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EX-32.1 - EXHIBIT 32.1 - Nuverra Environmental Solutions, Inc.nes_20180930xex321.htm
EX-31.2 - EXHIBIT 31.2 - Nuverra Environmental Solutions, Inc.nes_20180930xex312.htm
EX-31.1 - EXHIBIT 31.1 - Nuverra Environmental Solutions, Inc.nes_20180930xex311.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: September 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 001-33816
_________________________________
nesimagea10.jpg
__________________________________
Delaware
26-0287117
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
6720 N. Scottsdale Road, Suite 190, Scottsdale, AZ 85253
(602) 903-7802
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
__________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x
Smaller reporting company
x
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed all the documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan of confirmation by a court. Yes  x    No  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x
The number of shares outstanding of the registrant’s common stock as of October 31, 2018 was 12,233,087.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 

2



Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the “Exchange Act.” These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:
the expected benefits of our completed restructuring under chapter 11 of the United States Bankruptcy Code (“the Bankruptcy Code”) to improve our long-term capital structure;
future financial performance and growth targets or expectations;
market and industry trends and developments, including, but not limited to, statements regarding fluctuations in oil and natural gas prices and third-party projections for the markets in which we operate; and
the potential benefits of our completed and any future merger, acquisition, disposition, restructuring, and financing transactions.
You can identify these and other forward-looking statements by the use of words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “might,” “will,” “should,” “would,” “could,” “potential,” “future,” “continue,” “ongoing,” “forecast,” “project,” “target” or similar expressions, and variations or negatives of these words.
These forward-looking statements are based on information available to us as of the date of this Quarterly Report and our current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. Future performance cannot be ensured, and actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include, among others:
the effects of our completed restructuring on the Company and the interests of various constituents;

risks and uncertainties associated with the restructuring process, including the outcome of a pending appeal of the order confirming the plan of reorganization and our ability to execute the requirements of the plan of reorganization subsequent to the effective date;

the loss of one or more of our larger customers;

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

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

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

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

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

higher than forecasted capital expenditures to maintain and repair our fleet of trucks, equipment and disposal wells;
control of costs and expenses;
risks associated with the limited trading volume of our common stock on the NYSE American Stock Exchange, including potential fluctuations in the trading prices of our common stock;

3



risks associated with the reliance on third-party analyst and expert market projections and data for the markets in which we operate;
risks associated with changes in industry practices and operational technologies and the impact on our business;
present and possible future claims, litigation or enforcement actions or investigations;
financial results that may be volatile and may not reflect historical trends due to, among other things, changes in commodity prices or general market conditions, acquisition and disposition activities, fluctuations in consumer trends, pricing pressures, transportation costs, changes in raw material or labor prices or rates related to our business and changing regulations or political developments in the markets in which we operate;
changes in customer drilling, completion and production activities, operating methods and capital expenditure plans, including impacts due to low oil and/or natural gas prices or the economic or regulatory environment;
risks associated with our customers’ access to sufficient capital to fund their business operations in the areas in which we operate, including unforeseen reductions in customer budget or capital availability, depletion of unallocated customer capital over the course of the applicable budget period, or redeployment of customer capital into different geographic areas;
risks associated with the operation, construction, development and closure of saltwater disposal wells, solids and liquids treatment and transportation assets, landfills and pipelines, including access to additional locations and rights-of-way, environmental remediation obligations, unscheduled delays or inefficiencies and reductions in volume due to micro- and macro-economic factors or the availability of less expensive alternatives;
the effects of competition in the markets in which we operate, including the adverse impact of competitive product announcements or new entrants into our markets and transfers of resources by competitors into our markets;
changes in economic conditions in the markets in which we operate or in the world generally, including as a result of political uncertainty;
the potential impact of changes in governmental trade policies, including the imposition of tariffs and taxes, which may increase costs or otherwise negatively impact our business or the business of our customers;
reduced demand for our services due to regulatory or other influences related to extraction methods such as hydraulic fracturing, shifts in production among shale areas in which we operate or into shale areas in which we do not currently have operations;
the unknown future impact of changes in laws and regulation on waste management and disposal activities, including those impacting the delivery, storage, collection, transportation, treatment and disposal of waste products, as well as the use or reuse of recycled or treated products or byproducts;
risks involving developments in environmental or other governmental laws and regulations in the markets in which we operate and our ability to effectively respond to those developments including laws and regulations relating to oil and natural gas extraction businesses, particularly relating to water usage, and the disposal, transportation and treatment of liquid and solid wastes;
natural disasters, such as hurricanes, earthquakes and floods, or acts of terrorism, or extreme weather conditions, that may impact our business locations, assets, including wells or pipelines, distribution channels, or which otherwise disrupt our or our customers’ operations or the markets we serve; and
other risks identified in this Quarterly Report or referenced from time to time in our filings with the United States Securities and Exchange Commission.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.

 

4



PART I—FINANCIAL INFORMATION
Item  1. Financial Statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
Successor
 
September 30,
 
December 31,
 
2018
 
2017
 
 
 
 
Assets
 
 
 
Cash and cash equivalents
$
15,077

 
$
5,488

Restricted cash
1,850

 
1,296

Accounts receivable, net of allowance for doubtful accounts of $1.8 million and $1.9 million at September 30, 2018 and December 31, 2017, respectively
29,706

 
30,965

Inventories
3,651

 
4,089

Prepaid expenses and other receivables
2,748

 
8,594

Other current assets
869

 
226

Assets held for sale
3,172

 
2,765

Total current assets
57,073

 
53,423

Property, plant and equipment, net of accumulated depreciation of $64.5 million and $35.8 million at September 30, 2018 and December 31, 2017, respectively
184,975

 
229,874

Equity investments
40

 
48

Intangibles, net
429

 
547

Goodwill
27,139

 
27,139

Deferred income taxes
73

 
84

Other assets
133

 
207

Total assets
$
269,862

 
$
311,322

Liabilities and Shareholders’ Equity
 
 
 
Accounts payable
$
7,102

 
$
7,946

Accrued liabilities
15,724

 
13,939

Current contingent consideration
500

 
500

Current portion of long-term debt
4,526

 
5,525

Derivative warrant liability
154

 
477

Total current liabilities
28,006

 
28,387

Long-term debt
31,088

 
33,524

Other long-term liabilities
6,763

 
6,438

Total liabilities
65,857

 
68,349

Shareholders’ equity:
 
 
 
   Common stock
117

 
117

   Additional paid-in capital
302,243

 
290,751

   Accumulated deficit
(98,355
)
 
(47,895
)
Total shareholders’ equity
204,005

 
242,973

Total liabilities and shareholders’ equity
$
269,862

 
$
311,322

The accompanying notes are an integral part of these statements.
 

5



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

 
Successor
 
 
Predecessor
 
Three Months Ended
 
Two Months Ended
 
 
One Month Ended
 
September 30, 2018
 
September 30, 2017
 
 
July 31, 2017
Revenue:
 
 
 
 
 
 
Service revenue
$
45,694

 
$
30,620

 
 
$
13,608

Rental revenue
3,962

 
3,138

 
 
1,514

Total revenue
49,656

 
33,758

 
 
15,122

Costs and expenses:
 
 
 
 
 
 
Direct operating expenses
39,753

 
26,110

 
 
11,896

General and administrative expenses
5,849

 
4,928

 
 
1,326

Depreciation and amortization
10,018

 
17,321

 
 
4,003

    Impairment of long-lived assets
100

 
2,404

 
 

Other, net
49

 

 
 

Total costs and expenses
55,769

 
50,763

 
 
17,225

Operating loss
(6,113
)
 
(17,005
)
 
 
(2,103
)
Interest expense, net
(1,241
)
 
(778
)
 
 
(3,246
)
Other income, net
169

 
294

 
 
7

Reorganization items, net
137

 
530

 
 
229,198

(Loss) income before income taxes
(7,048
)
 
(16,959
)
 
 
223,856

Income tax (expense) benefit
(69
)
 
(34
)
 
 
304

Net (loss) income
$
(7,117
)
 
$
(16,993
)
 
 
$
224,160

 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
Net (loss) income per basic common share
$
(0.61
)
 
$
(1.45
)
 
 
$
1.48

 
 
 
 
 
 
 
Net (loss) income per diluted common share
$
(0.61
)
 
$
(1.45
)
 
 
$
1.42

 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
Basic
11,696

 
11,696

 
 
150,951

Diluted
11,696

 
11,696

 
 
157,394

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)

 
Successor
 
 
Predecessor
 
Nine Months Ended
 
Two Months Ended
 
 
Seven Months Ended
 
September 30, 2018
 
September 30, 2017
 
 
July 31, 2017
Revenue:
 
 
 
 
 
 
Service revenue
$
136,541

 
$
30,620

 
 
$
86,564

Rental revenue
11,732

 
3,138

 
 
9,319

Total revenue
148,273

 
33,758

 
 
95,883

Costs and expenses:
 
 
 
 
 
 
Direct operating expenses
120,449

 
26,110

 
 
81,010

General and administrative expenses
31,183

 
4,928

 
 
22,552

Depreciation and amortization
36,731

 
17,321

 
 
28,981

    Impairment of long-lived assets
4,563

 
2,404

 
 

Other, net
1,117

 

 
 

Total costs and expenses
194,043

 
50,763

 
 
132,543

Operating loss
(45,770
)
 
(17,005
)
 
 
(36,660
)
Interest expense, net
(3,695
)
 
(778
)
 
 
(22,792
)
Other income, net
683

 
294

 
 
4,247

Reorganization items, net
(1,609
)
 
530

 
 
223,494

(Loss) income before income taxes
(50,391
)
 
(16,959
)
 
 
168,289

Income tax (expense) benefit
(69
)
 
(34
)
 
 
322

Net (loss) income
$
(50,460
)
 
$
(16,993
)
 
 
$
168,611

 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
Net (loss) income per basic common share
$
(4.31
)
 
$
(1.45
)
 
 
$
1.12

 
 
 
 
 
 
 
Net (loss) income per diluted common share
$
(4.31
)
 
$
(1.45
)
 
 
$
0.97

 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
Basic
11,696

 
11,696

 
 
150,940

Diluted
11,696

 
11,696

 
 
174,304




7



NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
Successor
 
 
Predecessor
 
Nine Months Ended
 
Two Months Ended
 
 
Seven Months Ended
 
September 30, 2018
 
September 30, 2017
 
 
July 31,
2017
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net (loss) income
$
(50,460
)
 
$
(16,993
)
 
 
$
168,611

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
   Depreciation and amortization
36,731

 
17,321

 
 
28,981

   Amortization of debt issuance costs, net

 

 
 
2,135

   Accrued interest added to debt principal
119

 
177

 
 
11,474

   Stock-based compensation
11,492

 
181

 
 
457

   Impairment of long-lived assets
4,563

 
2,404

 
 

   Gain on sale of UGSI
(75
)
 
(76
)
 
 

   (Gain) loss on disposal of property, plant and equipment
(919
)
 
687

 
 
(258
)
   Bad debt (recoveries) expense
(164
)
 
41

 
 
788

   Change in fair value of derivative warrant liability
(323
)
 
140

 
 
(4,025
)
   Deferred income taxes
11

 
34

 
 
(337
)
   Other, net
541

 
152

 
 
(11,295
)
   Reorganization items, non-cash

 

 
 
(218,600
)
   Changes in operating assets and liabilities:
 
 
 
 
 
 
      Accounts receivable
1,423

 
(5,349
)
 
 
(4,528
)
      Prepaid expenses and other receivables
487

 
(528
)
 
 
472

      Accounts payable and accrued liabilities
1,028

 
(1,111
)
 
 
3,682

      Other assets and liabilities, net
(234
)
 
(152
)
 
 
3,494

Net cash provided by (used in) operating activities
4,220

 
(3,072
)
 
 
(18,949
)
Cash flows from investing activities:
 
 
 
 
 
 
   Proceeds from the sale of property, plant and equipment
19,066

 
1,623

 
 
3,083

   Purchases of property, plant and equipment
(9,687
)
 
(404
)
 
 
(3,149
)
   Proceeds from the sale of UGSI
75

 
76

 
 

Net cash provided by (used in) investing activities
9,454

 
1,295

 
 
(66
)
Cash flows from financing activities:
 
 
 
 
 
 
   Proceeds from Predecessor revolving credit facility

 

 
 
106,785

   Payments on Predecessor revolving credit facility

 

 
 
(129,964
)
   Proceeds from Predecessor term loan

 

 
 
15,700

   Proceeds from debtor in possession term loan

 

 
 
6,875

   Proceeds from Successor First and Second Lien Term Loans

 

 
 
36,053

   Payments on Successor First and Second Lien Term Loans
(2,132
)
 
(442
)
 
 

   Proceeds from Successor revolving facility
172,336

 
28,020

 
 

   Payments on Successor revolving facility
(172,336
)
 
(28,020
)
 
 

   Payments for debt issuance costs

 

 
 
(1,053
)
   Payments on vehicle financing and other financing activities
(1,399
)
 
(1,773
)
 
 
(2,797
)
Net cash (used in) provided by financing activities
(3,531
)
 
(2,215
)
 
 
31,599

Change in cash, cash equivalents and restricted cash
10,143

 
(3,992
)
 
 
12,584

Cash and cash equivalents, beginning of period
5,488

 
7,193

 
 
994

Restricted cash, beginning of period
1,296

 
7,805

 
 
1,420

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

 
14,998

 
 
2,414

Cash and cash equivalents, end of period
15,077

 
3,248

 
 
7,193

Restricted cash, end of period
1,850

 
7,758

 
 
7,805

Cash, cash equivalents and restricted cash, end of period
$
16,927

 
$
11,006

 
 
$
14,998

 
 
 
 
 
 
 

8



 
Successor
 
 
Predecessor
 
Nine Months Ended
 
Two Months Ended
 
 
Seven Months Ended
 
September 30, 2018
 
September 30, 2017
 
 
July 31,
2017
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
   Cash paid for interest
$
2,835

 
$
218

 
 
$
1,568

   Cash paid for taxes, net
390

 
23

 
 
193


The accompanying notes are an integral part of these statements.
 

9



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



 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Total
Shares
 
Amount
 
 
 
Balance at January 1, 2018 (Successor)
 
11,696

 
$
117

 
$
290,751

 
$
(47,895
)
 
$
242,973

Stock-based compensation
 

 

 
10,978

 
$

 
$
10,978

Net loss
 

 

 

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

 
$
117

 
$
301,729

 
$
(80,062
)
 
$
221,784

Stock-based compensation
 

 

 
416

 
$

 
$
416

Net loss
 

 

 

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

 
$
117

 
$
302,145

 
$
(91,238
)
 
$
211,024

Stock-based compensation
 

 

 
98

 

 
98

Net loss
 

 

 

 
(7,117
)
 
(7,117
)
Balance at September 30, 2018 (Successor)
 
11,696

 
$
117

 
$
302,243

 
$
(98,355
)
 
$
204,005


10



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



 
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury Stock
 
Accumulated
Deficit
 
Total
Shares
 
Amount
 
Shares
 
Amount
 
 
Balance at January 1, 2017 (Predecessor)
 
152,433

 
$
152

 
$
1,407,867

 
(1,514
)
 
$
(19,807
)
 
$
(1,557,278
)
 
$
(169,066
)
Stock-based compensation
 

 

 
309

 

 

 

 
309

Issuance of common stock to employees
 
32

 

 

 

 

 

 

Treasury stock acquired through surrender of shares for tax withholding
 

 

 

 
(12
)
 
(2
)
 

 
(2
)
Issuance of common stock for warrants exercised
 
2

 

 

 

 

 

 
 
Net loss
 

 

 

 

 

 
(35,962
)
 
(35,962
)
Balance at March 31, 2017 (Predecessor)
 
152,467

 
$
152

 
$
1,408,176

 
(1,526
)
 
$
(19,809
)
 
$
(1,593,240
)
 
$
(204,721
)
Stock-based compensation
 

 

 
112

 

 

 

 
112

Net loss
 

 

 

 

 

 
(19,587
)
 
(19,587
)
Balance at June 30, 2017 (Predecessor)
 
152,467

 
$
152

 
$
1,408,288

 
(1,526
)
 
$
(19,809
)
 
$
(1,612,827
)
 
$
(224,196
)
Stock-based compensation
 

 

 
36

 

 

 

 
36

Issuance of common stock for warrants exercised
 
13

 

 

 

 

 

 

Net income
 

 

 

 

 

 
224,160

 
224,160

Balance at July 31, 2017 (Predecessor)
 
152,480

 
$
152

 
$
1,408,324

 
(1,526
)
 
$
(19,809
)
 
$
(1,388,667
)
 
$

Implementation of Plan and Application of Fresh Start Accounting:
Cancellation of Predecessor equity
 
(152,480
)
 
(152
)
 
(1,408,324
)
 
1,526

 
19,809

 
1,388,667

 

Issuance of Successor common stock and warrants
 
11,696

 
117

 
290,074

 

 

 

 
290,191

Balance at August 1, 2017 (Successor)
 
11,696

 
$
117

 
$
290,074

 

 
$

 
$

 
$
290,191

Stock-based compensation
 

 

 
181

 

 

 

 
181

Net loss
 

 

 

 

 

 
(16,993
)
 
(16,993
)
Balance at September 30, 2017 (Successor)
 
11,696

 
$
117

 
$
290,255

 

 
$

 
$
(16,993
)
 
$
273,379




11



NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements of Nuverra Environmental Solutions, Inc. and its subsidiaries (collectively, “Nuverra,” the “Company,” “we,” “us,” or “our”) are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Our condensed consolidated balance sheet as of December 31, 2017, included herein, has been derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (or “GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 16, 2018 (as amended on April 19, 2018, the “2017 Annual Report on Form 10-K”).
All dollar and share amounts in the footnote tabular presentations are in thousands, except per share amounts and unless otherwise noted.
On May 1, 2017, the Company and certain of its material subsidiaries (collectively with the Company, the “Nuverra Parties”) filed voluntary petitions under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to pursue prepackaged plans of reorganization (together, and as amended, the “Plan”). On July 25, 2017, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan. The Plan became effective on August 7, 2017 (the “Effective Date”), when all remaining conditions to the effectiveness of the Plan were satisfied or waived. On June 22, 2018, the Bankruptcy Court issued a final decree and order closing the chapter 11 cases, subject to certain conditions as set forth therein.

Upon emergence, we elected to apply fresh start accounting effective July 31, 2017, to coincide with the timing of our normal accounting period close. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, a new entity for financial reporting purposes was created, and as such, the condensed consolidated financial statements on or after August 1, 2017, are not comparable with the condensed consolidated financial statements prior to that date.

References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to July 31, 2017. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company on and prior to July 31, 2017.

Recently Adopted Accounting Pronouncements

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

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

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) related to the classification of certain cash receipts and cash payments on the statement of cash flows. The pronouncement provides clarification and guidance on eight specific cash flow presentation issues that have developed due to diversity in practice. The issues include, but are not limited to, debt prepayment or extinguishment costs, settlement of zero-coupon debt, proceeds from the settlement of insurance claims, and contingent consideration payments made after a business combination. The pronouncement is effective for fiscal years, and for interim periods within those fiscal

12



years, beginning after December 15, 2017, with early adoption permitted. We adopted this pronouncement for our fiscal year beginning January 1, 2018, which did not have a significant impact on the consolidated statement of cash flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). This guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. As a result, restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and is to be applied retrospectively. The adoption of this guidance as of January 1, 2018 did not have a significant impact on our consolidated statement of cash flows, other than the classification of restricted cash within the beginning-of-period and end-of-period totals on the consolidated statement of cash flows, as opposed to being excluded from these totals. We have adjusted the prior year period to reflect this new presentation as well.

There have been no other material changes or developments in our significant accounting policies or evaluation of accounting estimates and underlying assumptions or methodologies from those disclosed in our 2017 Annual Report on Form 10-K.

Note 2 - Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, using a modified retrospective approach. Early adoption of ASU 2016-02 is permitted. We are nearing the completion of our assessment of the impact ASU 2016-02 will have on our consolidated financial statements. Based upon the work performed thus far, we expect the primary change upon adoption to be the recognition, on a discounted basis, of our minimum commitments under non-cancellable operating leases on our consolidated balance sheets resulting in the recording of right of use assets and lease obligations. We have also reviewed the various practical expedients that have been approved by the FASB for ASU 2016-02 and have selected which ones we plan to adopt when we implement the new standard effective January 1, 2019.

Note 3 - Revenues

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

Revenue Recognition

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

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


13



The following tables present our revenues disaggregated by revenue source for each reportable segment for the three months ended September 30, 2018, two months ended September 30, 2017, and one month ended July 31, 2017:

 
Successor
 
For the Three Months Ended September 30, 2018
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
21,809

 
$
9,243

 
$
3,682

 
$

 
$
34,734

Disposal Services
5,235

 
1,329

 
1,234

 

 
7,798

Other Revenue
2,471

 
615

 
76

 

 
3,162

    Total Service Revenue
29,515

 
11,187

 
4,992

 

 
45,694

 
 
 
 
 
 
 
 
 
 
Rental Revenue
3,884

 
60

 
18

 

 
3,962

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
33,399

 
$
11,247

 
$
5,010

 
$

 
$
49,656


 
Successor
 
For the Two Months Ended September 30, 2017
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
13,573

 
$
5,830

 
$
4,708

 
$

 
$
24,111

Disposal Services
2,325

 
400

 
890

 

 
3,615

Other Revenue
1,935

 
892

 
67

 

 
2,894

    Total Service Revenue
17,833

 
7,122

 
5,665

 

 
30,620

 
 
 
 
 
 
 
 
 
 
Rental Revenue
2,734

 
37

 
367

 

 
3,138

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
20,567

 
$
7,159

 
$
6,032

 
$

 
$
33,758


 
Predecessor
 
For the One Month Ended July 31, 2017
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
5,878

 
$
2,777

 
$
2,697

 
$

 
$
11,352

Disposal Services
980

 
308

 
311

 

 
1,599

Other Revenue
325

 
297

 
35

 

 
657

    Total Service Revenue
7,183

 
3,382

 
3,043

 

 
13,608

 
 
 
 
 
 
 
 
 
 
Rental Revenue
1,319

 
42

 
153

 

 
1,514

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
8,502

 
$
3,424

 
$
3,196

 
$

 
$
15,122




14



The following tables present our revenues disaggregated by revenue source for each reportable segment for the nine months ended September 30, 2018, two months ended September 30, 2017 and seven months ended July 31, 2017:

 
Successor
 
For the Nine Months Ended September 30, 2018
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
65,036

 
$
25,492

 
$
16,807

 
$

 
$
107,335

Disposal Services
13,387

 
3,061

 
3,551

 

 
19,999

Other Revenue
7,715

 
1,231

 
261

 

 
9,207

    Total Service Revenue
86,138

 
29,784

 
20,619

 

 
136,541

 
 
 
 
 
 
 
 
 
 
Rental Revenue
11,196

 
182

 
354

 

 
11,732

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
97,334

 
$
29,966

 
$
20,973

 
$

 
$
148,273


 
Successor
 
For the Two Months Ended September 30, 2017
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
13,573

 
$
5,830

 
$
4,708

 
$

 
$
24,111

Disposal Services
2,325

 
400

 
890

 

 
3,615

Other Revenue
1,935

 
892

 
67

 

 
2,894

    Total Service Revenue
17,833

 
7,122

 
5,665

 

 
30,620

 
 
 
 
 
 
 
 
 
 
Rental Revenue
2,734

 
37

 
367

 

 
3,138

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
20,567

 
$
7,159

 
$
6,032

 
$

 
$
33,758


 
Predecessor
 
For the Seven Months Ended July 31, 2017
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
38,844

 
$
17,118

 
$
15,764

 
$

 
$
71,726

Disposal Services
6,506

 
1,284

 
1,522

 

 
9,312

Other Revenue
2,975

 
2,240

 
311

 

 
5,526

    Total Service Revenue
48,325

 
20,642

 
17,597

 

 
86,564

 
 
 
 
 
 
 
 
 
 
Rental Revenue
8,221

 
109

 
989

 

 
9,319

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
56,546

 
$
20,751

 
$
18,586

 
$

 
$
95,883



Water Transfer Services

The majority of our revenues are from the removal and disposal of flowback and produced saltwater originating from oil and natural gas wells or the transportation of fresh water and saltwater to customer sites for use in drilling and hydraulic fracturing activities by trucks or through temporary or permanent water transport pipelines. Water transfer rates for trucking are generally based upon a fixed fee per barrel of disposal water, but in certain circumstances may be based upon an hourly rate. Revenue is

15



recognized once the water has been transferred, or over time, based upon the number of barrels transported or disposed of, or at the agreed upon hourly rate, depending upon the customer contract. Contracts for the use of our disposal water pipeline are priced at a fixed fee per disposal barrel transferred, with revenues recognized over time from when the water is injected into our pipeline until the transfer is complete. Water transfer services are all generally completed within 24 hours with no remaining performance obligation outstanding at the end of each month.

Disposal Services

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

Other Revenue

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

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

Rental Revenue

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

Practical Expedients

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

Note 4 - Earnings Per Common Share
Net (loss) income per basic and diluted common share have been computed using the weighted average number of shares of common stock outstanding during the period. For the three and nine months ended September 30, 2018, and the two months ended September 30, 2017, no shares of common stock underlying stock options, restricted stock or warrants were included in the computation of diluted earnings per common share because the inclusion of such shares would be anti-dilutive based on the net losses reported for those periods.

16



The following table presents the calculation of basic and diluted net (loss) income per common share, as well as the anti-dilutive stock-based awards that were excluded from the calculation of diluted loss per share for the periods presented:
 
Successor
 
 
Predecessor
 
Three Months Ended
 
Two Months Ended
 
 
One Month Ended
 
September 30, 2018
 
September 30, 2017
 
 
July 31, 2017
Numerator:
 
 
 
 
 
 
Net (loss) income
$
(7,117
)
 
$
(16,993
)
 
 
$
224,160

 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
Weighted average shares—basic
11,696

 
11,696

 
 
150,951

Common stock equivalents

 

 
 
6,443

Weighted average shares—diluted
11,696

 
11,696

 
 
157,394

 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
Net (loss) income per basic common share
$
(0.61
)
 
$
(1.45
)
 
 
$
1.48

 
 
 
 
 
 
 
Net (loss) income per diluted common share
$
(0.61
)
 
$
(1.45
)
 
 
$
1.42

 
 
 
 
 
 
 
Anti-dilutive stock-based awards excluded:
1,210

 
828

 
 
576

 
Successor
 
 
Predecessor
 
Nine Months Ended
 
Two Months Ended
 
 
Seven Months Ended
 
September 30, 2018
 
September 30, 2017
 
 
July 31, 2017
Numerator:
 
 
 
 
 
 
Net (loss) income
$
(50,460
)
 
$
(16,993
)
 
 
$
168,611

 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
Weighted average shares—basic
11,696

 
11,696

 
 
150,940

Common stock equivalents

 

 
 
23,364

Weighted average shares—diluted
11,696

 
11,696

 
 
174,304

 
 
 
 
 
 
 
Earnings per common share:
 
 
 
Net (loss) income per basic common share
$
(4.31
)
 
$
(1.45
)
 
 
$
1.12

 
 
 
 
 
 
 
Net (loss) income per diluted common share
$
(4.31
)
 
$
(1.45
)
 
 
$
0.97

 
 
 
 
 
 
 
Anti-dilutive stock-based awards excluded:
1,227

 
828

 
 
593


17



Note 5 - Intangible Assets

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

 
$
(13
)
 
$
(152
)
 
$
429

 
5.5
Total intangible assets
$
594

 
$
(13
)
 
$
(152
)
 
$
429

 
5.5
 
 
 
 
 
 
 
 
 
 
 
Successor
 
December 31, 2017
 
Gross Carrying Amount
 
Additions/(Disposals)
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
Disposal permits
$
594

 
$

 
$
(47
)
 
$
547

 
6.2
Total intangible assets
$
594

 
$

 
$
(47
)
 
$
547

 
6.2
 
 
 
 
 
 
 
 
 
 

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

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

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

During the three months ended September 30, 2018, we recorded an impairment charge of $0.1 million in the Southern division for the further write-down of buildings and land held for sale as a result of exiting the Eagle Ford Shale area due to updated market pricing. The $0.1 million is included in “Impairment of long-lived assets” on our condensed consolidated statements of operations.

During the two months ended September 30, 2017, management approved plans to sell certain underutilized assets located in the Rocky Mountain and Southern divisions. As the fair value of the assets reclassified as held for sale during the quarter was lower than its net book value, an impairment charge of $2.4 million was recognized during the two months ended September 30, 2017, and is included in “Impairment of long-lived assets” on our condensed consolidated statements of operations. Of the $2.4 million recorded during the two months ended September 30, 2017, $2.2 million related to the Rocky Mountain division and $0.2 million related to the Southern division.


18



Note 7 - Fair Value Measurements
Measurements
Fair value represents an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Observable inputs such as quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value on a recurring basis and the fair value hierarchy of the valuation techniques we utilized to determine such fair value included significant unobservable inputs (Level 3) and were as follows:
 
Successor
 
September 30, 2018
 
December 31, 2017
Derivative warrant liability
$
154

 
$
477

Contingent consideration
500

 
500

Derivative Warrant Liability
Upon emergence from chapter 11 on the Effective Date, all existing warrants outstanding under the Predecessor Company were canceled under the Plan. Additionally, on the Effective Date, pursuant to the Plan we issued to the holders of our pre-Effective Date 9.875% Senior Notes due 2018 (the “2018 Notes”) and holders of certain claims relating to the rejection of executory contracts and unexpired leases 118,137 warrants with an exercise price of $39.82 and a term expiring seven years from the Effective Date. Each warrant is exercisable for one share of our common stock, par value $0.01. The warrants issued by the Successor Company were determined to be derivative liabilities.
Our derivative warrant liability is adjusted to reflect the estimated fair value at each quarter end, with any decrease or increase in the estimated fair value recorded in “Other (income) expense, net” in the condensed consolidated statements of operations. We used Level 3 inputs for the valuation methodology of the derivative liabilities. The estimated fair values were computed using a Monte Carlo simulation model. The key inputs in determining our derivative warrant liability typically include our stock price, the volatility of our stock price, and the risk free interest rate. Future changes in these factors could have a significant impact on the computed fair value of the derivative warrant liability. As such, we expect future changes in the fair value of the warrants could vary significantly from quarter to quarter.
The following table provides a reconciliation of the beginning and ending balances of the Successor “Derivative warrant liability” presented in the condensed consolidated balance sheet during the nine months ended September 30, 2018, and the five months ended December 31, 2017.
 
Successor
 
Nine Months Ended
 
Five Months Ended
 
September 30, 2018
 
December 31, 2017
Balance at beginning of period
$
477

 
$

Issuance of warrants

 
717

Adjustments to estimated fair value
(323
)
 
(240
)
Balance at end of period
$
154

 
$
477


19



Contingent Consideration
We are liable for contingent consideration payments in connection with an acquisition. The fair value of the contingent consideration obligation was determined using a probability-weighted income approach at the acquisition date and is revalued at each reporting date or more frequently if circumstances dictate based on changes in the discount periods and rates, changes in the timing and amount of the revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the performance measurements upon which the obligation is based.
On June 28, 2017, certain of the Nuverra Parties filed a motion with the Bankruptcy Court seeking authorization to resolve unsecured claims related to the $8.5 million contingent consideration from the Ideal Oilfield Disposal LLC acquisition (the “Ideal Settlement”). On July 11, 2017, the Bankruptcy Court entered an order authorizing the Ideal Settlement. Pursuant to the approved settlement terms, the $8.5 million contingent claim was replaced with an obligation on the part of the applicable Nuverra Party to transfer $0.5 million to the counterparties to the Ideal Settlement upon emergence from chapter 11, and $0.5 million when the Ideal Settlement counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit. The $0.5 million due upon emergence from chapter 11 was paid during the five months ended December 31, 2017. The remaining $0.5 million due when the counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit has been classified as current, as these permits and certificates are expected to be received within one year.

Changes to the fair value of contingent consideration are recorded as “Other (income) expense, net” in the condensed consolidated statements of operations. The fair value measurement is based on significant inputs not observable in the market, which are referred to as Level 3 inputs. Changes to contingent consideration obligations during the nine months ended September 30, 2018, and five months ended December 31, 2017, were as follows:

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

 
$
1,000

Cash payments
 

 
(500
)
Balance at end of period
 
500

 
500

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

 
$


Note 8 - Accrued Liabilities
Accrued liabilities consisted of the following at September 30, 2018 and December 31, 2017:
 
Successor
 
September 30, 2018
 
December 31, 2017
Accrued payroll and employee benefits
$
5,829

 
$
3,304

Accrued insurance
2,573

 
2,701

Accrued legal
718

 
1,749

Accrued taxes
2,228

 
2,362

Accrued interest
327

 
161

Accrued operating costs
3,719

 
2,663

Accrued other
330

 
999

Total accrued liabilities
$
15,724

 
$
13,939



20



Note 9 - Debt
Debt consisted of the following at September 30, 2018 and December 31, 2017:
 
 
 
 
 
Successor
 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
Interest Rate
 
Maturity Date
 
Fair Value of Debt (d)
 
Carrying Value of Debt
 
Carrying Value of Debt
Successor Revolving Facility (a)
7.36%
 
Aug. 2020
 
$

 
$

 
$

Successor First Lien Term Loan (b)
9.36%
 
Aug. 2020
 
12,679

 
12,679

 
14,285

Successor Second Lien Term Loan (b)
11.00%
 
Feb 2021
 
20,592

 
20,592

 
21,000

Vehicle financings (c)
5.31%
 
Various
 
2,343

 
2,343

 
3,764

Total debt
 
 
 
 
$
35,614

 
35,614

 
39,049

Less: current portion of long-term debt
 
 
(4,526
)
 
(5,525
)
Long-term debt
 
 
 
 
 
 
$
31,088

 
$
33,524

_____________________
(a)
The interest rate presented represents the interest rate on the $30.0 million Successor Revolving Facility as of September 30, 2018.
(b)
Interest on the Successor First Lien Term Loan accrues at an annual rate equal to the LIBOR Rate plus 7.25%. Interest on the Successor Second Lien Term Loan accrues at both an annual rate equal to 11.0%, with 5.5% payable in cash and 5.5% payable in kind prior to February 7, 2018, and on or after February 7, 2018, at an annual rate equal to 11.0%, payable in cash, in arrears, on the first day of each month.
(c)
Vehicle financings consist of capital lease arrangements related to fleet purchases with a weighted-average annual interest rate of approximately 5.31%, which mature in varying installments between 2018 and 2020.
(d)
Our Successor Revolving Facility, Successor First Lien Term Loan, Successor Second Lien Term Loan, and vehicle financings bear interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value.
For a discussion of material changes and developments in our debt and its principal terms, see our discussion below.
Indebtedness
As of September 30, 2018, we had $35.6 million of indebtedness outstanding, consisting of $12.7 million under the Successor First Lien Term Loan (as defined herein), $20.6 million under the Successor Second Lien Term Loan (as defined herein), and $2.3 million of capital leases for vehicle financings.
See the “Bridge Term Loan Credit Agreement, Guaranty Agreement, and Subordination Agreement” discussion in Note 18 for details on the Bridge Term Loan Credit Agreement.
First Lien Credit Agreement
On the Effective Date, pursuant to the Plan, the Company entered into a $45.0 million First Lien Credit Agreement (the “Credit Agreement”) by and among the lenders party thereto (the “Credit Agreement Lenders”), ACF FinCo I, LP, as administrative agent (the “Credit Agreement Agent”), and the Company. Pursuant to the Credit Agreement, the Credit Agreement Lenders agreed to extend to the Company a $30.0 million senior secured revolving credit facility (the “Successor Revolving Facility”) and a $15.0 million senior secured term loan facility (the “Successor First Lien Term Loan”) (i) to repay obligations outstanding under the Predecessor asset-based lending facility and debtor in possession asset-based lending facility, (ii) to make certain payments as provided in the Plan, (iii) to pay costs and expenses incurred in connection with the Plan, and (iv) for working capital, transaction expenses, and other general corporate purposes. The Credit Agreement also contains an accordion feature that provides for an increase in availability of up to an additional $20.0 million, subject to the satisfaction of certain terms and conditions contained in the Credit Agreement.
The Successor Revolving Facility and the Successor First Lien Term Loan mature on August 7, 2020, at which time the Company must repay the outstanding principal amount of the Successor Revolving Facility and the Successor First Lien Term Loan, together with interest accrued and unpaid thereon. The Successor Revolving Facility may be repaid and, subject to the

21



terms and conditions of the Credit Agreement, reborrowed at any time during the term of the Credit Agreement. The principal amount of the Successor First Lien Term Loan shall be repaid in installments of $178.6 thousand beginning on September 1, 2017 and the first day of each calendar month thereafter prior to maturity. Interest on the Successor Revolving Facility accrues at an annual rate equal to the LIBOR Rate (as defined in the Credit Agreement) plus 5.25%, and interest on the Successor First Lien Term Loan accrues at an annual rate equal to the LIBOR Rate plus 7.25%; however, if there is an Event of Default (as defined in the Credit Agreement), the Credit Agreement Agent, in its sole discretion, may increase the applicable interest rate at a per annum rate equal to three percentage points above the annual rate otherwise applicable thereunder.
The Credit Agreement also contains certain affirmative and negative covenants, including a fixed charge coverage ratio covenant, as well as other terms and conditions that are customary for revolving credit facilities and term loans of this type. As of September 30, 2018, we were in compliance with all covenants.
See the “Amendment to First Lien Credit Agreement and Joinder to First Lien Guaranty and Security Agreement” discussion in Note 18 for details on the First Amendment to the Credit Agreement.

Second Lien Term Loan Credit Agreement
On the Effective Date, pursuant to the Plan, the Company also entered into a Second Lien Term Loan Credit Agreement (the “Second Lien Term Loan Agreement”) by and among the lenders party thereto (the “Second Lien Term Loan Lenders”), Wilmington Savings Fund Society, FSB, as administrative agent (the “Second Lien Term Loan Agent”) and the Company. Pursuant to the Second Lien Term Loan Agreement, the Second Lien Term Loan Lenders agreed to extend to the Company a $26.8 million second lien term loan facility (the “Successor Second Lien Term Loan”), of which $21.1 million was advanced on the Effective Date and up to an additional $5.7 million (“Delayed Draw Term Loan”) is available at the request of the Company after the closing date subject to the satisfaction of certain terms and conditions specified in the Second Lien Term Loan Agreement. The Second Lien Term Loan Lenders extended the Successor Second Lien Term Loan, among other things, (i) to repay obligations outstanding under the Predecessor asset-based lending facility and debtor in possession asset-based revolving facility, (ii) to make certain payments as provided in the Plan, (iii) to pay costs and expenses incurred in connection with the Plan, and (iv) for working capital, transaction expenses and other general corporate purposes.
The Successor Second Lien Term Loan matures on February 7, 2021, at which time the Company must repay all outstanding obligations under the Successor Second Lien Term Loan. The principal amount of the Successor Second Lien Term Loan shall be repaid in installments of $263.2 thousand beginning on October 1, 2017, and the first day of each fiscal quarter thereafter prior to maturity, with such amount to be proportionally increased as the result of the incurrence of a Delayed Draw Term Loan. Interest on the Successor Second Lien Term Loan accrues at an annual rate equal to 11.0%, with 5.5% payable in cash and 5.5% payable in kind prior to February 7, 2018 (or such later date as the Company may select in accordance with the terms of the Second Lien Term Loan Agreement) and, on or after February 7, 2018 (or such later date) at an annual rate equal to 11.0%, payable in cash, in arrears, on the first day of each month. However, upon the occurrence and during the continuation of an Event of Default (as defined in the Second Lien Term Loan Agreement) due to a voluntary or involuntary bankruptcy filing, automatically, or any other Event of Default, at the election of the Second Lien Term Loan Agent, the Successor Second Lien Term Loan and all obligations thereunder shall bear interest at an annual rate equal to three percentage points above the annual rate otherwise applicable thereunder.
The Second Lien Term Loan Agreement also contains certain affirmative and negative covenants, including a fixed charge coverage ratio covenant, as well as other terms and conditions that are customary for term loans of this type. As of September 30, 2018, we were in compliance with all covenants.
See the “Amendment to Second Lien Credit Agreement and Joinder to Second Lien Guaranty and Security Agreement” discussion in Note 18 for details on the First Amendment to the Second Lien Term Loan Agreement.

Note 10 - Derivative Warrants
Predecessor Warrants
During the year ended December 31, 2016, we issued 26.4 million warrants, with 17.5 million warrants for the exchange of the 2018 Notes for new 12.5%/10.0% Senior Secured Second Lien Notes due 2021 (the “2021 Notes”), 0.1 million warrants for the exchange of the 2018 Notes for common stock, and 8.8 million warrants to the lenders under the Predecessor Term Loan. All warrants were issued with an exercise price of $0.01 and had a term of ten years.

22



Upon emergence from chapter 11 on the Effective Date, all existing warrants outstanding under the Predecessor Company were canceled under the Plan. The following table shows the Predecessor warrant activity for the seven months ended July 31, 2017:
 
 
Predecessor
 
 
Seven Months Ended
 
 
July 31, 2017
Outstanding at the beginning of the period
 
25,283

Issued
 

Exercised
 
(16
)
Canceled due to emergence from chapter 11
 
(25,267
)
Outstanding at the end of the period
 


Successor Warrants

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

Issued
 

Exercised
 

Outstanding at the end of the period
 
118

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


23



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

 
$
39.82

Closing stock price
 
$
11.12

 
$
18.18

Risk free rate
 
2.93
%
 
2.29
%
Expected volatility
 
42.31
%
 
40.59
%

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

The total costs of the exit recorded during the three and nine months ended September 30, 2018 were $49.0 thousand and $1.1 million, respectively, and are reflected in “Other, net” in the condensed consolidated statements of operations. Such costs consisted of the following and all related to the Southern operating segment:

 
Successor
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2018
Severance and termination benefits
$
(11
)
 
$
225

Contract termination costs and exit costs
60

 
892

   Total restructuring and exit costs for Eagle Ford
$
49

 
$
1,117


The remaining liability for the Eagle Ford exit, shown below, totaled approximately $50.0 thousand as of September 30, 2018 and is included in “Accrued liabilities” in the condensed consolidated balance sheet. A rollforward of the liability from December 31, 2017 through September 30, 2018 is as follows:
 
Employee Termination Costs (a)
 
Lease Exit Costs (b)
 
Other Exit Costs (c)
 
Total
Balance accrued at beginning of period - Successor
$

 
$

 
$

 
$

Restructuring and exit-related costs
225

 
64

 
828

 
1,117

Cash payments
(225
)
 
(41
)
 
(801
)
 
(1,067
)
Balance accrued at end of period - Successor
$

 
$
23

 
$
27

 
$
50

_____________________
(a)
Employee termination costs consist primarily of severance and related costs.
(b)
Lease exit costs consist primarily of costs that will continue to be incurred under non-cancellable operating leases for their remaining term without benefit to the Company.
(c)
Other exit costs include costs related to the movement of vehicles, tanks and rental fleet in connection with the exit from the Eagle Ford Shale area.

24



Mississippian Shale Area and Tuscaloosa Marine Shale Logistics Business
In March 2015, we initiated a plan to restructure our business in certain shale basins and reduce costs, including an exit from the Mississippian shale area and the Tuscaloosa Marine Shale logistics business. Additionally, we closed certain yards within the Northeast and Southern divisions and transferred many of the related assets to our other operating locations. The total costs of the restructuring recognized in 2015 were approximately $7.1 million, and included severance and termination benefits, lease exit costs, other exits costs related to the movement of vehicles and rental fleet, and an asset impairment charge.
The remaining liability for the restructuring and exit costs incurred represents lease exit costs under non-cancellable operating leases and totaled approximately $45.0 thousand as of September 30, 2018, which is included in “Accrued liabilities” in the condensed consolidated balance sheet. A rollforward of the liability from December 31, 2017 through September 30, 2018 is as follows:
 
 
Lease Exit Costs
Balance accrued at beginning of period - Successor
 
$
82

Cash payments
 
(37
)
Balance accrued at end of period - Successor
 
$
45

Note 12 - Income Taxes
 
Successor
 
 
Predecessor
 
Three Months Ended
 
Two Months Ended
 
 
One Month Ended
 
September 30, 2018
 
September 30, 2017
 
 
July 31, 2017
Current income tax expense
$
(58
)
 
$

 
 
$
(33
)
Deferred income tax (expense) benefit
(11
)
 
(34
)
 
 
337

Total income tax (expense) benefit
$
(69
)
 
$
(34
)
 
 
$
304

 
Successor
 
 
Predecessor
 
Nine Months Ended
 
Two Months Ended
 
 
Seven Months Ended
 
September 30, 2018
 
September 30, 2017
 
 
July 31, 2017
Current income tax expense
$
(58
)
 
$

 
 
$
(15
)
Deferred income tax (expense) benefit
(11
)
 
(34
)
 
 
337

Total income tax (expense) benefit
$
(69
)
 
$
(34
)
 
 
$
322

The effective income tax rate for the three and nine months ended September 30, 2018 was (1.0)% and (0.1)%, which differs from the federal statutory benefit rate of 21.0% 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 two months ended September 30, 2017, was (0.2)%, which differed 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. The effective income tax rate for the one and seven months ended July 31, 2017, was (0.1)% and (0.2)%, respectively, which differed from the federal statutory benefit rate of 35.0%. The difference was primarily due to the change in the deferred tax liability related to certain long-lived assets resulting from the application of fresh start accounting.

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

We have significant deferred tax assets, consisting primarily of NOLs, which have a limited life, generally expiring between the years 2031 and 2038, and capital losses, which have a five year carryforward expiring in 2020. We regularly assess the positive and negative evidence available to estimate if sufficient future taxable income will be generated to use the existing deferred tax

25



assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred in recent years. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future taxable income.

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

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

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

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

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

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

26




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

The total grants awarded during the three and nine months ended September 30, 2018, and the two months ended September 30, 2017 are presented in the table below:
 
 
Successor
 
 
Three Months Ended
 
Nine Months Ended
 
Two Months Ended
 
 
September 30, 2018
 
September 30, 2018
 
September 30, 2017
Stock option grants
 

 

 
709

Restricted stock grants
 

 
20

 

Restricted stock unit grants
 

 
1,311

 

   Total grants in the Successor period
 

 
1,331

 
709


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

The total share-based compensation expense, net of estimated forfeitures, included in “General and administrative expenses” in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and the two months ended September 30, 2017 was as follows:
 
 
Successor
 
 
Three Months Ended
 
Nine Months Ended
 
Two Months Ended
 
 
September 30, 2018
 
September 30, 2018
 
September 30, 2017
Stock options
 
$

 
$
(788
)
 
$
181

Restricted stock
 
76

 
236

 

Restricted stock units
 
22

 
12,044

 

   Total expense
 
$
98

 
$
11,492

 
$
181


Predecessor Share-based Compensation

Prior to the Effective Date, we granted stock options, stock appreciation rights, restricted common stock and restricted stock units, performance shares and units, other share-based awards and cash-based awards to our employees, directors, consultants and advisors pursuant to the Nuverra Environmental Solutions, Inc. 2009 Equity Incentive Plan (as amended, the “2009 Plan”). On the Effective Date pursuant to the Plan, all of the pre-Effective Date share-based compensation awards issued and outstanding under the 2009 Plan were canceled.

There were no grants awarded during the one and seven months ended July 31, 2017 under the 2009 Plan. The total share-based compensation expense, net of estimated forfeitures, included in “General and administrative expenses” in the accompanying condensed consolidated statements of operations for the one and seven months ended July 31, 2017 was as follows:

27



 
 
Predecessor
 
 
One Month Ended
 
Seven Months Ended
 
 
July 31, 2017
 
July 31, 2017
Stock options
 
$
12

 
$
109

Restricted stock
 
22

 
153

Restricted stock units
 
2

 
195

   Total expense
 
$
36

 
$
457

Note 14 - Legal Matters
Environmental Liabilities
We are subject to the environmental protection and health and safety laws and related rules and regulations of the United States and of the individual states, municipalities and other local jurisdictions where we operate. Our operations are subject to rules and regulations promulgated by the Texas Railroad Commission, the Texas Commission on Environmental Quality, the Louisiana Department of Natural Resources, the Louisiana Department of Environmental Quality, the Ohio Department of Natural Resources, the Pennsylvania Department of Environmental Protection, the North Dakota Department of Health, the North Dakota Industrial Commission, Oil and Gas Division, the North Dakota State Water Commission, the Montana Department of Environmental Quality and the Montana Board of Oil and Gas, among others. These laws, rules and regulations address environmental, health and safety and related concerns, including water quality and employee safety. We have installed safety, monitoring and environmental protection equipment such as pressure sensors and relief valves, and have established reporting and responsibility protocols for environmental protection and reporting to such relevant local environmental protection departments as required by law.
We believe we are in material compliance with all applicable environmental protection laws and regulations in the United States and the states in which we operate. We believe that there are no unrecorded liabilities as of the periods reported herein in connection with our compliance with applicable environmental laws and regulations. The condensed consolidated balance sheet at September 30, 2018 and December 31, 2017 did not include any accruals for environmental matters.
Litigation
There are various lawsuits, claims, investigations and proceedings that have been brought or asserted against us, which arise in the ordinary course of business, including actions with respect to securities and shareholder class actions, personal injury, vehicular and industrial accidents, commercial contracts, legal and regulatory compliance, securities disclosure, labor and employment, and employee benefits and environmental matters, the more significant of which are summarized below. We record a provision for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter.
We believe that we have valid defenses with respect to legal matters pending against us. Based on our experience, we also believe that the damage amounts claimed in pending lawsuits are not necessarily a meaningful indicator of our potential liability. Litigation is inherently unpredictable, and it is possible that our results of operations or cash flow could be materially affected in any particular period by the resolution of one or more of the legal matters pending against us. We do not expect that the outcome of other current claims and legal actions not discussed below will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Chapter 11 Proceedings
On May 1, 2017, the Nuverra Parties filed voluntary petitions under chapter 11 of the Bankruptcy Code in the Bankruptcy Court to pursue the Plan. On July 25, 2017, the Bankruptcy Court entered the Confirmation Order confirming the Plan. The Plan became effective on the Effective Date, when all remaining conditions to the effectiveness of the Plan were satisfied or waived. On June 22, 2018, the Bankruptcy Court issued a final decree and order closing the chapter 11 cases, subject to certain conditions as set forth therein.
Confirmation Order Appeal
On July 26, 2017, David Hargreaves, an individual holder of 2018 Notes, appealed the Confirmation Order to the District Court of the District of Delaware (the “District Court”) and filed a motion for a stay pending appeal from the District Court.  Although the motion for a stay pending appeal was denied, the appeal remained pending and the District Court heard oral arguments on May 14, 2018.  On August 21, 2018 the District Court issued an order dismissing the appeal.  Hargreaves subsequently filed a

28



Notice of Appeal to the United States Court of Appeals for the Third Circuit on September 19, 2018, and as a result the appeal remains pending.  The ultimate outcome of this appeal and its effects on the Confirmation Order are impossible to predict with certainty. No assurance can be given that the final disposition of this appeal will not affect the validity, enforceability or finality of the Confirmation Order.

Note 15 - Related Party and Affiliated Company Transactions
There have been no significant changes to the other related party transactions as described in Note 21 to the consolidated financial statements in our 2017 Annual Report on Form 10-K other than described in Note 18.
Note 16 - Segments
We evaluate business segment performance based on income (loss) before income taxes exclusive of corporate general and administrative costs and interest expense, which are not allocated to the segments. Our shale solutions business is comprised of three operating divisions, which we consider to be operating and reportable segments of our operations: (1) the Northeast division comprising the Marcellus and Utica Shale areas, (2) the Southern division comprising the Haynesville Shale area and the Eagle Ford Shale area (which we substantially exited during the six months ended June 30, 2018) and (3) the Rocky Mountain division comprising the Bakken Shale area. Corporate/Other includes certain corporate costs and certain other corporate assets.
Financial information for our reportable segments related to operations is presented below.
 
Rocky Mountain
 
Northeast
 
Southern (b)
 
Corporate/ Other
 
Total
Three months ended September 30, 2018 - Successor
 
 
 
 
 
 
 
 
 
Revenue
$
33,399

 
$
11,247

 
$
5,010

 
$

 
$
49,656

Direct operating expenses
25,757

 
10,372

 
3,624

 

 
39,753

General and administrative expenses
1,605

 
442

 
106

 
3,696

 
5,849

Depreciation and amortization
5,698

 
1,976

 
2,331

 
13

 
10,018

Operating income (loss)
339

 
(1,543
)
 
(1,200
)
 
(3,709
)
 
(6,113
)
Income (loss) before income taxes
372

 
(1,628
)
 
(1,240
)
 
(4,552
)
 
(7,048
)
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018 - Successor
 
 
 
 
 
 
 
 
 
Revenue
97,334

 
29,966

 
20,973

 

 
148,273

Direct operating expenses
77,702

 
26,696

 
16,051

 

 
120,449

General and administrative expenses
4,763

 
1,722

 
935

 
23,763

 
31,183

Depreciation and amortization
17,910

 
9,565

 
9,205

 
51

 
36,731

Operating loss
(3,041
)
 
(8,086
)
 
(10,497
)
 
(24,146
)
 
(45,770
)
Loss before income taxes
(3,033
)
 
(8,307
)
 
(10,646
)
 
(28,405
)
 
(50,391
)
 
 
 
 
 
 
 
 
 
 
As of September 30, 2018 - Successor
 
 
 
 
 
 
 
 
 
Total assets (a)
118,791

 
46,713

 
86,877

 
17,481

 
269,862

Total assets held for sale

 
116

 
2,278

 
778

 
3,172

 
 
 
 
 
 
 
 
 
 
Two months ended September 30, 2017 - Successor
 
 
 
 
 
 
 
 
Revenue
20,567

 
7,159

 
6,032

 

 
33,758

Direct operating expenses
15,779

 
5,962

 
4,369

 

 
26,110

General and administrative expenses
1,278

 
460

 
829

 
2,361

 
4,928

Depreciation and amortization
8,020

 
4,834

 
4,421

 
46

 
17,321

Operating loss
(6,676
)
 
(4,097
)
 
(3,825
)
 
(2,407
)
 
(17,005
)
Loss before income taxes
(7,190
)
 
(4,027
)
 
(3,744
)
 
(1,998
)
 
(16,959
)
 
 
 
 
 
 
 
 
 
 

29



 
Rocky Mountain
 
Northeast
 
Southern (b)
 
Corporate/ Other
 
Total
One month ended July 31, 2017 - Predecessor
 
 
 
 
 
 
 
 
Revenue
8,502

 
3,424

 
3,196

 

 
15,122

Direct operating expenses
6,434

 
3,329

 
2,133

 

 
11,896

General and administrative expenses
425

 
331

 
3

 
567

 
1,326

Depreciation and amortization
2,376

 
657

 
955

 
15

 
4,003

Operating (loss) income
(733
)
 
(893
)
 
105

 
(582
)
 
(2,103
)
(Loss) income before income taxes
(4,944
)
 
27,121

 
22,583

 
179,096

 
223,856

 
 
 
 
 
 
 
 
 
 
Seven months ended July 31, 2017 - Predecessor
 
 
 
 
 
 
 
 
 
Revenue
56,546

 
20,751

 
18,586

 

 
95,883

Direct operating expenses
46,837

 
21,117

 
13,056

 

 
81,010

General and administrative expenses
3,877

 
1,917

 
1,684

 
15,074

 
22,552

Depreciation and amortization
15,964

 
5,352

 
7,542

 
123

 
28,981

Operating loss
(10,132
)
 
(7,635
)
 
(3,696
)
 
(15,197
)
 
(36,660
)
(Loss) income before income taxes
(14,854
)
 
20,194

 
18,650

 
144,299

 
168,289

 
 
 
 
 
 
 
 
 
 
As of December 31, 2017 - Successor
 
 
 
 
 
 
 
 
 
Total assets (a)
137,213

 
54,218

 
111,457

 
8,434

 
311,322

Total assets held for sale
2,765

 

 

 

 
2,765

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

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

Note 17 - Subsidiary Guarantors
The 2018 Notes and the 2021 Notes of the Predecessor Company were registered securities. As a result of these registered securities, we were required to present the following condensed consolidating financial information for the Predecessor periods pursuant to Rule 3-10 of SEC Regulation S-X, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. Our Successor Revolving Facility, Successor First Lien Term Loan, and Successor Second Lien Term Loan are not registered securities. Therefore, the presentation of condensed consolidating financial information is not required for the Successor period.
The following tables present consolidating financial information for Nuverra Environmental Solutions, Inc. (“Parent”) and its 100% wholly owned subsidiaries (the “Guarantor Subsidiaries”) for the one and seven months ended July 31, 2017.

30



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
ONE MONTH ENDED JULY 31, 2017
(Unaudited)
 
Predecessor
 
Parent
 
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$

 
$
15,122

 
$

 
$
15,122

Costs and expenses:
 
 
 
 
 
 
 
Direct operating expenses

 
11,896

 

 
11,896

General and administrative expenses
567

 
759

 

 
1,326

Depreciation and amortization
15

 
3,988

 

 
4,003

Total costs and expenses
582

 
16,643

 

 
17,225

Operating loss
(582
)
 
(1,521
)
 

 
(2,103
)
Interest expense, net
(3,207
)
 
(39
)
 

 
(3,246
)
Other income, net

 
7

 

 
7

Income (loss) from equity investments
122,214

 

 
(122,214
)
 

Reorganization items, net
182,885

 
46,313

 

 
229,198

Income (loss) before income taxes
301,310

 
44,760

 
(122,214
)
 
223,856

Income tax (expense) benefit
(77,150
)
 
77,454

 

 
304

Net income (loss)
$
224,160

 
$
122,214

 
$
(122,214
)
 
$
224,160




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

 
$
95,883

 
$

 
$
95,883

Costs and expenses:
 
 
 
 
 
 
 
Direct operating expenses

 
81,010

 

 
81,010

General and administrative expenses
15,074

 
7,478

 

 
22,552

Depreciation and amortization
123

 
28,858

 

 
28,981

Total costs and expenses
15,197

 
117,346

 

 
132,543

Operating loss
(15,197
)
 
(21,463
)
 

 
(36,660
)
Interest expense, net
(22,333
)
 
(459
)
 

 
(22,792
)
Other income, net
4,125

 
136

 

 
4,261

Income (loss) from equity investments
101,462

 
(14
)
 
(101,462
)
 
(14
)
Reorganization items, net
177,704

 
45,790

 

 
223,494

Income (loss) before income taxes
245,761

 
23,990

 
(101,462
)
 
168,289

Income tax (expense) benefit
(77,150
)
 
77,472

 

 
322

Net income (loss)
$
168,611

 
$
101,462

 
$
(101,462
)
 
$
168,611


31



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SEVEN MONTHS ENDED JULY 31, 2017
(Unaudited)
 
Predecessor
 
Parent
 
Guarantor Subsidiaries
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
Net cash used in operating activities
$
(18,672
)
 
$
(277
)
 
$
(18,949
)
Cash flows from investing activities:
 
 
 
 
 
Proceeds from the sale of property and equipment

 
3,083

 
3,083

Purchase of property, plant and equipment

 
(3,149
)
 
(3,149
)
Net cash used in investing activities

 
(66
)
 
(66
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from Predecessor revolving credit facility
106,785

 

 
106,785

Payments on Predecessor revolving credit facility
(129,964
)
 

 
(129,964
)
Proceeds from Predecessor term loan
15,700

 

 
15,700

Proceeds from debtor in possession term loan
6,875

 

 
6,875

Proceeds from Successor First and Second Lien Term Loans
36,053

 

 
36,053

Payments for debt issuance costs
(1,053
)
 

 
(1,053
)
Payments on vehicle financing and other financing activities

 
(2,797
)
 
(2,797
)
Net cash provided by (used in) financing activities
34,396

 
(2,797
)
 
31,599

Change in cash, cash equivalents and restricted cash
15,724

 
(3,140
)
 
12,584

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

 
1,026

 
2,414

Cash, cash equivalents and restricted cash - end of period
$
17,112

 
$
(2,114
)
 
$
14,998

Note 18 - Subsequent Events
Acquisition of Clearwater
On October 5, 2018, we completed the acquisition of Clearwater Three, LLC, Clearwater Five, LLC, and Clearwater Solutions, LLC (collectively, “Clearwater”) for an initial purchase price of $41.9 million, subject to customary working capital adjustments (the “Acquisition”). Clearwater is a supplier of waste water disposal services used by the oil and gas industry in the Marcellus and Utica Shale areas. Clearwater has three salt water disposal wells in service, all of which are located in Ohio. This acquisition expands our service offerings in the Marcellus and Utica Shale areas in our Northeast division.
Consideration consisted of $41.9 million in cash which was funded primarily by a $32.5 million bridge loan that will be repaid with proceeds from a planned offering to shareholders of common stock purchase rights. In addition, the Credit Agreement Lenders provided us with an additional term loan under the Credit Agreement in the amount of $10.0 million which was used to finance a portion of the Acquisition.
In connection with the Acquisition, we incurred transaction costs of $0.4 million during the three and nine months ended September 30, 2018, which are included in general and administrative costs in the accompanying condensed consolidated statements of operations.
Under the acquisition method of accounting, the total purchase price was allocated to the identifiable assets acquired and the liabilities assumed based on our preliminary valuation estimates of the fair values as of the acquisition date. As the acquisition accounting allocation is preliminary and subject to adjustments for the final valuation and tax analysis, this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, and the determination of any residual amount that will be allocated to goodwill.

32



The preliminary allocation of the purchase price at October 5, 2018 is summarized as follows:
Accounts receivable
 
$
1,897

Intangible assets
 
799

Property, plant and equipment
 
37,396

Goodwill
 
2,382

Accounts payable and accrued expenses
 
(574
)
Total
 
$
41,900

The preliminary purchase price allocation requires subjective estimates that, if incorrectly estimated, could be material to our condensed consolidated financial statements including the amount of depreciation and amortization expense. The fair value of the tangible assets, which are primarily comprised of the three salt water disposal wells, was estimated using the discounted cash flow method, a form of the income approach. This method estimates the fair value of the assets based upon the present value of the expected cash flows. Estimates that impact the measurement of the tangible assets using the discounted cash flow method are the discount rate and the timing and amount of cash flows. The intangible assets acquired, which primarily consists of the trade name, were valued using the relief from royalty method. The value of the trade name encompasses all items necessary to generate revenue utilizing the trade name. Estimates that impact the measurement of the intangible assets acquired are net sales projections, and the discount and royalty rates used.
Bridge Term Loan Credit Agreement, Guaranty Agreement, and Subordination Agreement

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

The Bridge Term Loan Credit Agreement requires us to use our reasonable best efforts to effectuate and close the Rights Offering (as defined below) as soon as reasonably practicable following October 5, 2018. Concurrently with the completion of the Rights Offering, we are required to prepay all outstanding amounts under the Bridge Term Loan Credit Agreement in cash in an amount equal to the net cash proceeds received from the Rights Offering.

We also have the option to prepay principal amounts outstanding under the Bridge Term Loan Credit Agreement at any time without premium or penalty. Except upon the completion of the Rights Offering or in the event that an insolvency proceeding is pending against us, all principal payments (whether at maturity or otherwise) are required to be tendered in the form of common stock of the Company, with the value of such common stock determined based on its volume weighted average price during the 20-day period preceding the announcement of the Acquisition.

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

On October 5, 2018, in connection with the Acquisition, we entered into a First Amendment to the Credit Agreement (the “First Amendment to the Credit Agreement”) with the Credit Agreement Lenders and the Credit Agreement Agent, which amends the Credit Agreement. Pursuant to the First Amendment to the Credit Agreement, the Credit Agreement Lenders provided us with an additional term loan under the Credit Agreement in the amount of $10.0 million, which was used to finance a portion of the Acquisition. The First Amendment to the Credit Agreement also amended the Credit Agreement to extend the maturity date from August 7, 2020 to February 7, 2021, in addition to allowing for the Acquisition and providing us with additional flexibility under the Credit Agreement, including certain availability, mandatory prepayment and financial reporting provisions thereunder.


33



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

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

On October 5, 2018, in connection with the Acquisition, we entered into a First Amendment to the Second Lien Term Loan Agreement (the “First Amendment to the Second Lien Term Loan Agreement”) with the Second Lien Term Loan Lenders and the Second Lien Term Loan Agent, which amends the Second Lien Term Loan Agreement. Pursuant to the First Amendment to Second Lien Term Loan Agreement, the Second Lien Term Loan Lenders agreed to certain conforming amendments to the Credit Agreement to allow for the funding of the additional term loan in the amount of $10.0 million under the First Amendment to the Credit Agreement and the term loans pursuant to the Bridge Term Loan Credit Agreement. The First Amendment to the Second Lien Term Loan Agreement also extended the maturity date from February 7, 2021 to October 7, 2021.

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

First Amendment to Intercreditor Agreement and Joinder to Intercompany Subordination Agreement

On October 5, 2018, in connection with the First Amendment to the Credit Agreement, we acknowledged the terms and conditions under a First Amendment to the Intercreditor Agreement, dated October 5, 2018, by and between the Credit Agreement Agent and the Second Lien Term Loan Agent, which amends the Subordination and Intercreditor Agreement, dated as of August 7, 2017, by and between the Credit Agreement Agent and the Second Lien Term Loan Agent. On October 5, 2018, the New Grantors also entered into the Joinder to Intercompany Subordination Agreement, pursuant to which the New Grantors agreed to become party to that Intercompany Subordination Agreement by and among the persons originally party thereto as an “Obligor”, the Credit Agreement Agent and the Second Lien Term Loan Agent.

Rights Offering and Backstop Commitment Letter

We have agreed, pursuant to the Bridge Term Loan Credit Agreement, to use our reasonable best efforts to effectuate and close a rights offering as soon as reasonably practicable following October 5, 2018 pursuant to which we plan to dividend to our holders of common stock subscription rights to purchase shares of our common stock on a pro rata basis with an aggregate offering price of $32.5 million (the “Rights Offering”). The proceeds of the Rights Offering will be used by us to pay the obligations under the Bridge Term Loan Credit Agreement.

In connection with the Rights Offering, we entered into a Backstop Commitment Letter on October 5, 2018 (the “Backstop Commitment Letter”) with certain backstop parties named therein (the “Backstop Parties”), pursuant to which the Backstop Parties agreed, subject to the terms and conditions in the Backstop Commitment Letter, to participate in the Rights Offering and backstop the full amount of the Rights Offering. The Backstop Parties are our two largest shareholders that, in the aggregate, hold approximately 90% of our stock. In exchange for the commitments under the Backstop Commitment Letter, we paid to the Backstop Parties, in the aggregate, a nonrefundable cash payment equal to 1.0% of the full amount of the Rights Offering. Pursuant to the Backstop Commitment Letter, we are required to file a registration statement with the SEC within 20 days following October 5, 2018. This registration statement was filed with the SEC on October 25, 2018. The record date for the Rights Offering will be set by the Board of Directors of the Company upon the registration statement being declared effective by the SEC. Pursuant to the Backstop Commitment Letter, the exercise price for each share of common stock issuable upon exercise of a subscription right will be $9.61, which is equal to the 20-day volume weighted average price of the common stock of the Company preceding the public announcement of the completion of the Acquisition on October 5, 2018.


34



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

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

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

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

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

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

In order to address our liquidity issues due to the prolonged depression in oil and natural gas prices that began in 2014, the Company and certain of its material subsidiaries (collectively with the Company, the “Nuverra Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on May 1, 2017 to pursue prepackaged plans of reorganization (together, and as amended, the “Plan”). On July 25, 2017, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan. The Plan became effective on August 7, 2017 (the “Effective Date”), when all remaining conditions to the effectiveness of the Plan were satisfied or waived. On June 22, 2018, the Bankruptcy Court issued a final decree and order closing the chapter 11 cases, subject to certain conditions as set forth therein.

35




Upon emergence, we elected to apply fresh start accounting effective July 31, 2017, to coincide with the timing of our normal accounting period close. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, a new entity for financial reporting purposes was created, and as such, the condensed consolidated financial statements on or after August 1, 2017, are not comparable with the condensed consolidated financial statements prior to that date.

References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to July 31, 2017. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company on and prior to July 31, 2017.
Trends Affecting Our Operating Results
Our results are driven by demand for our services, which are in turn affected by E&P spending trends in the shale basins in which we operate, in particular the level of drilling and completion activities (which impacts the amount of environmental waste products being managed) and active wells (which impacts the amount of produced water being managed). In general, drilling and completion activities in the oil and natural gas industry are affected by the market prices (or anticipated prices) for those commodities.

We continue to see improvement in West Texas Intermediate (“WTI) crude oil prices in 2018, with average oil prices of $69.69 during the third quarter of 2018 as compared to $48.18 in the third quarter of 2017, while Henry Hub (“HH”) natural gas prices remained flat as compared to the prior year. According to Baker Hughes, average rig count in our active basins increased 4.3% year over year to 179 in the third quarter of 2018, and completed wells in those basins increased 21.8% year over year to 945. (Average rig count and completed wells in our active basins no longer includes those in the Eagle Ford Shale area as we have substantially exited that basin as of June 30, 2018.) Per the US Energy Information Association (“EIA”), both oil production and natural gas production in the basins in which we operate were up during the third quarter of 2018 as compared to the prior year, with an 18.8% increase in oil production and a 23.8% increase in natural gas production. As a result of the increases in oil prices, average rig count, completed wells and overall production, we saw an increase in drilling and completion activities primarily in the Rocky Mountain and Northeast divisions in the third quarter of 2018 as compared with the third quarter of 2017.
Our results are also driven by a number of other factors, including (i) availability of our equipment, which we have assembled through acquisitions and capital expenditures, (ii) transportation costs, which are affected by fuel costs, (iii) utilization rates for our equipment, which are also affected by the level of our customers’ drilling and production activities and competition, and our ability to relocate our equipment to areas in which oil and natural gas exploration and production activities are growing, (iv) the availability of qualified drivers (or alternatively, subcontractors) in the areas in which we operate, particularly in the Bakken, Marcellus, and Utica shale basins, (v) labor costs, (vi) developments in governmental regulations, (vii) seasonality and weather events, (viii) pricing and (ix) our health, safety and environmental performance record.
The following tables summarize our total revenues by oil and natural gas shale area for the three and nine months ended September 30, 2018, two months ended September 30, 2017, and one and seven months ended July 31, 2017 (in thousands):
 
Successor
 
 
Predecessor
 
Three Months Ended
 
Two Months Ended
 
 
One Month Ended
 
September 30,
 
September 30,
 
 
July 31,
 
2018
 
2017
 
 
2017
Revenue - from predominantly oil shale areas (a)
$
33,399

 
$
22,290

 
 
$
9,420

Revenue - from predominantly natural gas shale areas (b)
16,257

 
11,468

 
 
5,702

Total revenue
$
49,656

 
$
33,758

 
 
$
15,122


36



 
Successor
 
 
Predecessor
 
Nine Months Ended
 
Two Months Ended
 
 
Seven Months Ended
 
September 30,
 
September 30,
 
 
July 31,
 
2018
 
2017
 
 
2017
Revenue - from predominantly oil shale areas (a)
$
99,474

 
$
22,290

 
 
$
62,302

Revenue - from predominantly natural gas shale areas (b)
48,799

 
11,468

 
 
33,581

Total revenue
$
148,273

 
$
33,758

 
 
$
95,883

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

Results of Operations:
Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):  
 
Successor
 
Predecessor
 
 
 
 
 
Three Months Ended
 
Two Months Ended
 
One Month Ended
 
 
 
 
 
September 30,
 
September 30,
 
July 31,
 
Increase (Decrease)
 
2018
 
2017
 
2017
 
2018 vs 2017 (Combined)
Service revenue
$
45,694

 
$
30,620

 
$
13,608

 
$
1,466

 
3.3
 %
Rental revenue
3,962

 
3,138

 
1,514

 
(690
)
 
(14.8
)%
Total revenue
49,656

 
33,758

 
15,122

 
776

 
1.6
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
Direct operating expenses
39,753

 
26,110

 
11,896

 
1,747

 
4.6
 %
General and administrative expenses
5,849

 
4,928

 
1,326

 
(405
)
 
(6.5
)%
Depreciation and amortization
10,018

 
17,321

 
4,003

 
(11,306
)
 
(53.0
)%
Impairment of long-lived assets
100

 
2,404

 

 
(2,304
)
 
(95.8
)%
Other, net
49

 

 

 
49

 
100.0
 %
Total costs and expenses
55,769

 
50,763

 
17,225

 
(12,219
)
 
(18.0
)%
Operating loss
(6,113
)
 
(17,005
)
 
(2,103
)
 
(12,995
)
 
(68.0
)%
Interest expense, net
(1,241
)
 
(778
)
 
(3,246
)
 
(2,783
)
 
(69.2
)%
Other income, net
169

 
294

 
7

 
(132
)
 
(43.9
)%
Reorganization items, net
137

 
530

 
229,198

 
(229,591
)
 
(99.9
)%
(Loss) income before income taxes
(7,048
)
 
(16,959
)
 
223,856

 
(213,945
)
 
(103.4
)%
Income tax (expense) benefit
(69
)
 
(34
)
 
304

 
(339
)
 
(125.6
)%
Net (loss) income
$
(7,117
)
 
$
(16,993
)
 
$
224,160

 
$
(214,284
)
 
(103.4
)%

37



Service Revenue
Service revenue consists of fees charged to customers for the removal and disposal of flowback and produced water originating from oil and natural gas wells or the transportation of fresh water and saltwater to customer sites for use in drilling and completion activities by trucks or through temporary or permanent water transport pipelines. Service revenue also includes fees charged for disposal of oilfield wastes in our landfill and disposal of fluids in our disposal wells. Service revenue for the three months ended September 30, 2018 was $45.7 million, up $1.5 million, or 3.3%, from $44.2 million in the prior year period. Service revenue growth was driven primarily by improvements in activity levels for water transfer and disposal services in the Rocky Mountain and Northeast divisions, offset by a decrease in activity levels for water transfer services, including our permanent disposal water pipeline, in the Southern division. Due to management’s decision to exit the Eagle Ford Shale area as of March 1, 2018, no revenues associated with the Eagle Ford Shale area were included in service revenues for the Southern division for the three months ended September 30, 2018, while $2.2 million was included during the prior year period.
Rental Revenue
Rental revenue consists of fees charged to customers over the term of the rental for use of equipment owned by us, as well as other fees charged to customers for items such as delivery and pickup. Rental revenue for the three months ended September 30, 2018 was $4.0 million, down $0.7 million, or 14.8%, from $4.7 million in the prior year period. The decrease was largely the result of management’s decision to exit the Eagle Ford Shale area as of March 1, 2018. As a result, no rental revenues were reported for the Eagle Ford Shale area for the three months ended September 30, 2018, while $0.5 million were included in rental revenue during the prior year period.
Direct Operating Expenses
Direct operating expenses for the three months ended September 30, 2018 increased $1.7 million to $39.8 million compared to the prior year period. The increase in direct operating expenses is primarily attributable to the use of higher cost third party or subcontracted truck drivers due to difficulties in recruiting and retaining enough full-time drivers to satisfy customer demand, particularly in our Rocky Mountain division. Additionally, the increase in direct operating expenses is attributable to higher revenues resulting from increased demand for our services.
General and Administrative Expenses
General and administrative expenses for the three months ended September 30, 2018 were $5.8 million, down $0.4 million, or 6.5% from $6.3 million in the same period in the prior year. The decrease is primarily due to lower legal and payroll expenses, as well as a reduction in bad debt expense, offset by transaction costs incurred during the three months ended September 30, 2018 for the Clearwater acquisition that closed on October 5, 2018. See Note 18 in the Notes to the Condensed Consolidated Financial Statements for further details on the Clearwater acquisition.
Depreciation and Amortization
Depreciation and amortization for the three months ended September 30, 2018 was $10.0 million, down 53.0% as compared to $21.3 million in the prior year period. The decrease is primarily the result of higher depreciation recorded during the three months ended September 30, 2017 as a result of a higher depreciable asset base with shorter useful lives due to the new fair values applied by fresh start accounting upon emergence from chapter 11. This primarily impacted depreciation expense for the first six months after the application of fresh start accounting.
Impairment of long-lived assets
During the three months ended September 30, 2018, we recorded an impairment charge of $0.1 million in the Southern division for the further write-down of buildings and land held for sale as a result of exiting the Eagle Ford Shale area due to updated market pricing.
During the three months ended September 30, 2017, management approved plans to sell certain underutilized assets in the Rocky Mountain and Southern division. These assets qualified to be classified as assets held for sale and as a result the assets were recorded at the lower of net book value or fair value less costs to sell, resulting in a long-lived asset impairment charge of $2.4 million for the three months ended September 30, 2017.
Other, net
On March 1, 2018, the Board determined it was in the best interests of the Company to cease our operations in the Eagle Ford Shale area. In making this determination, the Board considered a number of factors, including among other things, the historical and projected financial performance of our operations in the Eagle Ford Shale area, pricing for our services, capital requirements and projected returns on additional capital investment, competition, scope and scale of our business operations,

38



and recommendations from management. We substantially exited the Eagle Ford Shale area as of June 30, 2018. We continue to incur minimal related costs while the remaining assets previously used in the operation of our business in that basin are divested. Those costs were $49.0 thousand during the three months ended September 30, 2018.

Interest Expense, net
Interest expense, net during the three months ended September 30, 2018 was $1.2 million, down $2.8 million or 69.2% from $4.0 million in the prior year period. The lower interest expense is primarily due to an average debt balance of $36.1 million during the three months ended September 30, 2018, compared to an average debt balance of $272.4 million during the prior year period.
Other Income, net
Other income, net was $0.2 million for the three months ended September 30, 2018, compared to $0.3 million in the prior year period. The three months ended September 30, 2018 includes a $33.3 thousand gain associated with the change in the fair value of the derivative warrant liability, while the three months ended September 30, 2017 included a $140.1 thousand loss. We issued warrants with derivative features in connection with our chapter 11 filing in 2017 and our debt restructuring during 2016. These instruments are accounted for as derivative liabilities with any decrease or increase in the estimated fair value recorded in “Other income, net.” See Note 7 and Note 10 in the Notes to the Condensed Consolidated Financial Statements for further details on the warrants.
Reorganization Items, net
Expenses, gains and losses directly associated with the chapter 11 proceedings are reported as “Reorganization items, net” in the Condensed Consolidated Statements of Operations for the three months ended September 30, 2018 and September 30, 2017. These fees are primarily comprised of professional and legal fees, debtor in possession credit agreement financing costs, and retention payments.
Income Taxes
The income tax expense for the three months ended September 30, 2018 was $0.1 million compared to a benefit of $0.3 million for the three months ended September 30, 2017. The primary item impacting income taxes for the three months ended September 30, 2018 was the valuation allowance against our deferred tax assets. The primary items impacting income taxes for the three months ended September 30, 2017 was the change in the deferred tax liability related to certain long-lived assets resulting from the application of fresh start accounting. See Note 12 in the Notes to the Condensed Consolidated Financial Statements herein for additional information.
Segment Operating Results: Three Months Ended September 30, 2018 and 2017
The following table shows operating results for each of our segments for the three months ended September 30, 2018 and 2017:
 
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Three months ended September 30, 2018 (1)
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
33,399

 
$
11,247

 
$
5,010

 
$

 
$
49,656

Direct operating expenses
 
25,757

 
10,372

 
3,624

 

 
39,753

Operating income (loss)
 
339

 
(1,543
)
 
(1,200
)
 
(3,709
)
 
(6,113
)
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2017 (2)
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
29,069

 
$
10,583

 
$
9,228

 
$

 
$
48,880

Direct operating expenses
 
22,213

 
9,291

 
6,502

 

 
38,006

Operating loss
 
(7,409
)
 
(4,990
)
 
(3,720
)
 
(2,989
)
 
(19,108
)
(1)     Successor period
(2)
Represents the combined results from the two months ended September 30, 2017 (Successor) and the one month ended July 31, 2017 (Predecessor).

39




Rocky Mountain

Revenues for the Rocky Mountain division increased during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 due primarily to increased activity for water transfer and disposal services. Specifically, water transfer service volumes have increased due to more active operating rigs in the Rocky Mountain division during the three months ended September 30, 2018 as compared to the prior year period. To meet the increased demand in the region, we hired additional third party or subcontracted truck drivers. Additionally, volumes at the landfill and the disposal wells also increased over the same period in the prior year.

For the Rocky Mountain division, direct operating costs increased during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 due primarily to the reliance on third party or subcontracted truck drivers to meet the increased demand.

Northeast

Revenues for the Northeast division increased during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 due to higher activity levels for water transfer and disposal services. Additionally, pricing increases for disposal services contributed to the increase in revenues.

For the Northeast division, direct operating costs increased during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 due to higher activity levels.

Southern

Revenues for the Southern division decreased during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 due primarily to management’s decision to exit the Eagle Ford Shale area as of March 1, 2018. As a result, there were no revenues associated with the Eagle Ford Shale area included for the three months ended September 30, 2018, while $2.7 million was included during the prior year period. Additionally, activity levels for water transfer services, including our permanent disposal water pipeline, were down in the Southern division during the three months ended September 30, 2018.

In the Southern division, direct operating costs decreased during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 due to the exit of the Eagle Ford Shale area and lower activity levels.

Corporate/Other
The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general and administrative costs for the three months ended September 30, 2018 were higher than those reported for the three months ended September 30, 2017 due primarily to transaction costs incurred during the current year related to the acquisition of Clearwater that closed on October 5, 2018. See Note 18 in the Notes to the Condensed Consolidated Financial Statements for further details on the Clearwater acquisition.

40



Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):
 
Successor
 
Predecessor
 
 
 
 
 
Nine Months Ended
 
Two Months Ended
 
Seven Months Ended
 
 
 
 
 
September 30,
 
September 30,
 
July 31,
 
Increase (Decrease)
 
2018
 
2017
 
2017
 
2018 vs 2017 (Combined)
Service revenue
$
136,541

 
$
30,620

 
$
86,564

 
$
19,357

 
16.5
 %
Rental revenue
11,732

 
3,138

 
9,319

 
(725
)
 
(5.8
)%
Total revenue
148,273

 
33,758

 
95,883

 
18,632

 
14.4
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
Direct operating expenses
120,449

 
26,110

 
81,010

 
13,329

 
12.4
 %
General and administrative expenses
31,183

 
4,928

 
22,552

 
3,703

 
13.5
 %
Depreciation and amortization
36,731

 
17,321

 
28,981

 
(9,571
)
 
(20.7
)%
Impairment of long-lived assets
4,563

 
2,404

 

 
2,159

 
89.8
 %
Other, net
1,117

 

 

 
1,117

 
100.0
 %
Total costs and expenses
194,043

 
50,763

 
132,543

 
10,737

 
5.9
 %
Operating loss
(45,770
)
 
(17,005
)
 
(36,660
)
 
(7,895
)
 
(14.7
)%
Interest expense, net
(3,695
)
 
(778
)
 
(22,792
)
 
(19,875
)
 
(84.3
)%
Other income, net
683

 
294

 
4,247

 
(3,858
)
 
(85.0
)%
Reorganization items, net
(1,609
)
 
530

 
223,494

 
(225,633
)
 
(100.7
)%
(Loss) income before income taxes
(50,391
)
 
(16,959
)
 
168,289

 
(201,721
)
 
(133.3
)%
Income tax (expense) benefit
(69
)
 
(34
)
 
322

 
(357
)
 
(124.0
)%
Net (loss) income
$
(50,460
)
 
$
(16,993
)
 
$
168,611

 
$
(202,078
)
 
(133.3
)%
Service Revenue
Service revenue for the nine months ended September 30, 2018 was $136.5 million, up $19.4 million, or 16.5% from $117.2 million in the prior year period. With oil prices continuing to stabilize, customer demand for our disposal services has increased in all divisions, and demand for our water transfer services has increased in the Rocky Mountain and Northeast divisions as compared to the same period in the prior year. Additionally, pricing increases have also contributed to the increase in service revenue. Due to management’s decision to exit the Eagle Ford Shale area as of March 1, 2018, only $1.8 million in revenues associated with the Eagle Ford Shale area were included in service revenues for the nine months ended September 30, 2018, while $6.2 million was included in service revenue during the prior year period.
Rental Revenue
Rental revenue for the nine months ended September 30, 2018 was $11.7 million, down $0.7 million as compared to the prior year period. However, the prior year period included $1.3 million of rental revenues from the Eagle Ford Shale area, while the nine months ended September 30, 2018 only included $0.3 million of rental revenues due to management’s decision to exit the Eagle Ford Shale area as of March 1, 2018.
Direct Operating Expenses
Direct operating expenses for the nine months ended September 30, 2018 were $120.4 million, compared to $107.1 million in the prior year period. The increase in direct operating expenses is primarily attributable to the use of higher cost third party or subcontracted truck drivers due to difficulties in recruiting and retaining enough full-time drivers to satisfy customer demand, particularly in our Rocky Mountain division. Additionally, the increase in direct operating expenses is attributable to higher revenues resulting from increased demand for our services.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2018 amounted to $31.2 million, up $3.7 million from $27.5 million in the prior year period. The increase was primarily due to higher compensation costs, including $14.0

41



million related to the departure of our former Chief Executive Officer, offset by decreases in professional fees. General and administrative expenses for the nine months ended September 30, 2017 included $8.8 million in legal and professional fees for our chapter 11 filing that were incurred prior to the May 1, 2017 filing date. The legal and professional fees for our chapter 11 filing incurred after the May 1, 2017 filing date have been included in “Reorganization items, net” for the nine months ended September 30, 2017.
Depreciation and Amortization
Depreciation and amortization for the nine months ended September 30, 2018 was $36.7 million, down approximately $9.6 million from $46.3 million in the prior year period. The decrease is primarily the result of higher depreciation recorded during the nine months ended September 30, 2017 as a result of a higher depreciable asset base with shorter useful lives due to the new fair values applied by fresh start accounting upon emergence from chapter 11. This primarily impacted depreciation expense for the first six months after the application of fresh start accounting.
Impairment of long-lived assets
During the three months ended March 31, 2018, management approved a plan to sell certain assets located in the Southern division as a result of exiting the Eagle Ford Shale area. In addition, during the three months ended March 31, 2018, management approved the sale of certain assets, primarily frac tanks, located in the Northeast division, that are expected to sell within one year. These assets qualified to be classified as assets held for sale and as a result the assets were recorded at the lower of net book value or fair value less costs to sell, resulting in an impairment charge of $4.1 million during the three months ended March 31, 2018. Of the $4.1 million recorded, $4.0 million related to the Southern division and $0.1 million related to the Northeast division.

During the three months ended June 30, 2018, we recorded an impairment charge of $0.3 million for the Corporate division related to the sale of certain real property in Texas as the fair value was lower than the net book value. The real property was approved to be sold as part of the Eagle Ford closure.
During the three months ended September 30, 2018, we recorded an impairment charge of $0.1 million in the Southern division for the further write-down of buildings and land held for sale as a result of exiting the Eagle Ford Shale area due to updated market pricing.
During the nine months ended September 30, 2017, management approved plans to sell certain underutilized assets in the Rocky Mountain and Southern division. These assets qualified to be classified as assets held for sale and as a result the assets were recorded at the lower of net book value or fair value less costs to sell, resulting in a long-lived asset impairment charge of $2.4 million for the nine months ended September 30, 2017, of which $2.2 million related to the Rocky Mountain division and $0.2 million related to the Southern division.
Other, net
On March 1, 2018, the Board determined it was in the best interests of the Company to cease our operations in the Eagle Ford Shale area. In making this determination, the Board considered a number of factors, including among other things, the historical and projected financial performance of our operations in the Eagle Ford Shale area, pricing for our services, capital requirements and projected returns on additional capital investment, competition, scope and scale of our business operations, and recommendations from management. We substantially exited the Eagle Ford Shale area as of June 30, 2018. The total costs related to the exit recorded during the nine months ended September 30, 2018 were $1.1 million.

Interest Expense, net
Interest expense, net during the nine months ended September 30, 2018 was $3.7 million, or $19.9 million lower than the $23.6 million in the prior year period. The lower interest expense is primarily due to an average debt balance of $37.3 million during the nine months ended September 30, 2018, compared to an average debt balance of $256.0 million during the prior year period.
Other Income, net
Other income, net was $0.7 million for the nine months ended September 30, 2018, compared to $4.5 million in the prior year period. The difference is primarily attributable to the $0.3 million gain associated with the change in the fair value of the derivative warrant liability during the nine months ended September 30, 2018, compared to a $3.9 million gain during the nine months ended September 30, 2017. See Note 7 and Note 10 in the Notes to the Condensed Consolidated Financial Statements for further details on the warrants.

42



Reorganization Items, net
Expenses, gains and losses directly associated with the chapter 11 proceedings are reported as “Reorganization items, net” in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2018 and September 30, 2017, which includes the net gain on debt discharge, professional and insurance fees, debtor in possession credit agreement financing costs, retention payments, and other chapter 11 related items. Included in Reorganization items, net for the nine months ended September 30, 2018 was $1.3 million in chapter 11 fees paid to the US Trustee.
Income Taxes

The income tax expense for the nine months ended September 30, 2018 was $0.1 million, compared to a benefit of $0.3 million for the nine months ended September 30, 2017. The primary item impacting income taxes for the nine months ended September 30, 2018 was the valuation allowance against our deferred tax assets. The primary items impacting income taxes for the nine months ended September 30, 2017 was the change in the deferred tax liability related to certain long-lived assets resulting from the application of fresh start accounting. See Note 12 in the Notes to the Condensed Consolidated Financial Statements herein for additional information.
Segment Operating Results: Nine Months Ended September 30, 2018 and 2017
The following table shows operating results for each of our segments for the nine months ended September 30, 2018 and 2017:
 
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Nine months ended September 30, 2018 (1)
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
97,334

 
$
29,966

 
$
20,973

 
$

 
$
148,273

Direct operating expenses
 
77,702

 
26,696

 
16,051

 

 
120,449

Operating loss
 
(3,041
)
 
(8,086
)
 
(10,497
)
 
(24,146
)
 
(45,770
)
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2017 (2)
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
77,113

 
$
27,910

 
$
24,618

 
$

 
$
129,641

Direct operating expenses
 
62,616

 
27,079

 
17,425

 

 
107,120

Operating loss
 
(16,808
)
 
(11,732
)
 
(7,521
)
 
(17,604
)
 
(53,665
)
(1)
Successor period
(2)
Represents the combined results from the two months ended September 30, 2017 (Successor) and the seven months ended July 31, 2017 (Predecessor).
Rocky Mountain

Revenues for the Rocky Mountain division increased during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due primarily to increased activity for water transfer and disposal services. Specifically, water transfer service volumes have increased due to more active operating rigs in the Rocky Mountain division during the nine months ended September 30, 2018 as compared to the prior year period. Revenue improvement also came from the purchase and deployment of additional temporary water transport pipeline in early 2018. Additionally, volumes at the landfill and the disposal wells also increased over the same period in the prior year.

For the Rocky Mountain division, direct operating costs increased during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due primarily to increased activity.

Northeast

Revenues for the Northeast division increased during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due to higher activity levels for water transfer and disposal services. Additionally, pricing increases for disposal services contributed to the increase in revenues.

For the Northeast division, direct operating costs increased during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due to higher activity levels.


43



Southern

Revenues for the Southern division decreased during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due primarily to management’s decision to exit the Eagle Ford Shale area as of March 1, 2018. As a result, only $2.1 million in revenues associated with the Eagle Ford Shale area were included for the nine months ended September 30, 2018, while $7.5 million was included during the prior year period. Additionally, activity levels for water transfer services, including our permanent disposal water pipeline, were down in the Southern division during the nine months ended September 30, 2018.

In the Southern division, direct operating costs decreased during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due to the exit of the Eagle Ford Shale area and lower activity levels.

Corporate/Other
The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general and administrative costs for the nine months ended September 30, 2018 were higher than those reported for the nine months ended September 30, 2017 due primarily to higher compensation costs related to the departure of our former Chief Executive Officer in the first quarter of 2018.
Liquidity and Capital Resources
Cash Flows and Liquidity
Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. Cash provided by operating activities was $4.2 million for three months ended September 30, 2018. Total liquidity as of September 30, 2018, consisting of cash and available borrowings, was $21.1 million. Not included in the $21.1 million of liquidity, was an additional $10.2 million of borrowings available under the Successor Revolving Facility (as defined herein) that could be spent only on capital expenditures. Our sources of cash for 2018 have included cash generated by our operations, asset sales, and borrowings from our Successor Revolving Facility. Based on our current sources of cash, we believe we have adequate liquidity to meet our current and future needs.
The following table summarizes our sources and uses of cash for the nine months ended September 30, 2018, two months ended September 30, 2017, and the seven months ended July 31, 2017 (in thousands):
 
 
Successor
 
Predecessor
 
 
Nine Months Ended September 30,
 
Two Months Ended September 30,
 
Seven Months Ended
July 31,
Net cash (used in) provided by:
 
2018
 
2017
 
2017
Operating activities
 
$
4,220

 
$
(3,072
)
 
$
(18,949
)
Investing activities
 
9,454

 
1,295

 
(66
)
Financing activities
 
(3,531
)
 
(2,215
)
 
31,599

Net change in cash, cash equivalents and restricted cash
 
$
10,143

 
$
(3,992
)
 
$
12,584


Operating Activities

Net cash provided by operating activities was $4.2 million for the nine months ended September 30, 2018. The net loss, after adjustments for non-cash items, provided cash of $1.5 million, compared to the use of $18.0 million in the corresponding 2017 period. Changes in operating assets and liabilities provided $2.7 million in cash primarily due to a decrease in accounts receivable and an increase in accounts payable and other accrued expenses. The non-cash items and other adjustments included $36.7 million of depreciation and amortization, stock-based compensation expense of $11.5 million, long-lived asset impairment charges of $4.6 million, accrued interest added to debt principal of $0.1 million, offset by a $0.9 million gain on the sale of assets and $0.3 million gain resulting from the change in the fair value of the derivative warrant liability.

Net cash used in operating activities was $22.0 million for the nine months ended September 30, 2017. The net loss, after adjustments for non-cash items, used cash of $18.0 million. Changes in operating assets and liabilities used $4.0 million in cash primarily due to increases in accounts receivable, accounts payable and accrued expenses, and other long term liabilities as a result of the chapter 11 filing and the fresh start accounting. The non-cash items and other adjustments included $46.3 million

44



of depreciation and amortization, accrued interest added to debt principal of $11.7 million, a $3.9 million gain resulting from the change in the fair value of the derivative warrant liability, amortization of debt issuance costs of $2.1 million, an increase in bad debt expense of $0.8 million, and stock-based compensation expense of $0.6 million.

Investing Activities

Net cash provided by investing activities was $9.5 million for the nine months ended September 30, 2018 and primarily consisted of $19.1 million of proceeds from the sale of property, plant and equipment, offset by $9.7 million of purchases of property, plant and equipment.
Net cash provided in investing activities was $1.2 million for the nine months ended September 30, 2017 which consisted primarily of $4.7 million of proceeds from the sale of property, plant and equipment, offset by $3.6 million of purchases of property, plant and equipment.
Financing Activities
Net cash used in financing activities was $3.5 million for the nine months ended September 30, 2018 and was primarily comprised of $2.1 million of payments on the Successor First Lien Term Loan and the Successor Second Lien Term Loan and $1.4 million of payments on vehicle financing and other financing activities.
Net cash provided by financing activities was $29.4 million for the nine months ended September 30, 2017 and consisted of $15.7 million in additional proceeds from our Predecessor term loan, $6.9 million in cash proceeds from our Predecessor debtor in possession term loan, and $36.1 million in cash proceeds from our Successor First Lien Term Loan and Successor Second Lien Term Loan, offset by $23.2 million of net payments under our Predecessor asset-based lending facility and $4.6 million of payments on vehicle financing and other financing activities.
Capital Expenditures
Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. During the recent industry downturn, we sought to maximize liquidity by limiting our capital expenditures to only those deemed critical to our ongoing operations and those necessary to support our key growth initiatives. Coming out of the downturn, we have reinvested more heavily in our service lines and growth projects. Cash required for capital expenditures for the nine months ended September 30, 2018 totaled $9.7 million compared to $3.6 million for the nine months ended September 30, 2017. These capital expenditures were more than offset by proceeds received from the sale of under-utilized or non-core assets of $19.1 million and $4.7 million in the nine months ended September 30, 2018 and 2017, respectively. Although the proceeds from asset sales exceeded capital expenditures during the nine months ended September 30, 2018, we intend to reinvest these proceeds in both maintenance and growth projects, including the purchase of new trucks for our Northeast fleet and the acquisition of new disposal wells in Ohio (which is discussed further in Note 18 in the Notes to the Condensed Consolidated Financial Statements herein).

Historically, a portion of our transportation-related capital requirements were financed through capital leases. We had no new equipment additions under capital leases in the nine months ended September 30, 2018 or September 30, 2017. We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale areas in which we operate. Our planned capital expenditures for the remainder of 2018 could be financed through cash flow from operations, borrowings under the Successor Revolving Facility and Successor Second Lien Term Loan, capital leases, other financing structures, or a combination of the foregoing.

Indebtedness
As of September 30, 2018, we had $35.6 million of indebtedness outstanding, consisting of $12.7 million under the Successor First Lien Term Loan (as defined herein), $20.6 million under the Successor Second Lien Term Loan (as defined herein), and $2.3 million of capital leases for vehicle financings.
See the “Bridge Term Loan Credit Agreement, Guaranty Agreement, and Subordination Agreement” discussion below under “Subsequent Events - Acquisition of Clearwater and Changes to Indebtedness,” in addition to the discussion in Note 18 of the Notes to the Condensed Consolidated Financial Statements.
First Lien Credit Agreement
On the Effective Date, pursuant to the Plan, the Company entered into a $45.0 million First Lien Credit Agreement (the “Credit Agreement”) by and among the lenders party thereto (the “Credit Agreement Lenders”), ACF FinCo I, LP, as administrative agent (the “Credit Agreement Agent”), and the Company. Pursuant to the Credit Agreement, the Credit Agreement Lenders

45



agreed to extend to the Company a $30.0 million senior secured revolving credit facility (the “Successor Revolving Facility”) and a $15.0 million senior secured term loan facility (the “Successor First Lien Term Loan”) (i) to repay obligations outstanding under the Predecessor asset-based lending facility and debtor in possession asset based lending facility, (ii) to make certain payments as provided in the Plan, (iii) to pay costs and expenses incurred in connection with the Plan, and (iv) for working capital, transaction expenses, and other general corporate purposes. The Credit Agreement also contains an accordion feature that provides for an increase in availability of up to an additional $20.0 million, subject to the satisfaction of certain terms and conditions contained in the Credit Agreement.
The Successor Revolving Facility and the Successor First Lien Term Loan mature on August 7, 2020, at which time the Company must repay the outstanding principal amount of the Successor Revolving Facility and the Successor First Lien Term Loan, together with interest accrued and unpaid thereon. The Successor Revolving Facility may be repaid and, subject to the terms and conditions of the Credit Agreement, reborrowed at any time during the term of the Credit Agreement. The principal amount of the Successor First Lien Term Loan shall be repaid in installments of $178.6 thousand beginning on September 1, 2017 and the first day of each calendar month thereafter prior to maturity. Interest on the Successor Revolving Facility accrues at an annual rate equal to the LIBOR Rate (as defined in the Credit Agreement) plus 5.25%, and interest on the Successor First Lien Term Loan accrues at an annual rate equal to the LIBOR Rate plus 7.25%; however, if there is an Event of Default (as defined in the Credit Agreement), the Credit Agreement Agent, in its sole discretion, may increase the applicable interest rate at a per annum rate equal to three percentage points above the annual rate otherwise applicable thereunder.
The Credit Agreement also contains certain affirmative and negative covenants, including a fixed charge coverage ratio covenant, as well as other terms and conditions that are customary for revolving credit facilities and term loans of this type. As of September 30, 2018, we were in compliance with all covenants.
See the “Amendment to First Lien Credit Agreement and Joinder to First Lien Guaranty and Security Agreement” below under “Subsequent Events - Acquisition of Clearwater and Changes to Indebtedness,” in addition to the discussion in Note 18 of the Notes to the Condensed Consolidated Financial Statements.

Second Lien Term Loan Credit Agreement
On the Effective Date, pursuant to the Plan, the Company also entered into a Second Lien Term Loan Credit Agreement (the “Second Lien Term Loan Agreement”) by and among the lenders party thereto (the “Second Lien Term Loan Lenders”), Wilmington Savings Fund Society, FSB, as administrative agent (the “Second Lien Term Loan Agent”), and the Company. Pursuant to the Second Lien Term Loan Agreement, the Second Lien Term Loan Lenders agreed to extend to the Company a $26.8 million second lien term loan facility (the “Successor Second Lien Term Loan”), of which $21.1 million was advanced on the Effective Date and up to an additional $5.7 million (“Delayed Draw Term Loan”) is available at the request of the Company after the closing date, subject to the satisfaction of certain terms and conditions specified in the Second Lien Term Loan Agreement. The Second Lien Term Loan Lenders extended the Successor Second Lien Term Loan, among other things, (i) to repay obligations outstanding under the Predecessor asset-based lending facility and debtor in possession asset-based revolving facility, (ii) to make certain payments as provided in the Plan, (iii) to pay costs and expenses incurred in connection with the Plan, and (iv) for working capital, transaction expenses and other general corporate purposes.
The Successor Second Lien Term Loan matures on February 7, 2021, at which time the Company must repay all outstanding obligations under the Successor Second Lien Term Loan. The principal amount of the Successor Second Lien Term Loan shall be repaid in installments of $263.2 thousand beginning on October 1, 2017, and the first day of each fiscal quarter thereafter prior to maturity, with such amount to be proportionally increased as the result of the incurrence of a Delayed Draw Term Loan. Interest on the Successor Second Lien Term Loan accrues at an annual rate equal to 11.0%, payable in cash, in arrears, on the first day of each month. However, upon the occurrence and during the continuation of an Event of Default (as defined in the Second Lien Term Loan Agreement) due to a voluntary or involuntary bankruptcy filing, automatically, or any other Event of Default, at the election of the Second Lien Term Loan Agent, the Successor Second Lien Term Loan and all obligations thereunder shall bear interest at an annual rate equal to three percentage points above the annual rate otherwise applicable thereunder.
The Second Lien Term Loan Agreement also contains certain affirmative and negative covenants, including a fixed charge coverage ratio covenant, as well as other terms and conditions that are customary for term loans of this type. As of September 30, 2018, we were in compliance with all covenants.
See the “Amendments to Second Lien Credit Agreement and Joinder to Second Lien Guaranty and Security Agreement” below under “Subsequent Events - Acquisition of Clearwater and Changes to Indebtedness,” in addition to the discussion in Note 18

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of the Notes to the Condensed Consolidated Financial Statements.
Subsequent Events - Acquisition of Clearwater and Changes to Indebtedness
Acquisition of Clearwater
On October 5, 2018, we entered into a definitive agreement to acquire Clearwater Three, LLC, Clearwater Five, LLC, and Clearwater Solutions, LLC (collectively, “Clearwater”) for an initial purchase price of $41.9 million, subject to customary working capital adjustments (the “Acquisition”). Clearwater is a supplier of waste water disposal services used by the oil and gas industry in the Marcellus and Utica Shale areas. Clearwater has three salt water disposal wells in service, all of which are located in Ohio. This acquisition expands our service offerings in the Marcellus and Utica Shale areas in our Northeast division.
Consideration consisted of $41.9 million in cash which was funded primarily by a $32.5 million bridge loan that will be repaid with proceeds from a planned offering to shareholders of common stock purchase rights. In addition, the Credit Agreement Lenders provided us with an additional term loan under the Credit Agreement in the amount of $10.0 million which was used to finance a portion of the Acquisition.
In connection with the Acquisition, we incurred transaction costs of $0.4 million, which are included in general and administrative costs in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2018.

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

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

The Bridge Term Loan Credit Agreement requires us to use our reasonable best efforts to effectuate and close the Rights Offering (as defined below) as soon as reasonably practicable following October 5, 2018. Concurrently with the completion of the Rights Offering, we are required to prepay all outstanding amounts under the Bridge Term Loan Credit Agreement in cash in an amount equal to the net cash proceeds received from the Rights Offering.

We also have the option to prepay principal amounts outstanding under the Bridge Term Loan Credit Agreement at any time without premium or penalty. Except upon the completion of the Rights Offering or in the event that an insolvency proceeding is pending against us, all principal payments (whether at maturity or otherwise) are required to be tendered in the form of common stock of the Company, with the value of such common stock determined based on its volume weighted average price during the 20-day period preceding the announcement of the Acquisition.

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

On October 5, 2018, in connection with the Acquisition, we entered into a First Amendment to the Credit Agreement (the “First Amendment to the Credit Agreement”) with the Credit Agreement Lenders and the Credit Agreement Agent, which amends the Credit Agreement. Pursuant to the First Amendment to the Credit Agreement, the Credit Agreement Lenders provided us with an additional term loan under the Credit Agreement in the amount of $10.0 million, which was used to finance a portion of the Acquisition. The First Amendment to the Credit Agreement also amended the Credit Agreement to extend the maturity date from August 7, 2020 to February 7, 2021, in addition to allowing for the Acquisition and providing us with additional flexibility under the Credit Agreement, including certain availability, mandatory prepayment and financial reporting provisions thereunder.

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

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

On October 5, 2018, in connection with the Acquisition, we entered into a First Amendment to the Second Lien Term Loan Agreement (the “First Amendment to the Second Lien Term Loan Agreement”) with the Second Lien Term Loan Lenders and the Second Lien Term Loan Agent, which amends the Second Lien Term Loan Agreement. Pursuant to the First Amendment to Second Lien Term Loan Agreement, the Second Lien Term Loan Lenders agreed to certain conforming amendments to the Credit Agreement to allow for the funding of the additional term loan in the amount of $10.0 million under the First Amendment to the Credit Agreement and the term loans pursuant to the Bridge Term Loan Credit Agreement. The First Amendment to the Second Lien Term Loan Agreement also extended the maturity date from February 7, 2021 to October 7, 2021.

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

First Amendment to Intercreditor Agreement and Joinder to Intercompany Subordination Agreement

On October 5, 2018, in connection with the First Amendment to the Credit Agreement, we acknowledged the terms and conditions under a First Amendment to the Intercreditor Agreement, dated October 5, 2018, by and between the Credit Agreement Agent and the Second Lien Term Loan Agent, which amends the Subordination and Intercreditor Agreement, dated as of August 7, 2017, by and between the Credit Agreement Agent and the Second Lien Term Loan Agent. On October 5, 2018, the New Grantors also entered into the Joinder to Intercompany Subordination Agreement, pursuant to which the New Grantors agreed to become party to that Intercompany Subordination Agreement by and among the persons originally party thereto as an “Obligor”, the Credit Agreement Agent and the Second Lien Term Loan Agent.

Rights Offering and Backstop Commitment Letter

We have agreed, pursuant to the Bridge Term Loan Credit Agreement, to use our reasonable best efforts to effectuate and close a rights offering as soon as reasonably practicable following October 5, 2018 pursuant to which we plan to dividend to our holders of common stock subscription rights to purchase shares of our common stock on a pro rata basis with an aggregate offering price of $32.5 million (the “Rights Offering”). The proceeds of the Rights Offering will be used by us to pay the obligations under the Bridge Term Loan Credit Agreement.

In connection with the Rights Offering, we entered into a Backstop Commitment Letter on October 5, 2018 (the “Backstop Commitment Letter”) with certain backstop parties named therein (the “Backstop Parties”), pursuant to which the Backstop Parties agreed, subject to the terms and conditions in the Backstop Commitment Letter, to participate in the Rights Offering and backstop the full amount of the Rights Offering. In exchange for the commitments under the Backstop Commitment Letter, we paid to the Backstop Parties, in the aggregate, a nonrefundable cash payment equal to 1.0% of the full amount of the Rights Offering. The Backstop Parties are our two largest shareholders that, in the aggregate, hold approximately 90% of our stock. Pursuant to the Backstop Commitment Letter, we are required to file a registration statement with the SEC within 20 days following October 5, 2018. This registration statement was filed with the SEC on October 25, 2018. The record date for the Rights Offering will be set by the Board of Directors of the Company upon the registration statement being declared effective by the SEC. Pursuant to the Backstop Commitment Letter, the exercise price for each share of common stock issuable upon exercise of a subscription right will be $9.61, which is equal to the 20-day volume weighted average price of the common stock of the Company preceding the public announcement of the completion of the Acquisition on October 5, 2018.


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Off Balance Sheet Arrangements

As of September 30, 2018, other than operating leases, we did not have any off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Contractual Obligations

Our contractual obligations at September 30, 2018 did not change materially from those disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations” of our 2017 Annual Report on Form 10-K.

In connection with the Clearwater acquisition, on October 5, 2018, we entered into a Bridge Term Loan Credit Agreement, a First Amendment to the Credit Agreement, and First Amendment to the Second Lien Term Loan Agreement, thereby increasing our contractual obligations for long-term debt. See the discussion in “Item 2. Subsequent Events - Acquisition of Clearwater and Changes to Indebtedness” for additional details.

Critical Accounting Policies
There have been no significant changes to our Critical Accounting Policies in the nine months ended September 30, 2018 from those disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements
See Note 2 in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a description of accounting pronouncements recently issued that could potentially impact our consolidated financial statements.

Item  3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our quantitative and qualitative disclosures about market risk from those disclosed in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2017 Annual Report on Form 10-K.

Item 4.    Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, we performed an evaluation, under the supervision and with the participation of our Interim Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at that time to provide reasonable assurance that the information required to be disclosed in our reports filed with the SEC under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and are accumulated and communicated to our management, including the Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 30, 2018 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item  1. Legal Proceedings

See “Legal Matters” in Note 14 of the Notes to the Condensed Consolidated Financial Statements for a description of our material legal proceedings.

Item  1A. Risk Factors
In addition to the risk factors below and other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors of our 2017 Annual Report on Form 10-K.

Risks Related to Our Company
We may not be able to grow successfully through future acquisitions or successfully manage future growth, and we may not be able to effectively integrate the businesses we do acquire.
Our business strategy includes growth through the acquisitions of other businesses. We may not be able to continue to identify attractive acquisition opportunities or successfully acquire identified targets. In addition, we may not be successful in integrating our current or future acquisitions into our existing operations, which may result in unforeseen operational difficulties or diminished financial performance or require a disproportionate amount of our management’s attention. Even if we are successful in integrating our current or future acquisitions into our existing operations, we may not derive the benefits, such as operational or administrative synergies, that we expected from such acquisitions, which may result in the investment of our capital resources without realizing the expected returns on such investment. Furthermore, competition for acquisition opportunities may increase our cost of making further acquisitions or cause us to refrain from making additional acquisitions. We also may be limited in our ability to incur additional indebtedness in connection with or to fund future acquisitions under our credit agreements.
Whether we realize the anticipated benefits from an acquisition depends, in part, upon our ability to integrate the operations of the acquired business, the quality and performance of the operating assets of the acquired business, the performance of the underlying product and service portfolio, and the performance of the management team and other personnel of the acquired operations. Accordingly, our financial results could be adversely affected by unanticipated performance issues, legacy liabilities, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets, indemnifications and other unforeseen events or circumstances. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item  5. Other Information

None.


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Item 6. Exhibits
The exhibits listed on the “Exhibit Index” set forth below are filed or furnished with this Quarterly Report on Form 10-Q or incorporated by reference as set forth therein.
Exhibit
Number
Description
 
 
10.1
 
 
10.2
 
 
10.3

 
 
10.4
 
 
10.5

 
 
10.6

 
 
10.7

 
 
10.8
 
 
10.9

 
 
10.10

 
 
10.11

 
 
31.1*
 
 
31.2*
 
 
32.1*
 
 

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Exhibit
Number
Description
101.INS*
XBRL Instance Document.
 
 
101.SCH*
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
_______________
*
Filed herewith.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:
November 6, 2018
 
/s/ Charles K. Thompson
Name:
Charles K. Thompson
Title:
Interim Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
/s/ Edward A. Lang
Name:
Edward A. Lang
Title:
Executive Vice President and Chief Financial Officer
 
(Principal Financial Officer)
 
 
 
 
 


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