 2021 Notes, and note issued in connection with the acquisition of the remaining 49% interest in AWS.
  
In order to address our liquidity issues and provide for a restructuring of our indebtedness to improve our long-term capital structure, we have entered into the Restructuring Support Agreement and commenced the chapter 11 cases. See Note 17 on "Subsequent Events" for further details on the Restructuring.

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Plan automatically stayed most actions against the Nuverra Parties, including actions to collect indebtedness incurred prior to the filing of the Plan or to exercise control over the Nuverra Parties’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the chapter 11 cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Nuverra Parties or their property to recover on, collect or secure a claim arising prior to the filing of the Plan or to exercise control over property of the Nuverra Parties’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. As a result, the filing of the Plan with the Bankruptcy Court automatically stayed any potential action arising from the default under the ABL Facility, Term Loan, and the indentures governing our 2018 Notes and 2021 Notes, and we expect such indebtedness will be discharged through the chapter 11 proceeding.

Note 8 - Derivative Warrants
During the year ended December 31, 2016, we issued 26.4 million warrants, with 17.5 million warrants for the exchange of 2018 Notes for new 2021 Notes, 0.1 million warrants for the exchange of 2018 Notes for common stock, and 8.8 million warrants to the Term Loan lenders. All warrants were issued with an exercise price of $0.01 and have a term of ten years.
The following table shows the warrant activity for the three months ended March 31, 2017 and the year ended December 31, 2016:
 
 
Three Months Ended
 
Year Ended
 
 
March 31, 2017
 
December 31, 2016
Outstanding at the beginning of the period
 
25,283

 

Issued
 

 
26,400

Exercised
 
(2
)
 
(1,117
)
Outstanding at the end of the period
 
25,281

 
25,283

We accounted for warrants in accordance with the accounting guidance for derivatives, which sets forth a two-step model to be applied in determining whether a financial instrument is indexed to an entity's own stock which would qualify such financial instruments for a scope exception. This scope exception specifies that a contract that would otherwise meet the definition of a derivative financial instrument would not be considered as such if the contract is both (i) indexed to the entity's own stock and (ii) classified in the shareholders' equity section of the entity's balance sheet. We determined that the warrants were ineligible for equity classification due to the anti-dilution provisions set forth therein. As such, the warrants have been recorded as derivative liabilities at fair value on the "Derivative warrant liability" line in the condensed consolidated balance sheet as of March 31, 2017. The warrants are classified as a current liability in the condensed consolidated balance sheet as they can be exercised by the holders at any time.
As discussed previously in Note 5, the fair value of the derivative warrant liability was 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, net" in the condensed consolidated statement of operations.

16


The fair value of the derivative warrant liability was estimated using the following model inputs:
 
 
Period Ended
 
Period Ended
 
 
March 31, 2017
 
December 31, 2016
Exercise price
 
$
0.01

 
$
0.01

Closing stock price
 
$
0.24

 
$
0.18

Risk free rate
 
2.40
%
 
2.40
%
Expected volatility
 
84.2
%
 
79.5
%

Note 9 - Restructuring and Exit Costs
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, primarily in the Eagle Ford shale basin. 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.
There were no restructuring costs incurred during the three months ended March 31, 2017 or March 31, 2016. The remaining liability for the restructuring and exit costs incurred represents lease exit costs under non-cancellable operating leases and totaled approximately $0.1 million as of March 31, 2017, which is included in "Accrued liabilities" in the condensed consolidated balance sheets.
A rollforward of the liability from December 31, 2016 through March 31, 2017 is as follows:
 
 
Lease Exit Costs
Balance accrued at December 31, 2016
 
$
130

Cash payments
 
(13
)
Balance accrued at March 31, 2017
 
$
117


Note 10 - Income Taxes
The following table shows the components of the income tax expense for the periods indicated:
 
Three Months Ended
 
March 31,
 
2017
 
2016
Current income tax expense
$

 
$
(30
)
Deferred income tax expense

 
(25
)
Total income tax expense
$

 
$
(55
)
The effective income tax rate for the three months ended March 31, 2017 was 0.0%, which differs from the federal statutory benefit rate of 35.0%. The difference is primarily due to the increase in the valuation allowance on deferred tax assets resulting from current year losses.
The effective income tax rate for the three months ended March 31, 2016 was 0.2%, which differs from the federal statutory rate of 35.0% primarily due to the increase in the valuation allowance on deferred tax assets resulting from current year losses.
We have significant deferred tax assets, consisting primarily of NOLs, which have a limited life, generally expiring between the years 2029 and 2037, and capital losses, which have a five year carryforward expiring in 2020. We regularly assess the positive and negative evidence available to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred this year and in recent years. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future taxable income.

17


In light of our continued ordinary losses, at March 31, 2017 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 2017.

Note 11 - Share-based Compensation
We may grant stock options, stock appreciation rights, restricted common stock and restricted stock units, performance shares and units, other stock-based awards and cash-based awards to our employees, directors, consultants and advisors pursuant to the Nuverra Environmental Solutions, Inc. 2009 Equity Incentive Plan (as amended, the “2009 Plan”).
The total grants awarded during the three months ended March 31, 2017 and March 31, 2016 are presented in the table below:
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Stock option grants
 

 

Restricted stock grants
 

 

Restricted stock unit grants
 

 
1

    Total grants under the 2009 Plan
 

 
1

The total stock-based compensation expense, net of estimated forfeitures, included in "General and administrative expenses" in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2017 and March 31, 2016 was as follows:
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Stock options
 
$
65

 
$
84

Restricted stock
 
66

 
85

Restricted stock units
 
178

 
199

     Total stock-based compensation expense
 
$
309

 
$
368

Note 12 - Legal Matters
Environmental Liabilities
We are subject to the environmental protection and health and safety laws and related rules and regulations of the United States and of the individual states, municipalities and other local jurisdictions where we operate. Our continuing 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 sheets at March 31, 2017 and December 31, 2016 included accruals totaling $0.3 million and $2.8 million, respectively, for various environmental matters.
Litigation
There are various lawsuits, claims, investigations and proceedings that have been brought or asserted against us, which arise in the ordinary course of business, including actions with respect to securities and shareholder class actions, personal injury,

18


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 the lawsuits disclosed below 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.
AWS Arbitration Demand
On April 28, 2015, our former partner in AWS issued to us a Demand for Arbitration pursuant to the terms of the AWS operating agreement, relating to alleged breaches by us of certain of our obligations under the operating agreement. We entered into a settlement of this matter with our former partner in June 2015 whereby we purchased the remaining interest in AWS for $4.0 million in cash and a $7.4 million note payable with principal and interest due in equal quarterly installments through April 2019. Pursuant to the terms of the note, if we failed to meet the payment terms of the obligation, or if we became insolvent or declared bankruptcy, all remaining outstanding balances on the note payable would become immediately due and payable. As we failed to meet the payment terms of the obligation and filed the chapter 11 cases, all outstanding balances on the note payable became immediately due and payable.
Pursuant to Section 362 of the Bankruptcy Code, the filing of the Plan automatically stayed most actions against the Nuverra Parties, including actions to collect indebtedness incurred prior to the filing of the Plan or to exercise control over the Nuverra Parties’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the chapter 11 cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Nuverra Parties or their property to recover on, collect or secure a claim arising prior to the filing of the Plan or to exercise control over property of the Nuverra Parties’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. As a result, the filing of the Plan with the Bankruptcy Court automatically stayed any potential action to collect the outstanding balance on the note payable.

Note 13 - Related Party and Affiliated Company Transactions
There have been no significant changes to the other related party transactions with Mr. Johnsrud for apartment rentals, purchases of fresh water for resale and use of land where certain of our saltwater disposal wells are situated as described in Note 19 to the consolidated financial statements in our 2016 Annual Report on Form 10-K.

19


Note 14 - Segments
We evaluate business segment performance based on income (loss) before income taxes exclusive of corporate general and administrative costs and interest expense, which are not allocated to the segments. Our shale solutions business is comprised of three operating divisions, which we consider to be operating and reportable segments of our continuing operations: (1) the Northeast division comprising the Marcellus and Utica Shale areas, (2) the Southern division comprising the Haynesville, Eagle Ford, and Permian Basin Shale areas and (3) the Rocky Mountain division comprising the Bakken Shale area. Corporate/Other includes certain corporate costs and certain other corporate assets.
Financial information for our reportable segments related to continuing operations is presented below.
 
Rocky Mountain
 
Northeast
 
Southern
 
Corporate/ Other
 
Total
Three months ended March 31, 2017
 
 
 
 
 
 
 
 
 
Revenue
$
24,285

 
$
7,757

 
$
7,181

 
$

 
$
39,223

Direct operating expenses
21,232

 
7,957

 
5,100

 

 
34,289

General and administrative expenses
1,947

 
769

 
1,031

 
8,612

 
12,359

Depreciation and amortization
6,785

 
2,513

 
3,519

 
54

 
12,871

Operating loss
(5,679
)
 
(3,482
)
 
(2,469
)
 
(8,666
)
 
(20,296
)
Loss from continuing operations before income taxes
(5,701
)
 
(3,602
)
 
(2,527
)
 
(24,132
)
 
(35,962
)
 
 
 
 
 
 
 
 
 
 
As of March 31, 2017
 
 
 
 
 
 
 
 
 
Total assets (a)
180,234

 
44,103

 
100,019

 
5,444

 
329,800

 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016
 
 
 
 
 
 
 
 
 
Revenue
24,905

 
12,777

 
9,293

 

 
46,975

Direct operating expenses
19,558

 
11,568

 
7,491

 

 
38,617

General and administrative expenses
1,852

 
1,190

 
920

 
3,490

 
7,452

Depreciation and amortization
8,079

 
3,883

 
3,814

 
69

 
15,845

Operating loss
(4,584
)
 
(3,864
)
 
(2,932
)
 
(3,559
)
 
(14,939
)
Loss from continuing operations before income taxes
(4,652
)
 
(3,931
)
 
(2,926
)
 
(15,707
)
 
(27,216
)
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
 
Total assets (a)
184,116

 
46,094

 
107,350

 
5,044

 
342,604

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

Note 15 - Discontinued Operations
Our former industrial solutions operating and reportable segment, Thermo Fluids Inc. ("TFI"), was classified as discontinued operations since the sale process with various prospective acquirers began in fourth quarter of 2013. On April 11, 2015, we completed the TFI disposition with Safety-Kleen, Inc. ("Safety-Kleen"), a subsidiary of Clean Harbors, Inc., whereby Safety-Kleen acquired TFI for $85.0 million in an all-cash transaction, with $4.3 million of the purchase price deposited into an escrow account to satisfy working capital adjustments and our indemnification obligations under the purchase agreement.
The post-closing working capital reconciliation was completed during the year ended December 31, 2016, and as a result we recorded an additional loss on the sale of TFI of $1.3 million, bringing the total loss on sale to $1.5 million. The $4.3 million was released from escrow during 2016, of which $3.0 million was returned to us and $1.3 million was paid to Safety-Kleen for the post-closing working capital adjustment and certain indemnification claims.

20


The following table provides selected financial information of discontinued operations related to TFI:
 
Three Months Ended
 
March 31,
 
2017
 
2016
Income from discontinued operations before income taxes
$

 
$

Income tax expense

 

Income from discontinued operations - before sale
$

 
$

Gain on sale of TFI

 
55

Income from discontinued operations
$

 
$
55

Note 16 - Subsidiary Guarantors
Our obligations under the 2018 Notes and 2021 Notes are jointly and severally, fully and unconditionally guaranteed by certain of our subsidiaries. Pursuant to the terms of the Indenture, the guarantees are full and unconditional, but are subject to release under the following circumstances:
in connection with any sale, disposition or transfer of all or substantially all of the assets to a person that is not the Company or a subsidiary guarantor;
in connection with any sale, disposition or transfer of all of the capital stock of that subsidiary guarantor to a person that is not the Company or a subsidiary guarantor;
if we designate any restricted subsidiary that is a subsidiary guarantor to be an unrestricted subsidiary; or
upon legal defeasance or the discharge of our obligations under the Indenture.
Although the guarantees are subject to release under the above described circumstances, we have concluded they are still deemed full and unconditional for purposes of Rule 3-10 of Regulation S-X because these circumstances are customary, and accordingly, we concluded that we may rely on Rule 3-10 of Regulation S-X, as the other requirements of Rule 3-10 have been met.
The following tables present consolidating financial information for Nuverra Environmental Solutions, Inc. (“Parent”) and its 100% wholly-owned subsidiaries (the “Guarantor Subsidiaries”) as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016. During the three months ended December 31, 2015, Nuverra Rocky Mountain Pipeline, LLC (or "RMP") was released from all obligations including as guarantor for our debt obligations. However, because RMP's individual results are not material as there are no active contracts for new pipelines, we have not separately presented RMP as a Non-Guarantor, but rather continued to include RMP in the Guarantor Subsidiaries column. These condensed consolidating financial statements have been prepared from our financial information on the same basis of accounting as our condensed consolidated financial statements. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions.


21


CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2017
(Unaudited)

 
Parent
 
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
194

 
$
(3
)
 
$

 
$
191

Restricted cash

 
1,341

 

 
1,341

Accounts receivable, net

 
23,479

 

 
23,479

Other current assets
2,331

 
7,405

 

 
9,736

Assets held for sale

 
1,688

 

 
1,688

Total current assets
2,525

 
33,910

 

 
36,435

Property, plant and equipment, net
2,309

 
276,761

 

 
279,070

Equity investments
(63,418
)
 
67

 
63,418

 
67

Intangible assets, net

 
13,788

 

 
13,788

Other
366,991

 
95,795

 
(462,346
)
 
440

Total assets
$
308,407

 
$
420,321

 
$
(398,928
)
 
$
329,800

LIABILITIES AND SHAREHOLDERS' DEFICIT
 
 
 
 
 
 
 
Accounts payable
$
875

 
$
5,411

 
$

 
$
6,286

Accrued liabilities
12,289

 
10,572

 

 
22,861

Current portion of long-term debt
475,940

 
7,235

 

 
483,175

Derivative warrant liability
5,916

 

 

 
5,916

Total current liabilities
495,020

 
23,218

 

 
518,238

Deferred income taxes
(69,999
)
 
70,494

 

 
495

Long-term debt

 
3,618

 

 
3,618

Long-term contingent consideration

 
8,500

 

 
8,500

Other long-term liabilities
88,107

 
377,909

 
(462,346
)
 
3,670

Total shareholders' deficit
(204,721
)
 
(63,418
)
 
63,418

 
(204,721
)
Total liabilities and shareholders' deficit
$
308,407

 
$
420,321

 
$
(398,928
)
 
$
329,800


22


CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2016

 
Parent
 
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
913

 
$
81

 
$

 
$
994

Restricted cash
475

 
945

 

 
1,420

Accounts receivable, net

 
23,795

 

 
23,795

Other current assets
1,022

 
5,065

 

 
6,087

Assets held for sale

 
1,182

 

 
1,182

Total current assets
2,410

 
31,068

 

 
33,478

Property, plant and equipment, net
2,363

 
291,816

 

 
294,179

Equity investments
(51,590
)
 
73

 
51,590

 
73

Intangible assets, net

 
14,310

 

 
14,310

Other
363,291

 
94,388

 
(457,115
)
 
564

Total assets
$
316,474

 
$
431,655

 
$
(405,525
)
 
$
342,604

LIABILITIES AND SHAREHOLDERS' DEFICIT
 
 
 
 
 
 
 
Accounts payable
$
412

 
$
3,635

 
$

 
$
4,047

Accrued liabilities
6,961

 
11,826

 

 
18,787

Current portion of long-term debt
459,313

 
6,522

 

 
465,835

Derivative warrant liability
4,298

 

 

 
4,298

Total current liabilities
470,984

 
21,983

 

 
492,967

Deferred income taxes
(71,645
)
 
72,140

 

 
495

Long-term debt

 
5,956

 

 
5,956

Long-term portion of contingent consideration

 
8,500

 

 
8,500

Other long-term liabilities
86,201

 
374,666

 
(457,115
)
 
3,752

Total shareholders' deficit
(169,066
)
 
(51,590
)
 
51,590

 
(169,066
)
Total liabilities and shareholders' deficit
$
316,474

 
$
431,655

 
$
(405,525
)
 
$
342,604


23


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2017
(Unaudited)
 
Parent
 
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$

 
$
39,223

 
$

 
$
39,223

Costs and expenses:
 
 
 
 
 
 
 
Direct operating expenses

 
34,289

 

 
34,289

General and administrative expenses
8,612

 
3,747

 

 
12,359

Depreciation and amortization
54

 
12,817

 

 
12,871

Total costs and expenses
8,666

 
50,853

 

 
59,519

Operating loss
(8,666
)
 
(11,630
)
 

 
(20,296
)
Interest expense, net
(13,948
)
 
(260
)
 

 
(14,208
)
Other income, net
(1,518
)
 
66

 

 
(1,452
)
(Loss) income from equity investments
(11,830
)
 
(6
)
 
11,830

 
(6
)
Loss from continuing operations before income taxes
(35,962
)
 
(11,830
)
 
11,830

 
(35,962
)
Income tax expense

 

 

 

Loss from continuing operations
(35,962
)
 
(11,830
)
 
11,830

 
(35,962
)
Loss from discontinued operations, net of income taxes

 

 

 

Net loss attributable to common shareholders
$
(35,962
)
 
$
(11,830
)
 
$
11,830

 
$
(35,962
)



24


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2016
(Unaudited)
 
Parent
 
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$

 
$
46,975

 
$

 
$
46,975

Costs and expenses:
 
 
 
 
 
 
 
Direct operating expenses

 
38,617

 

 
38,617

General and administrative expenses
3,490

 
3,962

 

 
7,452

Depreciation and amortization
69

 
15,776

 

 
15,845

Total costs and expenses
3,559

 
58,355

 

 
61,914

Operating loss
(3,559
)
 
(11,380
)
 

 
(14,939
)
Interest expense, net
(11,758
)
 
(287
)
 

 
(12,045
)
Other income, net

 
163

 

 
163

(Loss) income from equity investments
(11,532
)
 
(5
)
 
11,532

 
(5
)
Loss on extinguishment of debt
(390
)
 

 

 
(390
)
Loss from continuing operations before income taxes
(27,239
)
 
(11,509
)
 
11,532

 
(27,216
)
Income tax expense
(32
)
 
(23
)
 

 
(55
)
Loss from continuing operations
(27,271
)
 
(11,532
)
 
11,532

 
(27,271
)
Gain from discontinued operations, net of income taxes
55

 

 

 
55

Net loss attributable to common shareholders
$
(27,216
)
 
$
(11,532
)
 
$
11,532

 
$
(27,216
)

 
 

25


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2017
(Unaudited)

 
Parent
 
Guarantor Subsidiaries
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
Net cash used in (provided by) operating activities
$
(9,717
)
 
$
2,431

 
$
(7,286
)
Cash flows from investing activities:
 
 
 
 
 
Proceeds from the sale of property and equipment

 
371

 
371

Purchase of property, plant and equipment

 
(1,029
)
 
(1,029
)
Change in restricted cash
475

 
(396
)
 
79

Net cash provided by (used in) investing activities
475

 
(1,054
)
 
(579
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from revolving credit facility
48,536

 

 
48,536

Payments on revolving credit facility
(40,006
)
 

 
(40,006
)
Payments on vehicle financing and other financing activities
(7
)
 
(1,461
)
 
(1,468
)
Net cash provided by (used in) financing activities
8,523

 
(1,461
)
 
7,062

Net decrease in cash
(719
)
 
(84
)
 
(803
)
Cash and cash equivalents - beginning of period
913

 
81

 
994

Cash and cash equivalents - end of period
$
194

 
$
(3
)
 
$
191


26


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2016
(Unaudited)

 
Parent
 
Guarantor Subsidiaries
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
Net cash provided by operating activities
$
115

 
$
2,450

 
$
2,565

Cash flows from investing activities:
 
 
 
 
 
Proceeds from the sale of property and equipment
25

 
1,424

 
1,449

Purchase of property, plant and equipment

 
(1,421
)
 
(1,421
)
Change in restricted cash

 
(200
)
 
(200
)
Net cash provided by (used in) investing activities
25

 
(197
)
 
(172
)
Cash flows from financing activities:
 
 
 
 


Proceeds from revolving credit facility
12,409

 

 
12,409

Payments on revolving credit facility
(51,968
)
 

 
(51,968
)
Payments for debt issuance costs
(426
)
 

 
(426
)
Payments on vehicle financing and other financing activities
(7
)
 
(1,680
)
 
(1,687
)
Net cash used in financing activities
(39,992
)
 
(1,680
)
 
(41,672
)
Net (decrease) increase in cash
(39,852
)
 
573

 
(39,279
)
Cash and cash equivalents - beginning of period
40,660

 
(1,351
)
 
39,309

Cash and cash equivalents - end of period
$
808

 
$
(778
)
 
$
30



27


Note 17 - Subsequent Events

Voluntary Petition Under Chapter 11 of the Bankruptcy Code and Solicitation of Votes on the Plan

On May 1, 2017, the Nuverra Parties filed voluntary petitions under chapter 11 of the Bankruptcy Code in the Bankruptcy Court to pursue the Plan. The Nuverra Parties’ chapter 11 cases are being jointly administered under the caption In re Nuverra Environmental Solutions, Inc., et al. (Case Nos. 17-10949 through 17-10962). No trustee has been appointed, and the Nuverra Parties will continue to operate their businesses as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. We expect to continue our operations without interruption during the pendency of the chapter 11 cases, but there can be no assurances.

On May 2, 2017, to assure ordinary course operations, the Bankruptcy Court entered the DIP Order approving on an interim basis a variety of “first day” motions seeking various relief and authorizing the Nuverra Parties to maintain their operations in the ordinary course. The DIP Order, among other things, authorized the Nuverra Parties to (i) enter into, execute, and deliver the DIP Revolving Facility and the DIP Term Loan Agreement, and (ii) borrow, on an interim basis, $2.5 million under the DIP Term Loan Agreement, $10.0 million under the DIP Revolving Facility in the aggregate, and $7.5 million under the DIP Term Loan Agreement in the aggregate (including the $2.5 million initial advance made on the May 3, 2017) during the interim period before the Bankruptcy Court considers entry of the DIP Order on a final basis. The Bankruptcy Court set a hearing for May 31, 2017 to consider approval of the DIP Order on a final basis.

On April 28, 2017, the Company commenced a solicitation of votes to accept or reject the Plan from holders of the 2018 Notes, 2021 Notes, and indebtedness under its Term Loan.
  
Debtor in Possession Financing

In connection with the filing of the chapter 11 cases, on May 3, 2017, following the authorization of the Bankruptcy Court, the Company, as borrower, the lenders party thereto (the “DIP Revolving Facility Lenders”), Wells Fargo Bank, National Association, as administrative agent, and other agents party thereto, closed a Debtor-in-Possession Credit Agreement (the “DIP Revolving Facility”), dated as of April 30, 2017, pursuant to which the DIP Revolving Facility Lenders agreed to provide the Company a secured revolving credit facility up to a maximum amount of $31.5 million to, among other things, refinance obligations under the Company's ABL Facility and finance the ongoing general corporate needs of the Nuverra Parties during the course of the chapter 11 proceedings. The DIP Revolving Facility is subject to the Bankruptcy Court's approval of the DIP Order on a final basis.

The maturity date of the DIP Revolving Facility will be the earliest to occur of: (i) August 7, 2017, (ii) the occurrence of an Event of Default (as defined in the DIP Revolving Facility), and (iii) the effective date of any chapter 11 plan of reorganization confirmed in connection with the chapter 11 cases. The DIP Revolving Facility contains customary events of default, including events related to the chapter 11 proceedings, the occurrence of which could result in the acceleration of the Nuverra Parties’ obligation to repay the outstanding indebtedness under the DIP Revolving Facility. The Nuverra Parties’ obligations under the DIP Revolving Facility are secured by a senior security interest in, and lien on, substantially all the assets of the Nuverra Parties.

In addition to the DIP Revolving Facility and in connection with the filing of the chapter 11 cases, on May 3, 2017, following authorization of the Bankruptcy Court, the Company, as borrower, the lenders party thereto (the “DIP Term Loan Agreement Lenders”), and Wilmington Savings Fund Society, FSB, as administrative agent closed a Debtor-in-Possession Term Loan Credit Agreement (the “DIP Term Loan Agreement”), dated as of April 30, 2017, pursuant to which the DIP Term Loan Lenders agreed to provide the Company with an initial term loan in the amount of $2.5 million and subsequent term loans not to exceed $12.5 million in the aggregate to, among other things, finance the ongoing general corporate needs of the Nuverra Parties during the course of the chapter 11 proceedings. The DIP Term Loan Lenders made the initial term loan on May 3, 2017, which the Company is using for general corporate purposes. The DIP Term Loan Agreement is subject to the Bankruptcy Court's approval of the DIP Order on a final basis.

The maturity date of the DIP Term Loan Agreement will be the earliest to occur of: (i) August 7, 2017, (ii) the occurrence of an Event of Default (as defined in the DIP Term Loan Agreement), and (iii) the effective date of any chapter 11 plan of reorganization confirmed in connection with the chapter 11 cases. The DIP Term Loan Agreement contains customary events of default, including events related to the chapter 11 proceedings, the occurrence of which could result in the acceleration of the Nuverra Parties’ obligation to repay the outstanding indebtedness under the DIP Term Loan Agreement. The Nuverra Parties’

28


obligations under the DIP Term Loan Agreement are secured by a security interest in, and lien on, substantially all the assets of the Nuverra Parties.

Restructuring Support Agreement

On April 9, 2017, the Nuverra Parties entered into the Restructuring Support Agreement with the Supporting Noteholders, which was further amended on April 20, 2017 and April 28, 2017. Under the Restructuring Support Agreement, the Supporting Noteholders have agreed, subject to certain terms and conditions, to support the Restructuring pursuant to the prepackaged Plan which was filed in a case commenced under chapter 11 of the United States Bankruptcy Code.

The Plan is based on the restructuring term sheet attached to and incorporated into the Restructuring Support Agreement (the “Term Sheet”) which includes:

debtor in possession financing (the “DIP Facilities”), consisting of the DIP Revolving Facility provided by the lenders under the Company’s ABL Facility and the DIP Term Loan Agreement provided by one or more of the lenders under the Company’s Term Loan;

a rights offering (the “Rights Offering”) to be commenced following the confirmation of the Plan, pursuant to which the Company will distribute freely transferrable rights (the “Rights”) to permit the holders thereof to acquire, in the aggregate, $150.0 million of newly issued common stock of the reorganized company at an enterprise valuation of $350.0 million (the “Plan Value”);

exit financing, to the extent necessary after the Rights Offering, to fund required disbursements under the Plan, through a new first lien, senior secured exit facility in the form of an asset backed revolver, term loan or combination thereof;

cash payment in full of all administrative expense claims, priority tax claims, priority claims, DIP Revolving Facility claims, and ABL Facility claims;

satisfaction in full of all DIP Term Loan claims and Term Loan claims (collectively, the “Term Loan Claims”) as follows: (i) by converting the first $75.0 million of Term Loan Claims to newly issued common stock of the reorganized company at Plan Value, subject to dilution by a new management incentive plan, the Rights Offering, and the conversion of the remainder of the Term Loan Claims, and (ii) the remaining Term Loan Claims, if any, to be paid in cash from the proceeds of the Rights Offering in excess of $50.0 million after repayment of the ABL Facility claims and other expenses, with any remaining balance thereafter to be converted to newly issued common stock of the reorganized company at Plan Value (subject to dilution);

receipt by the holders of the 2021 Notes, in full satisfaction of their claims, (a) their pro rata share of 99.75% of the reorganized company’s newly issued common stock, subject to dilution by a new management incentive plan, the Rights Offering, and the conversion of the Term Loan Claims, and (b) 50.0% of the Rights (which will be exercisable for up to two years following the completion of the Restructuring);

receipt by the holders of the 2018 Notes in full satisfaction of their claims of (a) their pro rata share of up to 0.25% of the reorganized company’s newly issued common stock, subject to dilution by a new management incentive plan, the Rights Offering, and the conversion of the Term Loan Claims, and (b) a portion of 50.0% of the Rights to be determined by the Nuverra Parties (which will be exercisable prior to the completion of the Restructuring);

existing equity interests shall receive no distribution; provided however that, subject to agreement among the Supporting Noteholders and the Nuverra Parties, existing equity holders may receive a portion of the Rights;

payment of all undisputed customer, employee, vendor or other trade obligations; and

continuation as a public reporting company under the Securities Exchange Act of 1934 and best efforts to have the new common stock listed on the New York Stock Exchange.

In accordance with the Restructuring Support Agreement, the Supporting Noteholders agreed, among other things, to: (i) provide interim financing to the Nuverra Parties in the aggregate amount of $9.1 million until the filing of the chapter 11 cases; (ii) support and take all necessary actions in furtherance of the Restructuring; (iii) vote all of its claims against Nuverra in favor

29


of the Plan; (iv) not direct or take any action inconsistent with the Plan or the Supporting Noteholders obligations; (v) not take any action that would, or is intended to in any material respect, interfere with, delay, or postpone the consummation of the Restructuring; and (vi) not transfer claims held by each Supporting Noteholder except with respect to limited and customary exceptions, generally requiring any transferee to become party to the Restructuring Support Agreement.

In accordance with the Restructuring Support Agreement, the Nuverra parties agreed, among other things, to: (i) use its best efforts to launch the solicitation of votes to approve the Plan, file the Plan, and seek confirmation of the Plan; (ii) use its best efforts to obtain orders from the bankruptcy court regarding the Restructuring; (iii) act in good faith and use its best efforts to support and complete the transactions contemplated in the Term Sheet; (iv) use its best efforts to obtain all required regulatory approvals and third-party approvals of the Restructuring; (v) not take any actions inconsistent with the Restructuring Support Agreement, Term Sheet, DIP Facilities, and the Plan; (vi) operate its business in the ordinary course consistent with past practice and preserve its businesses and assets; and (vii) support and take all actions that are necessary and appropriate to facilitate the confirmation of the Plan and the consummation of the Restructuring.

The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones related to the solicitation of votes to approve the Plan, commencement of the chapter 11 cases, confirmation of the Plan, consummation of the Plan, and the entry of orders relating to the DIP Facilities. The Restructuring Support Agreement also required the Company to enter into a new employment agreement with Mark D. Johnsrud, the Company’s Chief Executive Officer and Chairman, on terms mutually acceptable to Mr. Johnsrud and the Supporting Noteholders, which will be assumed by the Nuverra Parties under the Plan.

Amended and Restated Employment Agreement

Pursuant to the Restructuring Support Agreement, on April 28, 2017, the Company and Mr. Johnsrud entered into an Amended and Restated Employment Agreement (the “Amended Employment Agreement”), which amends and restates in its entirety the Employment Agreement between the Company and Mr. Johnsrud, dated as of November 30, 2012, as amended by the First Amendment to Employment Agreement effective as of January 1, 2017. Pursuant to the Amended Employment Agreement, Mr. Johnsrud will continue to serve as the Company’s President, Chief Executive Officer, and Chairman of the board of directors (the “Board”) for a three year term, with such term to be extended for an additional year beginning on the first day after the initial term and on each anniversary thereafter, unless either the Company or Mr. Johnsrud provide written notice of termination pursuant to the terms of the Amended Employment Agreement.

For Mr. Johnsrud’s services, he will continue to be paid his current annual base salary of $700,000, which may be increased by the Board at any time. In addition, Mr. Johnsrud will receive an annual bonus based on terms to be determined by the Board, insurance benefits, and shall be entitled to participate in any of the Company’s current or future incentive compensation and stock option plans. Upon executing the Amended Employment Agreement, Mr. Johnsrud is entitled to receive an incentive bonus in the amount equal to $700,000, payable in two installments, subject to Mr. Johnsrud’s continued employment through each payment date, as follows: (i) $233,333, payable as soon as practicable, and (ii) $466,667, payable within fifteen days following the effectiveness of the Plan.

Following the consummation of the chapter 11 cases, Mr. Johnsrud will receive an award of stock options in two tranches to purchase (i) 2.5% of the outstanding equity securities of the reorganized Company, on a fully diluted basis, at a premium exercise price equal to the value of a share of the reorganized Company’s common stock at an enterprise valuation of $475.0 million and (ii) 2.5% of the outstanding equity securities of the reorganized Company, on a fully diluted basis, at a premium exercise price equal to the value of a share of the reorganized Company’s common stock at an enterprise valuation of $525.0 million. Each tranche of options will vest in substantially equal installments on the first three anniversaries following the date of the consummation of the chapter 11 cases. The Amended Employment Agreement also requires the Company to establish a management incentive plan under which shares of common stock of the Company equal to 12.5% of the outstanding equity securities of the Company will be available for issuance, and to issue Mr. Johnsrud, as soon as reasonably practicable following the consummation of the chapter 11 cases, restricted stock units that represent 7.5% of the outstanding equity securities of the reorganized Company, on a fully diluted basis.

Mr. Johnsrud may terminate his employment under the Amended Employment Agreement upon at least thirty days written notice, for good reason (as defined in the Amended Employment Agreement), or a Change of Control (as defined in the Amended Employment Agreement). The Amended Employment Agreement also restricts Mr. Johnsrud from engaging in competitive activities during the term of his employment and thereafter until the later of (i) the end of the initial three year term or any applicable one year extension and (ii) one year following Mr. Johnsrud’s termination of employment.


30


Term Loan Credit Agreement Amendments

Fifth Amendment to Term Loan

On April 3, 2017 (the “Effective Date”), we entered into a Fifth Amendment (Increase Amendment) to Term Loan Credit Agreement (the “Fifth Term Loan Agreement Amendment”) by and among the Term Loan Lenders, Agent, Wells Fargo Bank, National Association, as collateral agent, the Company, and the guarantors named therein, which further amends the Term Loan Agreement by increasing the Term Loan Lenders’ commitment, and the principal amount borrowed by the Company, under the Term Loan Agreement from $58.1 million to $59.2 million (the “Fifth Amendment Additional Term Commitment”) and amending the EBITDA financial maintenance covenant.

Pursuant to the Fifth Term Loan Agreement Amendment, we are required to use the net cash proceeds of the Additional Term Commitment of $1.1 million to pay the fees, costs and expenses incurred in connection with the Fifth Term Loan Agreement Amendment. The remaining net cash proceeds, subject to satisfaction of certain release conditions, will be available for general operating, working capital and other general corporate purposes.

As a condition to the effectiveness of the Fifth Term Loan Agreement Amendment, we were required to enter into a letter agreement with the agent under our ABL Facility providing that the agent under the ABL Facility would not exercise any remedies with respect to the Additional Term Commitment deposited in the our Master Account (as defined in the ABL Facility). In addition, we received a waiver of certain events of default under the Term Loan Agreement arising from the inclusion of a going concern qualification from our registered public accounting firm, breach of the EBITDA financial maintenance covenant, and cross-default arising from the default under our ABL Facility.

The Fifth Term Loan Agreement Amendment required us to (i) on or before April 7, 2017, enter into a restructuring support agreement and other documentation required by the Term Loan Lenders in connection with the restructuring of the indebtedness of the Company and its subsidiaries; (ii) appoint Robert D. Albergotti as the Chief Restructuring Officer to the Company; and (iii) within five days of Fifth Amendment Effective Date, cause mortgage title policies to be issued for all real property collateral under the our ABL Facility and to pay all premiums for such title policies.

Sixth Amendment to Term Loan

On April 6, 2017 (the "Sixth Amendment Effective Date"), we entered into a Sixth Amendment (Increase Amendment) to Term Loan Credit Agreement (the “Sixth Term Loan Agreement Amendment”) by and among the Term Loan Lenders, Wilmington, as administrative agent, Wells Fargo, as collateral agent, the Company, and the guarantors named therein, which further amends the Term Loan Agreement by increasing the Term Loan Lenders’ commitment, and the principal amount borrowed by the Company, under the Term Loan Agreement from $59.2 million to $60.3 million (the “Sixth Amendment Additional Term Commitment”).

Pursuant to the Sixth Term Loan Agreement Amendment, we are required to use a portion of the net cash proceeds of the Sixth Amendment Additional Term Commitment of $1.0 million to pay the fees, costs and expenses incurred in connection with the Sixth Term Loan Agreement Amendment. The remaining net cash proceeds, subject to satisfaction of certain release conditions, will be available for general operating, working capital and other general corporate purposes. We intend to use the additional liquidity provided by the Sixth Amendment Additional Term Commitment to fund our business operations until the filing of the Plan.

As a condition to the effectiveness of the Sixth Term Loan Agreement Amendment, we were required to enter into a letter agreement with the agent under the ABL Facility providing, among other things, that the agent under the ABL Facility would not exercise any remedies with respect to the Sixth Amendment Additional Term Commitment deposited in our Master Account.

The Sixth Term Loan Agreement Amendment required us, among other things, to (i) on or before April 7, 2017, enter into the Restructuring Support Agreement and other documentation requested by the Term Loan Lenders in connection with the Restructuring; and (ii) within 5 days of Sixth Amendment Effective Date, cause mortgage title policies to be issued for all real property collateral under our Term Loan Agreement and to pay all premiums for such title policies.


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Seventh Amendment to Term Loan

On April 10, 2017 (the "Seventh Amendment Effective Date"), we entered into a Seventh Amendment (Increase Amendment) to Term Loan Credit Agreement (the “Seventh Term Loan Agreement Amendment”) by and among the Term Loan Lenders, Wilmington, as administrative agent, Wells Fargo, as collateral agent, the Company, and the guarantors named therein, which further amends the Term Loan Agreement by increasing the Term Loan Lenders’ commitment, and the principal amount borrowed by the Company, under the Term Loan Agreement from $60.3 million to $65.8 million (the “Seventh Amendment Additional Term Commitment”). The Seventh Amendment Additional Term Commitment is in partial satisfaction of the requirement to fund Supplemental Term Loans (as defined the Fifth Amendment to Term Loan Credit Agreement).

Pursuant to the Seventh Term Loan Agreement Amendment, we are required to use a portion of the net cash proceeds of the Seventh Amendment Additional Term Commitment of $5.0 million to pay the fees, costs and expenses incurred in connection with the Seventh Term Loan Agreement Amendment. The remaining net cash proceeds, subject to satisfaction of certain release conditions, will be available for general operating, working capital and other general corporate purposes. We intend to use the additional liquidity provided by the Seventh Amendment Additional Term Commitment to fund our business operations until the filing of the Plan.

As a condition to the effectiveness of the Seventh Term Loan Agreement Amendment, we were required to enter into a letter agreement with the agent under the ABL Facility providing, among other things, that the agent under the ABL Facility would not exercise any remedies with respect to the Seventh Amendment Additional Term Commitment deposited in the our Master Account, subject to the terms of such letter agreement.

The Seventh Term Loan Agreement Amendment required us, among other things, to (i) comply with the terms and conditions of the Restructuring Support Agreement; and (ii) within 5 days of Fifth Amendment Effective Date, cause mortgage title policies to be issued for all real property collateral under our Term Loan Agreement and to pay all premiums for such title policies.

Eighth Amendment to Term Loan

On April 18, 2017 (the “Eighth Amendment Effective Date”), we entered into an Eighth Amendment (Increase Amendment) to Term Loan Credit Agreement (the “Eighth Term Loan Agreement Amendment”) by and among the Term Loan Lenders, Wilmington, as administrative agent, Wells Fargo, as collateral agent, the Company, and the guarantors named therein, which further amends the Term Loan Credit Agreement by increasing the Term Loan Lenders’ commitment and the principal amount borrowed by the Company under the Term Loan Agreement from $65.8 million to $69.3 million (the “Eighth Amendment Additional Term Commitment”). The Eighth Amendment Additional Term Commitment is in partial satisfaction of the requirement to fund Supplemental Term Loans (as defined in the Fifth Amendment to Term Loan Credit Agreement).

Pursuant to the Eighth Term Loan Agreement Amendment, we are required to use a portion of the net cash proceeds of the Eighth Amendment Additional Term Commitment of $3.5 million to pay the fees, costs and expenses incurred in connection with the Eighth Term Loan Agreement Amendment. The remaining net cash proceeds, subject to satisfaction of certain release conditions, will be available for general operating, working capital and other general corporate purposes. We intend to use the additional liquidity provided by the Eighth Amendment Additional Term Commitment to fund our business operations until the filing of a prepackaged plan of reorganization under chapter 11 of the United States Bankruptcy Code.

As a condition to the effectiveness of the Eighth Term Loan Agreement Amendment, we were required to enter into a letter agreement with the agent under the ABL Facility providing, among other things, that the agent under the ABL Facility would not exercise any remedies with respect to the Eighth Amendment Additional Term Commitment deposited in our Master Account, subject to the terms of such letter agreement. The Eighth Term Loan Agreement Amendment required us, among other things, to (i) comply with the terms and conditions of the previously disclosed Restructuring Support Agreement; and (ii) within 5 days of the Eighth Amendment Effective Date, cause mortgage title policies to be issued for all real property collateral under our Term Loan Agreement and to pay all premiums or such title policies.

Ninth Amendment to Term Loan

On April 24, 2017 (the “Ninth Amendment Effective Date”), we entered into an Ninth Amendment (Increase Amendment) to Term Loan Credit Agreement (the “Ninth Term Loan Agreement Amendment”) by and among the Term Loan Lenders, Wilmington, as administrative agent, Wells Fargo, as collateral agent, the Company, and the guarantors named therein, which further amends the Term Loan Credit Agreement by increasing the Term Loan Lenders’ commitment and the principal amount borrowed by the Company under the Term Loan Agreement from $69.3 million to $75.4 million (the “Ninth Amendment

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Additional Term Commitment”). The Ninth Amendment Additional Term Commitment is in partial satisfaction of the requirement to fund Supplemental Term Loans (as defined in the Fifth Amendment to Term Loan Credit Agreement).

Pursuant to the Ninth Term Loan Agreement Amendment, we are required to use a portion of the net cash proceeds of the Ninth Amendment Additional Term Commitment of $6.0 million to pay the fees, costs and expenses incurred in connection with the Ninth Term Loan Agreement Amendment. The remaining net cash proceeds, subject to satisfaction of certain release conditions, will be available for general operating, working capital and other general corporate purposes. We intend to use the additional liquidity provided by the Ninth Amendment Additional Term Commitment to fund its business operations until the filing of the Plan.

As a condition to the effectiveness of the Ninth Term Loan Agreement Amendment, we were required to enter into a letter agreement with the agent under our ABL Facility providing, among other things, that the agent under the ABL Facility would not exercise any remedies with respect to the Ninth Amendment Additional Term Commitment deposited in our Master Account, subject to the terms of such letter agreement.

The Ninth Term Loan Agreement Amendment required us, among other things, to (i) comply with the terms and conditions of the RSA; and (ii) within 5 days of the Ninth Amendment Effective Date, cause mortgage title policies to be issued for all real property collateral under the Company’s Term Loan Agreement and to pay all premiums for such title policies.

Letter Agreements Regarding Additional Term Loan Commitments

Fifth Amendment Letter Agreement

On April 3, 2017, in connection with the Term Loan Agreement Amendment, we and Wells Fargo Bank, National Association, as Administrative Agent ("Wells Fargo") entered into a letter agreement regarding the Additional Term Commitment (the “Fifth Amendment Letter Agreement”). Pursuant to the Fifth Amendment Letter Agreement, Wells Fargo agreed to not exercise any remedies with respect to the cash proceeds received from the Additional Term Commitment or any additional Term Loans that are deposited in our Master Account. In addition, the Fifth Amendment Letter Agreement provides that in the event Wells Fargo or the lenders under the ABL Facility foreclose or otherwise obtain direct control over the Additional Term Commitment, such Additional Term Commitment shall be deemed to be held in trust by Wells Fargo or the lenders under the ABL Facility for the benefit of the Term Loan Lenders.

Sixth Amendment Letter Agreement

On April 6, 2017, in connection with the Sixth Term Loan Agreement Amendment, we and Wells Fargo entered into a letter agreement regarding the Sixth Amendment Additional Term Commitment (the “Sixth Amendment Letter Agreement”). Pursuant to the Sixth Amendment Letter Agreement, Wells Fargo agreed to not exercise any remedies with respect to the cash proceeds received from the Sixth Amendment Additional Term Commitment that are deposited in our Master Account. In addition, the Sixth Amendment Letter Agreement provides that in the event Wells Fargo or the lenders under the ABL Facility foreclose or otherwise obtain direct control over the Sixth Amendment Additional Term Commitment, such Sixth Amendment Additional Term Commitment shall be deemed to be held in trust by Wells Fargo or the lenders under the ABL Facility for the benefit of the Term Loan Lenders.

Seventh Amendment Letter Agreement

On April 10, 2017, in connection with the Seventh Term Loan Agreement Amendment, we and Wells Fargo entered into a letter agreement regarding the Seventh Amendment Additional Term Commitment (the “Seventh Amendment Letter Agreement”). Pursuant to the Seventh Amendment Letter Agreement, Wells Fargo agreed to not exercise any remedies with respect to the cash proceeds received from the Seventh Amendment Additional Term Commitment that are deposited in our Master Account. In addition, the Seventh Amendment Letter Agreement provides that in the event Wells Fargo or the lenders under the ABL Facility foreclose or otherwise obtain direct control over the Seventh Amendment Additional Term Commitment, such Seventh Amendment Additional Term Commitment shall be deemed to be held in trust by Wells Fargo or the lenders under the ABL Facility for the benefit of the Term Loan Lenders.

Eighth Amendment Letter Agreement

On April 18, 2017, in connection with the Eighth Term Loan Agreement Amendment, we and Wells Fargo entered into a letter agreement regarding the Eighth Amendment Additional Term Commitment (the “Eighth Amendment Letter Agreement”).

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Pursuant to the Eighth Amendment Letter Agreement, Wells Fargo agreed to not exercise any remedies with respect to the cash proceeds received from the Eighth Amendment Additional Term Commitment that are deposited in our Master Account, subject to the terms of such Eighth Amendment Letter Agreement. In addition, the Eighth Amendment Letter Agreement provides that in the event Wells Fargo or the lenders under the ABL Facility foreclose or otherwise obtain direct control over the Eighth Amendment Additional Term Commitment, such Eighth Amendment Additional Term Commitment shall be deemed to be held in trust by Wells Fargo or the lenders under the ABL Facility for the benefit of the Term Loan Lenders.

Ninth Amendment Letter Agreement

On April 24, 2017, in connection with the Ninth Term Loan Agreement Amendment, we and Wells Fargo entered into a letter agreement regarding the Ninth Amendment Additional Term Commitment (the “Ninth Amendment Letter Agreement”). Pursuant to the Ninth Amendment Letter Agreement, Wells Fargo agreed to not exercise any remedies with respect to the cash proceeds received from the Ninth Amendment Additional Term Commitment that are deposited in our Master Account, subject to the terms of such Ninth Amendment Letter Agreement. In addition, the Ninth Amendment Letter Agreement provides that in the event Wells Fargo or the lenders under the ABL Facility foreclose or otherwise obtain direct control over the Ninth Amendment Additional Term Commitment, such Ninth Amendment Additional Term Commitment shall be deemed to be held in trust by Wells Fargo or the lenders under the ABL Facility for the benefit of the Term Loan Lenders.

Intercreditor Agreement Amendments

Third Intercreditor Agreement Amendments

On April 3, 2017, in connection with the Fifth Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 3 to Intercreditor Agreement (the “Pari Passu Intercreditor Agreement Amendment”), dated April 3, 2017, by and among Wells Fargo, as pari passu collateral agent, Wells Fargo, as revolving credit agreement agent under the ABL Facility, and Wilmington, as administrative agent under the Term Loan Agreement, which further amends the Intercreditor Agreement, dated as of April 15, 2016, between Wells Fargo, as pari passu collateral agent, Wells Fargo, as administrative agent under the ABL Facility, and Wilmington, as administrative agent under the Term Loan Agreement. On April 3, 2017, in connection with the Fifth Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 3 to Intercreditor Agreement (the “Second Lien Intercreditor Agreement Amendment”), dated April 3, 2017, by and among Wells Fargo, as revolving credit agreement agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as second lien agent under the Second Lien Intercreditor Agreement, which further amends the Intercreditor Agreement, dated as of April 15, 2016, between Wells Fargo, as administrative agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as collateral agent under the indenture governing our 2021 Notes. The Pari Passu Intercreditor Agreement Amendment and the Second Lien Intercreditor Agreement Amendment permit the Additional Term Commitment by amending the Term Loan Cap (as defined therein) to increase it from $63.9 million to $65.1 million. The Term Loan Cap is higher than the commitment under the Term Loan, as it includes, in addition to the Term Loan Lenders’ commitment under the Term Loan Agreement, origination fees paid in kind and a 10.0% cushion.

Fourth Intercreditor Agreement Amendments

On April 6, 2017, in connection with the Sixth Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 4 to Intercreditor Agreement (the “Fourth Pari Passu Intercreditor Agreement Amendment”), dated April 6, 2017 by and among Wells Fargo, as pari passu collateral agent, Wells Fargo, as revolving credit agreement agent under the ABL Facility, and Wilmington, as administrative agent under the Term Loan Agreement, which further amends the Pari Passu Intercreditor Agreement. On April 6, 2017, in connection with the Sixth Term Loan Agreement Amendment,we acknowledged and agreed to the terms and conditions under Amendment No. 4 to Intercreditor Agreement (the “Second Lien Intercreditor Agreement Fourth Amendment”), dated April 6, 2017, by and among Wells Fargo, as revolving credit agreement agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as second lien agent under the Second Lien Intercreditor Agreement, which further amends the Second Lien Intercreditor Agreement. The Fourth Pari Passu Intercreditor Agreement Amendment and the Second Lien Intercreditor Agreement Fourth Amendment permit the Sixth Amendment Additional Term Commitment by amending the Term Loan Cap to increase it from $65.1 million to $66.3 million. The Term Loan Cap is higher than the commitment under the Term Loan, as it includes, in addition to the Term Loan Lenders’ commitment under the Term Loan Agreement, origination fees paid in kind and a 10.0% cushion.


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Fifth Intercreditor Agreement Amendments

On April 10, 2017, in connection with the Seventh Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 5 to Intercreditor Agreement (the “Fifth Pari Passu Intercreditor Agreement Amendment”), dated April 7, 2017 by and among Wells Fargo, as pari passu collateral agent, Wells Fargo, as revolving credit agreement agent under the ABL Facility, and Wilmington, as administrative agent under the Term Loan Agreement, which further amends the Pari Passu Intercreditor Agreement. On April 10, 2017, in connection with the Seventh Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 5 to Intercreditor Agreement (the “Second Lien Intercreditor Agreement Fifth Amendment”), dated April 7, 2017, by and among Wells Fargo, as revolving credit agreement agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as second lien agent under the Second Lien Intercreditor Agreement, which further amends the Second Lien Intercreditor Agreement. The Fifth Pari Passu Intercreditor Agreement Amendment and the Second Lien Intercreditor Agreement Fifth Amendment permit the Seventh Amendment Additional Term Commitment by amending the Term Loan Cap to increase it from to $66.3 million to $72.4 million. The Term Loan Cap is higher than the commitment under the Term Loan, as it includes, in addition to the Term Loan Lenders’ commitment under the Term Loan Agreement, origination fees paid in kind and a 10.0% cushion.

Sixth Intercreditor Agreement Amendments

On April 18, 2017, in connection with the Eighth Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 6 to Intercreditor Agreement (the “Sixth Pari Passu Intercreditor Agreement
Amendment”), dated April 18, 2017, by and among Wells Fargo, as pari passu collateral agent, Wells Fargo, as revolving credit agreement agent under the ABL Facility, and Wilmington, as administrative agent under the Term Loan Agreement, which further amends the Pari Passu Intercreditor Agreement. On April 18, 2017, in connection with the Eighth Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 6 to Intercreditor Agreement (the “Second Lien Intercreditor Agreement Sixth Amendment”), dated April 18, 2017, by and among Wells Fargo, as revolving credit agreement agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as second lien agent under the Second Lien Intercreditor Agreement, which further amends the Intercreditor Agreement, dated as of April 15, 2016, between Wells Fargo, as administrative agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as collateral agent under the indenture governing the 2021 Notes. The Sixth Pari Passu Intercreditor Agreement Amendment and the Second Lien Intercreditor Agreement Sixth Amendment permit the Eighth Amendment Additional Term Commitment by increasing the Term Loan Cap (as defined therein) from $72.4 million to $76.3 million. The Term Loan Cap is higher than the commitment under the Term Loan Agreement, as it includes, in addition to the Lenders’ commitment under the Term Loan Agreement, origination fees paid in kind and a 10.0% cushion.

Seventh Intercreditor Agreement Amendments

On April 24, 2017, in connection with the Ninth Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 7 to Intercreditor Agreement (the “Seventh Pari Passu Intercreditor Agreement Amendment”), dated April 24, 2017, by and among Wells Fargo, as pari passu collateral agent, Wells Fargo, as revolving credit agreement agent under the ABL Facility, and Wilmington, as administrative agent under the Term Loan Agreement, which further amends the Pari Passu Intercreditor Agreement. On April 24, 2017, in connection with the Ninth Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 7 to Intercreditor Agreement (the “Second Lien Intercreditor Agreement Seventh Amendment”), dated April 24, 2017, by and among Wells Fargo, as revolving credit agreement agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as second lien agent under the Second Lien Intercreditor Agreement, which further amends the Second Lien Intercreditor Agreement. The Seventh Pari Passu Intercreditor Agreement Amendment and the Second Lien Intercreditor Agreement Seventh Amendment permit the Ninth Amendment Additional Term Commitment by increasing the Term Loan Cap (as defined therein) from $76.3 million to $82.9 million. The Term Loan Cap is higher than the commitment under the Term Loan Agreement, as it includes, in addition to the Term Loan Lenders’ commitment under the Term Loan Agreement, origination fees paid in kind and a 10.0% cushion.

Deferral of Interest Payment and Debt Instrument Defaults

On April 17, 2017, we elected to exercise our 30-day grace periods and defer making the approximately $2.0 million in cash interest payments due April 17, 2017 on our outstanding 2018 Notes, and the approximately $9.0 million in cash interest payments due April 17, 2017 on our outstanding 2021 Notes. Under the Indenture governing the 2018 Notes and the 2021

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Notes, we have a 30-day grace period following the April 17, 2017 interest payment date to make the interest payments before an event of default would occur.

The occurrence of an event of default under the Indentures would also constitute an event of default under our ABL Facility, and Term Loan Agreement. As previously disclosed, we are in default under our ABL Facility and such default constitutes an event of cross-default under the Term Loan Agreement and the Indentures. The lenders under the ABL Facility and Term Loan Agreement and the trustees and noteholders under the Indentures have not yet exercised their rights and remedies in respect of such defaults; however, they may choose to do so at any time. We do not have sufficient liquidity to repay the obligations under the ABL Facility, Term Loan Agreement, or the Indentures. As such, the holders of our indebtedness may initiate foreclosure actions at any time. As previously disclosed, we filed a prepackaged plan of reorganization under chapter 11 of the United States Bankruptcy Code on May 1, 2017, in order to restructure our outstanding indebtedness. In addition, the filing of the Plan constituted an event of default that accelerated the Company’s obligations under the ABL Facility, Term Loan, indenture governing the 2018 Notes, indenture governing the 2021 Notes, and note issued in connection with the acquisition of the remaining 49% interest in AWS.

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Plan automatically stayed most actions against the Nuverra Parties, including actions to collect indebtedness incurred prior to the filing of the Plan or to exercise control over the Nuverra Parties’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the chapter 11 cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Nuverra Parties or their property to recover on, collect or secure a claim arising prior to the filing of the Plan or to exercise control over property of the Nuverra Parties’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. As a result, the filing of the Plan with the Bankruptcy Court automatically stayed any potential action arising from the default under the ABL Facility, Term Loan, and the indentures governing our 2018 Notes and 2021 Notes, and we expect such indebtedness will be discharged through the chapter 11 proceeding.

OTCQB Listing Removal

On May 1, 2017, the Company notified the OTCQB U.S. Market (the “OTCQB”) that it had filed the Plan and commenced the chapter 11 cases. As an issuer may not be listed on the OTCQB if it is subject to bankruptcy or reorganization proceedings, as a result of filing the Plan, on May 2, 2017, the OTCQB removed the Company from listing on the OTCQB and the Company began trading on the OTC Pink Marketplace under the symbol “NESCQ”.




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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Note about Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related notes thereto. See “Forward-Looking Statements” on page 3 of this Quarterly Report and “Risk Factors” included in our Annual Report on Form 10-K for fiscal year 2016, herein on page 54, and in our other filings with the SEC for a description of important factors that could cause actual results to differ from expected results.
Company Overview
Nuverra Environmental Solutions, Inc. (“Nuverra,” the “Company,” “we,” “us,” or “our”) is among the largest companies in the United States dedicated to providing comprehensive, full-cycle environmental solutions to customers focused on the development and ongoing production of oil and natural gas from shale formations. Our strategy is to provide one-stop, total environmental solutions and wellsite logistics management, including delivery, collection, treatment, recycling, and disposal of solid and liquid materials that are used in and generated by the drilling, completion, and ongoing production of shale oil and natural gas.
We operate in shale basins where customer exploration and production (“E&P”) activities are predominantly focused on shale oil and natural gas as follows:
Oil shale areas: includes our operations in the Bakken and Eagle Ford Shale areas.
Natural gas shale areas: includes our operations in the Marcellus, Utica, and Haynesville Shale areas.
We support our customers’ demand for diverse, comprehensive and regulatory compliant environmental solutions required for the safe and efficient drilling, completion and production of oil and natural gas from shale formations. Current services, as well as prospective services in which we have made investments, include (i) logistics management, including via procurement, delivery, collection, storage, treatment, recycling and disposal of solid and liquid materials and waste products; (ii) temporary and permanent water midstream assets, consisting of temporary and permanent pipeline facilities and other waste management infrastructure assets; (iii) equipment rental and staging services; and (iv) other ancillary services for E&P companies focused on the extraction of oil and natural gas resources from shale formations.
We utilize a broad array of assets to meet our customers' logistics and environmental management needs. Our logistics assets include trucks and trailers, temporary and permanent pipelines, temporary and permanent storage facilities, ancillary rental equipment, treatment facilities, and liquid and solid waste disposal sites. We continue to expand our suite of solutions to customers who demand safety, environmental compliance and accountability from their service providers.
As a result of our historical acquisition activity to expand our presence in existing shale basins, access new markets and to expand the breadth and scope of services we provide, we have accumulated a large level of indebtedness. Due to the continued decline in oil and natural gas prices, and the resulting decrease in drilling and completion activities, we have experienced a lower demand for our services over the last two years. The decrease in demand for our services impacts our overall liquidity and our ability to generate sufficient cash to meet our debt obligations and operating needs. Additionally, if the decrease in demand for our services continues for a prolonged period of time, or if we make downward adjustments to our projections, our actual cash flows could be less than our estimated cash flows, which could result in future impairment charges for long-lived assets. See the "Liquidity and Capital Resources" discussion later in this section for further details.

In order to address our liquidity issues and provide for a restructuring of our indebtedness to improve our long-term capital structure, we entered into a Restructuring Support Agreement with holders (the "Supporting Noteholders") of 100% of the existing Term Loan Debt and approximately 86% of our 12.5%/10.0% Senior Secured Second Lien Notes due 2021 (the "2021 Notes") on April 9, 2017, which was further amended on April 20, 2017 and April 28, 2017 (the "Restructuring Support Agreement"). See the "Subsequent Events Related to the Chapter 11 Cases, Indebtedness, and Restructuring Plan" section included in Item 2, as well as Note 17 of the Notes to the Condensed Consolidated Financial Statements for further discussion.

Recent Developments

On May 1, 2017, the Company and its subsidiaries (collectively with the Company, the “Nuverra Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to pursue prepackaged plans of reorganization (together, the “Plan”). The Nuverra Parties’ chapter 11 cases are being jointly administered under the caption In re Nuverra Environmental

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Solutions, Inc., et al. (Case Nos. 17-10949 through 17-10962). No trustee has been appointed, and the Nuverra Parties will continue to operate their businesses as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. We expect to continue our operations without interruption during the pendency of the chapter 11 cases, but there can be no assurances.

The subsidiary Debtors in the chapter 11 Cases are Heckmann Water Resources Corporation, Heckmann Water Resources (CVR) Inc., 1960 Well Services, LLC, HEK Water Solutions, LLC, Appalachian Water Services, LLC, Badlands Power Fuels, LLC (a Delaware limited liability company), Badlands Power Fuels LLC (a North Dakota limited liability company), Landtech Enterprises, L.L.C., Badlands Leasing, LLC, Ideal Oilfield Disposal, LLC, Nuverra Total Solutions, LLC, NES Water Solutions, LLC and Heckmann Woods Cross, LLC.

On May 2, 2017, to assure ordinary course operations, the Bankruptcy Court entered an interim order (the “DIP Order”) approving on an interim basis a variety of “first day” motions seeking various relief and authorizing the Nuverra Parties to maintain their operations in the ordinary course. The DIP Order, among other things, authorized the Nuverra Parties to (i) enter into, execute, and deliver the DIP Revolving Facility (as defined below) and the DIP Term Loan Agreement (as defined below), and (ii) borrow, on an interim basis, $2.5 million under the DIP Term Loan Agreement, $10.0 million under the DIP Revolving Facility in the aggregate, and $7.5 million under the DIP Term Loan Agreement in the aggregate (including the $2.5 million initial advance made on May 3, 2017) during the interim period before the Bankruptcy Court considers entry of the DIP Order on a final basis. The Bankruptcy Court set a hearing for May 31, 2017 to consider approval of the DIP Order on a final basis.

In connection with the filing of the chapter 11 cases, on May 3, 2017, following the authorization of the Bankruptcy Court, the Company, as borrower, the lenders party thereto (the “DIP Revolving Facility Lenders”), Wells Fargo Bank, National Association, as administrative agent, and other agents party thereto, closed a Debtor-in-Possession Credit Agreement (the “DIP Revolving Facility”), dated as of April 30, 2017, pursuant to which the DIP Revolving Facility Lenders agreed to provide the Company a secured revolving credit facility up to a maximum amount of $31.5 million to, among other things, refinance obligations under the Company's ABL Facility and finance the ongoing general corporate needs of the Nuverra Parties during the course of the chapter 11 proceedings. The DIP Revolving Facility is subject to the Bankruptcy Court's approval of the DIP Order on a final basis.

In addition to the DIP Revolving Facility and in connection with the filing of the chapter 11 cases, on May 3, 2017, following the authorization of the Bankruptcy Court, the Company, as borrower, the lenders party thereto (the “DIP Term Loan Agreement Lenders”), and Wilmington Savings Fund Society, FSB, as administrative agent, closed a Debtor-in-Possession Term Loan Credit Agreement (the “DIP Term Loan Agreement”), dated as of April 30, 2017, pursuant to which the DIP Term Loan Lenders agreed to provide the Company with an initial term loan in the amount of $2.5 million and subsequent term loans not to exceed $12.5 million in the aggregate to, among other things, finance the ongoing general corporate needs of the Nuverra Parties during the course of the chapter 11 proceedings. The DIP Term Loan Lenders made the initial term loan on May 3, 2017, which the Company is using for general corporate purposes. The DIP Term Loan Agreement is subject to the Bankruptcy Court's approval of the DIP Order on a final basis.

See “Subsequent Events Related to the Chapter 11 Cases, Indebtedness and Restructuring Plan” for a further discussion on the Plan, the DIP Revolving Facility, and the DIP Term Loan Agreement.

Trends Affecting Our Operating Results
Our results are driven by demand for our services, which are in turn affected by E&P spending trends in the shale areas in which we operate, in particular the level of drilling activity (which impacts the amount of environmental waste products being managed) and active wells (which impacts the amount of produced water being managed). In general, drilling activity in the oil and natural gas industry is affected by the market prices (or anticipated prices) for those commodities. Persistent low natural gas prices have resulted in reduced drilling activity in “dry” gas shale areas such as the Haynesville and Marcellus Shale areas where natural gas is the predominant natural resource. In addition, the low natural gas prices have in the past caused many natural gas producers to curtail capital budgets and these cuts in spending curtailed drilling programs, as well as discretionary spending on well services in certain shale areas, and accordingly reduced demand for our services in these areas. As a result of the decline in oil prices that began in the fourth quarter of 2014 and continued throughout most of 2016, drilling and completion activities in the oil and "wet" gas basins such as the Eagle Ford, Utica and Bakken shale areas experienced a dramatic decline. Accordingly, our customer base reduced their capital programs and drilling and completion activity levels during 2016.
Due to oil prices becoming more stable in early 2017, we are beginning to see drilling and completion activities increase in all basins. We would expect continued stability or further price growth to lead to increased drilling and completion activities by our customer base during 2017 when compared to 2016. Increased drilling and completion activities would likely lead to a

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