Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - Nuverra Environmental Solutions, Inc.nes_20200630xex311.htm
EX-32.1 - EXHIBIT 32.1 - Nuverra Environmental Solutions, Inc.nes_20200630xex321.htm
EX-31.2 - EXHIBIT 31.2 - Nuverra Environmental Solutions, Inc.nes_20200630xex312.htm
EX-10.2 - EXHIBIT 10.2 - Nuverra Environmental Solutions, Inc.nes_20200630xex102.htm
EX-10.1 - EXHIBIT 10.1 - Nuverra Environmental Solutions, Inc.nes_20200630xex101.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: June 30, 2020
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
_________________________________
nesimagea12.jpg
(Exact name of registrant as specified in its charter)
Delaware
26-0287117
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)

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

(602) 903-7802

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
__________________________________
    
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value
NES
NYSE American
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x
Smaller reporting company
x
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨




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

The number of shares outstanding of the registrant’s common stock as of July 31, 2020 was 15,772,420.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 


 

3



Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the “Exchange Act.” These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:

the impact of the coronavirus disease 2019 ("COVID-19") pandemic and oil price declines;

future financial performance and growth targets or expectations;

market and industry trends and developments, and

the potential benefits of any financing transactions and any potential benefits from future merger, acquisition, disposition, and restructuring 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 severity, magnitude and duration of the COVID-19 pandemic and oil price declines;

changes in commodity prices or general market conditions, acquisition and disposition activities;

fluctuations in consumer trends, pricing pressures, transportation costs, changes in raw material or labor prices or rates related to our business and changing regulations or political developments in the markets in which we operate;

risks associated with our indebtedness, including changes to interest rates, decreases in our borrowing availability, our ability to manage our liquidity needs and to comply with covenants under our credit facilities, including as a result of COVID-19 and oil price declines;

the loss of one or more of our larger customers;

delays in customer payment of outstanding receivables and customer bankruptcies;

natural disasters, such as hurricanes, earthquakes and floods, pandemics (including COVID-19) 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;

disruptions impacting crude oil and natural gas transportation, processing, refining, and export systems, including litigation regarding the Dakota Access Pipeline;

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

our ability to attract and retain a sufficient number of qualified truck drivers;

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

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

4




control of costs and expenses;

changes in customer drilling, completion and production activities, operating methods and capital expenditure plans, including impacts due to low oil and/or natural gas prices, shut-in production, decline in operating drilling rigs, closures or pending closures of third-party pipelines or the economic or regulatory environment;

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

risks and uncertainties associated with the outcome of an appeal of the order confirming our previously completed plan of reorganization;

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

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

risks associated with changes in industry practices and operational technologies;

risks associated with the operation, construction, development and closure of saltwater disposal wells, solids and liquids transportation assets, landfills and pipelines, including access to additional locations and rights-of-way, permitting and licensing, environmental remediation obligations, unscheduled delays or inefficiencies and reductions in volume due to micro- and macro-economic factors or the availability of less expensive alternatives;

the effects of competition in the markets in which we operate, including the adverse impact of competitive product announcements or new entrants into our markets and transfers of resources by competitors into our markets;

changes in economic conditions in the markets in which we operate or in the world generally, including as a result of political uncertainty;

reduced demand for our services due to regulatory or other influences related to extraction methods such as hydraulic fracturing, shifts in production among shale areas in which we operate or into shale areas in which we do not currently have operations, and shifts to reuse of water in completion activities;

the unknown future impact of changes in laws and regulation on waste management and disposal activities, including those impacting the delivery, storage, collection, transportation, and disposal of waste products, as well as the use or reuse of recycled or treated products or byproducts;

risks involving developments in environmental or other governmental laws and regulations in the markets in which we operate and our ability to effectively respond to those developments including laws and regulations relating to oil and natural gas extraction businesses, particularly relating to water usage, and the disposal and transportation of liquid and solid wastes; and

other risks identified in this Quarterly Report or referenced from time to time in our filings with the United States Securities and Exchange Commission.

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.

 

5



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
June 30,
 
December 31,
 
2020
 
2019
Assets
 
 
 
Cash and cash equivalents
$
15,793

 
$
4,788

Restricted cash

 
922

Accounts receivable, net of allowance for doubtful accounts of $1.0 million and $1.3 million at June 30, 2020 and December 31, 2019, respectively
16,881

 
26,493

Inventories
2,937

 
3,177

Prepaid expenses and other receivables
2,882

 
3,264

Other current assets

 
231

Assets held for sale
778

 
2,664

Total current assets
39,271

 
41,539

Property, plant and equipment, net of accumulated depreciation of $104.1 million and $98.0 million at June 30, 2020 and December 31, 2019, respectively
163,470

 
190,817

Operating lease assets
2,007

 
2,886

Equity investments
35

 
39

Intangibles, net
407

 
640

Other assets
129

 
178

Total assets
$
205,319

 
$
236,099

Liabilities and Shareholders’ Equity
 
 
 
Accounts payable
$
3,811

 
$
5,633

Accrued and other current liabilities
8,705

 
10,064

Current portion of long-term debt
8,553

 
6,430

Total current liabilities
21,069

 
22,127

Long-term debt
29,328

 
30,005

Noncurrent operating lease liabilities
1,494

 
1,457

Deferred income taxes
131

 
91

Long-term contingent consideration
500

 
500

Other long-term liabilities
7,617

 
7,487

Total liabilities
60,139

 
61,667

Commitments and contingencies

 

Shareholder's equity:
 
 
 
Preferred stock $0.01 par value (1,000 shares authorized, no shares issued and outstanding at June 30, 2020 and December 31, 2019)

 

Common stock, $0.01 par value (75,000 shares authorized, 15,821 shares issued and 15,761 outstanding at June 30, 2020, and 15,781 shares issued and 15,735 outstanding at December 31, 2019)
158

 
158

Additional paid-in capital
338,240

 
337,628

Treasury stock (60 shares and 46 shares at June 30, 2020 and December 31, 2019, respectively)
(477
)
 
(436
)
Accumulated deficit
(192,741
)
 
(162,918
)
Total shareholders' equity
145,180

 
174,432

Total liabilities and equity
$
205,319

 
$
236,099

The accompanying notes are an integral part of these statements.
 

6



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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Revenue:
 
 
 
 
 
 
 
Service revenue
$
22,956

 
$
41,238

 
$
57,427

 
$
80,239

Rental revenue
1,510

 
4,002

 
4,981

 
7,628

Total revenue
24,466

 
45,240

 
62,408

 
87,867

Costs and expenses:
 
 
 
 
 
 
 
Direct operating expenses
18,551

 
34,517

 
50,027

 
67,074

General and administrative expenses
4,445

 
5,280

 
9,369

 
10,755

Depreciation and amortization
7,156

 
9,277

 
15,145

 
18,412

Impairment of long-lived assets

 

 
15,579

 
117

Other, net

 
(6
)
 

 
(6
)
Total costs and expenses
30,152

 
49,068

 
90,120

 
96,352

Operating loss
(5,686
)
 
(3,828
)
 
(27,712
)
 
(8,485
)
Interest expense, net
(1,116
)
 
(1,297
)
 
(2,276
)
 
(2,718
)
Other income, net
38

 
152

 
180

 
177

Reorganization items, net

 
13

 

 
(210
)
Loss before income taxes
(6,764
)
 
(4,960
)
 
(29,808
)
 
(11,236
)
Income tax expense
(15
)
 
(46
)
 
(15
)
 
(125
)
Net loss
$
(6,779
)
 
$
(5,006
)
 
$
(29,823
)
 
$
(11,361
)
 
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
 
Net loss per basic common share
$
(0.43
)
 
$
(0.32
)
 
$
(1.89
)
 
$
(0.73
)
 
 
 
 
 
 
 
 
Net loss per diluted common share
$
(0.43
)
 
$
(0.32
)
 
$
(1.89
)
 
$
(0.73
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
15,761

 
15,704

 
15,757

 
15,627

Diluted
15,761

 
15,704

 
15,757

 
15,627

The accompanying notes are an integral part of these statements.





7



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

 
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury Stock
 
Accumulated
Deficit
 
Total
Shares
 
Amount
 
 
Shares
 
Amount
 
 
Balance at January 1, 2020
 
15,781

 
$
158

 
$
337,628

 
(46
)
 
$
(436
)
 
$
(162,918
)
 
$
174,432

Issuance of common stock to employees
 
40

 

 

 

 

 

 

Treasury stock acquired through surrender of shares for tax withholding
 

 

 

 
(14
)
 
(41
)
 

 
(41
)
Stock-based compensation
 

 

 
290

 

 

 

 
290

Net loss
 

 

 

 

 

 
(23,044
)
 
(23,044
)
Balance at March 31, 2020
 
15,821

 
158

 
337,918

 
(60
)
 
(477
)
 
(185,962
)
 
151,637

Issuance of common stock to employees
 

 

 

 

 

 

 

Treasury stock acquired through surrender of shares for tax withholding
 

 

 

 

 

 

 

Stock-based compensation
 

 

 
322

 

 

 

 
322

Net loss
 

 

 

 

 

 
(6,779
)
 
(6,779
)
Balance at June 30, 2020
 
15,821

 
$
158

 
$
338,240

 
(60
)
 
$
(477
)
 
$
(192,741
)
 
$
145,180

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
 
12,233

 
$
122

 
$
303,463

 

 
$

 
$
(107,158
)
 
$
196,427

Adjustment due to adoption of ASC 842, Leases
 

 

 

 

 

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

 
34

 
32,141

 

 

 

 
32,175

Issuance of common stock to employees
 
97

 
1

 
(1
)
 

 

 

 

Treasury stock acquired through surrender of shares for tax withholding
 

 

 

 
(34
)
 
(373
)
 

 
(373
)
Stock-based compensation
 

 

 
852

 

 

 

 
852

Net loss
 

 

 

 

 

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

 
157

 
336,455

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

Issuance of common stock to employees
 
34

 

 

 

 

 

 

Treasury stock acquired through surrender of shares for tax withholding
 

 

 

 
(3
)
 
(29
)
 

 
(29
)
Stock-based compensation
 

 

 
563

 

 

 

 
563

Net loss
 

 

 

 

 

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

 
$
157

 
$
337,018

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


The accompanying notes are an integral part of these statements.


8



NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net loss
$
(29,823
)
 
$
(11,361
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
   Depreciation and amortization
15,145

 
18,412

   Amortization of debt issuance costs, net
81

 
247

   Stock-based compensation
612

 
1,415

   Impairment of long-lived assets
15,579

 
117

   Gain on disposal of property, plant and equipment
(342
)
 
(1,706
)
   Bad debt recoveries
(160
)
 
(9
)
   Change in fair value of derivative warrant liability

 
(28
)
   Deferred income taxes
40

 
112

   Other, net
375

 
55

   Changes in operating assets and liabilities:
 
 
 
      Accounts receivable
9,772

 
2,724

      Prepaid expenses and other receivables
382

 
(576
)
      Accounts payable and accrued liabilities
(2,271
)
 
(6,059
)
      Other assets and liabilities, net
435

 
1,111

Net cash provided by operating activities
9,825

 
4,454

Cash flows from investing activities:
 
 
 
   Proceeds from the sale of property, plant and equipment
1,548

 
4,525

   Purchases of property, plant and equipment
(2,328
)
 
(5,019
)
Net cash used in investing activities
(780
)
 
(494
)
Cash flows from financing activities:
 
 
 
   Payments on First and Second Lien Term Loans
(1,909
)
 
(2,514
)
   Proceeds from Revolving Facility
76,202

 
96,677

   Payments on Revolving Facility
(76,202
)
 
(96,677
)
   Proceeds from PPP Loan
4,000

 

   Payments on Bridge Term Loan

 
(31,382
)
   Proceeds from the issuance of stock

 
31,057

   Payments on finance leases and other financing activities
(1,053
)
 
(1,226
)
Net cash provided by (used in) financing activities
1,038

 
(4,065
)
Change in cash, cash equivalents and restricted cash
10,083

 
(105
)
Cash and cash equivalents, beginning of period
4,788

 
7,302

Restricted cash, beginning of period
922

 
656

Cash, cash equivalents and restricted cash, beginning of period
5,710

 
7,958

Cash and cash equivalents, end of period
15,793

 
5,978

Restricted cash, end of period

 
1,875

Cash, cash equivalents and restricted cash, end of period
$
15,793

 
$
7,853

 
 
 
 

9



 
Six Months Ended
 
June 30,
 
2020
 
2019
Supplemental disclosure of cash flow information:
 
 
 
   Cash paid for interest
$
1,764

 
$
2,218

   Cash paid for taxes, net
181

 
138

   Property, plant and equipment purchases in accounts payable
481

 

   Common stock issued to settle Bridge Term Loan

 
1,118


The accompanying notes are an integral part of these statements.  

10



NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation

The accompanying condensed consolidated financial statements of Nuverra Environmental Solutions, Inc. and its subsidiaries (collectively, “Nuverra,” the “Company,” “we,” “us,” or “our”) are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Our condensed consolidated balance sheet as of December 31, 2019, 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, 2019, filed with the SEC on March 10, 2020 (the “2019 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.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates.

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 2019 Annual Report on Form 10-K.

Restricted Cash

Upon emergence from chapter 11 on August 7, 2017 (the “Effective Date”), we entered into a new $45.0 million First Lien Credit Agreement (the “First Lien Credit Agreement”) by and among the lenders party thereto (the “First Lien Credit Agreement Lenders”), ACF FinCo I, LP, as administrative agent (the “Credit Agreement Agent”), and the Company. Pursuant to the First Lien Credit Agreement, the First Lien Credit Agreement Lenders agreed to extend to the Company a $30.0 million senior secured revolving credit facility (the “Revolving Facility”) and a $15.0 million senior secured term loan facility (the “First Lien Term Loan”). As our collections on our accounts receivable serve as collateral on the Revolving Facility, all amounts collected are initially recorded to “Restricted cash” on the condensed consolidated balance sheet as these funds are not available for operations until our First Lien Credit Agreement Lenders release the funds to us approximately one day later. We had a restricted cash balance of $0.9 million as of December 31, 2019.

As of June 30, 2020, no borrowings were outstanding under the Revolving Facility. Additionally, on July 13, 2020, the Company entered into an amendment of its First Lien Credit Agreement, which includes among other terms and conditions, a prohibition on drawing on the Revolving Facility until the fixed charge coverage ratio (“FCCR”) is above the established ratio at 1.00 to 1.00. As such, beginning June 30, 2020, the Company will no longer record amounts to restricted cash until such time the Company meets the established FCCR and is able to draw on the Revolving Facility. See Note 18 for further discussion of the amendment.

Fair Value Measurements

Fair value represents an exit price, representing the amount that would be received from the sale of 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.

11




Liquidity and Going Concern

The Company continues to incur operating losses, and we anticipate losses to continue into the near future. Additionally, due to the COVID-19 outbreak, there has been a significant decline in oil and natural gas demand, which has negatively impacted our customers’ demand for our services, resulting in uncertainty surrounding the potential impact on our cash flows, results of operations and financial condition. We expect crude oil prices to remain low for the foreseeable future, so we anticipate our customers’ crude or natural gas liquids drilling and completion activity to continue to operate at lower levels. Due to the uncertainty of future oil and natural gas prices and the continued effects of the COVID-19 outbreak, there is substantial doubt as to the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued.

In order to mitigate these conditions, the Company has undertaken various initiatives in the first half of 2020 that management believes will positively impact our operations, including personnel and salary reductions, other changes to our operating structure to achieve additional cost reductions, and the sale of certain assets. In addition, on July 13, 2020, the Company entered into amendments of its First Lien Credit Agreement and Second Lien Term Loan Credit Agreement, dated August 7, 2017, by and among the lenders party thereto, Wilmington as administrative agent, and the Company (the “Second Lien Term Loan Credit Agreement”), which extended the maturity dates of its First Lien Term Loan and Revolving Facility from February 7, 2021 to May 15, 2022, and extended the maturity date of its Second Lien Term Loan Credit Agreement from October 7, 2021 to November 15, 2022. We believe that as a result of the cost reduction initiatives undertaken in the first half of 2020 and the extension of the maturity dates of our credit agreements, our cash flow from operations, together with cash on hand and other available liquidity, will provide sufficient liquidity to fund operations for at least the next twelve months.

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

Note 2 - Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326). Due to the issuance of ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), and the fact that we are a smaller reporting company, the new standard is effective for reporting periods beginning after December 15, 2022. The standard replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We plan to adopt the new credit loss standard effective January 1, 2023. We do not expect the new credit loss standard to have a material effect on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The standard removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard will be effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We plan to adopt this new ASU effective January 1, 2021. We do not expect the adoption of the new tax standard to have a material effect on our consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform, if certain criteria are met. ASU No. 2020-04 only applies to contracts and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The new standard is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact of the new reference rate reform practical expedient will have on our consolidated financial statements.

Note 3 - Revenues

Revenues are generated upon the performance of contracted services under formal and informal contracts with customers. Revenues are recognized when the contracted services for our customers are completed in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Sales and usage-based taxes are excluded from revenues. Payment is due when

12



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 transport 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.

Contract Assets

During 2019, we recorded a contract asset as a result of a contract modification for disposal services. The contract asset has been fully collected as of June 30, 2020. The contract asset is included in “Other current assets” on the condensed consolidated balance sheets. The change in contract asset balance for the six months ended June 30, 2020 was as follows:
Balance at the beginning of the period (January 1, 2020)
$
231

Balance at the end of the period (June 30, 2020)

Increase/(decrease)
$
(231
)

Disaggregated Revenues

The following tables present our revenues disaggregated by revenue source for each reportable segment for the three and six months ended June 30, 2020 and June 30, 2019:
 
Three months ended June 30, 2020
 
Rocky Mountain
 
Northeast
 
Southern
 
Corporate/Other
 
Total
Water Transport Services
$
8,649

 
$
5,989

 
$
2,125

 
$

 
$
16,763

Disposal Services
1,533

 
1,851

 
1,952

 

 
5,336

Other Revenue
565

 
289

 
3

 

 
857

    Total Service Revenue
10,747

 
8,129

 
4,080

 

 
22,956

 
 
 
 
 
 
 
 
 
 
Rental Revenue
1,475

 
33

 
2

 

 
1,510

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
12,222

 
$
8,162

 
$
4,082

 
$

 
$
24,466


 
Three months ended June 30, 2019
 
Rocky Mountain
 
Northeast
 
Southern
 
Corporate/Other
 
Total
Water Transport Services
$
18,448

 
$
7,296

 
$
2,726

 
$

 
$
28,470

Disposal Services
5,146

 
3,098

 
2,739

 

 
10,983

Other Revenue
1,471

 
255

 
59

 

 
1,785

    Total Service Revenue
25,065

 
10,649

 
5,524

 

 
41,238

 
 
 
 
 
 
 
 
 
 
Rental Revenue
3,928

 
71

 
3

 

 
4,002

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
28,993

 
$
10,720

 
$
5,527

 
$

 
$
45,240



13



 
Six months ended June 30, 2020
 
Rocky Mountain
 
Northeast
 
Southern
 
Corporate/Other
 
Total
Water Transport Services
$
22,963

 
$
13,133

 
$
4,381

 
$

 
$
40,477

Disposal Services
5,389

 
4,014

 
4,298

 

 
13,701

Other Revenue
2,431

 
741

 
77

 

 
3,249

    Total Service Revenue
30,783

 
17,888

 
8,756

 

 
57,427

 
 
 
 
 
 
 
 
 
 
Rental Revenue
4,907

 
68

 
6

 

 
4,981

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
35,690

 
$
17,956

 
$
8,762

 
$

 
$
62,408


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

 
$
15,268

 
$
6,210

 
$

 
$
55,635

Disposal Services
9,217

 
6,597

 
5,145

 

 
20,959

Other Revenue
3,017

 
557

 
71

 

 
3,645

    Total Service Revenue
46,391

 
22,422

 
11,426

 

 
80,239

 
 
 
 
 
 
 
 
 
 
Rental Revenue
7,479

 
138

 
11

 

 
7,628

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
53,870

 
$
22,560

 
$
11,437

 
$

 
$
87,867


Water Transport Services

The majority of our revenues are from the removal and disposal of produced water and flowback originating from oil and natural gas wells or the transportation of fresh water and produced water to customer sites for use in drilling and hydraulic fracturing activities by trucks or through temporary or permanent water transfer pipelines. Water transport rates for trucking are based upon either a fixed fee per barrel or upon an hourly rate. Revenue is recognized once the water has been transported, or over time, based upon the number of barrels transported or disposed of, or at the agreed upon hourly rate, depending upon the customer contract. Contracts for the use of our water disposal pipeline are priced at a fixed fee per disposal barrel transported, with revenues recognized over time from when the water is injected into our pipeline until the transport is complete. Water transport 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 fluids near disposal wells and disposal of oilfield wastes in our landfill. Disposal rates are generally based on a fixed fee per barrel of produced water, or on a per ton basis for landfill disposal, with revenues recognized once the disposal has occurred. The performance obligation for disposal services is considered complete once the disposal occurs. Therefore, disposal services revenues are recognized at a point in time.

Other Revenue

Other revenue 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 sales at a point in time once the goods are transferred.

Rental Revenue

We generate rental revenue from the rental of 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 842, Leases. As the rental service period for our equipment

14



is very short term in nature and does not include any sales-type or direct financing leases, nor any variable rental components, the adoption of ASC 842 in 2019 did not have a material impact upon our consolidated statement of operations.

Note 4 - Leases

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

Most of our leases have remaining lease terms of less than one year to 20 years, with one lease having a term of 99 years. Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with an initial term of twelve months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis. Some of our vehicle leases include residual value guarantees. It is probable that we will owe approximately $2.4 million under the residual value guarantees, therefore this amount has been included in the measurement of the lease liability and leased asset.

The components of lease expense were as follows:
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
June 30,
 
June 30,
Lease Cost
 
Classification
 
2020
 
2019
 
2020
 
2019
Operating lease cost (a)
 
General and administrative expenses
 
$
696

 
$
729

 
$
1,350

 
$
1,453

Finance lease cost:
 
 
 
 
 
 
 
 
 
 
     Amortization of leased assets
 
Depreciation and amortization
 
546

 
679

 
1,164

 
1,225

     Interest on lease liabilities
 
Interest expense, net
 
140

 
177

 
288

 
240

Variable lease cost
 
General and administrative expenses
 
669

 
1,055

 
1,596

 
2,121

Sublease income
 
Other income, net
 
(8
)
 
(22
)
 
(32
)
 
(73
)
Total net lease cost
 
 
 
$
2,043

 
$
2,618

 
$
4,366

 
$
4,966


(a)
Includes short-term leases, which represented $0.1 million and $0.2 million of the balance for the three months ended June 30, 2020 and June 30, 2019, respectively, and $0.2 million and $0.4 million of the balance for the six months ended June 30, 2020 and June 30, 2019, respectively.


15



Supplemental balance sheet, cash flow and other information related to leases was as follows (in thousands, except lease term and discount rate):
Leases
 
Classification
 
June 30,
2020
 
December 31,
2019
Assets:
 
 
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
2,007

 
$
2,886

Finance lease assets
 
Property, plant and equipment, net of accumulated depreciation (a)
 
7,057

 
8,202

Total leased assets
 
 
 
$
9,064

 
$
11,088

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Current
 
 
 
 
 
 
     Operating lease liabilities
 
Accrued and other current liabilities
 
$
518

 
$
1,442

     Finance lease liabilities
 
Current portion of long-term debt
 
1,277

 
1,443

Noncurrent
 
 
 
 
 
 
     Operating lease liabilities
 
Noncurrent operating lease liabilities
 
1,494

 
1,457

     Finance lease liabilities
 
Long-term debt
 
6,764

 
7,341

Total lease liabilities
 
 
 
$
10,053

 
$
11,683


(a)
Finance lease assets are recorded net of accumulated amortization of $2.8 million and $1.7 million as of June 30, 2020 and December 31, 2019, respectively.

Lease Term and Discount Rate
 
June 30,
2020
 
December 31,
2019
Weighted-average remaining lease term (in years):
 
 
 
 
     Operating leases
 
41.5

 
25.1

     Finance leases
 
3.7

 
4.3

 
 
 
 
 
Weighted-average discount rate:
 
 
 
 
     Operating leases
 
9.83
%
 
8.51
%
     Finance leases
 
6.75
%
 
6.77
%

 
 
Six Months Ended
 
 
June 30,
Supplemental Disclosure of Cash Flow Information and Other Information
 
2020
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
     Operating cash flows from operating leases
 
$
1,350

 
$
1,453

     Operating cash flows from finance leases
 
288

 
240

     Financing cash flows from finance leases
 
783

 
824

 
 
 
 
 
Leased assets obtained in exchange for new operating lease liabilities
 
$

 
$

Leased assets obtained in exchange for new finance lease liabilities
 
213

 
6,674



16



Maturities of lease liabilities are as follows:
 
June 30, 2020
 
Operating Leases (a)
 
Finance Leases (b)
Remainder of 2020
$
575

 
$
884

2021
466

 
1,821

2022
325

 
1,821

2023
200

 
3,447

2024
190

 
383

Thereafter
6,710

 
1,412

     Total lease payments
8,466

 
9,768

Less amount representing executory costs (c)

 

     Net lease payments
8,466

 
9,768

Less amount representing interest
(6,454
)
 
(1,727
)
Present value of total lease liabilities
2,012

 
8,041

Less current lease liabilities
(518
)
 
(1,277
)
Long-term lease liabilities
$
1,494

 
$
6,764


(a)
Operating lease payments do not include any options to extend lease terms that are reasonably certain of being exercised.
(b)
Finance lease payments include $1.7 million related to options to extend lease terms that are reasonably certain of being exercised.
(c)
Represents executory costs for all leases. We included executory costs in lease payments under ASC 840, Leases, and have elected to continue to include executory costs for both leases that commenced before and after the effective date of ASC 842.

Note 5 - Equity

Rights Offering

On January 2, 2019, we received the aggregate cash proceeds of $31.4 million from an offering to our shareholders to purchase shares of our common stock on a pro rata basis with an aggregate offering price of $32.5 million (the “Rights Offering”). We sold an aggregate of 3,381,894 shares of common stock at a purchase price of $9.61 per share in the Rights Offering. Additionally, one of the backstop parties elected to satisfy the backstop commitment by converting $1.1 million of the $32.5 million bridge loan (“Bridge Term Loan”) to common stock. The aggregate cash proceeds from the Rights Offering were used to repay the remaining $31.4 million balance of the Bridge Term Loan, satisfying the obligations under the Bridge Term Loan Credit Agreement, entered October 5, 2018 (the “Bridge Term Loan Credit Agreement”), with the lenders party thereto and Wilmington Savings Fund Society, FSB, as administrative agent (“Wilmington”). Immediately after the issuance of the 3,381,894 shares for the Rights Offering, which commenced on January 2, 2019, the Company had 15,614,981 common shares outstanding.

Other Equity Issuances

During the six months ended June 30, 2020, we issued common stock for our stock-based compensation program, which is discussed further in Note 13.

Note 6 - Earnings Per Common Share

Net loss per basic and diluted common share have been computed using the weighted average number of shares of common stock outstanding during the period. For the three and six months ended June 30, 2020 and June 30, 2019, no shares of common stock underlying 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.


17



The following table presents the calculation of basic and diluted net loss per common share, as well as the anti-dilutive stock-based awards that were excluded from the calculation of diluted net loss per share for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Numerator: Net loss
$
(6,779
)
 
$
(5,006
)
 
$
(29,823
)
 
$
(11,361
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares—basic
15,761

 
15,704

 
15,757

 
15,627

Common stock equivalents

 

 

 

Weighted average shares—diluted
15,761

 
15,704

 
15,757

 
15,627

 
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
 
Net loss per basic common share
$
(0.43
)
 
$
(0.32
)
 
$
(1.89
)
 
$
(0.73
)
 
 
 
 
 
 
 
 
Net loss per diluted common share
$
(0.43
)
 
$
(0.32
)
 
$
(1.89
)
 
$
(0.73
)
 
 
 
 
 
 
 
 
Anti-dilutive stock-based awards excluded:
415

 
559

 
415

 
513


Note 7 - Intangible Assets

Intangible assets consist of the following:
 
June 30, 2020
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
Disposal permits
$
540

 
$
(311
)
 
$
229

 
5.0
Trade name
799

 
(621
)
 
178

 
0.6
Total intangible assets
$
1,339

 
$
(932
)
 
$
407

 
3.1

 
December 31, 2019
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
Disposal permits
$
554

 
$
(269
)
 
$
285

 
5.0
Trade name
799

 
(444
)
 
355

 
1.0
Total intangible assets
$
1,353

 
$
(713
)
 
$
640

 
2.8

The gross carrying value of the disposal permits decreased by $27.0 thousand during the year ended December 31, 2019 due to the sale of disposal permits in the Northeast and Southern divisions. The disposal permits are related to the Rocky Mountain, Northeast and Southern divisions. The remaining weighted average useful lives shown are calculated based on the net book value and remaining amortization period of each respective intangible asset.

Amortization expense was $0.1 million and $0.1 million for the three months ended June 30, 2020 and June 30, 2019, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2020 and June 30, 2019, respectively.


18



Note 8 - Assets Held for Sale and Impairment

Impairment Charges

Impairment charges of $15.6 million and $0.1 million were recorded during the six months ended June 30, 2020 and June 30, 2019, respectively. No impairment charges were recorded during the three months ended June 30, 2020 and June 30, 2019.

Assets Held for Sale

During the six months ended June 30, 2020, certain property classified as “Assets held for sale” on the condensed consolidated balance sheet located in the Rocky Mountain division was re-evaluated for impairment based on an accepted offer from a buyer that indicated fair value of the real property was lower than its net book value, and impairment charges of $0.6 million were recorded during the six months ended June 30, 2020, which is included in “Impairment of long-lived assets” on our condensed consolidated statements of operations.

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

Impairment of Long-Lived Assets

Long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Due to the impacts of the outbreak of COVID-19 and the oil supply conflict between two major oil producing countries, there was a significant decline in oil prices during the first half of 2020, which resulted in a decrease in activities by our customers. As a result of these events, we determined that there were indicators that the carrying value of our assets may not be recoverable.

Our impairment review during the six months ended June 30, 2020 concluded that the carrying values of the assets associated with the landfill in the Rocky Mountain division and trucking equipment in the Southern division were not recoverable as the carrying value exceeded our estimate of future undiscounted cash flows for these asset groups. As a result, we recorded an impairment charge of $15.0 million during the six months ended June 30, 2020 as the carrying value exceeded fair value, which is included in “Impairment of long-lived assets” on our condensed consolidated statements of operations. The fair value of the assets associated with the landfill and trucking equipment asset groups was determined using discounted estimated future cash flows (Level 3 in the fair value hierarchy).

Note 9 - Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following at June 30, 2020 and December 31, 2019:
 
June 30,
2020
 
December 31,
2019
Accrued payroll and employee benefits
$
1,264

 
$
1,837

Accrued insurance
2,601

 
2,569

Accrued legal
144

 
295

Accrued taxes
1,067

 
695

Accrued interest
235

 
179

Accrued operating costs
2,452

 
2,653

Accrued other
424

 
394

Current operating lease liabilities
518

 
1,442

Total accrued and other current liabilities
$
8,705

 
$
10,064



19



Note 10 - Debt

Debt consisted of the following at June 30, 2020 and December 31, 2019:
 
 
 
 
 
June 30, 2020
 
December 31, 2019
 
Interest Rate
 
Maturity Date
 
Unamortized Debt Issuance Costs (i)
 
Carrying Value of Debt (j)
 
Carrying Value of Debt (j)
Revolving Facility (a)
6.25%
 
Feb. 2021
 
$

 
$

 
$

First Lien Term Loan (b)
8.25%
 
Feb. 2021
 
(13
)
 
16,362

 
18,008

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

 
8,750

 
9,013

PPP Loan (d)
1.00%
 
May 2022
 

 
4,000

 

Vehicle Term Loan (e)
5.27%
 
Dec. 2021
 

 
543

 
725

Equipment Term Loan (f)
6.50%
 
Nov. 2022
 

 
198

 

Finance leases (g)
6.75%
 
Various
 

 
8,041

 
8,784

Total debt
 
 
 
 
$
(13
)
 
37,894

 
36,530

Debt issuance costs presented with debt
 
 
 
(13
)
 
(95
)
Total debt, net
 
 
 
 
 
 
37,881

 
36,435

Less: current portion of long-term debt (h)
 
(8,553
)
 
(6,430
)
Long-term debt
 
 
 
 
 
 
$
29,328

 
$
30,005

_____________________

(a)
The interest rate presented represents the interest rate as of June 30, 2020 on the Revolving Facility.

(b)
Interest on the First Lien Term Loan accrues at an annual rate equal to the LIBOR Rate plus 7.25%.

(c)
Interest on the Second Lien Term Loan (as defined below) accrues at an annual rate equal to 11.0%, payable in cash, in arrears, on the first day of each month.

(d)
Interest on the PPP Loan (as defined below) accrues at an annual rate of 1.00%.

(e)
Interest on the Vehicle Term Loan (as defined below) accrues at an annual rate of 5.27%.

(f)
Interest on the Equipment Term Loan (as defined below) accrues at an annual rate of 6.50%.

(g)
Our finance leases include finance lease arrangements related to fleet purchases and real property with a weighted-average annual interest rate of approximately 6.75%, which mature in varying installments between 2020 and 2029.

(h)
The principal payments due within one year for the First Lien Term Loan, Second Lien Term Loan, Vehicle Term Loan, Equipment Term Loan and finance leases are included in current portion of long-term debt as of June 30, 2020.

(i)
The debt issuance costs as of June 30, 2020 and December 31, 2019 resulted from the amendment to the First Lien Term Loan, done in connection with our acquisition of Clearwater Three, LLC, Clearwater Five, LLC, and Clearwater Solutions, LLC.

(j)
Our Revolving Facility, First Lien Term Loan, Second Lien Term Loan, and finance leases bear interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value.

See below for a discussion of material changes and developments in our debt and its principal terms from those described in Note 12 to the consolidated financial statements in our 2019 Annual Report on Form 10-K.


20



Indebtedness

As of June 30, 2020, we had $37.9 million of indebtedness outstanding, consisting of $16.4 million under the First Lien Term Loan, $8.8 million under the second lien term loan facility (the “Second Lien Term Loan”) pursuant to the Second Lien Term Loan Credit Agreement, $4.0 million under the PPP Loan, $0.5 million under the Direct Loan Security Agreement ( the “Vehicle Term Loan”) with PACCAR Financial Corp as the secured party, $0.2 million under the Equipment Term Loan and $8.0 million of finance leases for vehicle financings and real property leases.

Our Revolving Facility, First Lien Term Loan and Second Lien Term Loan contain certain affirmative and negative covenants, including a FCCR covenant, as well as other terms and conditions that are customary for revolving credit facilities and term loans of this type. On July 13, 2020, the Company entered into amendments of its First Lien Credit Agreement and Second Lien Term Loan Credit Agreement, which included among other terms and conditions, deferral of the measurement of the FCCR covenant until the second quarter of 2021. See Note 18 for further discussion of the amendments. As of June 30, 2020, we were in compliance with all covenants.

Equipment Term Loan

On November 20, 2019, we entered into a Retail Installment Contract (the “Equipment Term Loan”) with a secured party to finance $0.2 million of equipment. The Equipment Term Loan matures on November 2022, and shall be repaid in monthly installments of approximately $7 thousand beginning December 2019 and then each month thereafter, with interest accruing at an annual rate of 6.50%.

Paycheck Protection Program Loan

On May 8, 2020, pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020, an indirect wholly-owned subsidiary of the Company (the “PPP Borrower”) received proceeds of a loan (the “PPP Loan”) from First International Bank & Trust (the “PPP Lender”) in the principal amount of $4.0 million. The PPP Loan is evidenced by a promissory note (the “Promissory Note”), dated May 8, 2020. The Promissory Note is unsecured, matures on May 8, 2022, bears interest at a rate of 1.00% per annum, and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration (the “SBA”) under the CARES Act.

Under the terms of the PPP, up to the entire principal amount of the PPP Loan, and accrued interest, may be forgiven if the proceeds are used for certain qualifying expenses over the covered period as described in the CARES Act and applicable implementing guidance issued by the SBA, subject to potential reduction based on the level of full-time employees maintained by the organization during the covered period as compared to a baseline period.

In June 2020, the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”) was signed into law, which amended the CARES Act. The Flexibility Act changed key provisions of the PPP, including, but not limited to, (i) provisions relating to the maturity of PPP loans, (ii) the deferral period covering PPP loan payments and (iii) the process for measurement of loan forgiveness. More specifically, the Flexibility Act provides a minimum maturity of five years for all PPP loans made on or after the date of the enactment of the Flexibility Act (“June 5, 2020”) and permits lenders and borrowers to extend the maturity date of earlier PPP loans by mutual agreement. As of the date of this filing, the Company has not approached the PPP Lender to request an extension of the maturity date from two years to five years. The Flexibility Act also provides that if a borrower does not apply for forgiveness of a loan within 10 months after the last day of the measurement period (“covered period”), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. In addition, the Flexibility Act extended the length of the covered period from eight weeks to 24 weeks from receipt of proceeds, while allowing borrowers that received PPP loans before June 5, 2020 to determine, at their sole discretion, a covered period of either eight weeks or 24 weeks.

The PPP Borrower used the PPP Loan proceeds for designated qualifying expenses over the covered period and plans to apply for forgiveness of the PPP Loan in accordance with the terms of the PPP, but no assurance can be given that the PPP Borrower will obtain forgiveness of the PPP Loan in whole or in part. As such, the Company has classified the PPP loan as debt and it is included in long-term debt on the condensed consolidated balance sheet.

With respect to any portion of the PPP Loan that is not forgiven, the PPP Loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the Promissory Note and cross-defaults on any other loan with the PPP Lender or other creditors. Upon a default under the Promissory Note, including the non-payment of principal or interest when due, the obligations of the PPP Borrower thereunder may be accelerated. In the event the PPP Loan is not forgiven, the principal amount of $4.0 million shall be repaid at maturity.

21



 
The Company has obtained the consent of the lenders under each of the Credit Agreement and the Second Lien Term Loan Credit Agreement for the PPP Borrower to enter into and obtain the funds provided by the PPP Loan.

Maturity Date Extension

On July 13, 2020, the Company entered into an amendment of its First Lien Credit Agreement, which extended the maturity date of the First Lien Credit Agreement from February 7, 2021 to May 15, 2022. Prior to executing the Third Amendment to Credit Agreement (the “Third Amendment to First Lien Credit Agreement”), the First Lien Credit Agreement, which includes the Revolving Facility and the First Lien Term Loan, was set to mature on February 7, 2021, at which time the Company would have been required to repay the outstanding principal amount of the Revolving Facility and approximately $15.0 million of the First Lien Term Loan, together with interest accrued and unpaid thereon. On July 13, 2020, the Company also entered into an amendment of its Second Lien Term Loan Credit Agreement, which extended the maturity date from October 7, 2021 to November 15, 2022. Due to the Third Amendment to First Lien Credit Agreement, the First Lien Term Loan principal payments that were due at maturity are no longer due within twelve months. Therefore, as of June 30, 2020, the First Lien Term Loan principal payments due at maturity are included in long-term debt on the condensed consolidated balance sheet. See Note 18 for further discussion of the amendments.

Note 11 - Derivative Warrants

On the Effective Date, pursuant to the prepackaged plan of reorganization (the “Plan”), we issued to the holders of our pre-Effective Date 9.875% Senior Notes due 2018 (the “2018 Notes”) and holders of certain claims relating to the rejection of executory contracts and unexpired leases warrants to purchase an aggregate of 118,137 shares of common stock, par value $0.01, at an exercise price of $39.82 per share and with a term expiring seven years from the Effective Date.

The following table shows the warrant activity for the six months ended June 30, 2020 and June 30, 2019:
 
Six Months Ended
 
June 30,
 
2020
 
2019
Outstanding at the beginning of the period
118

 
118

Issued

 

Exercised

 

Outstanding at the end of the period
118

 
118


The fair value of our derivative warrant liability was $354 at December 31, 2019. There was no change in the fair value at June 30, 2020.

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 warrants are ineligible for equity classification as the warrants are not indexed to our common stock. Therefore, the warrants are recorded as derivative liabilities at fair value and included in “Accrued and other current liabilities” in the condensed consolidated balance sheets. The warrants are classified as a current liability as they could be exercised by the holders at any time.

The fair value of the derivative warrant liability was estimated using a Monte Carlo simulation model (Level 3 in the fair value hierarchy) on the date of issue and is periodically re-measured until expiration or exercise of the underlying warrants with the resulting fair value adjustment recorded in “Other income, net” in the condensed consolidated statements of operations.


22



Note 12 - Income Taxes
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Current income tax expense
$
(30
)
 
$
(4
)
 
$
(30
)
 
$
(13
)
Deferred income tax benefit (expense)
15

 
(42
)
 
15

 
(112
)
Total income tax expense
$
(15
)
 
$
(46
)
 
$
(15
)
 
$
(125
)

The effective tax rate for the three and six months ended June 30, 2020 was (0.2)% and (0.1)%, respectively, which differs from the federal statutory rate of 21.0%. The difference is primarily due to the increase in the valuation allowance on deferred tax assets resulting from current year losses.

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

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

In light of our continued ordinary losses, at June 30, 2020 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 (0.1)% for the remainder of 2020.

Note 13 - Stock-Based Compensation

The Nuverra Environmental Solutions, Inc. 2017 Long Term Incentive Plan (the “Incentive Plan”) is intended to provide for the grant of equity-based awards to designated members of the Company’s management and employees. The maximum number of shares of the Company’s common stock that is available for the issuance of awards under the Incentive Plan is 1,772,058. As of June 30, 2020, approximately 771,000 shares were available for issuance under the Incentive Plan.

The 2018 Restricted Stock Plan for Directors (the “Director Plan”) provides for the grant of restricted stock to the non-employee directors of the Company. The Director Plan limits the shares that may be issued thereunder to 100,000 shares of common stock. As of June 30, 2020, no shares were remaining available for issuance under the Director Plan.

The total grants awarded under both the Incentive Plan and the Director Plan during the three and six months ended June 30, 2020 and June 30, 2019 are presented in the table below:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Restricted stock grants (1)
75

 
23

 
75

 
142

   Total grants in the period
75

 
23

 
75

 
142


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

The total stock-based compensation expense, net of estimated forfeitures, included in “General and administrative expenses” in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2020 and June 30, 2019 was as follows:

23



 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Restricted stock (1)
$
322

 
$
563

 
$
612

 
1,415

   Total expense
$
322

 
$
563

 
$
612

 
$
1,415

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

At June 30, 2020, the total unrecognized share-based compensation expense, net of estimated forfeitures, was $0.7 million and is expected to be recognized over a weighted average period of 0.5 years.

Note 14 - Commitments and Contingencies

Environmental Liabilities

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

We believe we are in material compliance with all applicable environmental protection laws and regulations in the United States and the states in which we operate. We believe that there are no unrecorded liabilities as of the periods reported herein in connection with our compliance with applicable environmental laws and regulations. The condensed consolidated balance sheets at June 30, 2020 and December 31, 2019 did not include any accruals for environmental matters.

Contingent Consideration for Ideal Settlement

On June 28, 2017, the Company and certain of its material subsidiaries (collectively with the Company, the “Nuverra Parties”) filed a motion with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking authorization to resolve unsecured claims related to the $8.5 million contingent consideration from the Ideal Oilfield Disposal LLC acquisition (the “Ideal Settlement”). On July 11, 2017, the Bankruptcy Court entered an order authorizing the Ideal Settlement. Pursuant to the approved settlement terms, the $8.5 million contingent claim was replaced with an obligation on the part of the applicable Nuverra Party to transfer $0.5 million to the counterparties to the Ideal Settlement upon emergence from chapter 11, and $0.5 million when the Ideal Settlement counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit. The $0.5 million due upon emergence from chapter 11 was paid during the five months ended December 31, 2017. The remaining $0.5 million, due when the counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit, has been classified as noncurrent and is reported in “Long-term contingent consideration” on the condensed consolidated balance sheets, as these permits and certificates are not expected to be received within one year.

State Sales and Use Tax Liabilities

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

24



an accrual as of June 30, 2020. If we lose this appeal, which could take several years to settle, we estimate that we would be required to pay between $1.0 million and $1.5 million to the DOR.

Note 15 - Legal Matters

Litigation

There are various lawsuits, claims, investigations and proceedings that have been brought or asserted against us, which arise in the ordinary course of business, including actions with respect to securities and shareholder class actions, personal injury, vehicular and industrial accidents, commercial contracts, legal and regulatory compliance, securities disclosure, labor and employment, and employee benefits and environmental matters, the more significant of which are summarized below. We record a provision for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter.

We believe that we have valid defenses with respect to legal matters pending against us. Based on our experience, we also believe that the damage amounts claimed in pending lawsuits are not necessarily a meaningful indicator of our potential liability. Litigation is inherently unpredictable, and it is possible that our results of operations or cash flow could be materially affected in any particular period by the resolution of one or more of the legal matters pending against us. We do not expect that the outcome of other current claims and legal actions not discussed below will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Confirmation Order Appeal

On July 25, 2017, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan. On July 26, 2017, David Hargreaves, an individual holder of 2018 Notes, appealed the Confirmation Order to the District Court of the District of Delaware (the “District Court”) and filed a motion for a stay pending appeal from the District Court. Although the motion for a stay pending appeal was denied, the appeal remained pending and the District Court heard oral arguments in May 2018, and in August 2018 the District Court issued an order dismissing the appeal. Hargreaves subsequently appealed the District Court’s decision to the United States Court of Appeals for the Third Circuit. The parties filed appellate briefs in December 2018 and January 2019, and as a result the appeal remains pending with the United States Court of Appeals for the Third Circuit. The ultimate outcome of this appeal and its effects on the Confirmation Order are impossible to predict with certainty. No assurance can be given that the final disposition of this appeal will not affect the validity, enforceability or finality of the Confirmation Order.

Note 16 - Related Party and Affiliated Company Transactions

There have been no significant changes to the other related party transactions as described in Note 22 to the consolidated financial statements in our 2019 Annual Report on Form 10-K.

Note 17 - Segments

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


25



Financial information for our reportable segments related to operations is presented below.
 
Rocky Mountain
 
Northeast
 
Southern
 
Corporate/ Other
 
Total
Three months ended June 30, 2020
 
 
 
 
 
 
 
 
Revenue
$
12,222

 
$
8,162

 
$
4,082

 
$

 
$
24,466

Direct operating expenses
10,458

 
5,593

 
2,500

 

 
18,551

General and administrative expenses
1,524

 
434

 
240

 
2,247

 
4,445

Depreciation and amortization
2,874

 
2,532

 
1,746

 
4

 
7,156

Operating loss
(2,634
)
 
(397
)
 
(404
)
 
(2,251
)
 
(5,686
)
Loss before income taxes
(2,786
)
 
(504
)
 
(457
)
 
(3,017
)
 
(6,764
)
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2020
 
 
 
 
 
 
 
 
Revenue
$
35,690

 
$
17,956

 
$
8,762

 
$

 
$
62,408

Direct operating expenses
30,009

 
13,964

 
6,054

 

 
50,027

General and administrative expenses
3,013

 
1,068

 
510

 
4,778

 
9,369

Depreciation and amortization
6,339

 
5,083

 
3,715

 
8

 
15,145

Operating loss
(15,854
)
 
(2,159
)
 
(4,913
)
 
(4,786
)
 
(27,712
)
Loss before income taxes
(16,041
)
 
(2,379
)
 
(5,020
)
 
(6,368
)
 
(29,808
)
 
 
 
 
 
 
 
 
 
 
As of June 30, 2020
 
 
 
 
 
 
 
 
 
Total assets
$
64,093

 
$
59,668

 
$
64,535

 
$
17,023

 
$
205,319

Total assets held for sale

 

 

 
778

 
778