UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
(Amendment No. 1)
__________________________________
(Mark One)
| | | | | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 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
(A Delaware Corporation)
__________________________________
I.R.S. Employer Identification No. 26-0287117
6720 N. Scottsdale Road, Suite 190, Scottsdale, AZ 85253
Telephone: (602) 903-7802
__________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, $0.01 par value | NES | NYSE American |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐¨ No ☒ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐¨ No ☒ý
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 ý 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 ý 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 | ☒ý | | Smaller reporting company | ☒ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ý
As of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $3.9 million based on the closing sale price of $2.32 on such date as reported on the NYSE American exchange. Shares held by executive officers, directors and persons owning directly or indirectly more than 10% of the outstanding common stock have been excluded
from the preceding number because such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for any other purposes.
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 ☒ No ☐¨
The number of shares outstanding of the registrant’s common stock as of February 26, 2021 was 16,002,474.
Documents Incorporated by Reference
Part III of this Annual Report on Form 10-K incorporates by reference information from the Definitive Proxy Statement for the registrant’s 2021 Annual Meeting of Stockholders or a Form 10-K/A to be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2020.None.
TABLE OF CONTENTS
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTSFORM 10-K/A
In additionEXPLANATORY NOTE
Nuverra Environmental Solutions, Inc. (the “Company,” “Nuverra,” “we,” “us,” or “our”) is filing this Amendment No. 1 on Form 10-K/A (“Form 10-K/A”) to historical information, this amend our Annual Report on Form 10-K (“Annual 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 commodity market disruptions;
•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 Annual 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 commodity market disruptions;
•changes in commodity prices or general market conditions;
•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 which are discussed further in Segment Operating Results;
•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), acts of terrorism, or extreme weather conditions, that may impact our business locations, assets, including wells or pipelines, or distribution channels, or which otherwise may disrupt our customers’ operations or the markets we serve;
•disruptions impacting crude oil and natural gas transportation, processing, refining, and export systems, including vacated easements, environmental impact studies, forced shutdown by governmental agencies, and litigation affecting the Dakota Access Pipeline;
•bans on drilling and fracking leases and permits on federal land;
•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 operating line of credit;
•higher than forecasted capital expenditures to maintain and repair our fleet of trucks, tanks, pipeline, equipment and disposal wells;
•our ability to control 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 a pending 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 business 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 salt water disposal wells, solids and liquids transportation assets, landfills and pipelines, including access to additional locations and rights-of-way, permitting and licensing, environmental remediation obligations, unscheduled delays or inefficiencies and reductions in volume due to micro- and macro-economic factors or the availability of less expensive alternatives;
•the effects of competition in the markets in which we operate, including the adverse impact of competitive product announcements or new entrants into our markets and transfers of resources by competitors into our markets;
•changes in economic conditions in the markets in which we operate or in the world generally, including as a result of political uncertainty;
•reduced demand for our services due to regulatory or other influences related to extraction methods such as hydraulic fracturing, shifts in production among shale areas in which we operate or into shale areas in which we do not currently have operations, and shifts to reuse of water and water sharing 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 Annual 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 Annual 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.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC.
PART I
Item 1. Business
Nuverra Environmental Solutions, Inc. was incorporated in Delaware on May 29, 2007 as “Heckmann Corporation.” On May 16, 2013, we changed our name to Nuverra Environmental Solutions, Inc. When used in this Annual Report, the terms “Nuverra,” the “Company,” “we,” “our,” and “us” refer to Nuverra Environmental Solutions, Inc. and its consolidated subsidiaries, unless otherwise specified.
Overview and Operations
Nuverra provides water logistics and oilfield services to customers focused on the development and ongoing production of oil and natural gas from shale formations in the United States. Our business operations are organized into three geographically distinct divisions: the Rocky Mountain division, the Northeast division and the Southern division. Within each division, we provide water transport services, disposal services, rental and other services associated with the drilling, completion, and ongoing production of shale oil and natural gas.
Rocky Mountain Division
The Rocky Mountain division is our Bakken Shale area business. The Bakken and underlying Three Forks shale formations are the two primary oil producing reservoirs currently being developed in this geographic region, which covers western North Dakota, eastern Montana, northwestern South Dakota and southern Saskatchewan.
We have operations in various locations throughout North Dakota and Montana, including yards in Dickinson, Williston, Watford City, Tioga, Stanley and Beach, North Dakota, as well as Sidney, Montana. Additionally, we operate a financial support office in Minot, North Dakota. As of December 31, 2020, we had 249 employees in the Rocky Mountain division.
Water Transport Services
We manage a fleet of 176 trucks in the Rocky Mountain division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities.
In the Rocky Mountain division, we own an inventory of lay flat temporary hose as well as related pumps and associated equipment used to move fresh water from water sources to operator locations for use in completion activities. We employ specially trained field personnel to manage and operate this business. For customers who have secured their own source of fresh water, we provide and operate the lay flat temporary hose equipment to move the fresh water to the drilling and completion location. We may also use third-party sources of fresh water in order to provide the water to customers as a package that includes our water transport service.
Disposal Services
We manage a network of 20 owned and leased salt water disposal wells with current capacity of approximately 82 thousand barrels of water per day, and permitted capacity of 104 thousand barrels of water per day. Our salt water disposal wells in the Rocky Mountain division are operated under the Landtech brand. Additionally, we operate a landfill facility near Watford City, North Dakota that handles the disposal of drill cuttings and other oilfield waste generated from drilling and completion activities in the region. The landfill is located on a 50-acre site with current permitted capacity of more than 1.7 million cubic yards of airspace. We believe that permitted capacity at this site could be expanded up to a total of 5.8 million cubic yards in the future.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Rocky Mountain division. These assets include tanks, loaders, manlifts, light towers, winch trucks and other miscellaneous equipment used in drilling and completion activities. In the Rocky Mountain division, we also provide oilfield labor services, also called “roustabout work,” where our employees move, set-up and maintain the rental equipment for customers, in addition to providing other oilfield labor services.
Northeast Division
The Northeast division is comprised of the Marcellus and Utica Shale areas, both of which are predominantly natural gas producing basins. The Marcellus and Utica Shale areas are located in the northeastern United States, primarily in Pennsylvania, West Virginia, New York and Ohio.
We have operations in various locations throughout Pennsylvania, West Virginia and Ohio, including yards in Masontown and Wheeling, West Virginia, Williamsport and Wellsboro, Pennsylvania, and Cambridge and Cadiz, Ohio. As of December 31, 2020, we had 186 employees in the Northeast division.
Water Transport Services
We manage a fleet of 177 trucks in the Northeast division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region, or to other customer locations for reuse in completing other wells. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities.
Disposal Services
We manage a network of 13 owned and leased salt water disposal wells with current and permitted capacity of approximately 22 thousand barrels of water per day in the Northeast division. Our salt water disposal wells in the Northeast division are operated under the Nuverra, Heckmann and Clearwater brands.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Northeast division. These assets include tanks and winch trucks used in drilling and completion activities.
Southern Division
The Southern division is comprised of the Haynesville Shale area, a predominantly natural gas producing basin, which is located across northwestern Louisiana and eastern Texas, and extends into southwestern Arkansas. The Haynesville shale area is the third largest natural gas-producing basin in North America, according to a United States Energy Information Administration report in 2020.
We have operations in various locations throughout eastern Texas and northwestern Louisiana, including a yard in Frierson, Louisiana. Additionally, we operate a corporate support office in Houston, Texas. As of December 31, 2020, we had 62 employees in the Southern division.
Water Transport Services
We manage a fleet of 35 trucks in the Southern division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water to operator locations for use in well completion activities.
In the Southern division, we also own and operate a 60-mile underground twin pipeline network for the collection of produced water for transport to interconnected disposal wells and the delivery of fresh water from water sources to operator locations for use in well completion activities. The pipeline network can currently handle disposal volumes up to approximately 68 thousand barrels per day with 6 disposal wells attached to the pipeline and is scalable up to approximately 106 thousand barrels per day.
Disposal Services
We manage a network of 7 owned and leased salt water disposal wells that are not connected to our pipeline with current capacity of approximately 32 thousand barrels of water per day, and permitted capacity of approximately 100 thousand barrels of water per day in the Southern division.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Southern division. These assets include tanks and winch trucks used in drilling and completion activities.
Business Strategy
Nuverra strives to be a leader in the oilfield services sector by providing value to our customers through an integrated service offering of water management solutions. Our strategy is focused on: (1) reinvesting in our core business in order to drive organic growth and provide a stable revenue stream, (2) optimizing our asset base to capitalize on favorable industry trends, (3) providing high quality, safe and reliable service to our customers, (4) hiring, training and retaining the best employees and (5) applying technology to optimize and streamline logistics and transaction processing.
We try to focus on the produced water sub-sector across our geographies as produced water is generated with or without drilling rig activity. While completion activities tend to fluctuate throughout each industry cycle, produced water volumes typically are more stable.
Through our network of assets strategically located in the Rocky Mountain, Northeast and Southern divisions, we have built a strong reputation in the industry by providing our customers with excellent service quality over many years. Nonetheless, we maintain rigorous focus on the key factors that determine whether our customer will use our services, such as: commitment to health, safety and environment (“HS&E”); service quality, reliability, and flexibility, including regulatory compliance; price; capacity and proximity; and technology. We continue to evolve our service offerings to address the critical value drivers while adapting to the changing water management industry. The ongoing trend of integrated gathering and disposal systems is driving increased use of water pipelines, although not all geographic divisions are able to utilize pipelines in a cost effective manner due to terrain and other limiting factors. Our salt water disposal wells (or “SWDs”) and pipeline are an integral part of our produced water business that provide core assets we can leverage to provide incremental offerings on existing disposal and water midstream projects. We are also evaluating additional service line growth opportunities. As we continue to refine our portfolio and footprint, we may consider opportunistic asset sales to provide additional capital to fund our growth investments.
Market Overview
Nuverra operates in the large and fragmented market for water management. The 2020 market size in the United States (or “U.S.”) for oilfield water management was estimated to be around $23 billion. The primary services in this market estimate include water disposal, water hauling, water treatment, water acquisition, water storage, water flowback and water transport services. Nuverra provides the majority of these services, but does not have a presence in all U.S. geographic markets.
From a geographic perspective, Nuverra remains focused on being the premier service provider in our core areas of the Bakken, Marcellus, Utica and Haynesville basins. We continue to evaluate growth opportunities in other areas. However, we do not plan to enter a market unless we believe we can generate attractive profitability and returns on invested capital. While some basins offer significant levels of water management activity, excess capacity and competition make it difficult to achieve minimum economic thresholds and returns.
A significant part of the Company’s service offering involves trucking operations. As of year end 2020, Nuverra had a fleet of approximately 388 trucks, a decrease from prior years due to a decline in oil and gas drilling activities. The Company is experiencing the same driver shortage challenge that most U.S. trucking companies are facing. Drivers decreased by 22% during 2020 mainly due to market conditions.
Customers
Our customers include major domestic and international oil and natural gas companies, foreign national oil and natural gas companies and independent oil and natural gas production companies. For the year ended December 31, 2020, our three largest customers represented 34% of our total consolidated revenues. The loss of any one of these three customers could have a material adverse effect on the Company.
Competition
Our competition includes small regional service providers, as well as larger companies with operations throughout the continental United States and internationally. Some of our competitors are Select Energy Services, Inc., Key Energy Services, Inc., Basic Energy Services, Inc., NexTier Oilfield Solutions, Inc., Superior Energy Services, Inc., Clean Harbors, Inc., TETRA Technologies, Inc., Stallion Oilfield Services, LLC, Tallgrass Energy, LP, Braun Trucking, Inc., OMNI Energy Services Corp., Myers Trucking Inc., and Tri-State Oil & Gas, Inc.
Health, Safety & Environment
We are committed to excellence in HS&E in our operations, which we believe is a critical characteristic of our business. Our customers in the unconventional shale basins require us to meet high standards on HS&E matters. As a result, we believe that being an environmental solutions company with a national presence and a dedicated focus on environmental solutions is a competitive advantage relative to smaller, regional companies, as well as companies that provide certain environmental services as ancillary offerings.
Seasonality
Certain of our business divisions are impacted by seasonal factors. Generally, our business is negatively impacted during the winter months due to inclement weather, fewer daylight hours and holidays. During periods of heavy snow, ice or rain, we may be unable to move our trucks and equipment between locations, thereby reducing our ability to provide services and generate revenue. In addition, these conditions may impact our customers’ operations, and, as our customers’ drilling and/or hydraulic fracturing activities are curtailed, our services may also be reduced.
Intellectual Property
We operate under numerous trade names and own several trademarks, the most important of which are “Nuverra,” “HWR,” “Power Fuels” and “Heckmann Water Resources.”
Operating Risks
Our operations are subject to hazards inherent in our industry, including accidents and fires that could cause personal injury or loss of life, damage to or destruction of property, equipment and the environment, suspension of operations and litigation, as described in Note 21 of the Notes to the Consolidated Financial Statements herein, associated with these hazards. Because our business involves the transportation of environmentally regulated materials, we may also experience traffic accidents or pipeline breaks that may result in spills, property damage and personal injury. We have implemented a comprehensive HS&E program designed to minimize accidents in the workplace, enhance our safety programs, maintain environmental compliance and improve the efficiency of our operations.
Governmental Regulation, Including Environmental Regulation and Climate Change
Our operations are subject to stringent United States federal, state and local laws and regulations concerning the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Additional laws and regulations, or changes in the interpretations of existing laws and regulations, that affect our business and operations may be adopted, which may in turn impact our financial condition. The following is a summary of the more significant existing HS&E laws and regulations to which our operations are subject.
Hazardous Substances and Waste
The United States Comprehensive Environmental Response, Compensation, and Liability Act, as amended (“CERCLA” or the “Superfund” law), and comparable state laws impose liability without regard to fault or the legality of the original conduct on certain defined persons, including current and prior owners or operators of a site where a release of hazardous substances occurred and entities that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these “responsible persons” may be liable for the costs of cleaning up the hazardous substances, for damages to natural resources and for the costs of certain health studies.
In the course of our operations, we occasionally generate materials that are considered “hazardous substances” and, as a result, may incur CERCLA liability for cleanup costs. Also, claims may be filed for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants. We also generate solid wastes that are subject to the requirements of the United States Resource Conservation and Recovery Act, as amended, or “RCRA,” and comparable state statutes.
Although we use operating and disposal practices that are standard in the industry, hydrocarbons or other wastes may have been released at properties owned or leased by us now or in the past, or at other locations where these hydrocarbons and wastes were taken for disposal. Under CERCLA, RCRA and analogous state laws, we could be required to clean up contaminated property (including contaminated groundwater) or to perform remedial activities to prevent future contamination.
Air Emissions
The Clean Air Act, as amended, or “CAA,” and similar state laws and regulations restrict the emission of air pollutants and also impose various monitoring and reporting requirements. These laws and regulations may require us to obtain approvals or permits for construction, modification or operation of certain projects or facilities and may require use of emission controls.
Global Warming and Climate Change
While we do not believe our operations raise climate change issues different from those generally raised by the commercial use of fossil fuels, legislation or regulatory programs that restrict greenhouse gas emissions in areas where we conduct business or that would require reducing emissions from our truck fleet could increase our costs.
Water Discharges
We operate facilities that are subject to requirements of the United States Clean Water Act, as amended, or “CWA,” and analogous state laws for regulating discharges of pollutants into the waters of the United States and regulating quality standards for surface waters. Among other things, these laws impose restrictions and controls on the discharge of pollutants, including into navigable waters as well as the protection of drinking water sources. Spill prevention, control and counter-measure requirements under the CWA require implementation of measures to help prevent the contamination of navigable waters in the event of a hydrocarbon spill. Other requirements for the prevention of spills are established under the United States Oil Pollution Act of 1990, as amended, or “OPA”, which amended the CWA and applies to owners and operators of vessels, including barges, offshore platforms and certain onshore facilities. Under OPA, regulated parties are strictly liable for oil spills and must establish and maintain evidence of financial responsibility sufficient to cover liabilities related to an oil spill for which such parties could be statutorily responsible.
State Environmental Regulations
Our operations involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants and other regulated substances. Various environmental laws and regulations require prevention, and where necessary, cleanup of spills and leaks of such materials and some of our operations must obtain permits that limit the discharge of materials. Failure to comply with such environmental requirements or permits may result in fines and penalties, remediation orders and revocation of permits. In Texas, we are subject to rules and regulations promulgated by the Texas Railroad Commission (the “RRC”) and the Texas Commission on Environmental Quality, including those designed to protect the environment and monitor compliance with water quality. In Louisiana, we are subject to rules and regulations promulgated by the Louisiana Department of Environmental Quality and the Louisiana Department of Natural Resources as to environmental and water quality issues, and the Louisiana Public Service Commission as to allocation of intrastate routes and territories for waste water transportation. In Pennsylvania, we are subject to the rules and regulations of the Pennsylvania Department of Environmental Protection and the Pennsylvania Public Service Commission. In Ohio, we are subject to the rules and regulations of the Ohio Department of Natural Resources and the Ohio Environmental Protection Agency. In West Virginia, we are subject to the rules and regulations of the West Virginia Department of Environmental Protection and the West Virginia Public Service Commission as to waste water transportation. In North Dakota, we are subject to the rules and regulations of the North Dakota Department of Health, the North Dakota Industrial Commission, Oil and Gas Division, and the North Dakota State Water Commission. In Montana, we are subject to the rules and regulations of the Montana Department of Environmental Quality and the Montana Board of Oil and Gas.
Occupational Safety and Health Act
We are subject to the requirements of the United States Occupational Safety and Health Act, as amended, or “OSHA,” and comparable state laws that regulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used or produced in our operations be maintained and provided to employees, state and local government authorities and citizens.
Salt Water Disposal Wells
We operate salt water disposal wells that are subject to the CWA, the Safe Drinking Water Act, or “SDWA,” and state and local laws and regulations, including those established by the Underground Injection Control (“UIC”) Program of the United States Environmental Protection Agency, or “EPA,” which establishes minimum requirements for permitting, testing, monitoring, record keeping and reporting of injection well activities. Our salt water disposal wells are located in Louisiana, Montana, North Dakota, Ohio and Texas. Regulations in many states require us to obtain a permit to operate each of our salt water disposal wells in those states. These regulatory agencies have the general authority to suspend or modify one or more of these permits if continued operation of one of our salt water wells is likely to result in pollution of freshwater, tremors or earthquakes, substantial violation of permit conditions or applicable rules, or leaks to the environment. Any leakage from the subsurface portions of the salt water wells could cause degradation of fresh groundwater resources, potentially resulting in cancellation of operations of a well, issuance of fines and penalties from governmental agencies, incurrence of expenditures for remediation of the affected resource and claims by third parties for property damages and personal injuries.
Transportation Regulations
We conduct interstate motor carrier (trucking) operations that are subject to federal regulation by the Federal Motor Carrier Safety Administration, or “FMCSA,” a unit within the United States Department of Transportation, or “USDOT.” The FMCSA publishes and enforces comprehensive trucking safety regulations, including rules on commercial driver licensing, controlled substance testing, medical and other qualifications for drivers, equipment maintenance, and drivers’ hours of service, referred to as “HOS.” The agency also performs certain functions relating to such matters as motor carrier registration (licensing), insurance, and extension of credit to motor carriers’ customers. Another unit within USDOT publishes and enforces regulations regarding the transportation of hazardous materials, or “hazmat.” The waste water and other water flows we transport by truck are generally not regulated as hazmat at this time.
Our intrastate trucking operations are also subject to various states environmental and waste water transportation regulations discussed under “Environmental Regulations” above. Federal law also allows states to impose insurance and safety requirements on motor carriers conducting intrastate business within their borders, and to collect a variety of taxes and fees on an apportioned basis reflecting miles actually operated within each state.
HOS regulations establish the maximum number of hours that a commercial truck driver may work and are intended to reduce the risk of fatigue and fatigue-related crashes and harm to driver health. Due to the specialized nature of our operations in the oil and gas industry, we qualify for an exception in the federal HOS rules (i.e., the “Oilfield Exemption”). Drivers of most property-carrying commercial motor vehicles have to take at least 34 hours off duty in order to reset their accumulated hours under the 60/70-hour rule, but drivers of property-carrying commercial motor vehicles that are used exclusively to support oil and gas activities can restart with just 24 hours off under the Oilfield Exemption. However, there are other HOS regulations that affect our operations, including the 11-Hour Driving Limit, 14-Hour On Duty Limit, 30-Minute Rest Break, 60/70-Hour Limit On Duty in 7/8 consecutive days. Compliance with these rules directly impacts our operating costs.
Employees
As of December 31, 2020, we had approximately 517 full time employees, of whom 100 were executive, managerial, sales, general, administrative and accounting staff, and 417 were truck drivers, service providers and field workers. We have not experienced, and do not expect, any work stoppages, and believe that we maintain a satisfactory working relationship with our employees.
Available Information
Information that we file with or furnish to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to or exhibits included in these reports, are available free of charge on our website at www.nuverra.com soon after such reports are filed with or furnished to the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of all recent press releases. Our reports, including any exhibits included in such reports, that are filed with or furnished to the SEC are also available on the SEC’s website at www.sec.gov.
Neither the contents of our website nor that maintained by the SEC are incorporated into or otherwise a part of this filing. Further, references to the URLs for these websites are intended to be inactive textual references only.
Item 1A. Risk Factors
This section describes material risks to our businesses that currently are known to us. You should carefully consider the risks described below. If any of the risks and uncertainties described in the cautionary factors described below actually occur, our business, financial condition and results of operations could be materially and adversely affected. The risks and factors listed below, however, are not exhaustive. Other sections of this Annual Report on Form 10-K include additional factors that could materially and adversely impact our business, financial condition and results of operations. Moreover, we operate in a rapidly changing environment. Other known risks that we currently believe to be immaterial could become material in the future. We also are subject to legal and regulatory changes. New factors emerge from time to time and it is not possible to predict the impact of all these factors on our business, financial condition or results of operations.
Risks Related to Our Company
Our business depends on spending by our customers in the oil and natural gas industry in the United States, and this spending and our business have been, and may in the future be, adversely affected by industry and financial market conditions that are beyond our control. Continued and prolonged reductions in oil and natural gas prices and in the overall level of exploration and development may adversely affect demand and pricing for our services.
We depend on our customers’ willingness to make operating and capital expenditures to explore, develop and produce oil and natural gas in the United States. These expenditures are generally dependent on current oil and natural gas prices and the industry’s view of future oil and natural gas prices, including the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. A continued and prolonged reduction in the overall level of exploration and development activities, whether resulting from changes in oil and natural gas prices or otherwise, could materially and adversely affect us by negatively impacting utilization, demand for our services and pricing.
Industry conditions are influenced by numerous factors over which we have no control. A substantial and extended decline in oil and natural gas prices could result in significant reductions in our customers’ operating and capital expenditures, which could have a material adverse effect on our financial condition, results of operations and cash flows. Any extended decline could result in diminished demand for oilfield services and downward pressure on the prices customers are willing to pay for services such as ours. There is no guarantee that oil and natural gas prices will remain stable or increase, drilling and completion activities in basins will remain stable or increase, or we will see an increase in the demand for our services.
Our business, results of operations and financial condition have been negatively impacted by the recent COVID-19 pandemic along with an international oil supply conflict, resulting in a significant decline in oil prices, and we expect this situation may continue to have a significant adverse effect on our business, liquidity, reported results and financial condition.
The COVID-19 outbreak emanating from China in December 2019 has impacted various businesses throughout the world. The outbreak was labeled as a global pandemic in March 2020 by the World Health Organization. Governments enacted significant actions to mitigate the public health crisis, including enacting travel restrictions, the extended shutdown of certain non-essential businesses and shelter in place/stay at home orders in many of the impacted geographic regions. Additionally, beginning in early March 2020, the global oil markets were negatively impacted by an oil supply conflict occurring when the Organization of the Petroleum Exporting Countries (“OPEC+”) was initially unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. The convergence of these events created the unprecedented dual impact of a dramatic decline in the demand for oil coupled with the risk of substantial excess supply. The resulting negative impact to oil prices was significant with the price per barrel of West Texas Intermediate (“WTI”) crude oil plummeting 56% during March 2020. The pandemic precipitated a significant slowdown in the global economy, thereby contributing to a material reduction in consumer demand for oil, dramatically lower oil prices, and as a result, drastically lower customer demand for our services. WTI crude oil prices have risen since May 2020 and ended the year at $48.52. In addition, in January 2021, Saudi Arabia agreed to cut oil production, causing WTI crude oil prices to reach levels not seen since February 2020. Despite the improvement in the crude oil markets, drilling and completion activity remains depressed relative to the levels experienced prior to the onset of the pandemic. Our operations and financial results to date have been negatively impacted by this situation, and this situation has had a significant adverse effect on our business, liquidity, reported results and financial condition for 2020, which may continue into 2021 and beyond.
The adverse impacts we have and may continue to experience include, but are not limited to, disruptions to customer demand for our services; to commodities markets generally; to the availability of fuel, equipment and other materials; to our workforce; to customers’ ability to pay outstanding invoices or to remain solvent; or to our business relationships with subcontractors and other third-parties. Other possible risks to our business include potential limitations on oil and gas production from regulations imposed by states and other jurisdictions, a change in demand for oil and natural gas resulting from fundamental changes in how people work, travel and socialize, or litigation risk and possible loss contingencies from the impact of COVID-19, including commercial contracts, employee matters and insurance arrangements. Any such disruptions could increase our costs or otherwise have a material adverse impact on our business operations, operating results and financial condition.
Additionally, our liquidity will be negatively impacted if oil and natural gas prices do not return to levels that induce our customers to increase their expenditures on activities that drive demand for our services. We may have to draw on amounts available under our operating line of credit and otherwise seek additional forms of financing to meet our financial obligations. Obtaining such financing is not guaranteed, and is largely dependent upon market conditions and other factors. The current environment may make it even more difficult to comply with our covenants and other restrictions in our credit facilities, and a lack of confidence in our industry on the part of the financial markets may result in a lack of access to capital, any of which could lead to reduced liquidity, an event of default, inability to draw on amounts available under our operating line of credit, the possible acceleration of our outstanding debt, the exercise of certain remedies by our lender, or a limited ability or inability to refinance our debt.
The COVID-19 pandemic situation is dynamic, and updates on restrictions on travel and non-essential businesses and shelter in place/stay at home orders are continually evolving. At this point, the extent to which COVID-19 may impact our liquidity, financial condition and results of operations is uncertain as the ultimate severity and duration of the outbreak is unknown. However, this situation has had a significant adverse effect on our business, liquidity, reported results and financial condition for fiscal 2020, and we expect it to continue during fiscal 2021.
We may not be able to successfully execute our growth initiatives, including through future acquisitions and divestitures, and we may not be able to effectively integrate the businesses we do acquire and identify and manage risks inherent in such acquisitions.
Our business strategy may include growth through the acquisitions of other businesses and divestitures of non-core businesses or assets. We may not be able to identify attractive acquisition opportunities or successfully acquire identified targets. In addition, we may not be successful in integrating 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 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. We also may not recognize the anticipated benefits of completed dispositions or other divestitures we may pursue in the future. We may evaluate potential divestiture opportunities with respect to portions of our business from time to time that support our growth initiatives, and may determine to proceed with a divestiture opportunity if and when we believe such opportunity is consistent with our business strategy and we would be able to realize value to our stockholders in so doing. If we do not realize the expected strategic, economic or other benefits of any divestiture transaction, it could adversely affect our financial condition and results of operation.
Our operating margins and profitability may be negatively impacted by changes in fuel and energy costs. In addition, due to certain fixed costs, our operating margins and earnings may be sensitive to changes in revenues.
Our business is dependent on availability of fuel for operating our fleet of trucks. Changes and volatility in the price of crude oil can adversely impact the prices for fuel and therefore affect our operating results. The price and supply of fuel is unpredictable and fluctuates based on events beyond our control, including geopolitical developments, supply and demand for oil and natural gas, actions by OPEC+ and other oil and natural gas producers, war and unrest in oil producing countries, regional production patterns, and environmental concerns. Furthermore, our facilities, fleet and personnel subject us to fixed costs, which make our margins and earnings sensitive to changes in revenues. In periods of declining demand, we may be unable to cut costs at a rate sufficient to offset revenue declines, which may put us at a competitive disadvantage to firms with lower or more flexible cost structures, and may result in reduced operating margins and/or higher operating losses. These effects could have a material adverse effect on our financial condition, results of operations and cash flows.
Future charges due to possible impairments of assets may have a material adverse effect on our results of operations and stock price.
As discussed more fully in Note 8 of the Notes to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations Impairment of Long-Lived Assets and Impairment of Goodwill” included in Item 7 herein, during the year ended December 31, 2019 we recorded a goodwill impairment charge of $29.5 million leaving no remaining goodwill on the consolidated balance sheet. Additionally, we recorded total impairment charges of $15.6 million, $0.8 million and $4.8 million for long-lived assets and long-lived assets classified as held for sale during the years ended December 31, 2020, 2019, and 2018 respectively, which were included in “Impairment of long-lived assets” in the consolidated statements of operations. If there is further deterioration in our business operations or prospects, our stock price, the broader economy or our industry, including further declines in oil and natural gas prices, the value of our long-lived assets, or those we may acquire in the future, could decrease significantly and result in additional impairment and financial statement write-offs.
The testing of long-lived assets for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in the composition of our reporting units; changes in economic, industry or market conditions; changes in business operations; changes in competition; or potential changes in the share price of our common stock and market capitalization. Changes in these factors, or differences in our actual performance compared with estimates of our future performance, could affect the fair value of long-lived assets, which may result in further impairment charges. We perform the assessment of potential impairment at least annually, or more often if events and circumstances require. Should the value of our long-lived assets become impaired, we would incur additional charges which could have a material adverse effect on our consolidated results of operations and could result in us incurring additional net operating losses in future periods.
Significant capital expenditures are required to conduct our business, and our failure or inability to make sufficient capital investments could significantly harm our business prospects.
The development of our business and services, excluding acquisition activities, requires capital expenditures. During the year ended December 31, 2020, we made gross cash capital expenditures of approximately $3.4 million, including expenditures to extend the useful life and productivity on our fleet of trucks, tanks, equipment and disposal wells. We continue to focus on finding ways to improve the utilization of our existing assets and optimize the allocation of resources in the various shale areas in which we operate. In addition to capital expenditures required to maintain our current level of business activity, we may incur capital expenditures to support future growth of our business. Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. In addition, our credit facilities currently limit the amount of our capital expenditures to $7.5 million annually.
We expect our gross capital spending levels in 2021 to remain generally consistent with 2020. Prolonged reductions or delays in capital expenditures could delay or diminish future cash flows and adversely affect our business and results of operations. Our planned capital expenditures for 2021 are expected to be financed through cash flow from operations, finance leases, borrowings under our operating line of credit, or a combination of the foregoing. Future cash flows from operations are subject to a number of risks and variables, such as the level of drilling activity and oil and natural gas production of our customers, prices of natural gas and oil, and the other risk factors discussed herein. Our ability to obtain capital from other sources, such as the capital markets, is dependent upon many of those same factors as well as the orderly functioning of credit and capital markets. To the extent we fail to have adequate funds, we could be required to further reduce or defer our capital spending, or pursue other funding alternatives which may not be as economically attractive to us, which in turn could have a materially adverse effect on our financial condition, results of operations and cash flows.
The compensation we offer our drivers is subject to market conditions, and we may find it necessary to increase driver compensation and/or modify the benefits provided to our employees in future periods.
Maintaining a staff of qualified truck drivers is critical to the success of our operations. We and other companies in the oil and natural gas industry suffer from a high turnover rate of drivers. The high turnover rate requires us to continually recruit a substantial number of drivers in order to operate existing equipment. If we are unable to continue to attract and retain a sufficient number of qualified drivers, we could be forced to, among other things, increase driver compensation and/or modify our benefit packages, or operate with fewer trucks and face difficulty meeting customer demands, any of which could adversely affect our growth and profitability. Additionally, in anticipation of or in response to geographical and market-related fluctuations in the demand for our services, we strategically relocate our equipment and personnel from one area to another, which may result in operating inefficiencies, increased labor, fuel and other operating costs and could adversely affect our growth and profitability. As a result, our driver and employee training and orientation costs could be negatively impacted. We also utilize the services of independent contractor truck drivers to supplement our trucking capacity in certain shale areas on an as-needed basis. There can be no assurance that we will be able to enter into these types of arrangements on favorable terms, or that there will be sufficient qualified independent contractors available to meet our needs, which could have a material adverse effect on our financial condition, results of operations and cash flows.
We depend on certain key customers for a significant portion of our revenues. The loss of any of these key customers or the loss of any contracted volumes could result in a decline in our business.
We rely on a limited number of customers for a significant portion of our revenues. Our three largest customers represented 34% of our total consolidated revenues for the year ended December 31, 2020, originally filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2021 (the “Original Form 10-K”), to include the information required by Items 10 through 14 of Part III of Form 10-K. This information was previously omitted from the Original Form 10-K in total equaled 27%reliance on General Instruction G(3) to Form 10-K, which permits the information in the above referenced items to be incorporated in the Form 10-K by reference from our definitive proxy statement if such definitive proxy statement is filed no later than 120 days after our fiscal year-end. We are filing this Form 10-K/A to provide the information required in Part III of Form 10-K because a definitive proxy statement containing such information will not be filed by the Company within 120 days after the end of the fiscal year covered by the Original Form 10-K. This Form 10-K/A also deletes the incorporation by reference to portions of our consolidated accounts receivable at December 31, 2020. The lossdefinitive proxy statement from the cover page and Items 10 through 14 of all, or even a portion,Part III of the revenues from these customers, as a result of competition, market conditions or otherwise, could have a material adverse effect on our business, results of operations, financial condition, and cash flows. A reduction in exploration, development and production activities by key customers due to the current declines in oil and natural gas prices, or otherwise, could have a material adverse effect on our financial condition, results of operations and cash flows.
Customer payment delays of outstanding receivables and customer bankruptcies could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition.
We typically provide credit to our customers for our services, and we are therefore subject to the risk of our customers delaying or failing to pay outstanding invoices. Although we monitor individual customer financial viability in granting such credit arrangements and maintain reserves we believe are adequate to cover exposure for doubtful accounts, in weak economic environments, customers’ delays and failures to pay often increase due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to credit markets. If our customers delay or fail to pay a significant amount of outstanding receivables, it could reduce our availability under our operating line of credit or otherwise have a material adverse effect on our liquidity, financial condition, results of operations and cash flows.
Some of our customers have entered bankruptcy proceedings in the past or are currently under bankruptcy proceedings, and certain of our customers’ businesses face financial challenges that put them at risk of future bankruptcies. Customer bankruptcies could delay or in some cases eliminate our ability to collect accounts receivable that are outstanding at the time the customer enters bankruptcy proceedings. We are also at risk that we may be required to refund amounts collected from a customer during the period immediately prior to that customer’s bankruptcy filing, and the amount we ultimately collect from the customer’s bankruptcy estate may be significantly less. Customer bankruptcies may also reduce our availability under our operating line of credit. Although we maintain reserves for potential customer credit losses, customer bankruptcies could result in unanticipated credit losses. As a result, if one or more of our customers enter bankruptcy proceedings, particularly our larger customers or those to whom we have greater credit exposure, it could have a material adverse impact on our liquidity, operating results and financial condition.
We may be unable to achieve or maintain pricing to our customers at a level sufficient to cover our costs, which would negatively impact our profitability.
We may be unable to charge prices to our customers that are sufficient to cover our costs. Our pricing is subject to highly competitive market conditions, and we may be unable to increase or maintain pricing as market conditions change. Likewise, customers may seek pricing declines more precipitously than our ability to reduce costs. In certain cases, we have entered into fixed price agreements with our customers, which may further limit our ability to raise the prices we charge our customers at a rate sufficient to offset any increases in our costs. Additionally, some customers’ obligations under their agreements with us may be permanently or temporarily reduced upon the occurrence of certain events, some of which are beyond our control, including force majeure events. Force majeure events may include (but are not limited to) events such as revolutions, wars, acts of enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions, mechanical or physical failures of our equipment or facilities of our customers. If the amounts we are able to charge customers are insufficient to cover our costs, or if any customer suspends, terminates or curtails its business relationship with us, the effects could have a material adverse impact on our financial condition, results of operations and cash flows.Original Form 10-K.
Pursuant to the rules of the SEC, Part IV, Item 15
has been amended to contain the currently dated certifications from the Company’s principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. The litigation environmentcertifications of the Company’s principal executive officer and principal financial officer are attached to this Form 10-K/A as Exhibit 31.3 and Exhibit 31.4, respectively. Because no financial statements have been included in which we operate poses a significant riskthis Form 10-K/A and this Form 10-K/A does not contain or amend any disclosure with respect to our businesses.Items 307 and 308 of Regulation S-K, paragraphs 3, 4 and 5 of the certifications have been omitted.
We are occasionally involvedExcept as described above, this Form 10-K/A does not amend any other information set forth in the ordinary course of business in a number of lawsuits involving employment, commercial, and environmental issues, other claims for injuries and damages, and various shareholder and class action litigation, among other matters. We may experience negative outcomes in such lawsuits in the future. Any such negative outcomes could have a material adverse effect on our business, liquidity, financial condition and results of operations. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of judgment. Actual outcomes or losses may differ materially from such assessments and estimates. The settlement or resolution of such claims or proceedings may have a material adverse effect on our results of operations. In addition, judges and juries in certain jurisdictions in which we conduct business have demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage and other tort cases. We use appropriate means to contest litigation threatened or filed against us, but the litigation environment in these areas poses a significant business risk to us and could cause a significant diversion of management’s time and resources, which could have a material adverse effect on our financial condition, results of operations and cash flows.
The hazards and risks associated with the transport, storage, handling and disposal of our customers’ waste (such as fires, spills, explosions and accidents) may expose us to personal injury claims, property damage claims and/or products liability claims from our employees, customers or third parties. As protection against such claims and operating hazards, we maintain insurance coverage against some, but not all, potential losses. However, we may sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. As more fully described in Note 21 of the Notes to Consolidated Financial Statements herein, due to the unpredictable nature of personal injury litigation, it is not possible to predict the ultimate outcome of these claims and lawsuits,Original Form 10-K and we may be held liable for significant personal injury or damage to property or third parties, or other losses, that are not fully covered by our insurance, which could have a material adverse effect on our financial condition, results of operations and cash flows.
We operate in competitive markets, and there can be no certainty that we will maintain our current customers, attract new customers or that our operating margins will not be impacted by competition.
The industries in which our business operates are highly competitive. We compete with numerous local and regional companies of varying sizes and financial resources. Competition intensified during the most recent downturn, and could further intensify in the future. Furthermore, numerous well-established companies are focusing significant resources on providing similar services to those that we provide that will compete with our services. We cannot assure you that we will be able to effectively compete with these other companies or that competitive pressures, including possible downward pressure on the prices we charge for our products and services, will not arise. In addition, any declines in oil and natural gas prices may result in competitors moving resources from higher-cost exploration and production areas to relatively lower-cost exploration and production areas where we are located thereby increasing supply and putting further downward pressure on the prices we can charge for our products and services, including our rental business. In the event that we cannot effectively compete on a continuing basis, or competitive pressures arise, such inability to compete or competitive pressures could have a material adverse effect on our financial condition, results of operations and cash flows.
Our customers’ business depends on crude oil and natural gas transportation, processing, refining, and export systems and disruptions impacting those systems could adversely impact our business.
The price our customers receive for crude oil and natural gas is significantly impacted by the cost, availability, proximity and capacity of gathering, pipeline and rail systems and centralized storage, processing, refining and export facilities. The inadequacy or unavailability of capacity in these systems and facilities could result in the deferral or cancellation of drilling and completion activities, the shut-in of producing wells, the delay or discontinuance of development plans for properties or higher operational costs for our customers. If our customers’ business operations are negatively impacted for these or other reasons, it likely would reduce customer demand for our services and negatively impact our business.
Certain shale basins, including the Bakken shale area in which our Rocky Mountain operating division is located, are particularly susceptible to increases in the cost of product transport and disruptions in transport capacity due to the long distance between the geographic area where production occurs and the locations of centralized storage, processing, refining and export facilities in other parts of the United States. Although additional pipeline infrastructure has generally increased takeaway capacity in the Bakken shale area in recent years, ongoing legal disputes regarding pipeline systems, including the current litigation regarding the Dakota Access Pipeline (“DAPL”) which became commercially operational in 2017, have resulted in periodic shutdowns of significant portions of the basin’s pipeline takeaway capacity. A temporary or permanent closure of the DAPL (which transports approximately 40% of the crude oil that is produced in the Bakken), as a result of the ongoing litigation, new regulatory provisions under the Biden administration or otherwise, would likely have an adverse effect on overall drilling and completion as well as production activity in the Bakken area. Although transport of product from the Bakken shale area historically has also occurred by rail and other means, there can be no assurance that there will be sufficient future takeaway capacity. Any temporary or permanent reduction in pipeline takeaway capacity, including the DAPL, or other constraints or disruptions impacting product transport by rail or other means, could harm our customers’ business operations and, as a result, significantly reduce the demand or pricing for our services in the impacted region. Any such reduction in demand or pricing could have a material adverse effect on our business operations, financial condition, results of operations and cash flows.
Changes to trade regulation, quotas, duties or tariffs, caused by the changing U.S. and geopolitical environments or otherwise, may increase our costs or otherwise adversely affect our business.
The implementation by governmental bodies of tariffs or trade quotas, or changes to certain inter-governmental trade agreements, could, among other things, increase the costs of fuel or equipment used in our business, or negatively impact our customers’ business in a manner that reduces demand for our services. To the extent we incur fuel price increases, we may not be able to recover such increases through pricing increases or fuel price surcharges, which could have an adverse effect on our business.
Any interruption in our services due to pipeline ruptures or spills or necessary maintenance could impair our financial performance and negatively affect our brand.
Our water transport pipelines are susceptible to ruptures and spills, particularly during start up and initial operation, and require ongoing inspection and maintenance. We may experience difficulties in maintaining the operation of our pipelines, which may cause downtime and delays. We also may be required to periodically shut down all or part of our pipelines for regulatory compliance and inspection purposes. Any interruption in our services due to pipeline breakdowns or necessary maintenance, inspection or regulatory compliance could reduce revenues and earnings and result in remediation costs. While we have business interruption insurance coverage for our pipeline which would help mitigate lost revenues and remediation costs should a rupture, spill or other shut-down occur, there can be no assurances as to how much lost revenue or remediation costs our business interruption insurance would cover, if any. Transportation interruptions at our pipelines, even if only temporary, could severely harm our business and reputation, and could have a material adverse effect on our financial condition, results of operations and cash flows.
Our operations are subject to risks inherent in the oil and natural gas industry, some of which are beyond our control. These risks may not be fully covered under our insurance policies.
Our business is subject to risks, many of which are beyond our control. We are self-insured for many of these risks, and our insurance policies may not be adequate to cover all insured losses that we might incur in our operations.
Our operations are subject to operational hazards, including accidents or equipment failures that can cause pollution and other damage to the environment, injuries to persons or property and interruptions in business operations. Pursuant to applicable law, we may be required to remediate the environmental impact of any such accidents or incidents, which may include costs related to site investigation and soil, groundwater and surface water cleanup as well as penalties, damages or other costs of remediation. In addition, hazards inherent in the oil and natural gas industry, such as, but not limited to, accidents, blowouts, fires, explosions, pollution and other damage to the environment, and hydrocarbon spills may delay or halt operations at locations we service.
The occurrence of a significant event or a series of events that together are significant, or adverse claims in excess of the insurance coverage that we maintain or that are not covered by insurance, could have a material adverse effect on our financial condition, results of operations and cash flows. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims.
We self-insure against a significant portion of these liabilities. For losses in excess of our self-insurance limits, we maintain insurance from unaffiliated commercial carriers. However, our insurance may not be adequate to cover all losses or liabilities that we might incur in our operations. We maintain insurance coverage that we believe to be customary in the industry against these hazards. We may not be able to maintain adequate insurance in the future at rates we consider reasonable. In addition, insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, the coverage provided by such insurance may exclude coverage for damages resulting from environmental contamination or otherwise be inadequate, or insurance premiums or other costs could make such insurance prohibitively expensive.
Improvements in or new discoveries of alternative energy technologies or our customers’ operating methodologies could have a material adverse effect on our financial condition and results of operations.
Because our business depends on the level of activity in the oil and natural gas industry, any improvement in or new discoveries of alternative energy technologies (such as wind, solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the demand for oil and natural gas could have a material adverse effect on our financial condition, results of operations and cash flows. In addition, technological changes in our customers’ operating methods could decrease the need for management of water and other wellsite environmental services or otherwise affect demand for our services.
We may be adversely affected by seasonal weather conditions, natural disasters, pandemics (including the recent COVID-19 outbreak) and other catastrophic events, and by man-made problems such as terrorism, that could severely disrupt our business operations or reduce customer demand for our services.
Adverse weather conditions (including significant weather events related to climate change), natural disasters, floods, pandemics (including the recent coronavirus outbreak), acts of terrorism and other catastrophic or geopolitical events may cause damage or disruption to our operations, international commerce and the global economy, or could result in market disruption or reduced customer demand for our services, any of which could have an adverse effect on our business, operating results and financial condition.
Areas in which we operate are adversely affected by seasonal weather conditions, primarily in the winter and spring. During periods of heavy snow, ice or rain, our customers may curtail their operations or we may be unable to move our trucks between locations or provide other services, thereby reducing demand for, or our ability to provide services and generate revenues. For example, many municipalities impose weight restrictions on the roads that lead to our customers’ job sites in the spring due to the muddy conditions caused by spring thaws, limiting our access and our ability to provide service in these areas. In addition, the regions in which we operate have in the past been, and may in the future be, affected by natural disasters such as hurricanes, windstorms, floods and tornadoes. In certain areas, our business may be dependent on our customers’ ability to access sufficient water supplies to support their hydraulic fracturing operations. To the extent severe drought conditions or other factors prevent our customers from accessing adequate water supplies, our business could be negatively impacted.
Our financial and operating performance may be affected by the inability to renew landfill operating permits, obtain new landfills and expand existing ones.
We currently own one landfill and our ability to meet our financial and operating objectives may depend, in part, on our ability to acquire, lease, or renew landfill operating permits, expand existing landfills and develop new landfill sites. It has become increasingly difficult and expensive to obtain required permits and approvals to build, operate and expand solid waste management facilities, including landfills. We may not be able to obtain new landfill sites or expand the permitted capacity of our landfills when necessary. In addition, we may be unable to make the contingent consideration payment required upon the issuance of a second special waste disposal permit to expand the current landfill. Any of these circumstances could have a material adverse effect on our financial condition, results of operations and cash flows.
Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments may be limited. Future changes in ownership could eliminate or limit our use of net operating loss carryforwards.
Our ability to utilize our net operating loss carryforwards to offset future taxable income and to reduce federal and state income tax liabilities is subject to certain requirements, limitations and restrictions, including Internal Revenue Code Section 382 which under certain circumstances may substantially limit our ability to offset future tax liabilities with federal net operating loss carryforwards. If we undergo an ownership change, the net operating loss carryforward limitations would impose an annual limit on the amount of the taxable income that may be offset by our net operating losses generated prior to the ownership change. We have determined that an ownership change occurred on April 15, 2016 as a result of the debt restructuring that occurred during fiscal 2016. In addition, another ownership change occurred on August 7, 2017 as a result of our chapter 11
reorganization. The limitation under Section 382 may result in federal net operating loss carryforwards expiring unused. Subject to the impact of those rules as a result of past or future restructuring transactions, we may be unable to use all or a significant portion of our net operating loss carryforwards to offset future taxable income.
We manage our insurable risks through a combination of third party purchased policies and self-insurance, and we retain a substantial portion of the risk associated with expected losses under these programs, which exposes us to volatility associated with those risks, including the possibility that changes in our assumptions and estimates could have a material adverse effect on our financial condition, results of operations and cash flows.
We maintain high deductible or self-insured retention insurance policies for certain exposures including automobile liability, workers’ compensation, general liability, property damage and certain employee group health insurance plans. We carry policies for certain types of claims to provide excess coverage beyond the underlying policies and per incident deductibles or self-insured retentions. Because many claims against us do not exceed the deductibles under our insurance policies, we are effectively self-insured for a substantial portion of our claims. Given our large deductibles, we retain a substantial portion of the risk associated with expected losses under these programs. We could suffer significant losses in any given year as a result of one or multiple claims exhausting our deductible. Our insurance accruals are based on claims filed and estimates of claims incurred but not reported. The insurance accruals are influenced by our past claims experience factors, which have a limited history, and by published industry development factors. The estimates inherent in these accruals are determined using actuarial methods that are widely used and accepted in the insurance industry. If our insurance claims increase or if costs exceed our estimates of insurance liabilities, we could experience a decline in profitability and liquidity, which would adversely affect our business, financial condition or results of operations. In addition, should there be a loss or adverse judgment or other decision in an area for which we are self-insured, then our business, financial condition, results of operations and liquidity may be adversely affected.
We evaluate our insurance accruals, and the underlying assumptions, regularly throughout the year and make adjustments as needed. While we believe that the recorded amounts are reasonable, there can be no assurance that changes to our estimates will not occur due to limitations inherent in the estimation process. Changes in our assumptions and estimates could have a material adverse effect on our financial condition, results of operations and cash flows.
Concentration of ownership among our Significant Shareholders may prevent new investors from influencing significant corporate decisions and may result in conflicts of interest.
Two shareholder groups (the “Significant Shareholders”) beneficially own approximately 87% of our issued and outstanding common stock and, therefore, have significant control on the outcome of matters submitted to a vote of shareholders, including, but not limited to, electing directors and approving corporate transactions. As a result, the Significant Shareholders are able to exercise significant influence over all matters requiring shareholder approval, including: the election of directors; approval of mergers or a sale of all or substantially all of our assets and other significant corporate transactions; and the amendment of our Certificate of Incorporation and our Bylaws. Circumstances may occur in which the interests of the Significant Shareholders could be in conflict with the interests of other shareholders, and the Significant Shareholders would have substantial influence to cause us to take actions that align with their interests. Should conflicts arise, we can provide no assurance that the Significant Shareholders would act in the best interests of other shareholders or that any conflicts of interest would be resolved in a manner favorable to our other shareholders. In addition, this significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages in owning common stock in companies with Significant Shareholders.
Risks Related to Our Indebtedness
The amount of our debt and the covenants in the agreements governing our debt could negatively impact our business operations, financial condition, results of operations and business prospects.
As of December 31, 2020, we had approximately $35.0 million of total debt. Our level of indebtedness and the covenants contained in the agreements governing our debt, could have important consequences for our operations, including requiring us to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities. Each of our debt instruments contain certain negative covenants that impose specific restrictions on us. These restrictions include, among others, our ability to incur additional debt; operationally prepay, redeem or purchase any indebtedness; pay dividends or make other distributions; make other restricted payments and investments; create liens; transfer collateral; enter into certain merger, consolidation, reorganization, or recapitalization transactions; and merge, consolidate, or transfer or dispose of substantially all of our assets. We are also subject to a limitation on annual capital expenditures and debt service coverage ratio and must maintain a $7 million positive working capital position at all times. There are also a number of affirmative covenants with which we must comply. In addition, our $13 million equipment term loan (the “Equipment Loan”) is subject to all covenants and certifications required by the Main Street Priority Loan Facility (the “MSPLF”) as established by the Board of Governors of the Federal Reserve System under Section 13(3) of the Federal Reserve Act. A breach of any of these negative or affirmative covenants, including those under the MSPLF, could result in a default under our indebtedness. If we default, our lender will no longer be obligated to extend credit to us, and could declare all amounts of outstanding debt, together with accrued interest, to be immediately due and payable. The results of such actions would have a significant impact on our results of operations, financial position and cash flows. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify and could further exacerbate the risks associated with our indebtedness.
Our ability to meet our obligations under our indebtedness depends in part on our earnings and cash flows and those of our subsidiaries and on our ability and the ability of our subsidiaries to pay dividends or advance or repay funds to us.
We conduct all of our operations through our subsidiaries. Consequently, our ability to service our debt is dependent, in large part, upon the earnings from the businesses conducted by our subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts to us, whether by dividends, loans, advances or other payments. The ability of our subsidiaries to pay dividends and make other payments to us depends on their earnings, capital requirements and general financial conditions and is restricted by, among other things, applicable corporate and other laws and regulations as well as, in the future, agreements to which our subsidiaries may be a party.
Our borrowings under our credit facilities expose us to interest rate risk.
Our earnings are exposed to interest rate risk associated with borrowings under our credit facilities. Our credit facilities carry a floating interest rate; therefore, as interest rates increase, so will our interest costs, which may have a material adverse effect on our financial condition, results of operations and cash flows. In 2020, the Federal Reserve lowered the interest rates to 1.25% and subsequently to 0.25% in response to the escalating outbreak of the pandemic. However, there can be no assurances that interest rates will not rise in the future.
Certain covenants in our Main Street Priority Loan Facility concerning employee compensation, stock buybacks, and distributions may negatively impact our ability to attract and retain talent and may discourage an acquisition of the Company that could otherwise benefit our shareholders.
Our Equipment Loan is subject to the rules and regulations of the MSPLF. While MSPLF loans have various borrower friendly economic terms, the MSPLF also has long term restrictions on employee compensation, stock buybacks and distributions, which could negatively impact our ability to attract and retain talent and execute an acquisition, sale or other strategic transaction involving the Company. During the term of the MSPLF and for one year thereafter (the “Restricted Period”), employees or officers whose total compensation in 2019 exceeded $425,000 are restricted from receiving an increase in total annual compensation from 2019 levels and severance pay in excess of two times their 2019 compensation. These compensation restrictions may negatively impact our ability to attract, retain and integrate valuable and qualified talent as compared to competitors who are not subject to the MSPLF. In addition, we are restricted from paying dividends, making other capital distributions or repurchasing any equity securities listed on a national securities exchange during the Restricted Period. These restrictions may complicate a transaction to acquire us that would have otherwise involved stock buybacks, post-closing dividends or distributions of cash to shareholders, which may make a sale of the Company significantly more costly and less attractive to a buyer. In addition, the compensation restrictions may make it more difficult for a potential purchaser to retain, incentivize and motivate highly compensated individuals to remain with the Company following an acquisition. Further, the long term restrictions of the MSPLF may affect our ability to carry out an acquisition, sale or other strategic acquisition if the lender were to require our counterpart to contractually assume these restrictions or become a co-borrower or guarantor under the MSPLF.
Risk Factors Related To Our Common Stock
We cannot assure you that an active trading market for our common stock will develop or be maintained, and the market price of our common stock may be volatile, which could cause the value of your investment to decline.
We cannot assure you that an active public market for our common stock will develop or, if it develops, be sustained. We currently have a limited trading volume of our common stock. In the absence of an active public trading market, it may be difficult to liquidate your investment in our common stock. The trading price of our common stock on the NYSE American may fluctuate significantly. Numerous factors, including many over which we have no control, may have a significant impact on the market price of our common stock, including our operating and financial performance and prospects; our ability to repay our debt; investor perceptions of us and the industry and markets in which we operate; future sales, or the availability for sale, of equity or equity-related securities; changes in earnings estimates or buy/sell recommendations by analysts; limited trading volume of our common stock; and general financial, domestic, economic and other market conditions.
Our stock price may be volatile, which could result in substantial losses for investors in our securities, and the trading price of our common stock may not reflect accurately the value of our business.
The stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, ownership of our common stock is highly concentrated, and there are a limited number of shares available for trading on the NYSE American or any other public market. As a result, reported trading prices for our common stock at any given time may not reflect accurately the underlying economic value of our business at that time. Reported trading prices could be higher or lower than the price a shareholder would be able to receive in a sale transaction, and there can be no assurance that there will be sufficient public trading in our common stock to create a liquid trading market that accurately reflects the underlying economic value of our business.
The resale of shares of our common stock may adversely affect the market price of our common stock.
At the time of our emergence from bankruptcy in 2017, we granted registration rights to certain stockholders. The shares of our outstanding common stock held by these stockholders were registered pursuant to a registration statement filed pursuant to the Securities Act and declared effective by the SEC on May 3, 2018. In addition, on January 3, 2019, an additional 3,220,330 shares were issued to these stockholders pursuant to a rights offering. The shares held by these stockholders constitute approximately 90% of our outstanding common stock as of February 26, 2021, all of which may be sold in the public markets.
The sale of a significant number of shares of our common stock, including shares issuable upon exercise of our warrants, or substantial trading in our common stock or the perception in the market that substantial trading in our common stock will occur, may adversely affect the market price of our common stock. Further, even the perception in the public market that our existing shareholders might sell shares of common stock could depress the market price of the common stock.
If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.
The trading market for our shares of common stock could rely in part on the research and reporting that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our stock, the price of our stock could decline. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.
We may issue a substantial number of shares of our common stock in the future and shareholders may be adversely affected by the issuance of those shares.
We may raise additional capital by issuing shares of common stock, or other securities convertible into common stock, which will increase the number of shares of common stock outstanding and may result in substantial dilution in the equity interest of our current shareholders and may adversely affect the market price of our common stock. We had 16,002,474 shares outstanding as of February 26, 2021. The issuance, and the resale or potential resale, of shares of our common stock could adversely affect the market price of our common stock and could be dilutive to our shareholders.
Certain of our charter and bylaw provisions, Delaware law, our rights plan, and the substantial ownership of our common stock by a small number of shareholders, could subject us to anti-takeover effects or could have a material negative impact on our business.
Provisions of our certificate of incorporation and bylaws, each as amended and restated, and Delaware law, as well as our rights plan, may discourage, delay or prevent a merger or acquisition that shareholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, deter potential acquirers of our Company, and frustrate or prevent any attempts by our shareholders to replace or remove our management and board of directors “the Board”. These provisions include:
•authorizing the issuance of “blank check” preferred stock without any need for action by shareholders;
•establishing a classified Board, so that only approximately one-third of our directors are elected each year;
•providing our Board with the ability to set the number of directors and to fill vacancies on the board of directors occurring between shareholder meetings;
•providing that directors may only be removed for “cause” and only by the affirmative vote of the holders of at least a majority in voting power of our issued and outstanding capital stock; and
•limiting the ability of our shareholders to call special meetings.
In addition, on December 21, 2020, we adopted a rights agreement to implement a standard “poison pill.” In general terms, for so long as the rights issued under the rights agreement are outstanding, the rights agreement prevents any person or group from acquiring a significant percentage of our outstanding capital stock or attempting a hostile takeover of our Company by significantly diluting the ownership percentage of such person or group. The rights agreement, as amended, expires on December 21, 2021. As a result, the rights agreement has a significant anti-takeover effect.
We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years following the date the beneficial owner acquired at least 15% of our stock, unless various conditions are met, such as approval of the transaction by the Board. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.
The existence of the foregoing provisions and anti-takeover measures, as well as the significant percentage of common stock beneficially owned by our Significant Shareholders, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
Risks Related to Environmental and Other Governmental Regulation
We are subject to United States federal, state and local laws and regulations relating to health, safety, transportation and protection of natural resources and the environment. Under these laws and regulations, we may become liable for significant penalties, damages or costs of remediation. Any changes in laws and regulations could increase our costs of doing business.
Our operations, and those of our customers, are subject to United States federal, state and local laws and regulations relating to health, safety, transportation and protection of natural resources and the environment and worker safety, including those relating to waste management and transportation and disposal of produced water and other materials. For example, we are subject to environmental regulation relating to disposal into injection wells, which can pose some risks of environmental liability, as well as liability for property damage and personal injuries. In addition, federal, state and local laws and regulations could increase costs to our customers and possibly decrease demand for our services. For example, many of our customers have intrastate pipeline operations that are subject to regulation by various agencies of the states in which they are located. If new laws and/or regulations that further regulate intrastate pipelines are adopted in response to equipment failures, spills, negative environmental effects or public sentiment, our customers may face increased costs of compliance, and thus reduce demand for our services.
Our business involves the use, handling, storage, and contracting for recycling or disposal of environmentally sensitive materials. Accordingly, we are subject to health and environmental regulations established by federal, state and local authorities. We also are subject to laws, ordinances and regulations governing the investigation and remediation of contamination at facilities we operate or to which we send hazardous or toxic substances or wastes for recycling or disposal. In particular, CERCLA imposes strict joint and several liability on owners and operators of facilities at, from, or to which a release of hazardous substances has occurred; on parties that generated hazardous substances that were released at such facilities; and on parties that transported or arranged for the transportation of hazardous substances to such facilities. A majority of states have adopted comparable statutes. Under CERCLA or a similar state statute, we could be held liable for all investigative and remedial costs associated with addressing such contamination. Claims alleging personal injury or property damage also could be brought against us based on alleged exposure to hazardous substances resulting from our operations.
Failure to comply with these laws and regulations could result in the assessment of significant administrative, civil or criminal penalties, imposition of cleanup and site restoration costs and liens, revocation of permits and orders to limit or cease certain operations. Additionally, future events, such as the discovery of currently unknown matters, spills caused by future pipeline ruptures, changes in existing environmental laws and regulations or their interpretation, and more vigorous enforcement policies by regulatory agencies, may give rise to expenditures or liabilities, which could impair our operations and could have a material adverse effect on our financial condition, results of operations and cash flows.
Increased regulation of hydraulic fracturing, including regulation of the quantities, sources and methods of water use and disposal, could result in reduction in drilling and completing new oil and natural gas wells or minimize water use or disposal, which could adversely impact the demand for our services.
Demand for our services depends, in large part, on the level of exploration and production of oil and natural gas and the oil and natural gas industry’s willingness to purchase our services. Most of our customer base uses hydraulic fracturing to drill new oil and natural gas wells. Hydraulic fracturing is used to release hydrocarbons, particularly natural gas, from certain geological formations. The process involves the injection of water (typically mixed with significant quantities of sand and small quantities of chemical additives) under pressure into the formation to fracture the surrounding rock and stimulate movement of hydrocarbons through the formation. The process is typically regulated by state oil and natural gas commissions and since 2005 has been exempt from federal regulation under the SDWA, except when the fracturing fluids or propping agents contain diesel fuels.
The EPA has been reviewing the potential environmental impacts of hydraulic fracturing activities. On February 11, 2014, the EPA released a revised UIC program permitting guidance for wells that use diesel fuels during hydraulic fracturing activities to clarify how companies can comply with a 2005 federal law that exempts hydraulic fracturing operations from the UIC permit requirement, except where diesel fuel is used as a fracturing fluid. On July 16, 2015, the EPA’s Inspector General (IG) issued a report entitled “Enhanced EPA Oversight and Action Can Further Protect Water Resources From the Potential Impacts of Hydraulic Fracturing” stating that the EPA should enhance its oversight of permit issuance for hydraulic fracturing by state and develop a plan for responding to concerns about chemicals used in hydraulic fracturing. On May 19, 2014, the EPA issued an Advance Notice of Proposed Rulemaking announcing its intention to develop a rule under the Toxic Substances Control Act (“TSCA”) to require disclosure of chemicals used in hydraulic fracturing. While the EPA’s regulatory agenda previously estimated that the EPA would issue a proposed TSCA rule in June 2018, the agency withdrew the action in March 2018. The EPA’s regulatory agenda stated, however, that the withdrawal does not preclude the EPA from developing a similar action in the future. On October 15, 2012, new EPA regulations under the CAA went into effect that require reductions in certain criteria and hazardous air pollutant emissions from hydraulic fracturing wells. In May 2016, the EPA issued new CAA regulations to reduce methane emissions from oil and gas operations, including hydraulic fracturing. Effective September 14, 2020 the EPA rescinded certain provisions of both the 2012 and 2016 regulations. On January 20, 2021, however, the new federal Administration announced that the EPA would review the rescission pursuant to a newly issued presidential Executive Order.
In June 2016, the EPA finalized regulations under the CWA to prohibit wastewater discharges from hydraulic fracturing and other natural gas production to municipal sewage plants (called publicly owned treatment works (“POTWs”)). The regulations went into effect on August 29, 2016 for most facilities, but the EPA extended the compliance date to August 29, 2019 for facilities that had been lawfully discharging extraction wastewater to POTWs prior to June 28, 2016. In December 2016, the EPA issued a final report entitled “Hydraulic Fracturing for Oil and Gas: Impacts from the Hydraulic Fracturing Water Cycle on Drinking Water Resources in the United States” that concluded that hydraulic fracturing can impact drinking water resources under some circumstances, but stated that the national frequency of impacts on drinking water could not be estimated due to significant data gaps and uncertainties in the available data. In March 2015, the Department of the Interior (“DOI”) issued regulations imposing stringent requirements on hydraulic fracturing wells constructed on federal lands, but the DOI rescinded the regulations in December 2017. On January 20, 2021, however, the new federal Administration announced that the DOI would review the rescission pursuant to a newly issued presidential Executive Order. During the last several sessions of Congress, legislation has been introduced to provide for federal regulation of hydraulic fracturing, including, requiring disclosure of chemicals used in the fracturing process, potentially repealing the SWDA exemption and even banning hydraulic fracturing. Similar legislation may be proposed in the future. If adopted, such legislation would add another level of regulation and permitting at the federal level for wells using hydraulic fracturing and could potentially severely restrict hydraulic fracturing. Full or partial bans on hydraulic fracturing have been enacted in some states, while laws and regulations restricting hydraulic fracturing have been adopted or are being considered in several other states, including certain states in which we operate. In November 2017, the Delaware River Basin Commission issued proposed regulations that would ban “high volume hydraulic fracturing” in certain areas of Pennsylvania, New York, New Jersey and Delaware although those regulations have not yet been finalized. Some local governments have also soughtupdated disclosures included therein to restrict drilling.
Some regulators have adopted or are considering additional requirements for hydraulic fracturing related to seismic activities. For example, in April 2014, the Ohio Department of Natural Resources issued new guidelines that require companies to install seismic monitors forreflect any horizontal drilling within 3 miles of a known fault or area of seismic activity greater than 2.0 magnitude and allow regulators to halt drilling in the event of an earthquake greater than 1.0 magnitude. In Texas, the RRC amended its existing oil and natural gas disposal well regulations to require applicants for new disposal wells to conduct seismic activity searches utilizing the U.S. Geological Survey to assess whether the RRC should impose limits on existing wells, including a temporary injection ban. Arkansas has prohibited waste-water injection in certain areas of the state due to concerns that hydraulic fracturing may be related to increased earthquake activity. These and other such laws and regulations could delay or curtail production of oil and natural gas by our customers, and thus reduce demand for our services. Additionally, a number of states require disclosure of the fluids used in hydraulic fracturing.
Future United States federal, state or local laws or regulations could significantly restrict, or increase costs associated with hydraulic fracturing and make it more difficult or costly for producers to conduct hydraulic fracturing operations, which could result in a decline in exploration and production. New laws and regulations, new enforcement policies by regulatory agencies and even tort litigation in some states, could also expressly restrict the quantities, sources and methods of water use and disposal in hydraulic fracturing and otherwise increase our costs and our customers’ cost of compliance, which could minimize water use and disposal needs even if other limits on drilling and completing new wells were not imposed. Any decline in exploration and production or any restrictions on water use and disposal could result in a decline in demand for our services and have a material adverse effect on our business, financial condition, results of operations and cash flows.
Delays or restrictions in obtaining permits by our customers for their operations or by us for our operations could impair our business.
In most states, our customers are required to obtain permits from one or more governmental agencies in order to perform drilling and completion activities and we may be required to procure permits for construction and operation of our disposal wells and pipelines. Such permits are typically required by state agencies, but they can be required by federal and local governmental agencies as well. The requirements for such permits vary, but with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued, and the conditions that may be imposed by the permit. Delays or restrictions in obtaining salt water disposal well permits could adversely impact our growth, which is dependent in part on new disposal capacity.
Our customers have been affected by moratoriums that have been imposed on the issuance of permits for drilling and completion activities in certain jurisdictions. For example, in December 2014, the State of New York announced a ban on high volume hydraulic fracturing in the state, and the New York legislature made the ban permanent in April 2020. A moratorium has been in place within the Delaware River Basin pending finalization of regulations by the Delaware River Basin Commission that would permanently ban high volume hydraulic fracturing in the Basin. Other states, including California, Texas, Arkansas, Pennsylvania, Wyoming and Colorado, have enacted laws and regulations applicable to our business activities, including disclosure of information regarding the substances used in hydraulic fracturing. In December 2013, the EPA issued a revised National Pollutant Discharge Elimination System permit under the CWA (which became effective on March 1, 2014) that requires oil and natural gas companies using hydraulic fracturing off the coast of California to disclose the chemicals they discharge into the ocean. Although the permit technically expired on February 28, 2019, permittees have been permitted to continue their operations pending the EPA’s renewal of the permit, provided that they gave the EPA timely notice of their intent to do so. Some drilling and completion activities by our customers may take place on federal land, requiring leases from the federal government to conduct such drilling and completion activities. In some cases, federal agencies have canceled oil and natural gas leases on federal lands. Moreover, on January 27, 2021 the new federal Administration imposed a moratorium on all new oil and natural gas leases on public lands pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices and the potential climate and other impacts associated with oil and gas activities on public lands. Consequently, our operations in certain areas of the country may be interrupted or suspended for varying lengths of time, causing a loss of revenue and potentially having a materially adverse effect on our financial condition, results of operations and cash flows.
We are subject to the trucking safety regulations, which are likely to be amended, and made stricter, as part of the initiative known as Compliance, Safety, Accountability, or “CSA.” If our current USDOT safety rating of “Satisfactory” is downgraded in connection with this initiative, our business and results of our operations may be adversely affected.
As part of the CSA initiative, the FMCSA is continuously revising its safety rating methodology and implementation of the same. These revisions will likely link safety ratings more closely to roadside inspection and driver violation data gathered and analyzed from month to month under the FMCSA’s new Safety Measurement System, or “SMS” and may place increased scrutiny on carriers transporting significant quantities of hazardous material.subsequent events. This linkage could result in greater variability in safety ratings than the current system. Preliminary studies by transportation consulting firms indicate that “Satisfactory” ratings (or any equivalent under a new SMS-based system) may become more difficult to achieve and maintain under such a system. If our operations lose their current “Satisfactory” rating, which is the highest and best rating under this initiative, we may lose some of our customer contracts that require such a rating, adversely affecting our financial condition, results of operations and cash flows.
General Risk Factors
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, storage, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, and damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business, operating margins, revenues and competitive position.
Form 10-K/A failure in our operational systems, or those of third parties, may adversely affect our business.
Our business is dependent upon our operational and technological systems to process a large amount of data. If any of our financial, operational, or other data processing systems fail or have other significant shortcomings, our financial results could be adversely affected. Our financial results could also be adversely affected if an employee causes our operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating our operational systems. In addition, dependence upon automated systems may further increase the risk that operational system flaws, employee tampering or manipulation of those systems could result in losses that are difficult to detect. We are heavily reliant on technology for communications, financial reporting, treasury management and many other important aspects of our business. Any failure in our operational systems could have a material adverse impact on our business. Third-party systems on which we rely could also suffer operational failures. Any of these occurrences could disrupt our business, including the ability to close our financial ledgers and report the results of our operations publicly on a timely basis or otherwise have a material adverse effect on our financial condition, results of operations and cash flows.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease our corporate headquarters in Scottsdale, Arizona and we own or lease numerous facilities including administrative offices, sales offices, truck yards, maintenance and warehouse facilities, and a landfill facility in seven other states. We also own or lease 46 salt water disposal wells in Louisiana, Montana, North Dakota, Ohio and Texas as of December 31, 2020. We believe that we have satisfactory title to the properties owned and used in our businesses, subject to liens for taxes not yet payable, liens incident to minor encumbrances, liens for credit arrangements (including liens under our credit facilities) and easements and restrictions that do not materially detract from the value of these properties, our interests in these properties or the use of these properties in our businesses.
We believe all properties that we currently occupy are suitable for their intended uses. We believe that we have sufficient facilities to conduct our operations. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires.
Item 3. Legal Proceedings
We are party to legal proceedings and potential claims arising in the ordinary course of our business, including, but not limited to, claims related to employment matters, contractual disputes, personal injuries and property damage. In addition, various legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our subsidiaries. See “Legal Matters” section in Note 21 of the Notes to the Consolidated Financial Statements herein for a description of our legal proceedings.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the NYSE American under the symbol “NES” and has been trading on the NYSE American since October 12, 2017. Prior to the commencement of our voluntarily chapter 11 proceedings, before August 7, 2017, our pre-Effective Date common stock was trading on the OTCQB U.S. Market (the “OTCQB”) beginning on January 20, 2016 under the symbol “NESC.”
As an issuer may not be listed on the OTCQB if it is subject to bankruptcy or reorganization proceedings, upon filing the Plan with the Bankruptcy Court, our pre-Effective Date common stock was removed from the OTCQB and began trading on the OTC Pink Open Market (the “OTC Pink”) under the symbol “NESCQ” beginning on May 2, 2017. As a result of the cancellation of the pre-Effective Date common stock pursuant to the Plan, the Company ceased trading on the OTC Pink on August 7, 2017, the “Effective Date”. From the Effective Date until our listing on the NYSE American on October 12, 2017, there was no active public trading market for our common stock. The Plan is a prepackaged plans of reorganization that became effective on the Effective Date when the Company and certain of its material subsidiaries filed voluntary petitions under chapter 11 of the United States Bankruptcy Code.
Holders
As of February 26, 2021, there were three shareholders of record of our common stock. The majority of the shares are held by CEDE & CO., a nominee of The Depository Trust Company. This number of record holders does not include beneficial holders whose shares are held in “street name,” meaning that the shares are held for their accounts by brokers or other nominees. In these instances, the brokers or other nominees are included in the number of record holders, but the underlying beneficial holders of the common stock held in “street name” are not.
Dividends
We have not paid any dividends on our common stock to date, and we currently do not intend to pay dividends in the future. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of the “Board and will be subject to other limitations as may be contained in our agreements governing our indebtedness. It is the present intention of the Board to retain all earnings, if any, for use in our business operations and, accordingly, the Board does not anticipate declaring any dividends in the foreseeable future.
Unregistered Sales of Equity Securities
There were no unregistered sales of our equity securities during the fiscal year ended December 31, 2020.
Repurchases of Equity Securities
During the year ended December 31, 2020, there were no repurchases of our common stock.
Item 6. Selected Financial Data
We have adopted the amended rules of Regulation S-K which allow the elimination of five years of Selected Financial Data.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Original Form 10-K and with our Consolidated Financial Statements, and the Notes and Schedules related thereto, which are included in this Annual Report.
Company Overview
Nuverra provides water logistics and oilfield services to customers focused on the development and ongoing production of oil and natural gas from shale formations in the United States. Our business operations are organized into three geographically distinct divisions: the Rocky Mountain division, the Northeast division, and the Southern division. Within each division, we provide water transport services, disposal services, and rental and other services associatedfilings with the drilling, completion, and ongoing production of shale oil and natural gas.
Rocky Mountain Division
The Rocky Mountain division is our Bakken Shale area business. The Bakken and underlying Three Forks shale formations are the two primary oil producing reservoirs currently being developed in this geographic region, which covers western North Dakota, eastern Montana, northwestern South Dakota and southern Saskatchewan. We have operations in various locations throughout North Dakota and Montana, including yards in Dickinson, Williston, Watford City, Tioga, Stanley, and Beach, North Dakota, as well as Sidney, Montana. Additionally, we operate a financial support office in Minot, North Dakota. As of December 31, 2020, we had 249 employees in the Rocky Mountain division.
Water Transport Services
We manage a fleet of 176 trucks in the Rocky Mountain division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities.
In the Rocky Mountain division, we own an inventory of lay flat temporary hose as well as related pumps and associated equipment used to move fresh water from water sources to operator locations for use in completion activities. We employ specially trained field personnel to manage and operate this business. For customers who have secured their own source of fresh water, we provide and operate the lay flat temporary hose equipment to move the fresh waterSEC subsequent to the drilling and completion location. We may also use third-party sources of fresh water in order to provide the water to customers as a package that includes our water transport service.
Disposal Services
We manage a network of 20 owned and leased salt water disposal wells with current capacity of approximately 82 thousand barrels of water per day, and permitted capacity of 104 thousand barrels of water per day. Our salt water disposal wells in the Rocky Mountain division are operated under the Landtech brand. Additionally, we operate a landfill facility near Watford City, North Dakota that handles the disposal of drill cuttings and other oilfield waste generated from drilling and completion activities in the region.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Rocky Mountain division. These assets include tanks, loaders, manlifts, light towers, winch trucks, and other miscellaneous equipment used in drilling and completion activities. In the Rocky Mountain division, we also provide oilfield labor services, also called “roustabout work,” where our employees move, set-up and maintain the rental equipment for customers, in addition to providing other oilfield labor services.
Northeast Division
The Northeast division is comprised of the Marcellus and Utica Shale areas, both of which are predominantly natural gas producing basins. The Marcellus and Utica Shale areas are located in the northeastern United States, primarily in Pennsylvania, West Virginia, New York and Ohio. We have operations in various locations throughout Pennsylvania, West Virginia, and Ohio, including yards in Masontown and Wheeling, West Virginia, Williamsport and Wellsboro, Pennsylvania, and Cambridge and Cadiz, Ohio. As of December 31, 2020, we had 186 employees in the Northeast division.
Water Transport Services
We manage a fleet of 177 trucks in the Northeast division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region, or to other customer locations for reuse in completing other wells. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities.
Disposal Services
We manage a network of 13 owned and leased salt water disposal wells with current and permitted capacity of approximately 22 thousand barrels of water per day in the Northeast division. Our salt water disposal wells in the Northeast division are operated under the Nuverra, Heckmann, and Clearwater brands.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Northeast division. These assets include tanks and winch trucks used in drilling and completion activities.
Southern Division
The Southern division is comprised of the Haynesville Shale area, a predominantly natural gas producing basin, which is located across northwestern Louisiana and eastern Texas, and extends into southwestern Arkansas. We have operations in various locations throughout eastern Texas and northwestern Louisiana, including a yard in Frierson, Louisiana. Additionally, we operate a corporate support office in Houston, Texas. As of December 31, 2020, we had 62 employees in the Southern division.
Water Transport Services
We manage a fleet of 35 trucks in the Southern division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water to operator locations for use in well completion activities.
In the Southern division, we also own and operate a 60-mile underground twin pipeline network for the collection of produced water for transport to interconnected disposal wells and the delivery of fresh water from water sources to operator locations for use in well completion activities. The pipeline network can currently handle disposal volumes up to approximately 68 thousand barrels per day with 6 disposal wells attached to the pipeline and is scalable up to approximately 106 thousand barrels per day.
Disposal Services
We manage a network of 7 owned and leased salt water disposal wells that are not connected to our pipeline with current capacity of approximately 32 thousand barrels of water per day, and permitted capacity of approximately 100 thousand barrels of water per day, in the Southern division.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Southern division. These assets include tanks and winch trucks used in drilling and completion activities.
Acquisitions
On October 5, 2018, we completed the acquisition of Clearwater Three, LLC, Clearwater Five, LLC, and Clearwater Solutions, LLC (collectively, “Clearwater”) for an initial purchase price of $42.3 million, subject to customary working capital adjustments (the “Clearwater Acquisition”). Clearwater is a supplier of waste water disposal services used by the oil and gas industry in the Marcellus and Utica shale areas. Clearwater has three salt water disposal wells in service, all of which are located in Ohio. This acquisition expanded our service offerings in the Marcellus and Utica shale areas in our Northeast division. Refer to Note 6 in the Notes to Consolidated Financial Statements for additional information.
Trends Affecting Our Operating Results
COVID-19 Pandemic and Oil Price Declines
The outbreak of COVID-19 in the first quarter of 2020 and its continued spread across the globe throughout 2020 has resulted, and is likely to continue to result, in significant economic disruption, including reduction in energy demand and commodity price volatility that adversely impacted our business. Beginning in the first quarter of 2020, federal, state and local governments implemented significant actions to mitigate the public health crisis, including shelter-in-place orders, business closures and capacity limits, quarantines, travel restrictions, executive orders and similar restrictions intended to control the spread of COVID-19. Over the remainder of 2020, many of these restrictions were adjusted based on the severity of the COVID-19 outbreak in particular communities, sometimes resulting in an easing of restrictions while other times resulting in a reinstatement or tightening of restrictions. As a result, the economy was marked by significant uncertainty, and changes in travel patterns have resulted in a generally reduced demand for refined products, such as gasoline and jet fuel, and consequently a reduction in the demand for crude oil. The uncertainty of the ongoing COVID-19 pandemic has continued to impact travel patterns and generally depress market demand for crude oil.
Additionally, beginning in early March 2020, the global oil markets were negatively impacted by an oil supply conflict occurring when the Organization of Petroleum Exporting Countries and other oil producing nations (“OPEC+”) were initially unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase crude oil production. The result was an oversupply of oil, which put downward pressure on the price of crude oil.
The convergence of the COVID-19 pandemic and oil supply conflict created a dramatic decline in the demand and price of crude oil. The resulting impact to oil prices during the first half of 2020 was significant, with the price per barrel of West Texas Intermediate (“WTI”) crude oil plummeting 56% during March 2020. WTI oil spot prices decreased from a high of $63 per barrel in early January to a low of $9 per barrel in late April, including negative pricing for one day in April. The physical markets for crude oil showed signs of distress as spot prices were negatively impacted by the lack of available storage capacity. This significantly increased the volatility in oil prices. OPEC+ agreed in April 2020 to cut production, which began in May 2020 and continued through December 2020. The effect of the production cuts began to ease storage supply issues and stabilize crude oil markets. WTI crude oil prices began to steadily rise during May 2020, and since June 2020, prices have been above $35 per barrel. Despite the improvement in the crude oil markets, there continues to be an oversupply of crude oil, and drilling and completion activity in the United States and our markets remains depressed. While commodity prices have increased, a recent trend by our customers, at the insistence of investors, has been to limit capital expenditures to cash flow and to return any excess cash to shareholders in the form of dividends or stock repurchases and or to repay debt. This trend may limit the increase in activity and pricing by our customers despite commodity price increases as our customers focus on these objectives versus increasing production volumes.
While we experienced minimal impact in the first quarter of 2020, we experienced a significant decline in activity during the remainder of 2020. We do not foresee a return to pre-COVID-19 activity and pricing during 2021 and possibly beyond. In anticipation of a meaningful and sustained decline in our revenues, during the first quarter of 2020, we implemented a number of initiatives to adjust our cost structure, including:
•Adjusted salaries for all exempt and non-exempt non-contracted employees between 10% and 20%;
•Headcount reduction of approximately 100 employees, including changes made earlier in the first quarter of 2020;
•Reduced Chief Executive Officer’s salary by 25%, Chief Operating Officer salary by 20% and two other executives’ salaries between 10% and 20%;
•Reduced the compensation program for the non-employee Board of Directors by 25%;
•Materially scaled back operations in two completions-related businesses and closed one location; and
•Reduced other non-critical operating expenses.
Additionally, we implemented a significant reduction in our capital expenditures budget. We continue to maintain most of our pay reductions and other savings initiatives, but monitor market conditions that would necessitate increasing employee wages.
Our liquidity may be negatively impacted depending on how quickly consumer demand and oil prices return to more normalized levels. A lack of confidence in our industry on the part of the financial markets may result in a lack of access to capital, which could lead to reduced liquidity, an event of default, or an inability to access amounts available under our operating line of credit of $5.0 million, and our letter of credit facility of $5.35 million. Our operating line of credit is secured by a first lien security interest in all business assets of the Company and its subsidiaries including without limitation all accounts receivable, inventory, trademarks and intellectual property licenses to which it is a party and by a reserve Account, while the letter of credit facility is secured by a first lien security interest in all business assets of the Company and its subsidiaries and by a reserve Account.
While we are not able to estimate the full impact of the COVID-19 outbreak and oil price declines on our financial condition and future results of operations, we expect that this situation will have an adverse effect on our reported results through 2021 and possibly beyond.
Other Trends Affecting Operating Results
We continue to monitor several industry trends in the shale basins in which we operate. Our results are affected by capital expenditures made by the exploration and production operators in the shale basins in which we operate. These capital expenditures determine the level of drilling and completion activity which in turn impacts the amount of produced water, water for fracking, flowback water, drill cuttings and rental equipment requirements that create demand for our services. The primary drivers of these expenditures are current or anticipated prices of crude oil and natural gas. Prices trended lower during 2019 and continued to decline considerably during 2020. The average price per barrel of WTI crude oil was $39.16 in 2020 as compared to $56.98 in 2019. The average price per million Btu of natural gas as measured by the Henry Hub Natural Gas index was $2.03 in 2020 compared to $2.56 in 2019. See “COVID-19 Pandemic and Oil Price Declines” above for further discussion.
The rapid drop in crude prices occurred primarily in March and April 2020. In May 2020, OPEC+ began cutting oil production, which began to positively impact crude prices. Between June and December 2020, crude oil prices ranged between $35 and $49 per barrel, but prices were still below levels from earlier in 2020. The drop in crude oil prices had minimal impact on the first quarter of 2020 operating results as our customers had little time to adjust activity levels. However, our customers’ drilling and completion activity fell substantially beginning in the second quarter of 2020, with many customers also shutting in or lowering production as a result of spot crude prices falling below the cash costs of production in many basins and wells. Producers have shut-in production on a scale not seen in prior downturns and have been slower to bring wells back on line than anticipated.
During June 2020, per the North Dakota Industrial Commission, approximately 28% of daily crude oil production in the Bakken shale region was estimated to have been shut-in, contributing to a reduction of approximately 405,000 barrels per day. The curtailed production dropped the volumes of produced water accordingly. This had a dramatic negative effect on our produced water business in the Rocky Mountain division that has been slow to rebound. Additionally, in early July 2020, a United States court ruling ordered the shutdown of the DAPL over concerns on the environmental impact of the pipeline. The DAPL is a major transporter of oil volumes from the Bakken shale area. Although transport of product from the Bakken shale area historically has also occurred by rail and other means, which is a higher transportation cost than the DAPL, there can be no assurance that there will be sufficient future takeaway capacity. An appeals court has allowed the DAPL to continue to operate in the near term, but courts have also vacated needed easements making DAPL vulnerable to being shut down by government action or further litigation. The potential closure of the DAPL has customers cautious about returning to more normal business volumes and/or deferring capital expenditure projects until the litigation has been adjudicated. As a result, the recovery of the Rocky Mountain division has been slower than other oil producing basins.
The reduction in customer activity related to commodity prices most directly impacts our services that cater to drilling and completion activities. This includes fresh water transportation via lay flat hose, our rental equipment business and our landfill business in the Rocky Mountain division. Additionally, a portion of our trucking and salt water disposal business comes from completion-related flowback work; however, the majority of this business is derived from produced water transportation and disposal from existing wells. As such, we anticipate meaningful reductions in revenue and profitability to continue during fiscal 2021.
An additional important trend in recent years has been the focus of Wall Street and investors in the energy sector to encourage exploration and production operators to spend as a function of the cash flow they generate. Historically, as a result of accommodating debt and equity markets, exploration and production companies were able to spend in excess of the cash flow generated by the business. This shift in investor sentiment has brought increased capital discipline to exploration and production companies who are careful to make more selective capital allocation decisions. The drop during 2020 in underlying commodity prices, net of hedging activities, will impact our customers’ underlying cash flows and therefore their drilling plans. Additionally, following the decrease in commodity prices and the impact of COVID-19, a number of our customers witnessed a material drop in their public stock prices and received debt rating downgrades. We believe this trend will make it more difficult for our customers to raise new sources of capital, which may further limit their ability to spend capital on future drilling and completion activities.
Lastly, during 2020, we have seen an increase in reuse and water sharing in the Northeast. Some of our customers are using produced and flowback water for fracking as they have determined it is more economical to transport produced water to sites than it is to dispose of the water. Operators are also sharing water with other operators to avoid disposal. Transporting shared or reused water still requires trucking services, but it is generally shorter haul work done at an hourly rate which negatively impacts our revenues.
Other Factors Affecting Our Operating Results
Our results are also driven by a number of other factors, including (i) availability of our equipment, which we have built 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, competition, and our ability to relocate our equipment to areas in which oil and natural gas exploration and production activities are more robust on a relative basis, (iv) the availability of qualified employees (or alternatively, subcontractors) in the areas in which we operate, (v) labor costs, (vi) changes in governmental laws and regulations at the federal, state and local levels, (vii) seasonality and weather events, (viii) pricing and (ix) our health, safety and environmental performance record.
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. Accordingly, our customer agreements generally provide the customer the ability to change the relationship by either in-sourcing some or all services we have 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 variation over time.
Results of Operations: Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Increase (Decrease) |
| 2020 | | 2019 | | 2020 vs 2019 |
| Revenue: | | | | | | | |
| Service revenue | $ | 102,810 | | | $ | 152,541 | | | $ | (49,731) | | | (32.6) | % |
| Rental revenue | 7,477 | | | 15,697 | | | (8,220) | | | (52.4) | % |
| Total revenue | 110,287 | | | 168,238 | | | (57,951) | | | (34.4) | % |
| Costs and expenses: | | | | | | | |
| Direct operating expenses | 87,299 | | | 131,019 | | | (43,720) | | | (33.4) | % |
| General and administrative expenses | 18,960 | | | 20,864 | | | (1,904) | | | (9.1) | % |
| Depreciation and amortization | 28,614 | | | 36,183 | | | (7,569) | | | (20.9) | % |
| Impairment of long-lived assets | 15,579 | | | 766 | | | 14,813 | | | 1,933.8 | % |
| Impairment of goodwill | — | | | 29,518 | | | (29,518) | | | NM |
| Other, net | — | | | (10) | | | 10 | | | (100.0) | % |
| Total costs and expenses | 150,452 | | | 218,340 | | | (67,888) | | | (31.1) | % |
| Operating loss | (40,165) | | | (50,102) | | | 9,937 | | | (19.8) | % |
| Interest expense, net | (4,070) | | | (5,227) | | | 1,157 | | | (22.1) | % |
| Other income, net | 216 | | | 502 | | | (286) | | | (57.0) | % |
| Reorganization items, net | (111) | | | (200) | | | 89 | | | (44.5) | % |
| Loss before income taxes | (44,130) | | | (55,027) | | | 10,897 | | | (19.8) | % |
| Income tax benefit (expense) | (13) | | | 90 | | | (103) | | | (114.4) | % |
| Net loss | $ | (44,143) | | | $ | (54,937) | | | $ | 10,794 | | | (19.6) | % |
NM - Percentages over 100% are not displayed.
Service Revenue
Service revenue consists of fees charged to customers for water transport services, disposal services and other service revenues associated with the drilling, completion, and ongoing production of shale oil and natural gas.
On a consolidated basis, service revenue for the year ended December 31, 2020 was $102.8 million, down $49.7 million, or 32.6%, from $152.5 million for the year ended December 31, 2019. The decline in service revenue is primarily due to decreases in water transport services and disposal services in all three divisions. As the primary causes of the decreases in water transport services and decreases in disposal services are different for all three divisions, see “Segment Operating Results” below for further discussion.
Rental Revenue
Rental revenue consists of fees charged to customers for use of equipment owned by us, as well as other fees charged to customers for items such as delivery and pickup of equipment. Our rental business is primarily located in the Rocky Mountain division, however, we do have some rental equipment available in both the Northeast and Southern divisions.
Rental revenue for the year ended December 31, 2020 was $7.5 million, down $8.2 million, or 52.4%, from the year ended December 31, 2019 due primarily to a significant decline in drilling and completion activity and lower commodity prices, which resulted in lower utilization and the return of rental equipment by our customers in the Rocky Mountain division.
Direct Operating Expenses
The primary components of direct operating expenses are compensation costs for employees performing operational activities, third-party hauling costs, fuel costs associated with transportation and logistics activities, and costs to repair and maintain transportation, rental equipment and disposal wells.
Direct operating expenses for the year ended December 31, 2020 were $87.3 million, compared to $131.0 million for the year ended December 31, 2019, a decrease of 33.4%. The decrease is primarily attributable to lower activity levels in water transport services and disposal services and company-enacted cost cutting measures resulting in a decline in third-party hauling costs, compensation costs, and fleet-related expenses, including fuel and maintenance and repair costs. See “Segment Operating Results” below for further details on each division.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2020 were $19.0 million, down $1.9 million from $20.9 million for the year ended December 31, 2019. The decrease was primarily due to a decrease in compensation costs resulting from broad employee wage reductions and layoffs, partially offset by $1.9 million of transaction fees during 2020 associated with the credit agreements.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2020 was $28.6 million, down $7.6 million from $36.2 million for the year ended December 31, 2019. The decrease is primarily attributable to lower depreciable asset base due to impairment of long-lived assets during 2020, the sale of under-utilized or non-core assets and assets becoming fully depreciated partially offset by asset additions.
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 amount 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 quarter of 2020, which resulted in a decrease in activities by our customers. As a result of these events, during the year ended December 31, 2020, there were indicators 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 and as a result we recorded long-lived asset impairment charges of $15.0 million. We may face additional asset impairments in the future, along with other accounting charges, if demand for our services decreases.
Additionally, during 2020, certain property classified as held for sale in the Rocky Mountain division was evaluated for impairment based on an accepted offer received by the Company for the sale of the property. As a result of that offer, an impairment charge of $0.6 million was recorded during the year ended December 31, 2020 to adjust the book value to match the fair value.
During the year ended December 31, 2019, management approved plans to sell real property located in the Northeast and Rocky Mountain divisions. The real property qualified to be classified as held for sale and as a result was recorded at the lower of net book value or fair value less costs to sell, which resulted in long-lived asset impairment charges of $0.8 million, of which $0.6 million related to the Northeast division and $0.1 million related to the Rocky Mountain division.
During the year ended December 31, 2018, management approved plans to sell certain assets located in the Southern division as a result of exiting the Eagle Ford shale area. In addition, management approved the sale of certain assets, primarily frac tanks, located in the Northeast division, that were also expected to sell within one year. These assets qualified to be classified as assets held for sale and as the fair value of the assets was lower than the net book value, we recorded an impairment charge of $4.8 million, of which $4.4 million related to the Southern division for the Eagle Ford exit, $0.3 million related to the Corporate division for the sale of certain real property in Texas approved to be sold as part of the Eagle Ford exit, and $0.1 million related to the Northeast division.
See also Note 8 in the Notes to the Consolidated Financial Statements herein for further discussion.
Impairment of Goodwill
When we reviewed goodwill for impairment as of October 1, 2019, we determined that it was more likely than not that the fair value of the reporting units were less than their carrying value. As a result, we completed the goodwill impairment test and determined that the fair value of all three reporting units was less than the carrying amount, resulting in a goodwill impairment charge of $29.5 million during the year ended December 31, 2019, which is a full impairment of all existing goodwill. Of the $29.5 million recorded for goodwill impairment during 2019, $21.9 million related to the Northeast division, $4.9 million related to the Rocky Mountain division, and $2.7 million related to the Southern division. The majority of the goodwill associated with this impairment was established based on valuation work completed at the time of the Company’s emergence from bankruptcy. During 2019, enterprise valuations in the energy sector materially decreased resulting in a lower estimated valuation of the Company and the impairment charge. See Note 8 in the Notes to the Consolidated Financial Statements herein for further details on goodwill impairment during 2019.
Other, net
On March 1, 2018, the Board determined it was in the best interest 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 year ended December 31, 2018 were $1.1 million.
During the year ended December 31, 2019, we recorded final adjustments to the accrued lease liabilities for the both the Eagle Ford exit and the Mississippian exit in 2015 as further payments were not required.
Interest Expense, net
Interest expense primarily consists of interest costs related to our outstanding debt, accretion expense related to our asset retirement obligations and amortization of debt issuance costs.
Interest expense, net during the year ended December 31, 2020 was $4.1 million compared to $5.2 million for the year ended December 31, 2019. The decrease is primarily due to the refinancing of the First and Second Lien Term Loans (as defined below) and the lower overall effective interest rates on our outstanding debt.
Other Income, net
Other income, net was $0.2 million for the year ended December 31, 2020 compared to $0.5 million for the year ended December 31, 2019. The decrease is primarily due to $0.2 million of insurance proceeds during 2019 for business interruption coverage.
Reorganization Items, net
Expenses, gains and losses directly associated with the chapter 11 proceedings are reported as “Reorganization items, net” in the consolidated statements of operations. For the year ended December 31, 2019, these fees are primarily comprised of professional and legal fees related to our 2017 chapter 11 filing. Reorganization items were $0.1 million and 0.2 million during the year ended December 31, 2020 and 2019, respectively.
Income Taxes
Income tax expense for the year ended December 31, 2020 was $13.0 thousand (a 0.0% effective rate) compared to benefit of $0.1 million (a 0.2% effective rate) in the prior year. The effective tax rate in 2019 is primarily the result of the current year state income taxes offset by the current year state income taxes offset by the change in the deferred tax liability attributable to long-lived assets. See Note 19 in the Notes to the Consolidated Financial Statements herein for additional information on income taxes.
Segment Operating Results: Years Ended December 31, 2020 and 2019
The following table shows operating results for each of our segments for the years ended December 31, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Rocky Mountain | | Northeast | | Southern | | Corporate/Other | | Total |
| Year ended December 31, 2020 | | | | | | | | | | |
| Revenue | | $ | 59,393 | | | $ | 34,173 | | | $ | 16,721 | | | $ | — | | | $ | 110,287 | |
| Direct operating expenses | | 49,245 | | | 26,040 | | | 12,014 | | | — | | | 87,299 | |
| Impairment of long-lived assets | | 12,183 | | | — | | | 3,396 | | | — | | | 15,579 | |
| Impairment of goodwill | | — | | | — | | | — | | | — | | | — | |
| Operating loss | | (18,654) | | | (3,761) | | | (6,146) | | | (11,604) | | | (40,165) | |
| | | | | | | | | | |
| Year ended December 31, 2019 | | | | | | | | | | |
| Revenue | | $ | 103,552 | | | $ | 44,001 | | | $ | 20,685 | | | $ | — | | | $ | 168,238 | |
| Direct operating expenses | | 81,529 | | | 35,836 | | | 13,654 | | | — | | | 131,019 | |
| Impairment of long-lived assets | | 120 | | | 646 | | | — | | | — | | | 766 | |
| Impairment of goodwill | | 4,922 | | | 21,861 | | | 2,735 | | | — | | | 29,518 | |
| Operating loss | | (5,022) | | | (27,977) | | | (5,208) | | | (11,895) | | | (50,102) | |
| | | | | | | | | | |
| Change | | | | | | | | | | |
| Revenue | | $ | (44,159) | | | $ | (9,828) | | | $ | (3,964) | | | $ | — | | | $ | (57,951) | |
| Direct operating expenses | | (32,284) | | | (9,796) | | | (1,640) | | | — | | | (43,720) | |
| Impairment of long-lived assets | | 12,063 | | | (646) | | | 3,396 | | | — | | | 14,813 | |
| Impairment of goodwill | | (4,922) | | | (21,861) | | | (2,735) | | | — | | | (29,518) | |
| Operating loss | | (13,632) | | | 24,216 | | | (938) | | | 291 | | | 9,937 | |
Rocky Mountain
The Rocky Mountain division experienced a significant slowdown in 2020, with rig count declining 56% from 52 at December 31, 2019 to 23 at December 31, 2020 in addition to producers shutting in wells due to the decline in WTI crude oil price per barrel, which averaged $39.16 for the year ended December 31, 2020 versus an average of $56.98 for the same period in 2019. Revenues for the Rocky Mountain division decreased by $44.2 million, or 43%, during 2020 as compared to 2019 primarily due to a $24.3 million, or 38%, decrease in water transport revenues from lower trucking volumes. Third-party trucking revenue decreased 60%, or $12.1 million, and company-owned trucking revenue declined 25%, or $10.9 million. Average total billable hours were down 19% compared to the prior year. While company-owned trucking activity is more levered to production water volumes, third-party trucking activity is more sensitive to drilling and completion activity, which has declined to historically low levels, thereby resulting in meaningful revenue reduction. Our rental and landfill businesses are our two service lines most levered to drilling activity, and therefore have declined by the highest percentage versus the prior period. Rental revenues decreased by 52%, or $8.0 million, in the current year due to lower utilization resulting from a significant decline in drilling activity driving the return of rental equipment. Our landfill revenues decreased 62%, or $3.2 million, compared to prior year due primarily to a 61% decrease in disposal volumes at our landfill as rigs working in the vicinity declined materially. Our salt water disposal well revenue decreased $6.4 million, or 50%, compared to prior year as well shut-ins and lower completion activity led to a 37% decrease in average barrels per day disposed during the current year, with water from producing wells continuing to maintain a base level of volume activity.
For the Rocky Mountain division, direct operating costs decreased by $32.3 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019 due primarily to lower activity levels for water transport services and disposal services resulting in a decline in third-party hauling costs, compensation costs that are also impacted by company cost cutting initiatives, and fleet-related expenses, including fuel and maintenance and repair costs. The average number of drivers during the year decreased 19% from the prior year. Operating loss increased $13.6 million over the prior year period primarily due to an increase in $12.1 million in long-lived asset impairment charge (as previously discussed above in the consolidated results) and lower activity levels for water transport services and disposal services.
Northeast
Revenues for the Northeast division decreased by $9.8 million, or 22%, during 2020 as compared to 2019 due to decreases in water transport services of $5.6 million, or 19%, and disposal services of $3.9 million, or 32%. Natural gas prices per million Btu, as measured by the Henry Hub Natural Gas Index, decreased 6% from an average of $2.38 for 2019 to an average of $2.52 for 2020, contributing to a 27% rig count reduction in the Northeast operating area from 52 at December 31, 2019 to 38 at December 31, 2020. Additionally, as a result of the 25% decline in WTI crude oil prices experienced during the period, many of our customers who had historically focused on production of liquids-rich wells reduced activity levels and shut-in some production in our operating area due to lower realized prices for these products. This led to lower activity levels for both water transport services and disposal services despite the relatively lower decrease in natural gas prices versus crude oil prices. In addition to reduced drilling and completion activity due to commodity prices, our customers continued the industry trend of water reuse during completion activities. Water reuse inherently reduces trucking activity due to shorter hauling distances as water is being transported between well sites rather than to disposal wells. For our trucking services, revenues per billed hour decreased by 24% which contributed to the decline, along with disposal volumes in our salt water disposal wells by a 5% decrease in average barrels per day. These were offset by total billable hours, up 8% from the prior year and a 6% improvement in driver utilization.
For the Northeast division, direct operating costs decreased by $9.8 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019 due to a combination of lower activity levels for water transport services and disposal services as well as company cost cutting initiatives resulting in a decline in compensation costs and fleet-related expenses, including fuel costs. The average number of drivers during the year decreased 20% from the prior year. Operating loss improved by $24.2 million over the prior year period primarily due to $21.9 million goodwill impairment charge during 2019 (as previously discussed above in the consolidated results), $0.6 million long-lived asset impairment charge during 2019 (as previously discussed above in the consolidated results), a $1.1 million decrease in general and administrative expenses due to headcount and compensation reductions and $0.7 million in lower depreciation and amortization expense.
Southern
Revenues for the Southern division decreased by $4.0 million, or 19%, during the year ended December 31, 2020 as compared to the year ended December 31, 2019. The decrease was due primarily to lower disposal well volumes, whether connected to the pipeline or not, resulting from an activity slowdown in the region, as evidenced by fewer rigs operating in the area as well as lower revenue per barrel. Rig count declined 18% in the area, from 49 at December 31, 2019 to 40 at December 31, 2020. Volumes received in our disposal wells not connected to our pipeline decreased by an average of 8,644 barrels per day or 30% during 2020 and volumes received in the disposal wells connected to the pipeline decreased by an average of 7,557 barrels per day or 17% during 2020.
In the Southern division, direct operating costs decreased by $1.6 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019 due to lower activity levels for disposal services and water transport services. Operating loss increased by $0.9 million over the prior year period due primarily to a $3.4 million long-lived asset impairment charge during 2020 (as previously discussed above in the consolidated results) partially offset by $2.7 million goodwill impairment charge during 2019.
Corporate/Other
The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general and administrative costs for the year ended December 31, 2020 were $0.3 million lower than the year ended December 31, 2019 due primarily to headcount and compensation reductions, partially offset by $1.9 million of transaction fees during 2020 associated with the credit agreements.
Results of Operations: Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Increase (Decrease) |
| 2019 | | 2018 | | 2019 vs 2018 |
| Revenue: | | | | | | | |
| Service revenue | $ | 152,541 | | | $ | 181,793 | | | $ | (29,252) | | | (16.1) | % |
| Rental revenue | 15,697 | | | 15,681 | | | 16 | | | 0.1 | % |
| Total revenue | 168,238 | | | 197,474 | | | (29,236) | | | (14.8) | % |
| Costs and expenses: | | | | | | | |
| Direct operating expenses | 131,019 | | | 158,896 | | | (27,877) | | | (17.5) | % |
| General and administrative expenses | 20,864 | | | 38,510 | | | (17,646) | | | (45.8) | % |
| Depreciation and amortization | 36,183 | | | 46,434 | | | (10,251) | | | (22.1) | % |
| Impairment of long-lived assets | 766 | | | 4,815 | | | (4,049) | | | (84.1) | % |
| Impairment of goodwill | 29,518 | | | — | | | 29,518 | | | NM |
| Other, net | (10) | | | 1,119 | | | (1,129) | | | (100.9) | % |
| Total costs and expenses | 218,340 | | | 249,774 | | | (31,434) | | | (12.6) | % |
| Operating loss | (50,102) | | | (52,300) | | | 2,198 | | | (4.2) | % |
| Interest expense, net | (5,227) | | | (5,973) | | | 746 | | | (12.5) | % |
| Other income, net | 502 | | | 896 | | | (394) | | | (44.0) | % |
| Reorganization items, net | (200) | | | (1,679) | | | 1,479 | | | (88.1) | % |
| Loss before income taxes | (55,027) | | | (59,056) | | | 4,029 | | | (6.8) | % |
| Income tax benefit (expense) | 90 | | | (207) | | | 297 | | | (143.5) | % |
| Net loss | $ | (54,937) | | | $ | (59,263) | | | $ | 4,326 | | | (7.3) | % |
NM - Percentages over 100% are not displayed.
Service Revenue
On a consolidated basis, service revenue for the year ended December 31, 2019 was $152.5 million, down $29.3 million, or 16.1%, from $181.8 million for the year ended December 31, 2018. The largest contributors to the decline in service revenues were Rocky Mountain third-party trucking activity and lay flat hose projects, slower trucking activity in the Northeast due to customers moving to reuse of produced water and overall activity declines and, in the South, the loss of a large customer that historically consumed a material percentage of the capacity on our Haynesville pipeline. These declines were partially offset by an increase in disposal revenues in all three divisions. Additionally, $1.8 million in revenues associated with the Eagle Ford Shale area were included in service revenues in the prior year but did not reoccur in 2019 due to management’s decision to exit the Eagle Ford Shale area as of March 1, 2018. As the primary causes of the decreases in water transport services and increases in disposal services are different for all three divisions, see “Segment Operating Results” below for further discussion.
Rental Revenue
Rental revenue for the year ended December 31, 2019 was $15.7 million, up $16.0 thousand, or 0.1%, from the year ended December 31, 2018. The prior year period included $0.3 million of rental revenues for the Eagle Ford Shale area that did not reoccur in 2019 due to management’s decision to exit the Eagle Ford Shale area as of March 1, 2018. When removing the impact of the Eagle Ford exit, rental revenues increased by $0.3 million primarily as a result of pricing increases implemented in the Rocky Mountain division.
Direct Operating Expenses
Direct operating expenses for the year ended December 31, 2019 were $131.0 million, compared to $158.9 million for the year ended December 31, 2018, a decrease of 17.5%. While the decrease in direct operating expenses was primarily attributable to lower activity levels for water transport services during the period, direct operating expenses improved to 77.9% of revenues from 80.5% in the prior year period as a result of favorable service mix due to more higher margin work, a reduction in outsourced trucking and active cost reduction efforts during the past year. (See “Segment Operating Results” below for further details on each division.)
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2019 were $20.9 million, down $17.6 million from $38.5 million for the year ended December 31, 2018. The decrease in general and administrative expenses was primarily attributable to higher compensation costs in the prior year, including $15.3 million related to the departures of our former Chief Executive Officer and Chief Financial Officer. Additionally, general and administrative expenses in 2018 included $1.3 million in transaction fees for the acquisition of Clearwater.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2019 was $36.2 million, down $10.3 million from $46.4 million for the year ended December 31, 2018. The decrease was primarily attributable to a lower depreciable asset base due to the sale of under-utilized or non-core assets, assets becoming fully depreciated and assets being classified as held for sale with the resulting cessation of depreciation.
Impairment of Long-Lived Assets
During the year ended December 31, 2019, management approved plans to sell real property located in the Northeast and Rocky Mountain divisions. The real property qualified to be classified as held for sale and as a result was recorded at the lower of net book value or fair value less costs to sell, which resulted in long-lived asset impairment charges of $0.8 million, of which $0.6 million related to the Northeast division and $0.1 million related to the Rocky Mountain division.
During the year ended December 31, 2018, management approved plans to sell certain assets located in the Southern division as a result of exiting the Eagle Ford shale area. In addition, management approved the sale of certain assets, primarily frac tanks, located in the Northeast division, that were also expected to sell within one year. These assets qualified to be classified as assets held for sale and as the fair value of the assets was lower than the net book value, we recorded an impairment charge of $4.8 million, of which $4.4 million related to the Southern division for the Eagle Ford exit, $0.3 million related to the Corporate division for the sale of certain real property in Texas approved to be sold as part of the Eagle Ford exit, and $0.1 million related to the Northeast division.
See also Note 8 in the Notes to the Consolidated Financial Statements herein for further discussion.
Impairment of Goodwill
When we reviewed goodwill for impairment as of October 1, 2019, we determined that it was more likely than not that the fair value of the reporting units were less than their carrying value. As a result, we completed the goodwill impairment test and determined that the fair value of all three reporting units was less than the carrying amount, resulting in a goodwill impairment charge of $29.5 million during the year ended December 31, 2019, which is a full impairment of all existing goodwill. Of the $29.5 million recorded for goodwill impairment during 2019, $21.9 million related to the Northeast division, $4.9 million related to the Rocky Mountain division, and $2.7 million related to the Southern division. The majority of the goodwill associated with this impairment was established based on valuation work completed at the time of the Company’s emergence from bankruptcy. During 2019, enterprise valuations in the energy sector materially decreased resulting in a lower estimated valuation of the Company and the impairment charge. See Note 8 in the Notes to the Consolidated Financial Statements herein for further details on the goodwill impairment during 2019.
Other, net
On March 1, 2018, the Board determined it was in the best interest 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 year ended December 31, 2018 were $1.1 million.
During the year ended December 31, 2019, we recorded final adjustments to the accrued lease liabilities for the both the Eagle Ford exit and the Mississippian exit in 2015 as further payments were not required.
Interest Expense, net
Interest expense, net during the year ended December 31, 2019 was $5.2 million compared to $6.0 million for the year ended December 31, 2018. The lower interest expense was primarily due to repayment of the Bridge Term Loan (as defined below) in January of 2019 and continued principal payments on the First and Second Lien Term Loans (as defined below), offset by additional finance leases recorded upon the adoption of ASU No. 2016-02, Leases (Topic 842) (“ASC 842”) as of January 1, 2019 and as a result of our heavy duty truck replacement project.
Other Income, net
Other income, net was $0.5 million for the year ended December 31, 2019 compared to $0.9 million for the year ended December 31, 2018. The decrease was primarily attributable to a $34.0 thousand gain associated with the change in the fair value of the derivative warrant liability during the year ended December 31, 2019, compared to a $0.4 million gain during the year ended December 31, 2018. We issued warrants with derivative features upon our emergence from chapter 11 during 2017. 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 13 and Note 14 in the Notes to the 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 consolidated statements of operations for the years ended December 31, 2019 and 2018. These fees are primarily comprised of professional, legal and insurance fees, and other continuing fees related to our 2017 chapter 11 filing. Included in Reorganization items, net for the year ended December 31, 2018 was $1.3 million in chapter 11 fees paid to the United States Trustee for the District of Delaware. See Note 26 in the Notes to the Consolidated Financial Statements herein for further details.
Income Taxes
The income tax benefit for the year ended December 31, 2019 was $0.1 million (a 0.2% effective rate) compared to expense of $0.2 million (a (0.4%) effective rate) in the prior year. The effective tax rate in 2019 was primarily the result of the change in the deferred tax liability attributable to long-lived assets. See Note 19 in the Notes to the Consolidated Financial Statements herein for additional information on income taxes.
Segment Operating Results: Years Ended December 31, 2019 and 2018
The following table shows operating results for each of our segments for the years ended December 31, 2019 and 2018 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Rocky Mountain | | Northeast | | Southern | | Corporate/Other | | Total |
| Year ended December 31, 2019 | | | | | | | | | | |
| Revenue | | $ | 103,552 | | | $ | 44,001 | | | $ | 20,685 | | | $ | — | | | $ | 168,238 | |
| Direct operating expenses | | 81,529 | | | 35,836 | | | 13,654 | | | — | | | 131,019 | |
| Operating loss | | (5,022) | | | (27,977) | | | (5,208) | | | (11,895) | | | (50,102) | |
| | | | | | | | | | |
| Year ended December 31, 2018 | | | | | | | | | | |
| Revenue | | $ | 127,758 | | | $ | 43,564 | | | $ | 26,152 | | | $ | — | | | $ | 197,474 | |
| Direct operating expenses | | 101,855 | | | 37,660 | | | 19,381 | | | — | | | 158,896 | |
| Operating loss | | (2,782) | | | (9,059) | | | (11,396) | | | (29,063) | | | (52,300) | |
Rocky Mountain
Revenues for the Rocky Mountain division decreased during the year ended December 31, 2019 as compared to the year ended December 31, 2018 due primarily to a $14.3 million decrease in overall water transport revenues largely stemming from lower trucking volumes outsourced to third parties and an $8.0 million reduction in water transport revenues from lay flat temporary hose projects. The decrease in trucking volumes outsourced to third parties was due to less fresh water and flowback hauling from well completion projects in the geographical areas that we serve. In addition, some of this third-party work was replaced by operators using lay flat hose. The decrease in water transport service revenues from lay flat temporary hose during 2019 was due to increased overall competition for this service and more specifically from competitors that had better access to water sources. Disposal volumes in our salt water disposal wells increased by an average of 8,379 barrels per day (or 21.7%) and revenue increased proportionally. Disposal volumes at our landfill decreased by 12,260 tons (or 6.1%) due to fewer rigs operating near our landfill, coupled with pricing pressures from competing landfills rendering our facility less attractive to customers relative to the competition. Rental revenues increased by 2.1% in 2019 due to pricing increases implemented during 2019.
For the Rocky Mountain division, direct operating costs decreased during the year ended December 31, 2019 as compared to the year ended December 31, 2018 due primarily to decreased water transport activity. Direct operating costs improved as a percentage of revenue to 78.7% in 2019 as compared to 79.7% in the prior year period. The Rocky Mountain division had a $5.0 million operating loss during 2019, as opposed to a $2.8 million loss in the prior year period, due primarily to the aforementioned factors as well as a $4.9 million goodwill impairment charge.
Northeast
Revenues for the Northeast division increased slightly during the year ended December 31, 2019 as compared to the year ended December 31, 2018. During 2019, natural gas prices, as measured by the Henry Hub Natural Gas index decreased 36% from $3.25 in 2018 to $2.09 in 2019, contributing to a 30% rig count reduction as of December 2019 in the Northeast operating area from 74 in 2018 to 52 in 2019. Also, as a result of pricing declines, customers sought to reduce costs and turned to the reuse of production water in completion activities leading to a reduction in both price and activity for our water transport services. During 2019, we experienced a shift of approximately 50% of our transportation revenue from disposal wells to reuse. Water reuse inherently reduces trucking activity due to shorter hauling distances as water is being transported between well sites rather than to disposal wells and partially negates our considerable competitive advantage of having higher barrel capacity trailers hauling to better positioned disposal wells. As a result, overall billable trucking hours declined 9% and revenue decreased from $33.9 million to $29.6 million on a year-over-year basis. However, the Clearwater Acquisition presented a transportation cost savings due to its proximity to customers and generated salt water disposal revenues sufficient to offset the declines in trucking.
For the Northeast division, direct operating costs decreased during the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to proportionally higher disposal volumes which generate lower costs on a dollar of revenue as compared to our trucking operations. Direct operating costs improved as a percentage of revenue to 81.4% in 2019 as compared to 86.4% in the prior year period due to the increase in higher margin disposal services. Operating loss was $18.9 million higher in 2019 due mainly to total impairment charges of $22.5 million for goodwill and long-lived assets held for sale, partially offset by $1.4 million in lower depreciation and amortization expense.
Southern
Revenues for the Southern division decreased during the year ended December 31, 2019 as compared to the year ended December 31, 2018 due to three primary factors: a $2.1 million decrease in revenue due to management’s decision to exit the Eagle Ford shale area in 2018, a $1.9 million decrease in pipeline revenue and a $1.1 million decline in trucking revenue. In the Southern division, despite the overall decline in revenue due to pricing pressures, the volume of water transported by our pipeline increased in 2019 driven by a number of new customers acquired to replace the loss of a sizable customer’s pipeline volumes. The volumes from this particular customer largely ceased in May 2019. Disposal revenue was effectively flat with pricing decreases negating the slight increase in volumes. Trucking total billed hours were down approximately 24% in 2019 and revenue decreased $1.1 million due to overall lower customer activity in the region. During 2019, natural gas prices, as measured by the Henry Hub Natural Gas index, decreased 36% from $3.25 in 2018 to $2.09 in 2019, leading to a rig count reduction of 15% in the Southern operating area from 62 in 2018 to 53 in 2019.
In the Southern division, direct operating costs decreased during the year ended December 31, 2019 as compared to the year ended December 31, 2018 with direct operating costs as a percentage of revenue improving to 66.0% in 2019 as compared to 74.1% in the prior year period due to an increase in higher margin disposal services relative to trucking services. Operating loss improved by $6.2 million over the prior year period due to $5.5 million in restructuring and impairment charges during the year ended December 31, 2018 in connection with the Eagle Ford exit, while goodwill impairment charges were $2.7 million in 2019. Additionally, there was $3.0 million in lower depreciation and amortization expense in 2019.
Corporate/Other
The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general and administrative costs for the year ended December 31, 2019 were $16.8 million lower than those reported for the year ended December 31, 2018 due primarily to $15.3 million in compensation costs related to the departure of our former Chief Executive Officer and Chief Financial Officer during 2018. Operating loss for the Corporate division improved by $17.2 million due to the aforementioned compensation cost reduction and $0.3 million in non-recurring impairment charges in the prior year period.
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. Our primary sources of capital for 2020 included cash generated by our operations and asset sales, our credit facilities, our Paycheck Protection Program loan, a comprehensive refinancing of the majority of the Company’s debt on November 16, 2020 with a commercial bank, and the proceeds received on January 2, 2019 from our 2018 Rights Offering (as defined below). During the years ended December 31, 2020 and December 31, 2019, cash provided by operating activities was $13.2 million and $6.5 million, respectively, and losses from continuing operations were $44.1 million and $54.9 million, respectively. As of December 31, 2020, our total indebtedness was $35.0 million and total liquidity was $17.9 million, consisting of $12.9 million of cash and $5.0 million available under the Operating LOC Loan (as defined below).
On November 16, 2020, the Company entered into a Loan Agreement (the “Master Loan Agreement”) with First International Bank & Trust, a North Dakota banking corporation (“Lender”). Pursuant to the Master Loan Agreement, Lender agreed to extend to the Company: (i) the “Equipment Loan”; (ii) a $10.0 million real estate term loan (the “CRE Loan”); (iii) a $5.0 million operating line of credit (the “Operating LOC Loan”); and (iv) a $4.839 million letter of credit facility (the “Letter of Credit Facility”) (the CRE Loan, the Equipment Loan, the Operating LOC Loan and the Letter of Credit Facility, collectively may be referred to as the “Loans”). The Loans were funded and closed on November 20, 2020. In connection with the closing of the Loans, the Company repaid all outstanding obligations in full under the First Lien Credit Agreement (as defined below) and the Second Lien Term Loan Agreement (as defined below) totaling $12.6 million and $8.3 million, respectively.
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 demand for oilfield services to be curtailed for the foreseeable future as we anticipate our customers’ crude oil or natural gas drilling and completion activity to continue to operate at lower levels.
In order to mitigate these conditions, the Company implemented various initiatives during 2020 that management believes positively impacted our operations, including personnel and salary reductions, other changes to our operating structure to achieve additional cost reductions, and the sale of certain assets. We believe that as a result of the cost reduction initiatives, 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.
The following table summarizes our sources and uses of cash, cash equivalents and restricted cash for the years ended December 31, 2020, 2019 and 2018 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Net cash provided by (used in): | 2020 | | 2019 | | 2018 |
| Operating activities | $ | 13,165 | | | $ | 6,519 | | | $ | 9,449 | |
| Investing activities | (165) | | | (1,264) | | | (35,318) | |
| Financing activities | (3,010) | | | (7,503) | | | 27,043 | |
| Change in cash, cash equivalents and restricted cash | $ | 9,990 | | | $ | (2,248) | | | $ | 1,174 | |
Operating Activities
Net cash provided by operating activities was $13.2 million for the year ended December 31, 2020. The net loss, after adjustments for non-cash items, provided cash and restricted cash of $1.2 million in 2020 as compared to $12.1 million in 2019, as described below. Changes in operating assets and liabilities provided $12.0 million primarily due to a decrease of accounts receivable of $11.2 million. The non-cash items and other adjustments included $28.6 million of depreciation and amortization expense, long-lived asset impairment charges of $15.6 million, stock-based compensation expense of $2.0 million partially offset by a $1.6 million gain on the sale of assets.
Net cash provided by operating activities was $6.5 million for the year ended December 31, 2019. The net loss, after adjustments for non-cash items, provided cash and restricted cash of $12.1 million in 2019 as compared to $3.9 million in 2018, as described below. Changes in operating assets and liabilities used $5.6 million primarily due to a decrease in accounts payable and accrued and other current liabilities. The non-cash items and other adjustments included $36.2 million of depreciation and amortization expense, goodwill impairment charges of $29.5 million, stock-based compensation expense of $2.0 million, and long-lived asset impairment charges of $0.8 million partially offset by a $2.0 million gain on the sale of assets.
Net cash provided by operating activities was $9.4 million for the year ended December 31, 2018. The net loss, after adjustments for non-cash items, provided cash and restricted cash of $3.9 million. Changes in operating assets and liabilities provided $5.6 million primarily due to an increase in accounts payable and accrued liabilities, as well as a decrease in prepaid expenses and other receivables. The non-cash items and other adjustments included $46.4 million of depreciation and amortization expense, stock-based compensation expense of $12.7 million, $4.8 million for impairment of long-lived assets, and a $0.3 million change in deferred income taxes partially offset by a $0.9 million gain on the disposal of property, plant and equipment, a $0.4 million gain resulting from the change in the fair value of the derivative warrant liability, and bad debt recoveries of $0.3 million.
Investing Activities
Net cash used in investing activities was $0.2 million for the year ended December 31, 2020, and primarily consisted of $3.4 million for purchases of property, plant and equipment, offset by $3.2 million of proceeds from the sale of property, plant and equipment. Asset sales were primarily comprised of the disposition of two properties and under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our fleet upgrades for water transport and disposal services.
Net cash used in investing activities was $1.3 million for the year ended December 31, 2019, and primarily consisted of $8.2 million for purchases of property, plant and equipment, partially offset by $7.0 million of proceeds from the sale of property, plant and equipment. Asset sales were primarily comprised of under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our trucks for water transport and disposal services.
Net cash used in investing activities was $35.3 million for the year ended December 31, 2018, and consisted primarily of $42.3 million in cash paid for the acquisition of Clearwater (which is discussed further in Note 6 in the Notes to the Consolidated Financial Statements herein), $12.2 million for purchases of property, plant and equipment, partially offset by $19.1 million of proceeds from the sale of property, plant and equipment.
Financing Activities
Net cash used in financing activities was $3.0 million for the year ended December 31, 2020 and was primarily comprised of $27.0 million of payments on the First Lien Term Loan and Second Lien Term Loan, $2.0 million of payments on vehicle finance leases and other financing activities, partially offset by proceeds from the Equipment Loan of $13.0 million, the CRE Loan of $10.0 million and the PPP Loan (as defined below) of $4.0 million.
Net cash used in financing activities was $7.5 million for the year ended December 31, 2019 and was primarily comprised of $31.4 million in cash payments for the Bridge Term Loan, $4.9 million of payments on the First Lien Term Loan and Second Lien Term Loan, $2.2 million of payments on finance leases and other financing activities, partially offset by $31.1 million of proceeds received from the issuance of stock for the completed Rights Offering.
Net cash provided by financing activities was $27.0 million for the year ended December 31, 2018, and consisted of $32.5 million in proceeds from the Bridge Term Loan, $10.0 million in additional proceeds under the First Lien Term Loan, partially offset primarily by payments of $13.4 million on the First Lien Term Loan and Second Lien Term Loan and $1.9 million in payments under capital leases and other financing activities. The Bridge Term Loan proceeds were primarily related to the acquisition of Clearwater and were repaid on January 2, 2019 from the proceeds raised in the Rights Offering.
Capital Expenditures
Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. Cash required for capital expenditures for the year ended December 31, 2020 totaled $3.4 million compared to $8.2 million for the year ended December 31, 2019. These capital expenditures were partially offset by proceeds received from the sale of under-utilized or non-core assets of $3.2 million and $7.0 million in the years ended December 31, 2020 and 2019, respectively.
A portion of our transportation-related capital requirements are financed through finance leases (see Note 5 in the Notes to the Consolidated Financial Statements for further discussion of finance leases). We had $0.5 million and $9.5 million of equipment additions under finance leases during the years ended December 31, 2020 and 2019, respectively.
We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale basins in which we operate. Due to the COVID-19 outbreak, we implemented a significant reduction in our capital expenditures budget for fiscal 2020, as discussed above in “Trends Affecting Our Operating Results.” Our planned capital expenditures for 2021 are expected to be financed through cash flow from operations, finance leases, borrowings under our Operating LOC Loan, or a combination of the foregoing.
Indebtedness
As of December 31, 2020, we had $35.0 million of indebtedness outstanding, consisting of $13.0 million under the Equipment Loan, $9.9 million under the CRE Loan, $4.0 million under the PPP Loan, $0.4 million under the Vehicle Term Loan (as defined below), $0.2 million under the Equipment Finance Loan (defined below), and $7.6 million of finance leases for vehicle financings and real property leases.
As further described below, the Loans contain certain affirmative and negative covenants, including a minimum debt service coverage ratio (“DSCR”), beginning December 31, 2021, as well as other terms and conditions that are customary for loans of this type. As of December 31, 2020, we were in compliance with all covenants.
Master Loan Agreement
On November 16, 2020, the Company entered into the Master Loan Agreement with Lender. Pursuant to the Master Loan Agreement, Lender agreed to extend to the Company: (i) the Equipment Loan that is subject to the MSPLF; (ii) the CRE Loan; (iii) the Operating LOC Loan; and (iv) the Letter of Credit Facility. On November 18, 2020, the Company was advised by Lender that the Equipment Loan had been approved as a MSPLF, and the Loans were funded and closed on November 20, 2020. In connection with the closing of the Loans, the Company repaid all outstanding obligations in full under the First Lien Credit Agreement and Second Lien Term Loan Agreement totaling $12.6 million and $8.3 million, respectively.
The terms of the Master Loan Agreement provide for customary events of default, including, among others, those relating to a failure to make payment, bankruptcy, breaches of representations and covenants, and the occurrence of certain events. Pursuant to the Master Loan Agreement, the Company must maintain a minimum DSCR of 1.35 to 1.00 beginning December 31, 2021 and annually on December 31 of each year thereafter. The DSCR means the ratio of (i) Adjusted EBITDA to (ii) the annual debt service obligations (less subordinated debt annual debt service) of the Company, calculated based on the actual four quarters ended on the applicable December 31 measurement date. If the DSCR falls below 1.35 to 1.00, then in addition to all other rights and remedies available to Lender, the interest rates on the CRE Loan, the Operating LOC Loan and the Letter of Credit Facility will increase by 1.5% until the minimum DSCR is maintained. The Company may cure a failure to comply with the DSCR by issuing equity interests in the Company for cash and applying the proceeds to the applicable Adjusted EBITDA measurement.
In addition, the Master Loan Agreement limits capital expenditures to $7.5 million annually and requires the Company to maintain a positive working capital position of at least $7.0 million at all times. The Master Loan Agreement also requires the Company deposit into a reserve account held by Lender (the “Reserve Account”) the sum of $2.5 million and make additional monthly deposits of $100 thousand into the Reserve Account. Funds held in the Reserve Account are not accessible by the Company and are pledged as additional security for the CRE Loan, the Operating LOC Loan and the Letter of Credit Facility.
Equipment Loan
The Equipment Loan is evidenced by that certain Promissory Note (Equipment Loan) executed by the Company in the original principal amount of $13.0 million. The Equipment Loan bears interest at a rate of one-month US dollar LIBOR plus 3.00%. Interest payments during the first year will be deferred and added to the loan balance and principal payments during the first two years will be deferred. Monthly amortization of principal will commence on December 1, 2022, with principal amortization payments due in annual installments of 15% on November 16, 2023, 15% on November 16, 2024, and the remaining 70% on the maturity date of November 16, 2025. The Equipment Loan, plus accrued and unpaid interest, may be prepaid at any time at par. The entire outstanding principal balance of the Equipment Loan together with all accrued and unpaid interest is due and payable in full on November 16, 2025. In connection with the Equipment Loan, the Company paid a $130 thousand origination fee to Lender and a $130 thousand origination fee to MSPLF.
The Equipment Loan includes all covenants and certifications required by the MSPLF, including, without limitation, the MSPLF Borrower Certifications and Covenants Instructions and Guidance. In connection with the same, the Company delivered a Borrower Certifications and Covenants (the “MS Certifications and Covenants”) to MS Facilities LLC, a Delaware limited liability company, a special purpose vehicle of the Federal Reserve. Under the MS Certifications and Covenants, the Company is subject to certain restrictive covenants during the period that the Equipment Loan is outstanding and, with respect to certain of those restrictive covenants, for an additional one year period after the Equipment Loan is repaid, including restrictions on the Company’s ability to repurchase stock, pay dividends or make other distributions and limitations on executive compensation and severance arrangements. The Equipment Loan is secured by a first lien security interest in all equipment and titled vehicles of the Company and its subsidiaries.
CRE Loan
The CRE Loan is evidenced by that certain Promissory Note (Real Estate) executed by the Company in the original principal amount of $10.0 million.The CRE Loan bears interest at the Federal Home Loan Bank Rate of Des Moines three-year advance rate plus 4.50% with an interest rate floor of 6.50%. The CRE Loan has a twelve-year maturity. The Company is required to make monthly principal and interest payments, and monthly escrow deposits for real estate taxes and insurance. The entire outstanding principal balance of the CRE Loan together with all accrued and unpaid interest is due and payable in full on November 13, 2032. In connection with the CRE Loan, the Company paid a $150 thousand origination fee to Lender.
The CRE Loan is secured by a first lien real estate mortgage on certain real estate owned by the Company and its subsidiaries and by the Reserve Account. The Company will incur a declining prepayment premium of 6%, 5%, 4%, 3%, 2%, and 1% of the outstanding principal balance of the CRE Loan over the first six years of the loan, respectively.The Company is not permitted to prepay the principal of the CRE Loan more than 5% per year without Lender’s prior written approval.
Operating LOC Loan
The Operating LOC Loan is evidenced by that certain Revolving Promissory Note (Operating Line of Credit Loan) executed by the Company in the original maximum principal amount of $5.0 million. The Operating LOC Loan bears interest at a variable rate, adjusting daily, equal to the Prime Rate plus 3.75%, with an interest rate floor of 7.00%. In connection with the Operating LOC Loan, the Company paid a $50 thousand origination fee to Lender. The Operating LOC Loan is currently undrawn and fully available to the Company.
The Operating LOC Loan is secured by a first lien security interest in all business assets of the Company and its subsidiaries, including without limitation all accounts receivable, inventory, trademarks and intellectual property licenses to which it is a party and by the Reserve Account. The entire outstanding principal balance of the Operating LOC Loan together with all accrued and unpaid interest is due and payable in full on November 14, 2021.
Letter of Credit Facility
The Letter of Credit Facility provides for the issuance of letters of credit of up to $4.839 million in aggregate face amount and is evidenced by that certain Promissory Note (Letter of Credit Loan) executed by the Company. Amounts drawn on letters of credit issued under the Letter of Credit Facility bear interest at a variable rate, adjusting daily, equal to the Prime Rate plus 3.75%, with an interest rate floor of 7.00%. The Letter of Credit Facility has a one-year final maturity on November 19, 2021.
On January 25, 2021, the Letter of Credit Facility was amended in order to increase by $510,000 the maximum availability thereunder. As amended, the Letter of Credit Facility provides for the issuance of letters of credit of up to $5.349 million in aggregate face amount and is evidenced by that certain Amended and Restated Promissory Note (Letter of Credit Loan), dated January 25, 2021, executed by the Company.
In connection with the Letter of Credit Facility, the Company is required to pay an annual fee equal to 3.00% of the maximum undrawn face amount of each letter of credit issued thereunder. The Letter of Credit Facility is secured by a first lien security interest in all business assets of the Company and its subsidiaries and by the Reserve Account.
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 “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, which included 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”). The First Lien Credit Agreement also contained an accordion feature that provided 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 First Lien Credit Agreement.
On October 5, 2018, in connection with the Clearwater Acquisition, we entered into a First Amendment to the Credit Agreement (the “First Amendment to the Credit Agreement”) with the First Lien Credit Agreement Lenders and the Credit Agreement Agent, which amended the First Lien Credit Agreement. Pursuant to the First Amendment to the Credit Agreement, the Credit Agreement Lenders provided us with an additional term loan under the First Lien Credit Agreement in the amount of $10.0 million, which was used to finance a portion of the Clearwater Acquisition.
On July 13, 2020, the Company entered into the Third Amendment to First Lien Credit Agreement (the “Third Amendment to First Lien Credit Agreement”) with the First Lien Credit Agreement Lenders and Credit Agreement Agent, which further amended the First Lien Credit Agreement to extend the maturity date from February 7, 2021 to May 15, 2022. In connection with the Third Amendment to First Lien Credit Amendment, on July 13, 2020, the Company repaid $2.5 million of the outstanding principal amount of the First Lien Term Loan.
On November 20, 2020, in connection with the closing of the Loans, all amounts outstanding under the First Lien Term Loan totaling $12.6 million were repaid in full, and all of the commitments and obligations under the First Lien Credit Agreement were terminated.
The Company made a liquidated damages payment in the amount of $0.5 million and paid a deferred amendment fee of $325 thousand as a result of the repayment of indebtedness and termination of the First Lien Credit Agreement. The Company also deposited approximately $5.1 million as cash collateral to secure outstanding letters of credit, which will be released and refunded to the Company upon cancellation of such outstanding letters of credit as replacements are issued under the Letter of Credit Facility. In connection with the repayment of outstanding indebtedness by the Company, the Company was permanently released from all security interests, mortgages, liens and encumbrances under the First Lien Credit Agreement.
Second Lien Term Loan Credit Agreement
On the Effective Date, pursuant to the Plan, the Company also entered into the Second Lien Term Loan Agreement (the “Second Lien Term Loan Agreement”) by and among the lenders party thereto (the “Second Lien Term Loan Lenders”), Wilmington, 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 “Second Lien Term Loan”), of which $21.1 million was advanced on the Effective Date and up to an additional $5.7 million was 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.
On July 13, 2020, the Company entered into a Second Amendment to Credit Agreement with the lenders party thereto and Wilmington, which amended the Second Lien Term Loan Credit Agreement to extend the maturity date from October 7, 2021 to November 15, 2022.
On November 20, 2020, in connection with the closing of the Loans, all amounts outstanding under the Second Lien Term Loan Agreement totaling $8.3 million were repaid in full, and all of the commitments and obligations under the Second Lien Term Loan Agreement were terminated. The Company did not incur any early termination penalties as a result of the repayment of indebtedness and termination of the Second Lien Term Loan Agreement. In connection with the repayment of outstanding indebtedness by the Company, the Company was permanently released from all security interests, mortgages, liens and encumbrances under the Second Lien Term Loan Credit Agreement.
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 applied for forgiveness of the PPP Loan during September 2020 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 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.
The Company obtained the consent of the lenders under each of the First Lien 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.
Vehicle Term Loan
On December 27, 2019, we entered into a Direct Loan Security Agreement (the “Vehicle Term Loan”) with PACCAR Financial Corp as the Secured Party. The Vehicle Term Loan was used to refinance 38 trucks that were previously recorded as finance leases with balloon payments that would have been due in January of 2020. The Vehicle Term Loan matures on December 27, 2021, when the entire unpaid principal balance and interest, plus any other accrued charges, shall become due and payable. The Vehicle Term Loan shall be repaid in installments of $31,879 beginning on January 27, 2020 and on the same day of each month thereafter, with interest accruing at an annual rate of 5.27%.
Equipment Finance Loan
On November 20, 2019, we entered into a Retail Installment Contract (the “Equipment Finance Loan”) with a secured party to finance $0.2 million of equipment. The Equipment Finance Loan matures on November 15, 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%.
Off Balance Sheet Arrangements
As of December 31, 2020, we did not have any material off-balance-sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results, however, may materially differ from our calculated estimates.
We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements and changes in these judgments and estimates may impact future results of operations and financial condition. For additional discussion of our accounting policies see Note 3 in the Notes to the Consolidated Financial Statements included in this Annual Report onOriginal Form 10-K.
Allowance for Doubtful Accounts
Accounts receivable are recognized and carried at the original invoice amount less an allowance for doubtful accounts. We provide an allowance for doubtful accounts to reflect the expected uncollectibility of trade receivables for both billed and unbilled receivables on our service and rental revenues. We perform ongoing credit evaluations of prospective and existing customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by a review of their current credit information. In addition, we continuously monitor collections and payments from customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, our compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Additionally, if the financial condition of a specific customer or our general customer base were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Accounts receivable are presented net of allowances for doubtful accounts of approximately $1.0 million, $1.3 million, and $1.6 million at December 31, 2020, 2019 and 2018, respectively.
Impairment of Goodwill
Our goodwill was tested for impairment annually at October 1st and more frequently if events or circumstances lead to a determination that it was more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determined it was not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test was unnecessary. In the event a determination was made that it was more likely than not that the fair value of a reporting unit was less than its carrying value, the goodwill impairment test was performed. The first step of the test, used to identify potential impairment, compared the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit was not considered to be impaired. If the carrying amount of a reporting unit exceeded its fair value, since we adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, an impairment charge was recorded based on the excess of a reporting unit’s carrying amount over its fair value.
When we reviewed goodwill for impairment as of October 1, 2019, we determined that it was more likely than not that the fair value of the reporting units were less than their carrying value. As a result, we completed the goodwill impairment test and determined that the fair value of all three reporting units was less than the carrying amount, resulting in a goodwill impairment charge of $29.5 million during the year ended December 31, 2019. See Note 8 for further details on the goodwill impairment during 2019.
Impairment of Long-Lived Assets and Intangible Assets with Finite Useful Lives
We review long-lived assets including intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate the carrying value of a long-lived asset (or asset group) may not be recoverable. If an impairment indicator is present, we evaluate recoverability by comparing the estimated future cash flows of the asset group, on an undiscounted basis, to their carrying values. The asset group represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the undiscounted cash flows exceed the carrying value, no impairment is present. If the undiscounted cash flows are less than the carrying value, the impairment is measured as the difference between the carrying value and the fair value of the long-lived asset (or asset group). Our determination that an event or change in circumstance has occurred potentially indicating the carrying amount of an asset (or asset group) may not be recoverable generally includes but is not limited to one or more of the following: (1) a deterioration in an asset’s financial performance compared to historical results, (2) a shortfall in an asset’s financial performance compared to forecasted results, (3) changes affecting the utility and estimated future demands for the asset, (4) a significant decrease in the market price of an asset, (5) a current expectation that a long-lived asset will be sold or disposed of significantly before the end of its previously estimated useful life, (6) a significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition, and (7) declining operations and severe changes in projected cash flows.
We recorded total impairment charges of $15.6 million, $0.8 million and $4.8 million for long-lived assets during the years ended December 31, 2020, 2019 and 2018, respectively, which was included in “Impairment of long-lived assets” in the consolidated statement of operations. Of the impairment charges recorded during the year ended December 31, 2020, $15.0 million related to long-lived assets and $0.6 million related to long-lived assets classified as held for sale. All of the impairment charges recorded during 2019 and 2018 were related to long-lived assets classified as held for sale. We could recognize future impairments to the extent adverse events or changes in circumstances result in conditions in which long-lived assets are not recoverable. See Note 8 in the Notes to the Consolidated Financial Statements for additional information on our impairment charges.
Income Taxes and Valuation of Deferred Tax Assets
We are subject to federal income taxes and state income taxes in those jurisdictions in which we operate. We exercise judgment with regard to income taxes in interpreting whether expenses are deductible in accordance with federal income tax and state income tax codes, estimating annual effective federal and state income tax rates and assessing whether deferred tax assets are, more likely than not, expected to be realized. The accuracy of these judgments impacts the amount of income tax expense we recognize each period.
With regard to the valuation of deferred tax assets, we record valuation allowances to reduce net deferred tax assets to the amount considered more likely than not to be realized. All available evidence is considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. See Note 19 to our Consolidated Financial Statements herein for further information regarding the valuation of our deferred tax assets and the impact of new legislation.
Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character (for example ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We have had significant pretax losses in recent years. Accordingly, we do not have income in carryback years. These cumulative losses also present significant negative evidence about the likelihood of income in carryforward periods.
Future reversals of existing taxable temporary differences are another source of taxable income that is used in this analysis. As a result, deferred tax liabilities in excess of deferred tax assets generally will provide support for recognition of deferred tax assets. However, most of our deferred tax assets are associated with net operating loss (“NOL”) carryforwards, many of which statutorily expire after a specified number of years; therefore, we compare the estimated timing of these taxable timing difference reversals with the scheduled expiration of our NOL carryforwards, considering any limitations on use of NOL carryforwards, and record a valuation allowance against deferred tax assets for which realization is not more likely than not. In addition, as a result of limitations on the use of our NOLs due to prior ownership changes, we have reduced our deferred tax asset and corresponding valuation allowance by the NOLs that will likely expire unused.
As a matter of law, we are subject to examination by federal and state taxing authorities. We have estimated and provided for income taxes in accordance with settlements reached with the Internal Revenue Service in prior audits. Although we believe that the amounts reflected in our tax returns substantially comply with the applicable federal and state tax regulations, both the IRS and the various state taxing authorities can take positions contrary to our position based on their interpretation of the law. A tax position that is challenged by a taxing authority could result in an adjustment to our income tax liabilities and related tax provision.
We measure and record tax contingency accruals in accordance with GAAP which prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return. Only positions meeting the “more likely than not” recognition threshold at the effective date may be recognized or continue to be recognized. A tax position is measured at the largest amount that is greater than 50% likely of being realized upon ultimate settlement.
Revenue Recognition
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.
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 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.
Environmental and Legal Contingencies
We have established liabilities for environmental and legal contingencies. We record a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In determining the liability, we consider a number of factors including, but not limited to, the jurisdiction of the claim, related claims, insurance coverage when insurance covers the type of claim and our historic outcomes in similar matters, if applicable. We are primarily self-insured against physical damage to our property, equipment and vehicles due to large deductibles or self-insurance. We are also self-insured for certain potential liabilities for third-party vehicular claims. A significant amount of judgment and the use of estimates are required to quantify our ultimate exposure in these matters, and the actual outcome could differ significantly from estimated amounts. The determination of liabilities for these contingencies is reviewed periodically to ensure that we have accrued the proper level of expense. The liability balances are adjusted to account for changes in circumstances for ongoing issues, including the effect of any applicable insurance coverage for these matters. While we believe that the amount accrued is adequate, future changes in circumstances, or in our assumptions or estimates, could impact these determinations or have a negative impact on our reported financial results.
Asset Retirement Obligations
We record obligations to retire tangible, long-lived assets on our balance sheet as liabilities, which are recorded at a discount when we incur the liability. A certain amount of judgment is involved in estimating the future cash flows of such obligations, as well as the timing of these cash flows. If our assumptions and estimates on the amount or timing of the future cash flows change, it could potentially have a negative impact on our earnings.
Recently Issued Accounting Pronouncements
See the “Recently Issued Accounting Pronouncements” section of Note 3 on Significant Accounting Policies in the Notes to the Consolidated Financial Statements herein for a complete description of recent accounting standards which may be applicable to our operations. The significant accounting standards that have been adopted during the year ended December 31, 2020 are described in Note 3 on Significant Accounting Policies in the Notes to the Consolidated Financial Statements herein.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Inflation
Inflationary factors, such as increases in our cost structure, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.
Commodity Risk
We are subject to market risk exposures arising from declines in oil and natural gas drilling activity in unconventional areas, which is primarily a function of the market price for oil and natural gas. Various factors beyond our control affect the market prices for oil and natural gas, including but not limited to the level of consumer demand, governmental regulation, the price and availability of alternative fuels, oil supply conflicts, political instability in foreign markets, weather-related factors and the overall economic environment. Market prices for oil and natural gas historically have been volatile and unpredictable, and we expect this volatility to continue in the future. Prolonged declines in the market price of oil and/or natural gas could contribute to declines in drilling activity and accordingly would reduce demand for our services. We attempt to manage this risk by strategically aligning our assets with those areas where we believe demand is highest and market conditions for our services are most favorable. If there is further deterioration in our business operations or prospects, our stock price, the broader economy or our industry, including further declines in oil and natural gas prices, the value of our long-lived assets, or those we may acquire in the future, could decrease significantly and result in additional impairment and financial statement write-offs which could have a material adverse effect on our financial condition, results of operations and cash flows.
Interest Rates
As of December 31, 2020, no borrowings were outstanding under the Operating LOC Loan, while the outstanding principal balances on the Equipment Loan and CRE Loan were $13.0 million and $9.9 million, respectively. Interest on the Equipment Loan accrues at an annual rate equal to the LIBOR Rate plus 3.00%, and interest on the CRE Loan accrues at an annual rate equal to the Federal Home Loan Bank Rate of Des Moines three-year advance rate plus 4.50%, with an interest rate floor of 6.50%. The weighted average interest rate for the year ended December 31, 2020 was 7.0% for the Operating LOC Loan, 3.1% for the Equipment Loan, and 6.5% for the CRE Loan. We have assessed our exposure to changes in interest rates on variable rate debt by analyzing the sensitivity to our earnings assuming various changes in market interest rates. Assuming a hypothetical increase of 1% to the interest rates on the average outstanding balance of our variable rate debt portfolio during the year ended December 31, 2020, our net interest expense for year ended December 31, 2020 would have increased by an estimated $0.2 million.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by Regulation S-X are included in Item 15. “Exhibits, Financial Statement Schedules” contained in Part IV, Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures was performed under the supervision of, and with the participation of, management, including our Chief Executive Officer and Interim Chief Financial Officer, as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
Due to our aggregate market value of the voting and non-voting common equity held by non-affiliates falling below $75.0 million as of June 30, 2020, and our corresponding status as a smaller reporting company, our independent registered public accounting firm, Moss Adams LLP, was not required to issue an audit report on the effectiveness of our internal control over financial reporting for the year ended December 31, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended December 31, 2020 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
The following table sets forth information required by this item will be contained in,regarding our Board of Directors (the “Board”) as of April 20, 2021. There are no family relationships between any directors or executive officers of the Company.
| | | | | | | | | | | | | | | | | | | | |
Name (1) | | Position with our Company | | Age | | Director Since |
| Charles K. Thompson | | Chairman, Chief Executive Officer and Director | | 59 | | 2017 |
| Lawrence A. First | | Director | | 59 | | 2018 |
| Michael Y. McGovern | | Director | | 69 | | 2017 |
David J. Nightingale (2) | | Director | | 63 | | 2021 |
(1) John B. Griggs formerly served as a Class II director and is incorporated by referenceresigned from the Board effective April 5, 2021.
(2) David J. Nightingale was appointed to the Definitive Proxy Statement for ourBoard effective April 6, 2021 and currently serves as a Class II director and as member of the Audit Committee and as Chairman of the Compensation and Nominating Committee.
Below is biographical information about each director as well as the particular experience, qualifications, attributes and/or skills which led the Board to conclude the director should serve as a director of the Company.
Director Whose Term Expires at the 2021 Annual Meeting of Stockholders (Class I Director)
Michael Y. McGovern: Mr. McGovern currently serves as Chairman of the Board and Interim Principal Executive Officer of Superior Energy Services, Inc., a worldwide provider of drilling, completion and production related services and equipment, a director for Cactus Wellhead, LLC, a manufacturer and servicer of pressure control equipment for offshore and onshore oil and gas production, and as a director of ION Geophysical, a global provider of acquisition equipment, software, planning and seismic processing services, and seismic data libraries to the oil and gas industry. Mr. McGovern has served previously as a director of various public and private companies operating in the oil and gas and energy industries, including Sherwood Energy, LLC (through September 2020), Fibrant LLC, a U.S unit of Fibrant BV (through June 2019), Probe Holding Inc. (2014-2017), Quicksilver Resources Inc. (2013-2016), Long Run Exploration Ltd. (2008-2013); and Columbia Chemical Company (2010-2011). Mr. McGovern holds a B.S. from Centenary College and attended the Freeman School of Business at Tulane University from 1973-1974 and the Loyola University New Orleans College of Law from 1979-1980.
Director Whose Term Expires at the 2022 Annual Meeting of Stockholders (Class II Director)
David J. Nightingale: Mr. Nightingale has been the Chief Executive Officer of CIG Logistics since March 6, 2020. He previously served as the Executive Vice President, Wellsite Services of Select Energy Services, Inc. (“Select”) from November 2017 through March 29, 2019. Prior to Select’s merger with Rockwater Energy Solutions, Inc. (“Rockwater”) in November 2017, Mr. Nightingale served as the Executive Vice President and Chief Operating Officer of Rockwater from June 2015 through the merger date and, prior thereto, as Rockwater’s Senior Vice President, Fluids Management and Executive Vice President, Water Management. Prior to joining Rockwater, he served as the President of I.E. Miller Services Inc., a former subsidiary of Complete Production Services, Inc., in Houston, Texas. Mr. Nightingale worked at Complete Production Services for seven years in a variety of leadership roles, including running the company’s rig and heavy equipment moving division and a well servicing subsidiary in the Rocky Mountain region. Prior to that, he spent over 25 years in a number of engineering and operating management roles at several energy and midstream companies. Mr. Nightingale obtained his B.S. in Civil Engineering from Bradley University in Peoria, Illinois, and his M.B.A. from the University of Houston.
Directors Whose Term Expire at the 2023 Annual Meeting of Stockholders (Class III Directors)
Charles K. Thompson: Mr. Thompson currently serves as our Chairman of the Board and through April 20, 2021 served as our Chief Executive Officer. He served as our Interim Chief Executive Officer from March 2018 to November 2018. Mr. Thompson also is currently a Managing Partner of PinHigh Capital Partners, a Houston-based family office affiliated investment partnership with a focus on private oil service and exploration and production (“E&P”) investments. Mr. Thompson currently serves as chairman of the board of directors of Pioneer Energy Services Corp., as well as a member of its Audit Committee and Compensation, Nominating and Governance Committee, and as a member of the boards of directors of KSW Oilfield Services, Wayfinder Resources, Invictus, Inc. and Sullivan Process Controls. Previously, Mr. Thompson spent two years at Nomura Securities building the oil and gas investment banking business, and from 2004 to 2014 he was an original partner of Legacy Partners Group, a boutique mergers and acquisitions firm based in New York that was sold to FBR Capital Markets in 2007. Mr. Thompson holds a B.A. in geology from Williams College and attended Columbia Business School.
Lawrence A. First:Mr. First currently serves as the Chief Investment Officer and Managing Director of Ascribe Capital LLC (“Ascribe”). Mr. First joined Ascribe in 2008. Prior to joining Ascribe, Mr. First was a Managing Director and Co-Portfolio Manager in Merrill Lynch’s Principal Credit Group, a proprietary investing platform for the firm’s capital, where he was responsible for evaluating and managing assets in the team’s North American portfolio, including non-investment grade bank loans, stressed/distressed fixed income investments and public and private equity. Prior to joining Merrill Lynch in 2003, Mr. First was a senior partner in the Bankruptcy and Restructuring department of the law firm of Fried, Frank, Harris, Shriver & Jacobson LLP, where he began his legal career in 1987. At Fried Frank, he represented both debtors and creditors in both in-court and out-of- court restructurings as well as lenders to, investors in, and potential buyers and sellers of, financially troubled companies. Prior to his joining Fried Frank’s Bankruptcy and Restructuring department, he was a member of its Corporate Department, where he became a partner in 1994. On behalf of Ascribe, Mr. First has been a member of the boards of directors of the Company since May 2018, Basic Energy Services, Inc. since 2020, and Forbes Energy Services Ltd. since April 2017. He was a director on the board of Geokinetics Inc. from 2013 to 2018, Alion Science and Technology Corp. from August 2014 to August 2015, and EnviroSolutions Inc. from July 2010 to March 2018. Mr. First received a Bachelor of Arts in History and Sociology from Haverford College, and a Juris Doctor from New York University School of Law. He also attended the London School of Economics.
Executive Officers
The following table sets forth information regarding our executive officers as of April 20, 2021.
| | | | | | | | | | | | | | | | | | | | |
| Name | | Position with our Company | | Age | | Executive Officer Since |
Charles K. Thompson (1) | | Chairman, Chief Executive Officer and Director | | 59 | | 2018 |
| Robert Y. Fox | | President and Chief Operating Officer | | 59 | | 2018 |
| Eric Bauer | | Executive Vice President and Interim Chief Financial Officer | | 40 | | 2020 |
| Joseph M. Crabb | | Executive Vice President, Chief Legal Officer and Corporate Secretary | | 53 | | 2014 |
(1) Mr. Thompson’s biographical information is included in the previous section “Directors”.
Robert Y. Fox, President and Chief Operating Officer
Mr. Fox serves as the Company’s President and Chief Operating Officer. Mr. Fox has over 25 years of senior management experience in the transportation and logistics businesses. Prior to joining the Company on June 18, 2018, Mr. Fox served in various senior executive positions with Comcar Industries, Inc. from 2001 to June 2018, including as Executive Vice President, Chief Operating Officer and Chief Financial Officer. Mr. Fox also previously held senior management positions with Rocor International, Builder’s Transport, Inc. and Burlington Northern Motor Holdings, Inc. Mr. Fox is a graduate of the University of Texas at Arlington, with a B.B.A. in accounting and he is a Certified Public Accountant.
Eric Bauer, Executive Vice President and Interim Chief Financial Officer
Mr. Bauer joined the Company on April 3, 2020, and serves as the Company’s Executive Vice President and Interim Chief Financial Officer. Mr. Bauer has over seventeen years of experience in corporate finance and investment banking, working primarily on merger and acquisition advisory, equity underwriting, and debt underwriting across all sectors of the energy industry. Mr. Bauer was most recently a Managing Director at Evercore in the Energy Corporate Advisory Business focused on mergers and acquisitions. Mr. Bauer has previously worked for both Lehman Brothers and Citi in their Global Energy Groups
and worked at Avista Capital Partners focused on private equity investing in the energy industry. Mr. Bauer graduated from Southern Methodist University, where he received a B.B.A. in Finance and a B.A. in History.
Joseph M. Crabb, Executive Vice President, Chief Legal Officer and Corporate Secretary
Mr. Crabb serves as the Company’s Executive Vice President, Chief Legal Officer and Corporate Secretary. He has served in his present position since joining the Company in 2014. Prior to joining the Company, Mr. Crabb was in private practice with the law firm now known as Squire Patton Boggs (US) LLP, where he was a partner in the corporate practice group in the firm’s Phoenix office. Mr. Crabb received his B.A. degree in History and his J.D. degree from the University of Iowa.
Appointment of Chief Executive Officer
On April 21, 2021, the Company announced the appointment of Patrick L. Bond to succeed Mr. Thompson as the Chief Executive Officer of the Company, effective as of the announcement date. Mr. Thompson will continue to serve as Chairman of the Board following the transition.
Mr. Bond, age 62, has over 35 years’ experience in the energy business in various sales, management and executive roles with companies such as Halliburton Company, Weatherford International plc, Schlumberger Limited and Gravity Oilfield Services, Inc. Throughout his career, Mr. Bond has led companies through all aspects of business life including expansion and contraction, mergers and acquisitions, raising capital and restructuring. Prior to joining the Company on April 21, 2021, Mr. Bond served as President and Chief Operating Officer of Power On Demand, LLC, from March 2020 to April 2021 and as Chief Operating Officer - Energy Investments of Joy Holdings, Ltd. from October 2018 to March 2021. Prior thereto, Mr. Bond was Co-Chief Executive Officer of Gravity Oilfield Services, Inc. from January 2017 to October 2018 and President and Chief Operating Officer of Light Tower Rentals Inc. from June 2012 to January 2017. Mr. Bond serves on the boards of directors of Power On Demand, LLC and the Permian Basin Petroleum Association (PBPA) and also is an advisory board member of Downhole Chemical Solutions, LLC and the Petroleum Equipment and Services Association (PESA). Mr. Bond is a graduate of The University of Texas with a B.S. in Petroleum Engineering.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s officers and directors, and persons who own more than ten percent (10%) of a registered class of the Company’s equity securities, to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than ten percent stockholders also are required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms in our possession and on written representations from reporting persons, except for the filing of (i) an initial statement of beneficial ownership on Form 3 by Mr. Bauer (which reflected no shares of Company common stock owned at the time of his appointment or at the time of filing) and (ii) an initial statement of beneficial ownership on Form 3 by the former Principal Accounting Officer of the Company (which reflected no shares of Company common stock owned at the time of such person’s appointment or at the time of filing), we believe that during fiscal 2020 all of our executive officers and directors filed the required reports on a Form 10-K/A which,timely basis under Section 16(a).
Code of Business Conduct and Ethics
The Company has a Code of Business Conduct and Ethics that is applicable to all directors, officers and employees of the Company. The Code of Business Conduct and Ethics is available in either case,the “Corporate Governance” section of the Company’s website at www.nuverra.com under the Investors tab and a printed copy may also be obtained by any stockholder upon request directed to Nuverra Environmental Solutions, Inc., 6720 N. Scottsdale Road, Suite 190, Scottsdale, Arizona 85253, Attention: Corporate Secretary. The Company intends to post amendments to or waivers, if any, from its Code of Business Conduct and Ethics (to the extent applicable to the Company’s directors or its principal executive officer, principal financial officer, or principal accounting officer) at this location on its website. Among other matters, our Code of Business Conduct and Ethics is designed to promote:
•honest and ethical conduct;
•avoidance of conflicts of interest;
•full, fair, accurate, timely and understandable disclosure in reports and documents that we will file with, or submit to, the SecuritiesSEC and Exchange Commission within 120 days afterin our fiscal year ended December 31, 2020.other public communications;
•compliance with applicable governmental laws and regulations and stock exchange rules;
•prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the code; and
•accountability for adherence to the Code of Business Conduct and Ethics.
Selection of Board Nominees
Future director candidates will be evaluated by the Compensation and Nominating Committee in accordance with its charter and our Corporate Governance Guidelines. The Compensation and Nominating Committee’s consideration of a candidate for director will include assessment of the individual’s understanding of our business, the individual’s professional and educational background, skills and abilities and potential time commitment, and whether such characteristics are consistent with our Corporate Governance Guidelines and other criteria established by the Compensation and Nominating Committee from time to time. In addition, the Compensation and Nominating Committee will take into account diversity of background and experience that the individual will bring to the Board. In evaluating potential director candidates, the Compensation and Nominating Committee will consider a variety of factors, in addition to personal and professional integrity, including the following:
•experience in corporate management;
•experience with complex business organizations;
•experience as a board member or officer of another publicly held company;
•diversity of expertise, experience in substantive matters related to the Company’s business and professional experience as compared to existing members of our Board and other nominees; and
•practical and mature business judgment.
The Compensation and Nominating Committee may also adopt such procedures and criteria not inconsistent with our Corporate Governance Guidelines as it considers advisable for the assessment of director candidates. Other than the foregoing, there are no stated minimum criteria for director nominees. The Compensation and Nominating Committee does, however, recognize that each member of the Audit Committee must be financially literate, as such qualification is interpreted by the Board in its business judgment, at least one member of the Audit Committee should meet the criteria for an “audit committee financial expert” as defined by SEC rules, and that a majority of the members of the Board must meet the definition of “independent director” under applicable rules governing independence. Although we do not have a formal policy with regard to the consideration of diversity in identifying candidates for election to the Board, the Compensation and Nominating Committee recognizes the benefits associated with a diverse board, and intends to take diversity considerations into account when identifying candidates. The Compensation and Nominating Committee will utilize a broad conception of diversity, including diversity of professional experience, employment history, prior experience on other boards of directors, and more familiar diversity concepts such as race, gender and national origin. These factors, and others considered useful by the Compensation and Nominating Committee, will be reviewed in the context of an assessment of the perceived needs of the Board at a particular point in time. The priorities and emphasis of the Compensation and Nominating Committee and of the Board may change from time to time to take into account changes in business and other trends and the portfolio of skills and experience of current and prospective board members.
The Compensation and Nominating Committee also has responsibility for establishing procedures for the nomination process and recommending candidates for election to the Board. It is anticipated that consideration of new Board nominee candidates will involve a series of internal discussions, review of information concerning candidates, and interviews with selected candidates. Board members or employees typically suggest candidates for nomination to the Board. In 2020, we did not employ a search firm or pay fees to other third parties in connection with seeking or evaluating Board nominee candidates.
Stockholder Nominations
The Compensation and Nominating Committee will consider stockholder recommendations for candidates for the Board if the stockholder complies with the advance notice, information and consent provisions contained in our Third Amended and Restated Bylaws (“Bylaws”). The Compensation and Nominating Committee will evaluate recommendations for director nominees submitted by directors, management or qualifying stockholders in the same manner. All directors and director nominees will be required to submit a completed directors’ and officers’ questionnaire as part of the nominating process. The process may also include interviews and additional background and reference checks for non-incumbent nominees, at the discretion of the Compensation and Nominating Committee.
To be in proper written form, our Bylaws provide that a stockholder’s notice to the Corporate Secretary must set forth as to each person whom the stockholder proposes to nominate as a director: (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Company that are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) with respect to the nomination, including the nominee, (iv) any derivative positions with respect to shares of the Company’s capital stock held or beneficially held by or on behalf of such stockholder, the extent to which any hedging or other transaction or series of transactions has been entered into with respect to shares of the Company’s capital stock by or on behalf of such stockholder, and the extent to which any other agreement or understanding has been made, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of such stockholder with respect to shares of the Company’s capital stock, (v) a representation that such stockholder is a holder of record entitled to vote at the annual meeting and intends to appear in person or by proxy at the annual meeting to bring such nomination before the annual meeting, (vi) a representation whether the stockholder intends or is part of a group which intends (A) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Company’s outstanding capital stock required to elect the nominee and/or (B) otherwise to solicit proxies from stockholders in support of such nomination, and (vii) any other information relating to such stockholder required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the election of directors in an election contest pursuant to and in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder.
In addition, the stockholder’s notice to our Corporate Secretary with respect to persons that the stockholder proposes to directly nominate as a director must set forth (A) as to each individual whom the stockholder proposes to nominate, all information relating to the person that is required to be disclosed in solicitations of proxies for the election of directors or is otherwise required, pursuant to Regulation 14A (or any successor provisions) under the Securities Exchange Act of 1934, as amended (including their name, age, business address, residence address, principal occupation or employment, the number of shares beneficially owned by such candidate, and the written consent of the such person to be named in the proxy statement as a nominee and to serve as a director if elected), and (B) such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected.
There have been no material changes to these procedures since last disclosed by the Company.
Audit Committee
The Company has a separately-designated standing Audit Committee. The members of the Audit Committee during our 2020 fiscal year were Messrs. Griggs (Chair) and McGovern and the current members of our Audit Committee are Messrs. McGovern (Chair) and Nightingale. All members of the Audit Committee met the independence requirements of the Company’s Corporate Governance Guidelines, the additional independence requirements of the SEC and NYSE American, and other applicable law during all of the 2020 fiscal year, and all current members meet all such independence requirements. The Audit Committee’s written charter can be found in the “Corporate Governance” section of our website at www.nuverra.com under the Investors tab. The Audit Committee oversees our accounting and financial reporting processes, internal control systems, independent auditor relationships and the audits of our financial statements. The Audit Committee’s responsibilities include the following:
•selecting and hiring of our independent registered public accounting firm;
•evaluating the qualifications, independence and performance of our independent registered public accounting firm;
•reviewing and approving the audit and non-audit services to be performed by our independent registered public accounting firm;
•reviewing the design, adequacy, implementation and effectiveness of our internal controls established for finance, accounting, legal compliance and ethics;
•reviewing the design, adequacy, implementation and effectiveness of our critical accounting and financial policies;
•overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements and accounting matters;
•reviewing with management and our independent registered public accounting firm the results of our annual and quarterly financial statements;
•reviewing with management and our independent registered public accounting firm any earnings announcements or other public announcements concerning our operating results;
•reviewing and approving any related party transactions (See “Certain Relationships and Related Party Transactions” herein for further discussion); and
•overseeing, discussing with our Board, management and our independent registered public accounting firm and, as necessary, making recommendations to our Board regarding how to address risks relating to accounting matters, financial reporting and legal and regulatory compliance and developments, and the services provided by our independent registered public accounting firm.
The Board has determined that Messrs. Griggs, McGovern and Nightingale are financially literate and each of Mr. Griggs and Mr. McGovern qualifies as an “audit committee financial expert” as defined under SEC rules and regulations. As noted above, Messrs. Griggs, McGovern and Nightingale meet the applicable independence requirements.
Item 11. Executive Compensation
Introduction
We are currently considered a smaller reporting company for purposes of the SEC’s executive compensation disclosure rules. In accordance with such rules, we are required to provide a Summary Compensation Table and an Outstanding Equity Awards at Fiscal Year-End Table, as well as limited narrative disclosures. Our disclosure includes the individual serving as our Principal Executive Officer during the 2020 fiscal year and our two next most highly compensated executive officers. We refer to the aforementioned individuals throughout this section as the “named executive officers” or “NEOs” and their names, titles and positions as of December 31, 2020 are as follows:
| | | | | | | | |
| Name | | Title |
| Current Executive Officers |
| Charles K. Thompson | | Chairman, Chief Executive Officer and Director |
| Robert Y. Fox | | President and Chief Operating Officer |
| Joseph M. Crabb | | Executive Vice President, Chief Legal Officer and Corporate Secretary |
Overview of Executive Compensation
The overarching objective of our executive compensation program is to attract, motivate and retain executives who will deliver short and long-term stockholder value through the use of competitive compensation programs with strong links to Company and individual performance. Nuverra seeks to achieve this objective by providing a market-competitive compensation program that consists of base salary, short-term incentives and longer-term incentives.
The Company continues its focus on attracting and retaining qualified senior executives while also emphasizing pay-for-performance alignment, by basing a significant portion of target total direct compensation on short-term and long-term incentive pay. Short-term and long-term incentives align executives with stockholder interests by basing the potential receipt of incentives on successful achievement of Company business objectives, including defined financial performance targets, which are intended to drive stockholder value.
Incentive-pay structures provide for maximum payouts in instances when Company performance both exceeds internal expectations and results in positive returns for stockholders relative to our industry peers. Furthermore, we align financial interests of our executives with those of our stockholders through emphasis on long-term incentives and encouragement of equity ownership.
We seek to deliver pay-for-performance while meeting the following objectives:
•Attract, motivate and retain highly qualified executives;
•Establish challenging but realistic performance objectives, balanced between short-term and long-term measurable results;
•Provide a substantial portion of executive compensation in the form of variable (versus fixed) pay, with a significant portion of variable compensation in the form of possible incentive and equity payouts; and
•Ensure internal alignment of executive activities and actions with Company financial performance and operating objectives, without undue risk.
In connection with a company-wide cost reduction initiative implemented by the Company in the second quarter of 2020, certain members of the Company’s executive management team have agreed to voluntarily reduce their 2020 base salaries. Mr. Thompson, Chairman and Chief Executive Officer, voluntarily reduced his base salary by 25% and Mr. Fox, President and Chief Operating Officer, voluntarily reduced his base salary by 20%. Each of the foregoing salary reductions were effective as of April 6, 2020.
Components of Named Executive Officer Compensation
The Compensation and Nominating Committee is committed to a strong, positive link between our compensation practices and our Company’s short- and long-term objectives. The executive compensation program for our named executive officers is comprised of the following components: base salary, short-term incentive awards, long-term incentive awards, health and welfare benefits, retirement benefits, and post-employment agreements.
Base Salary
Base salary is a fixed component of compensation for our executives. We establish base salary levels which are competitive with companies of comparable revenue and size and which enable us to attract and retain top executive talent. Annual merit increases for named executive officers are not automatic or guaranteed. Merit increases for named executive officers other than the Chairman and Chief Executive Officer are based on the Chairman and Chief Executive Officer’s evaluation of each named executive officer’s performance, competitive positioning, as well as the Company’s performance and outlook for the upcoming fiscal year. It is the responsibility of the Compensation and Nominating Committee to review the performance of the Chairman and Chief Executive Officer and recommend an annual merit increase, if warranted.
The following table shows the annual base salaries of our current executive officers as of December 31, 2020 and December 31, 2019.
| | | | | | | | | | | | | | | | | | | | |
| | | | Base Salary as of December 31, |
| Name | | Title | | 2020 | | 2019 |
| Current Executive Officers | | | | |
| Charles K. Thompson | | Chairman, Chief Executive Officer and Director | | $ | 450,000 | | | $ | 600,000 | |
| Robert Y. Fox | | President and Chief Operating Officer | | $ | 340,000 | | | $ | 425,000 | |
| Joseph M. Crabb | | Executive Vice President, Chief Legal Officer and Corporate Secretary | | $ | 400,000 | | | $ | 400,000 | |
In connection with certain cost reduction initiatives implemented by the Company in the second quarter of 2020, Mr. Thompson agreed to voluntarily reduce his annual base salary by 25% and Mr. Fox agreed to voluntarily reduce his annual base salary by 20%, each effective as of April 6, 2020. In February 2021, the Company implemented a partial restoration of the salary reductions that were implemented in the second quarter of 2020, which impacted employees across the Company, and in connection with this partial restoration Mr. Fox’s annual base salary was increased to $362,640.
Short-Term Cash Incentive Awards
2020 Bonus Plan
For fiscal 2020, the Board determined that any awards to Mr. Thompson, Mr. Fox or Mr. Crabb under the senior executive bonus plan would be discretionary. Following conclusion of the 2020 fiscal year, the Board made the decision that no bonuses would be awarded under the senior executive bonus plan for fiscal year 2020. In making this determination, the Board considered a variety of factors that it deemed relevant, including but not limited to individual and company performance, the Company’s annual financial results and liquidity position, and market and industry conditions generally.
No outstanding employment agreement for our named executive officers currently provides for an annual bonus in a guaranteed amount.
2021 Bonus Plan
For fiscal 2021, the senior executive bonus plan will again provide for discretionary awards only, to be determined by the Board, based on such factors as it may deem appropriate. Such factors may include, but are not limited to, individual and company performance, the Company’s annual financial results and liquidity position, market and industry conditions generally, and such additional factors as may in the Board’s judgment be relevant under the circumstances.
Long-Term Equity Incentive Awards
Each of our NEOs is eligible to receive equity compensation, which can consist of a mix of stock options, restricted stock, and restricted stock units, to encourage a focus on long-term stockholder value and to foster long-term retention.
2019 Equity Grants
In connection with Mr. Fox’s appointment as President and Chief Operating Officer on June 18, 2018, he was entitled to receive an initial grant of restricted stock units under the 2017 Long Term Incentive Plan (the “MIP”) with a target grant date value of $1,250,000 (the “Initial Award”). The Initial Award is comprised of one-half time-based restricted stock units (“TRSUs”) that vest in one-third increments. The first one-third of the TRSUs granted to Mr. Fox vested on the grant date or, March 5, 2019, the second one-third vested on December 31, 2019, and the third one-third vested on December 31, 2020. The other half of the Initial Award consisted of performance-based restricted stock units (“PRSUs”) that partially vested based on certain specified 2019 partial-year and full-year performance measurements.
On April 5, 2019, Mr. Thompson received a grant of 11,338 restricted stock units with a target grant date fair value of $100,000 in connection with the final tranche of equity awards issued for his service as Interim Chief Executive Officer. The awards were issued under the MIP and vested on the date of grant.
2020 Equity Grants
On December 16, 2020, the Company granted TRSUs to its executive officers under the MIP, consisting of 86,076 shares to Mr. Thompson, 84,388 shares to Mr. Fox, and 42,194 shares to Mr. Crabb. The Company also agreed to issue 65,823 additional TRSUs to Mr. Thompson on or before June 30, 2021. The TRSUs granted and to be granted to Mr. Thompson are scheduled to vest on December 31, 2021, and the TRSUs granted to Mr. Fox and Mr. Crabb are scheduled to vest one-half on December 31, 2021 and one-half on December 31, 2022. All TRSUs are subject to potential accelerated vesting in the event the executive’s employment is terminated without “Cause” or with “Good Reason” prior to scheduled vesting, as such terms are defined in the applicable executive’s employment agreement, which are discussed in more detail in the “Potential Payments upon Termination or Change-in-Control” section herein.
Health, Welfare, and Retirement Plans
We offer all eligible employees, including the named executive officers, a health and welfare benefits package which includes coverage for medical, dental, vision, disability, life, accidental death and dismemberment, and employee assistance. The named executive officers participate in these benefit arrangements on the same basis as all eligible employees.
We maintain a defined contribution plan, intended to qualify under Section 401(k) of the Internal Revenue Code, which is available to all employees, including our named executive officers, to assist them in saving for retirement. Under this plan, a participant may contribute a percentage of their salary on a pre-tax basis up to the IRS maximum through payroll deductions. The plan permits catchup contributions on a pre-tax basis for employees at least 50 years old up to the IRS maximum, and Roth deferrals on a post-tax basis. Effective April 1, 2017, the Company reinstated a discretionary matching contribution under the plan, pursuant to which the Company made a cash matching contribution in an amount equal to 100% of the first 3% of base salary contributed, and 50% of the next 2% of base salary contributed, by participating employees. The discretionary matching contribution was suspended in the second quarter of 2020 as part of the Company’s cost reduction initiatives.
Severance and Transition Arrangements and Change-in-Control Payments
We have entered into employment agreements with Mr. Thompson, Mr. Fox and Mr. Crabb that contain provisions that provide for certain severance and change-in-control benefits, which are discussed in more detail in the “Executive Employment Agreements” and “Potential Payments upon Termination or Change-in-Control” sections herein. We believe these employment agreements provide severance and change-in-control protection in a manner consistent and competitive with common practice in the marketplace.
Our outlook with respect to these change-in-control provisions is that they are appropriate because they make it easier for the executive to focus on the best interests of our Company and stockholders rather than the personal implications in the event our Company faces the possibility of a change-in-control. These provisions were designed to:
•Be consistent and competitive with current market practices;
•Afford reasonable protection without creating any undue windfall;
•Enhance the Company’s ability to retain key employees during critical but uncertain times; and
•Enhance an acquirer’s potential interest in retaining key executives.
Severance payments are only made under the employment agreements if the named executive officer executes a full general release of claims in favor of the Company. We believe that these severance and change-in-control payment provisions in our executive employment agreements are necessary for us to provide competitive compensation and benefits within our industry. They encourage our named executive officers to remain in our employ, while also protecting the interests of the Company and its stockholders in certain circumstances of a key executive’s separation from employment.
Summary Compensation Table
The following table summarizes the compensation during the last two fiscal years (as applicable) to the Company’s named executive officers. Compensation data is not shown for years in which the executive officer was not serving in such position.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | Year | Salary ($) | | Bonus ($) | | Stock Awards ($) (1) | | All Other Compensation ($) (3) | | Total
($) |
| Current Executive Officers |
| Charles K. Thompson | 2020 | 462,039 | | | — | | | 197,114 | | | 7,154 | | | 666,307 | |
| Chairman, Chief Executive Officer and Director | 2019 | 600,000 | | | — | | | 97,393 | | | 11,200 | | | 708,593 | |
| Robert Y. Fox | 2020 | 364,283 | | | — | | | 193,249 | | | 5,100 | | | 562,632 | |
| President and Chief Operating Officer | 2019 | 425,000 | | | — | | | 1,300,087 | | (2) | 6,787 | | | 1,731,874 | |
| Joseph M. Crabb | 2019 | 402,198 | | | — | | | 96,624 | | | 4,923 | | | 503,745 | |
| Executive Vice President, Chief Legal Officer and Corporate Secretary | 2019 | 400,000 | | | — | | | — | | | 11,200 | | | 411,200 | |
(1) The amounts reported in this column represent the aggregate grant date fair value of awards of restricted stock or restricted stock units granted to the named executive officers in each covered fiscal year and do not reflect whether the recipient has actually realized a financial benefit from the award. The assumptions used in the calculations of these amounts are included in Note 18 in the Notes to the Consolidated Financial Statements to the Company’s Form 10-K filed on March 16, 2021.
(2) As disclosed in the Current Report on Form 8-K filed by the Company on June 21, 2018, Mr. Fox received certain equity grants in March 2019, consisting of TRSUs and PRSUs for an aggregate of up to 119,275 shares, subject to the satisfaction of applicable vesting criteria. See Long-Term Equity Incentive Awards section for additional discussion of these awards.
(3) The amounts reported in this column for fiscal 2019 and 2020 consist entirely of 401(k) Plan matching contributions, which were suspended in the second quarter of 2020.
Outstanding Equity Awards at 2020 Fiscal Year End
The following table discloses certain information requiredregarding all outstanding equity awards held by this item will beeach of our named executive officers as of December 31, 2020. All of these awards were granted under our MIP. Some values contained in the table below have not been, and may never be, realized.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| Name | Award Date | Number of Securities Underlying Unexercised Options (#) Exercisable | | Option Exercise Price ($) | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested (#) | | Market Value of Shares or Units of Stock that Have Not Vested ($) (1) |
| Current Executive Officers |
| Charles K. Thompson | 12/16/2020 | — | | | — | | — | | | 86,076 | | (2) | 197,114 | |
| Robert Y. Fox | 12/16/2020 | — | | | — | | — | | | 84,388 | | (3) | 193,249 | |
| Joseph M. Crabb | 12/16/2020 | — | | | — | | — | | | 42,194 | | (3) | 96,624 | |
(1) The market value of shares of restricted stock unit awards that have not vested is incorporated by reference to,calculated based on the Definitive Proxy Statement forclosing trading price of our 2021 Annual Meetingcommon stock of Stockholders or a Form 10-K/A which, in either case, we will file with$2.29 as reported on the Securities and Exchange Commission within 120 days after our fiscal year endedNYSE American on December 31, 2020.
(2) Represents a TRSU award, which assuming continued employment with the Company, will vest on December 31, 2021.
(3) Represents a TRSU award which, assuming continued employment with the Company, will vest one-half on December 31, 2021 and one-half on December 31, 2022.
Executive Employment Agreements
Thompson Employment Agreement. On March 2, 2018, the Board appointed Mr. Thompson, who at that time was serving as a non-employee member of the Company’s Board, to serve as Chairman of the Board and Interim Chief Executive Officer.
On November 19, 2018, Mr. Thompson was appointed as non-interim Chief Executive Officer, and in connection with such appointment, the Company entered into an Employment Agreement with Mr. Thompson (as amended, the “Thompson Employment Agreement”). Pursuant to the Thompson Employment Agreement, Mr. Thompson serves as the Chief Executive Officer of the Company for a term ending on the earlier of (i) a termination of Mr. Thompson’s employment pursuant to the Thompson Employment Agreement and (ii) December 31, 2021. Under the Thompson Employment Agreement, Mr. Thompson is paid an annual base salary of $600,000 (which was voluntary reduced to $450,000 in connection with the Company’s cost-reduction initiatives in the second quarter of 2020), subject to review annually by the Board or its Compensation and Nominating Committee to determine whether the annual base salary should be increased and, if so, in what amount. In addition, Mr. Thompson receives insurance benefits and is entitled to participate in any of the Company’s current or future incentive compensation plans. Mr. Thompson also received grants under the Company’s MIP of 210,000 TRSUs which vested on December 31, 2020 and 86,076 TRSUs which are scheduled to vest on December 31, 2021, subject to potential accelerated vesting upon the termination of Mr. Thompson’s employment by the Company without Cause (as defined in the Thompson Employment Agreement) or voluntary termination by Mr. Thompson for Good Reason (as defined in the Thompson Employment Agreement).
In the event Mr. Thompson is terminated for Cause or voluntarily terminates his employment without Good Reason he shall be entitled to payment of accrued and unpaid base salary and reimbursement for expenses incurred through the last day of his employment. In the event Mr. Thompson is terminated without Cause or terminates his employment for Good Reason, Mr. Thompson shall be entitled to (i) payment of accrued and unpaid base salary, unused vacation, and reimbursement for expenses incurred through the last day of his employment, (ii) a lump sum severance pay amount equal to the sum of 18 months base salary (increasing by an additional one-half month for each calendar month elapsed starting January 1, 2021, up to a maximum of 24 months) in effect immediately prior to the date of termination and 18 months of the Company’s COBRA premiums (increasing by an additional one-half month for each calendar month elapsed starting January 1, 2021, up to a maximum of 24 months) as in effect on the date of termination, (iii) a lump sum amount equal to at least 100% of any bonus or bonuses attributable to the fiscal year during which the termination occurs based on actual performance results through the full fiscal year, (iv) acceleration in full of the vesting and/or exercisability of all non-performance based equity awards outstanding, and (v) to the extent not previously issued, the issuance of 65,823 TRSUs which shall fully vest no later than the last day of his employment. For purposes of the foregoing calculations set forth in clause (ii) of this paragraph, Mr. Thompson’s annual base salary will be deemed to be the greater of $600,000 per year (which was his actual base salary immediately prior to the voluntary salary reduction in the second quarter of 2020) or his actual base salary at the time of determination.
During and after termination of the Thompson Employment Agreement, Mr. Thompson is obligated to maintain the confidentiality of the Company’s confidential information. In addition, he agrees to certain non-competition and non-solicitation covenants for a one-year period following any termination of his employment.
Fox Employment Agreement. On June 18, 2018, the Company appointed Mr. Fox as the Company’s President and Chief Operating Officer. In connection with Mr. Fox’s appointment, he entered into an Employment Agreement with the Company (as amended, the “Fox Employment Agreement”). Pursuant to the Fox Employment Agreement, Mr. Fox serves as the President and Chief Operating Officer of the Company for a three year term, with such term to be automatically extended for successive one-year periods thereafter, unless either the Company or Mr. Fox provide at least three months prior written notice of termination pursuant to the terms of the Fox Employment Agreement. For Mr. Fox’s services, he is paid an annual base salary of $425,000, (which was voluntary reduced to $340,000 in connection with the Company’s cost-reduction initiatives in the second quarter of 2020), subject to annual review by the Board or its Compensation and Nominating Committee to determine whether the annual base salary should be increased and, if so, in what amount. Mr. Fox receives insurance benefits and is entitled to participate in any of the Company’s current or future incentive compensation plans.
In the event Mr. Fox is terminated for Cause (as defined in the Fox Employment Agreement) or voluntarily terminates his employment without Good Reason (as defined in the Fox Employment Agreement) he shall be entitled to payment of accrued and unpaid base salary, unused vacation, and reimbursement for expenses incurred through the last day of his employment. In the event Mr. Fox is terminated without Cause or terminates his employment for Good Reason, in each case that occurs without connection to a Change of Control (as defined in the Fox Employment Agreement), Mr. Fox shall be entitled to (i) payment of accrued and unpaid base salary, unused vacation, and reimbursement for expenses incurred through the last day of his employment, (ii) a lump sum severance pay amount equal to the sum of 12 months base salary in effect immediately prior to the date of termination and 12 months of the Company’s COBRA premiums in effect on the date of termination, (iii) a lump sum amount equal to at least 100% of the bonus or bonuses attributable to the fiscal year during which the termination occurs based on actual performance results through the full fiscal year, and (iv) acceleration in full of the vesting and/or exercisability of all time-based equity awards outstanding and a pro rata portion of any performance-based equity awards outstanding (which will continue to be subject to applicable vesting criteria). For purposes of the foregoing calculations set forth in clause (ii) of this paragraph, Mr. Fox’s annual base salary will be deemed to be the greater of $425,000 per year (which was his actual base salary immediately prior to the voluntary salary reduction in the second quarter of 2020) or his actual base salary at the time of determination.
In the event Mr. Fox is terminated without Cause or terminates his employment for Good Reason, either of which occurs within 12 months after a Change of Control, or if Mr. Fox is terminated by the Company without Cause within 6 months prior to a Change of Control if such termination was in contemplation of such Change of Control, he shall be entitled to the payment described above with the following revisions: (i) Mr. Fox will receive an additional lump sum severance payment equal to the sum of 12 months base salary in effect immediately prior to the date of termination and 12 months of the Company’s COBRA premiums in effect on the date of termination, (ii) in lieu of the lump sum bonus amount described above, he will receive a lump sum payment equal to 100% of all bonuses attributable to the fiscal year during which the termination occurs at target, and (iii) acceleration in full of a pro rata portion of all performance-based equity awards without regard to applicable performance targets (in addition to acceleration of any time-based equity awards). For purposes of the foregoing calculations set forth in clause (i) of this paragraph, Mr. Fox’s annual base salary will be deemed to be the greater of $425,000 per year (which was his actual base salary immediately prior to the voluntary salary reduction in the second quarter of 2020) or his actual base salary at the time of determination.
During and after termination of the Fox Employment Agreement, Mr. Fox is obligated to maintain the Company’s confidential information in confidence. In addition, he agreed to certain non-competition and non-solicitation covenants for a one-year period following any termination of his employment.
Crabb Employment Agreement. On August 7, 2017, the Company entered into an amended and restated employment agreement with Mr. Crabb (the “Crabb Employment Agreement”). Pursuant to the Crabb Employment Agreement, Mr. Crabb serves as the Executive Vice President and Chief Legal Officer of the Company for a three year term, with such term to be automatically extended for successive one-year periods thereafter, unless either the Company or Mr. Crabb provide at least three months prior written notice of termination pursuant to the terms of the Crabb Employment Agreement. For Mr. Crabb’s services, he is paid an annual base salary of $400,000, which is reviewed annually by the Board or its Compensation and Nominating Committee to determine whether the annual base salary should be increased and, if so, in what amount. Mr. Crabb receives insurance benefits and is entitled to participate in any of the Company’s current or future incentive compensation plans.
In the event Mr. Crabb is terminated for Cause (as defined in the Crabb Employment Agreement) or voluntarily terminates his employment without Good Reason (as defined in the Crabb Employment Agreement) he shall be entitled to payment of accrued and unpaid base salary, unused vacation, and reimbursement for expenses incurred through the last day of his employment. In the event Mr. Crabb is terminated without Cause or terminates his employment for Good Reason, in each case that occurs without connection to a Change of Control (as defined in the Crabb Employment Agreement), Mr. Crabb shall be entitled to (i) payment of accrued and unpaid base salary, unused vacation, and reimbursement for expenses incurred through the last day of his employment, (ii) a lump sum severance pay amount equal to the sum of 24 months base salary in effect immediately prior to the date of termination and 12 months of the Company’s COBRA premiums in effect on the date of termination, (iii) a lump sum amount equal to at least 100% of the bonus or bonuses attributable to the fiscal year during which the termination occurs based on actual performance results through the full fiscal year, and (iv) acceleration in full of the vesting and/or exercisability of all time-based equity awards outstanding and a pro rata portion of any performance-based equity awards outstanding (which will continue to be subject to the applicable vesting criteria). In the event Mr. Crabb is terminated without Cause or terminates his employment for Good Reason, either of which occurs within 12 months after a Change of Control, or if Mr. Crabb is terminated by the Company without Cause within 6 months prior to a Change of Control if such termination was in contemplation of such Change of Control, he shall be entitled to the payment described above with the following revisions: (i) Mr. Crabb will receive an additional lump sum severance payment equal to 12 months of the Company’s COBRA premiums in effect on the date of termination, (ii) in lieu of the lump sum bonus amount described above, he will receive a lump sum payment equal to 100% of all bonuses attributable to the fiscal year during which the termination occurs at target, and (iii) acceleration in full of a pro rata portion of all performance-based equity awards without regard to the applicable performance targets (in addition to acceleration of any time-based equity awards).
During and after termination of the Crabb Employment Agreement, Mr. Crabb is obligated to maintain the Company’s confidential information in confidence. In addition, he agreed to certain non-competition and non-solicitation covenants for a one-year period following any termination of his employment.
Voluntary Base Salary Reductions. In connection with certain cost reduction initiatives implemented by the Company in the second quarter of 2020, Mr. Thompson agreed to voluntarily reduce his annual base salary by 25% and Mr. Fox agreed to voluntarily reduce his annual base salary by 20%, each effective as of April 6, 2020. Notwithstanding these voluntary base salary reductions and as described above, potential payments under their respective employment agreements in the event of a termination without Cause or a resignation for Good Reason would be calculated based on the annual base salary in effect prior to the April 6, 2020 voluntary reduction. See “Potential Payments upon Termination or Change-in Control” for further discussion.
Potential Payments upon Termination or Change-in-Control
Charles K. Thompson
Mr. Thompson’s employment agreement provides for the following potential payments upon termination. The total amounts payable for certain severance benefits to Mr. Thompson may be reduced to the extent necessary so that the amount payable is not subject to excise tax under Section 4999 of the Internal Revenue Code. In order to receive the severance payments and benefits described below (other than those provided in the event of his death), Mr. Thompson is required to execute a full general release of claims in favor of the Company.
Termination without Cause or Resignation for Good Reason. Mr. Thompson’s employment agreement provides for the following payments and benefits:
•Payment of 18 to 24 months of base salary as in effect immediately prior to the termination date (as described below), calculated using a base salary equal to the greater of $600,000 per year or Mr. Thompson’s actual base salary as of the termination of his employment;
•Payment of 18 to 24 months of the Company’s COBRA premiums in effect on the termination date (as described below);
•Payment of at least 100% of the bonus attributable to the fiscal year during which the termination date occurs if such bonus would have been earned and paid but for the termination of Mr. Thompson’s employment; and
•Full vesting of all then outstanding time-based equity awards (including certain time-based equity awards with the Company is obligated to issue Mr. Thompson no later than the last day of his employment) and a pro rata portion (based on the portion of the applicable performance period actually served prior to termination) of all then outstanding performance-based awards regardless of whether or not such performance-based awards would become vested and exercisable based on the applicable performance criteria.
Upon termination of Mr. Thompson’s employment without “Cause” or in the event of his resignation for “Good Reason”, as such terms are defined in his employment agreement, he is entitled to a lump sum severance payment equal to the sum of 18 months base salary (increasing by an additional one-half month for each calendar month elapsed starting January 1, 2021, up to a maximum of 24 months) plus 18 months of the Company’s COBRA premiums in effect on the date of termination (increasing by an additional one-half month for each calendar month elapsed, starting January 1, 2021, up to a maximum of 24 months), provided that for purposes of calculating the foregoing lump sum severance payment the annual base salary shall be the greater of $600,000 or Mr. Thompson’s actual annual base salary as in effect on the termination date.
Change-in-Control. Mr. Thompson’s employment agreement does not provide for separate payments and benefits, in lieu of those described above, following a termination without cause or resignation for good reason, in connection with a change-in-control of the Company (which generally means a termination within 6 months prior to, or one year after, a change-in-control).
Death or Disability. If Mr. Thompson’s employment terminates due to death or disability, his employment agreement provides for full vesting of all then outstanding time-based equity awards and a pro rata portion (based on the portion of the applicable performance period actually served prior to termination) of all then outstanding performance-based awards regardless of whether or not such performance-based awards would become vested and exercisable based on the applicable performance criteria.
Cause and Good Reason Defined. For purposes of the Thompson Employment Agreement, “cause” is generally deemed to exist, subject to applicable notice and cure provisions, if the executive at any time: commits a material breach of his employment agreement, is guilty of gross insubordination, gross negligence, recklessness or willful misconduct in connection with or affecting the business or affairs of the Company, engages in material and intentional unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of the Company, alcohol or substance abuse that interferes with executive’s ability to discharge the duties and responsibilities of his position, committing a knowing breach of executive’s fiduciary duties to the Company and its stockholders, or is convicted of, or pleads no contest to, a felony criminal offense.
For purposes of the Thompson Employment Agreement, “good reason” generally means a material reduction in base salary, a material reduction in an executive’s authority, duties, and executive responsibilities with the Company, a material change in geographic location(s) at which the executive must perform services or in the location of the Company’s principal office at which the executive renders services, excluding required business travel, or a material breach of his employment agreement by the Company. “Good reason” also includes a change in Mr. Thompson’s direct reporting to anyone other than the Board of the Company and the scheduled expiration of the term of the Thompson Employment Agreement which is December 31, 2021.
Robert Y. Fox
Mr. Fox’s employment agreement provides for the following potential payments upon termination or a change-in-control of the Company. The total amounts payable for certain severance benefits to Mr. Fox may be reduced to the extent necessary so that the amount payable is not subject to excise tax under Section 4999 of the Internal Revenue Code. In order to receive the severance payments and benefits described below (other than those provided in the event of his death), Mr. Fox is required to execute a full general release of claims in favor of the Company.
Termination without Cause or Resignation for Good Reason. Mr. Fox’s employment agreement provides for the following payments and benefits:
•Payment of 12 months of the base salary as in effect immediately prior to the termination date, calculated using a base salary equal to the greater of $425,000 per year or Mr. Fox’s actual base salary as of the termination of his employment;
•Payment of 12 months of the Company’s COBRA premiums in effect on the termination date;
•Payment of at least 100% of the bonus attributable to the fiscal year during which the termination date occurs if such bonus would have been earned and paid but for the termination of Mr. Fox’s employment; and
•Full vesting of all then outstanding time-based equity awards and a pro rata portion (based on the portion of the applicable performance period actually served prior to termination) of all then outstanding performance-based awards (which will continue to be subject to applicable vesting criteria).
Change-in-Control. Mr. Fox’s employment agreement provides for the following payments and benefits, in lieu of those described above, following a termination without cause or resignation for good reason, in connection with a change-in-control of the Company (which generally means a termination within 6 months prior to, or one year after, a change-in-control):
•Payment of 24 months of base salary as in effect immediately prior to the termination date, calculated using a base salary equal to the greater of $425,000 per year or Mr. Fox’s actual base salary as of the termination of his employment;
•Payment of 24 months of the Company’s COBRA premiums in effect on the termination date;
•A lump-sum payment equal to 100% of the bonus attributable to the fiscal year during which the termination date occurs at target; and
•Full vesting of all then outstanding time-based equity awards and a pro rata portion (based on the portion of the applicable performance period actually served prior to termination) of all then outstanding performance-based awards without regard to applicable performance targets.
Death or Disability. If Mr. Fox’s employment terminates due to death or disability, his employment agreement provides for full vesting of all then outstanding equity awards (other than awards whose vesting is based on performance-based criteria - which are subject to pro rata accelerated vesting if and to the extent the performance criteria are ultimately satisfied).
Cause and Good Reason Defined. For purposes of the Fox Employment Agreement, “cause” is generally deemed to exist, subject to applicable notice and cure provisions, if the executive at any time: commits a material breach of his employment agreement, is guilty of gross insubordination, gross negligence, recklessness or willful misconduct in connection with or affecting the business or affairs of the Company, engages in material and intentional unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of the Company, alcohol or substance abuse that interferes with executive’s ability to discharge the duties and responsibilities of his position, committing a knowing breach of executive’s fiduciary duties to the Company and its stockholders, or is convicted of, or pleads no contest to, a felony criminal offense.
For purposes of the Fox Employment Agreement, “good reason” generally means a material reduction in base salary, a material reduction in an executive’s authority, duties, and executive responsibilities with the Company, a material change in geographic location(s) at which the executive must perform services or in the location of the Company’s principal office at which the executive renders services, excluding required business travel, or a material breach of his employment agreement by the Company. “Good reason” also means a change in direct reporting to anyone other than the Board or Chief Executive Officer of the Company.
Joseph M. Crabb
Mr. Crabb’s employment agreement provides for the following potential payments upon termination or a change-in-control of the Company. The total amounts payable for certain severance benefits to Mr. Crabb may be reduced to the extent necessary so that the amount payable is not subject to excise tax under Section 4999 of the Internal Revenue Code. In order to receive the severance payments and benefits described below (other than those provided in the event of his death), Mr. Crabb is required to execute a full general release of claims in favor of the Company.
Termination without Cause or Resignation for Good Reason. Mr. Crabb’s employment agreement provides for the following payments and benefits:
•Payment of 24 months of the Base Salary in effect immediately prior to the termination date;
•Payment of 12 months of the Company’s COBRA premiums in effect on the termination date;
•Payment of at least 100% of the bonus attributable to the fiscal year during which the termination date occurs if such bonus would have been earned and paid but for the termination of Mr. Crabb’s employment; and
•Full vesting of all then outstanding time-based equity awards and a pro rata portion (based on the portion of the applicable performance period actually served prior to termination) of all then outstanding performance-based awards (which will continue to be subject to applicable vesting criteria).
Change-in-Control. Mr. Crabb’s employment agreement provides for the following payments and benefits, in lieu of those described above, following a termination without cause or resignation for good reason, in connection with a change-in-control of the Company (which generally means a termination within 6 months prior to, or one year after, a change-in-control):
•Payment of 24 months of the Base Salary in effect immediately prior to the termination date;
•Payment of 24 months of the Company’s COBRA premiums in effect on the termination date;
•A lump-sum payment equal to 100% of the bonus attributable to the fiscal year during which the termination date occurs at target; and
•Full vesting of all then outstanding time-based equity awards and a pro rata portion (based on the portion of the applicable performance period actually served prior to termination) of all then outstanding performance-based awards without regard to applicable performance targets.
Death or Disability. If Mr. Crabb’s employment terminates due to death or disability, his employment agreement provides for full vesting of all then outstanding equity awards (other than awards whose vesting is based on performance-based criteria - which are subject to pro rata accelerated vesting if and to the extent the performance criteria are ultimately satisfied).
Cause and Good Reason Defined. For purposes of the employment agreement, “cause” is generally deemed to exist, subject to applicable notice and cure provisions, if the executive at any time: commits a material breach of his employment agreement, is guilty of gross insubordination, negligence, recklessness or willful misconduct in connection with or affecting the business or affairs of the Company, engages in material and intentional unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of the Company, alcohol or substance abuse that interferes with executive’s ability to discharge the duties and responsibilities of his position, committing a knowing breach of executive’s fiduciary duties to the Company and its stockholders, or is convicted of, or pleads no contest to, a felony criminal offense.
For purposes of the employment agreement, “good reason” generally means a material reduction in base salary, a material reduction in an executive’s authority, duties, and executive responsibilities with the Company, a material change in geographic location(s) at which the executive must perform services or in the location of the Company’s principal office at which the executive renders services, excluding required business travel or a material breach of his employment agreement by the Company. “Good reason” also means a change in direct reporting to anyone other than the Board or CEO of the Company.
Director Compensation
Background, Fees and Awards
Directors of publicly traded companies have substantial responsibilities and time commitments, and there is a competitive market for highly qualified and experienced directors. As such, the Compensation and Nominating Committee seeks to provide appropriate compensation to directors taking into account these factors.
In the second quarter of 2020, in connection with a company-wide cost reduction initiative implemented by the Company, the Board approved a modification to the existing compensation arrangements for non-employee Board members. The modification reduced overall cash and, non-cash compensation by 25% and reallocated the amount equally between cash and an annual restricted stock grant. Accordingly, for the fiscal year beginning January 1, 2020, Board compensation for non-employee directors consisted of $56,250 in cash and an annual grant of restricted stock with a target grant-date value of $56,250, and additional annual cash compensation for the Chair of the Audit Committee and the Chair of the Compensation and Nominating Committee in the amounts of $15,000 and $10,000, respectively. Board compensation for the fiscal year beginning January 1, 2021 is expected to be unchanged from 2020 amounts.
Board Compensation Table
The following table provides information for compensation of the non-employee members of our Board as of December 31, 2020. As the Chairman of the Board and Chief Executive Officer, Mr. Thompson’s compensation related to his service as a member of the Board is provided in the Summary Compensation Table.
| | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash ($) (1) | | Stock Awards ($) (2) | | Total ($) |
| John B. Griggs (3) | | 71,250 | | | 58,125 | | | 129,375 | |
| Michael Y. McGovern | | 66,250 | | | 58,125 | | | 124,375 | |
| Lawrence A. First (4) | | 56,250 | | | — | | | 56,250 | |
(1) Directors currently receive $56,250 annually in cash compensation. The Audit Committee Chair, which was Mr. Griggs for all of the 2020 fiscal year, receives $15,000 annually for this role. The Compensation and Nominating Committee Chair, which was Mr. McGovern for all of the 2020 fiscal year, receives $10,000 annually for this role. As of April 20, 2021, Mr. McGovern serves as Audit Committee Chair and Mr. Nightingale serves as Compensation and Nominating Committee Chair.
(2) Represents award grants of 37,500 shares of restricted stock to each non-employee director for service during fiscal 2020, with a grant date fair value of $1.55 calculated pursuant to ASC 718.
(2) Mr. Griggs resigned from the Board and all committees effective April 5, 2021.
(3) Mr. First’s compensation was received by Ascribe Investments II LLC and Ascribe Investments III LLC on Mr. First’s behalf. Mr. First has directed the Company to pay any director compensation owed to him to Ascribe’s affiliates. Mr. First has declined to receive any equity-based compensation for his service as a director, either personally or through Ascribe’s affiliates.
The following table provides information on the unvested restricted stock held by our non-employee directors as of April 22, 2021.
| | | | | | | | |
| Name | | Number of Awards (1) (2) |
| Lawrence A. First | | 0 (3) |
| Michael Y. McGovern | | 22,959 | |
| David J. Nightingale | | 17,220 | |
(1) Represents award grants of restricted stock to each non-employee director for service during fiscal 2021, which are scheduled to vest on April 21, 2022. Mr. Nightingale joined the Board on April 6, 2021 and received a restricted stock grant of 17,220 shares, which reflects three-fourths of the number of shares granted to non-employee directors for Board service for the full 2021 fiscal year.
(2) Mr. Griggs resigned from the Board effective April 5, 2020 and, in connection with his resignation, the Board accelerated the vesting of one-fourth of the number of shares of restricted stock previously granted to Mr. Griggs for fiscal year 2021 Board service.
(3) Mr. First has declined to receive any equity-based compensation for his service as a director, either personally or through Ascribe’s affiliates.
Compensation and Nominating Committee
/s/ David J. Nightingale
David J. Nightingale
Chair
/s/ Michael Y. McGovern
Michael Y. McGovern
Committee Member
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderShareholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents information required by this item will be contained in,concerning our equity compensation plans, including the MIP, and is incorporated by reference to, the Definitive Proxy Statement for our 2021 Annual MeetingDirectors Plan, as of Stockholders or a Form 10-K/A which, in either case, we will file with the SecuritiesDecember 31, 2020:
| | | | | | | | | | | | | | | | | |
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) (1) | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights ($) (2) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) |
| Equity compensation plans approved by security holders | 350,949 | | | — | | | 644,770 | |
| Equity compensation plans not approved by security holders | — | | | — | | | — | |
| Total | 350,949 | | | — | | | 644,770 | |
(1) Includes awards of 75,000 shares of restricted stock and Exchange Commission within 120 days after our fiscal year ended275,949 of restricted stock units that have been granted but not yet issued.
(2) There were no options outstanding at December 31, 2020.
Security Ownership of Certain Beneficial Owners and Management
Beneficial ownership of shares and percentage ownership are determined in accordance with the rules of the SEC. Except as otherwise indicated by footnote, and subject to community property laws where applicable, the persons named in the table below have reported that they have sole voting and sole investment power with respect to all shares of common stock shown as beneficially owned by them. No shares of common stock held by a director or officer have been pledged as security. The Company is not aware of any arrangement or pledge of common stock that could result in a change of control of the Company.
Unless otherwise indicated, the address for each director and officer is c/o Nuverra Environmental Solutions, Inc., 6720 N. Scottsdale Road, Suite 190, Scottsdale, AZ 85253. The information in this table is based on statements in filings with the SEC, or other reliable information available to the Company.
The following table sets forth information known to the Company regarding the beneficial ownership of its common stock as of April 22, 2021 by (i) each director, (ii) each of our named executive officers, and (iii) all executive officers and directors serving as of April 22, 2021 as a group. An individual’s percentage ownership of common stock outstanding is based on 15,993,087 shares of our common stock outstanding as of April 22, 2021. Pursuant to Rule 13d-3(d)(1) under the Exchange Act, shares of common stock subject to stock options currently exercisable or exercisable within 60 days, as well as shares of common stock issuable upon the settlement of vested restricted stock units, are deemed outstanding for purposes of computing the percentage ownership of the person holding such securities and the management group but are not deemed outstanding for computing the percentage ownership of any other person.
| | | | | | | | | | | | | | |
| | | | |
| | Shares Beneficially Owned |
| Name of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of
Class |
| Current Executive Officers and Directors | | | | |
Charles K. Thompson Chairman of the Board and Chief Executive Officer | | 160,844 | | | * |
Robert Y. Fox President and Chief Operating Officer | | 62,032 | | | * |
Joseph M. Crabb Executive Vice President, Chief Legal Officer and Corporate Secretary | | 59,000 | | | * |
Lawrence A. First Director | | — | | | * |
Michael Y. McGovern (1) Director | | 47,857 | | | * |
David J. Nightingale (2) Director | | — | | | * |
| Shares owned by executive officers and directors as a group | | 329,733 | | | * |
* Less than 1% of shares outstanding
(1) Excludes 22,959 shares of restricted stock granted under the Directors Plan on April 21, 2021, which vest on the first anniversary of the grant date (subject to potential acceleration upon the occurrence of certain events as set forth in the Directors Plan).
(2) Excludes 17,220 shares of restricted stock granted under the Directors Plan on April 21, 2021, which vest on the first anniversary of the grant date (subject to potential acceleration upon the occurrence of certain events as set forth in the Directors Plan).
The following table sets forth information known to the Company regarding the beneficial ownership of common stock as of April 22, 2021 of persons or groups that own or have the right to acquire more than 5% of our common stock.
| | | | | | | | | | | | | | | | | |
| | | Shares Beneficially Owned |
| Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of
Class |
Ascribe II Investments LLC (1) Ascribe III Investments LLC 299 Park Avenue, 34th Floor, New York, NY 10171 | | 7,021,879 | | | 43.9 | % |
ECF Value Fund, LP (2) ECF Value Fund II, LP ECF Value Fund International Master, LP 1177 Ave. of Americas, 46th Floor, New York, NY 10036 | | 6,626,660 | | | 41.4 | % |
| | | | |
(1) Ascribe is the investment manager of Ascribe III Investments LLC (“Fund III”). Ascribe Management LLC (“Ascribe Management”) is the investment manager of Ascribe II Investments LLC (“Fund II”, and together with Fund III, the “Ascribe Funds”). The Ascribe Funds hold Common Stock. American Securities LLC (“American Securities”) is the 100% owner of Ascribe and Ascribe Management. Ascribe Opportunities Fund III, L.P. (“Opportunities III”) and Ascribe Opportunities Fund III(B), L.P. (“Opportunities III(B)”) are the sole members of Fund III. Ascribe Associates III, LLC (“Associates III”) is the general partner of Opportunities III and Opportunities III(B). Ascribe Opportunities Fund II, L.P. (“Opportunities II”) and Ascribe Opportunities Fund II(B), L.P. (“Opportunities II(B)”) are the sole members of Fund II. Ascribe Associates II, LLC (“Associates II”) is the general partner of Opportunities II and Opportunities II(B). Mr. First is the Chief Investment Officer and Managing Director of each of Ascribe and Ascribe Management, which are the investment managers to the Ascribe Funds, and may be deemed to have voting and dispositive power over the shares of Common Stock held by each of the Ascribe Funds. Each of Ascribe, Ascribe Management, American Securities, Associates III, Opportunities III, Opportunities III(B), Associates II, Opportunities II, Opportunities II(B) and Mr. First may be deemed to share beneficial ownership of the Common Stock held by the Ascribe Funds. Each of Ascribe, Ascribe Management, American Securities, Associates III, Opportunities III, Opportunities III(B), Associates II, Opportunities II, Opportunities II(B) and Mr. First disclaims beneficial ownership of the Common Stock held by the Ascribe Funds, except to the extent of its pecuniary interests. Number of shares beneficially owned is based solely on a Schedule 13D filed jointly with the SEC on January 7, 2019 by (i) Ascribe Capital; (ii) American Securities; (iii) Ascribe Funds; (iv) Opportunities III; (v) Opportunities III(B); (vi) Associates III; (vii) Ascribe Management; (viii) Opportunities II; (ix) Opportunities II(B); and (x) Associates II.
(2) Gates Capital Management, L.P. (“Gates Capital”), acts as the investment manager to certain funds directly holding Common Stock (the “Gates Capital Funds”). Gates Capital Management GP, LLC (the “General Partner”) is the general partner of Gates Capital, with respect to the shares of Common Stock directly held by the Gates Capital Funds. Gates Capital Management, Inc. (the “Gates Corporation”) is the managing member of the General Partner with respect to the shares of Common Stock directly held by the Gates Capital Funds. Jeffrey L. Gates serves as President of the Gates Corporation with respect to the shares of Common Stock directly held by the Gates Capital Funds. Each of Gates Capital, the General Partner, the Gates Corporation and Mr. Gates, may be deemed to share beneficial ownership of the Common Stock held by the Gates Capital Funds. Each of Gates Capital, the General Partner, the Gates Corporation and Mr. Gates, disclaims beneficial ownership of the Common Stock held by the Gates Capital Funds except to the extent of its pecuniary interests. In accordance with the Plan of Reorganization (as defined below), the Gates Corporation designated Mr. McGovern and Mr. Thompson to serve as directors of the Company. Number of shares beneficially owned is based solely on a Statement of Changes in Beneficial Ownership on Form 4 filed jointly with the SEC on February 19, 2021 by (i) Gates Capital; (ii) General Partner; (iii) Gates Corporation; and (iv) Jeffrey L. Gates.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required byCertain Relationships and Related Party Transactions
Our Board has adopted a written policy regarding the review, approval and ratification of any related party transaction. Under this itempolicy, the Board’s Audit Committee will review the relevant facts and circumstances of each related party transaction, including if the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party and the extent of the related party’s interest in the transaction, and either approve or disapprove the related party transaction. Any related party transaction may be consummated, and may continue, only if the Audit Committee has approved or ratified such transaction in accordance with the guidelines set forth in the policy.
A “related party transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we were, are or will be containeda participant and in which any related party had, has or will have a direct or indirect interest (other than solely as a result of being a director or a less than five percent beneficial owner of another entity). A “related party” is any (a) person who is or was (since the beginning of the Company’s last fiscal year) an executive officer, director or nominee for election as a director, (b) greater than five percent beneficial owner of any class of the Company’s voting securities, or (c) immediate family member of any of the foregoing, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law of such person, and anyone (other than a tenant or employee) sharing the household of such person. Disclosure is incorporatedrequired for each related party transaction in which the amount involved exceeds the lesser of (i) $120,000 or (ii) one percent of the average of the Company’s total assets at year end for the last two completed fiscal years.
Other Relationships
Mr. First, a director of the Company, serves as the Chief Investment Officer and Managing Director of Ascribe. Ascribe and/or one or more of its affiliates own approximately 43.9% of the outstanding common stock of the Company as of April 22, 2021, and was owed approximately $4.5 million as of December 31, 2019, respectively of the aggregate principal amount of the Second Lien Term Loan Credit Agreement (the “Second Lien Term Loan Agreement”), as amended. All obligations under the Second Lien Term Loan Agreement were repaid in full on November 20, 2020. The Company originally entered into the Second Lien Term Loan Agreement on August 7, 2017 (the “Effective Date”) contemporaneously with the approval by referenceof the United States Bankruptcy Court for the District of Delaware of the Company’s prepackaged plans of reorganization (together, and as amended, the “Plan of Reorganization”). Under the Plan of Reorganization, Ascribe designated Mr. Griggs and Mr. First to serve as directors of the Company. Mr. Griggs resigned from the Board effective April 5, 2021, and the Plan of Reorganization does not provide Ascribe with the right to designate Mr. Griggs’ successor or a continuing right to designate directors of the Company. Affiliates of Ascribe are parties to that certain Registration Rights Agreement dated as of the Effective Date by and among the Company and certain stockholders of the Company (see the “Registration Rights Agreement” section below).
Registration Rights Agreement
On the Effective Date, pursuant to the Definitive ProxyPlan of Reorganization, the Company entered into a Registration Rights Agreement with certain of our pre-Effective Date creditors that, in the aggregate, received approximately 90% of our common stock on the Effective Date. Pursuant to the Registration Rights Agreement, any holder that, together with its affiliates, (i) beneficially owned 10% of the aggregate outstanding shares of common stock on the Effective Date and (ii) continues to beneficially own at least 5% of the aggregate outstanding shares of common stock (“Demand Holder”), may request registration of its common stock at any time under the Securities Act on Form S-1 (“Long-Form Registration”), if Form S-3 is not available to the Company, or on Form S-3, or any similar short-form registration statement (“Short-Form Registration”), if available. The Company, however, is not required to conduct more than three Long-Form Registrations for each holder, but is required to conduct an unlimited number of Short-Form Registrations for each holder.
In addition, promptly after the Effective Date, the Company was required to use its reasonable best efforts to cause a shelf registration (“Shelf”) on Form S-1 to be declared effective as promptly as reasonably practicable thereafter for the offer and resale of the Common Stock on a delayed or continuous basis. At any time and from time to time after the Shelf has been declared effective, any Demand Holder may request to sell all or any portion of their common stock in an underwritten offering that is registered pursuant to the Shelf, and any holder may participate in such a Shelf takedown. On March 16, 2018, the Company filed a Registration Statement foron Form S-1 pursuant to the foregoing obligation, and the registration statement was declared effective on May 3, 2018.
Pursuant to the Registration Rights Agreement, holders also have customary piggyback registration rights with respect to any offering by the Company under the Securities Act. The registration rights are subject to certain conditions and limitations, including our 2021 Annual Meetingability to suspend registration statement under certain circumstances. We will generally pay all fees and expenses in connection with our obligations under the Registration Rights Agreement. The rights granted in the Registration Rights Agreement are subject to customary indemnification and contribution provisions. No separate review of Stockholders orthis transaction was performed by the Audit Committee as it was a Form 10-K/A which, in either case, we will filerequirement of the Plan of Reorganization.
Director Independence
We currently have four directors on our Board. Our Corporate Governance Guidelines and SEC rules require us to maintain a board of directors with at least a majority of independent directors. For a director to qualify as independent, the Board must affirmatively determine that the director has no material relationship with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2020.Company, either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company that, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Each member of the Board must meet certain mandatory qualifications for membership on the Board, and the Board as a whole must meet the minimum independence requirements imposed by our Corporate Governance Guidelines, the SEC, and any other laws and regulations applicable to us. Each member of the Board is required to promptly advise the Chairman of the Board and the Chairman of the Compensation and Nominating Committee of any matters which, at any time, may affect such member’s qualifications for membership under the criteria imposed by the SEC, any applicable exchange or market, any other laws and regulations or these guidelines, including, but not limited to, such member’s independence.
The Board has affirmatively determined that three of our four Board members, Messrs. First, McGovern, and Nightingale, and all Board committee members, are independent under all applicable rules governing independence. In reaching its determination, the Board reviewed the Company’s Corporate Governance Guidelines, SEC rules, NYSE American listing rules, and the individual circumstances of each director and determined that each of the directors identified as independent satisfied the applicable standards. The Board determined that Mr. Thompson does not currently satisfy the independence standards due to his service as Chief Executive Officer through April 20, 2021.
Item 14. Principal Accounting Fees and Services
The information requiredfollowing is a summary of the independent registered public accounting fees billed to us for professional services rendered by this item will be containedMoss Adams for the fiscal years ended December 31, 2020 and 2019.
| | | | | | | | | | | | | | |
| Fee Category | | 2020 | | 2019 |
| Audit Fees | | $ | 252,410 | | | $ | 270,315 | |
| Audit Related Fees | | 15,200 | | | — | |
| Tax Fees | | — | | | — | |
| All Other Fees | | — | | | — | |
| Total Fees | | $ | 267,610 | | | $ | 270,315 | |
Audit fees consist of fees billed for each of 2020 and 2019 for professional services rendered in and is incorporated by reference to, the Definitive Proxy Statement for our 2021 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will fileconnection with the Securitiesaudit of our annual Consolidated Financial Statements and Exchange Commission within 120 days afterreviews of our interim Consolidated Financial Statements included in our periodic reports. All of Moss Adams’ services in auditing the Company’s financial statements for the fiscal year ended December 31, 2020.2020 were performed by full-time permanent employees of Moss Adams.
Audit related fees consist of fees that are reasonably related to the performance of the audit or review of our financial statements and are not reported under the caption “Audit Fees.”
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
The Audit Committee has, by resolution, adopted policies and procedures regarding the pre-approval of the performance by the independent registered public accounting firm of audit and non-audit services. The independent registered public accounting firm may not perform any service unless the approval of the Audit Committee is obtained prior to the performance of the services, except as may otherwise be provided by law or regulation. All services described above were pre-approved by the Audit Committee in accordance with this policy.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:Financial Statements and Schedules
The financial statements and financial statement schedules are included in Item 8 of the Original From 10-K.
1.
(b) Exhibits
Audited Consolidated Financial Statements
The exhibits required to be filed by Item 15 are set forth in, and filed with or incorporated by reference in, the “Exhibit Index” of the Original Form 10-K. The “Exhibit Index” to this Form 10-K/A sets forth the additional exhibits required to be filed with this Form 10-K/A.
:
2. Financial Statement Schedules: All financial statement schedules have been omitted since they are not required, not applicable, or the information is otherwise included in the audited consolidated financial statements.
(b)�� The exhibits listed on the “Exhibit Index” set forth below are filed with this Annual Report on Form 10-K or incorporated by reference as set forth therein.
| | | | | | | | | | | |
| Exhibit Number | | Description |
| | | |
2.1 | | | | |
| | | |
2.2 | | | | |
| | | |
3.1 | | | | |
| | | |
3.2 | | | | |
| | | |
3.3 | | | | |
| | | |
4.1 | | | | |
| | | |
4.2 | | | | |
| | | |
4.3 | | | | |
| | | |
4.4 | | | | |
| | | |
| | | |
4.5 | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Exhibit Number24.2 | | Description* |
4.6 | | | | |
| | | |
10.1 | | † | | |
| | | |
10.2 | | † | | |
| | | |
10.3 | | † | | |
| | | |
10.4 | | † | | |
| | | |
10.5 | | † | | |
| | | |
10.6 | | † | | |
| | | |
10.7 | | † | | |
| | | |
10.8 | | † | | |
| | | |
10.9 | | † | | |
| | | |
10.10 | | | | |
| | | |
10.11 | | | | |
| | | |
10.12 | | | | |
| | | |
10.13 | | | | |
| | | |
10.14 | | | | |
| | | |
10.15 | | | | |
| | | |
10.16 | | | | |
| | | |
| | | | | | | | | | | |
Exhibit Number | | Description |
10.17 | | † | | |
| | | |
10.18 | | † | | |
| | | |
10.19 | | | | |
| | | |
10.20 | | | | |
| | | |
10.21 | | | | |
| | | |
10.22 | | † | | |
| | | |
10.23 | | † | | |
| | | |
10.24 | | | | |
| | | |
10.25 | | | | |
| | | |
10.26 | | | | |
| | | |
10.27 | | | | |
| | | |
21.1 | | * | | |
| | | |
23.1 | | * | | |
| | | |
24.1 | | * | | Power of Attorney of Officers and Directors of the Company (set forth on the signature pagespage of this Form 10-K)10-K/A). |
| | | | |
31.1 31.3 | | * | | | |
| | | | |
31.2 31.4 | | * | | | |
| | | | |
32.1 | | * | | |
| | | | |
| | | | |
| | | | |
| | | |
101.INS | * | | Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | | |
| | | |
101.SCH | * | | Inline XBRL Taxonomy Extension Schema Document | | |
| | | |
101.CAL | * | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | |
| | | |
101.DEF | * | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
| | | | | | | | | | | |
Exhibit Number | | Description |
101.LAB | * | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
101.PRE | * | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | |
| | | |
104.1 | * | | Cover Page Interactive Data File - The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
| | | |
| * | | | | Filed herewith |
† | | | Compensatory plan, contract or arrangement in which directors or executive officers may participate | |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Scottsdale, State of Arizona, on March 16, 2021.authorized.
| | | | | | | | | | | |
| Nuverra Environmental Solutions, Inc. |
| | |
| By: | | /s/ CHARLES K. THOMPSON |
| Name: | | Charles K. Thompson |
| Title: | | Chairman of the Board and ChiefPrincipal Executive Officer |
| Date: | | March 16,April 26, 2021 |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles K. Thompson as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K10-K/A and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | |
| /s/ CHARLES K. THOMPSON | | Chairman of the Board Chief Executive Officer, and Director
(Principal Executive Officer) | | March 16,April 26, 2021 |
| Charles K. Thompson | | | |
| | | | |
| /s/ ERIC BAUER | | Executive Vice President and Interim Chief Financial Officer
(Principal Financial Officer) | | March 16,April 26, 2021 |
| Eric Bauer | | |
| | | | |
/s/ ROGER L. MENDELOVITZ | | Corporate Controller
(Principal Accounting Officer) | | March 16,April 26, 2021 |
Roger L. Mendelovitz | | |
| | | | |
/s/ JOHN B. GRIGGSLAWRENCE A. FIRST | | Director | | March 16,April 26, 2021 |
John B. GriggsLawrence A. First | | |
| | | | |
| /s/ MICHAEL Y. MCGOVERN | | Director | | March 16,April 26, 2021 |
| Michael Y. McGovern | | |
| | | | |
/s/ LAWRENCE A. FIRSTDAVID J. NIGHTINGALE | | Director | | March 16,April 26, 2021 |
Lawrence A. FirstDavid J. Nightingale | | | | |
INDEX TO FINANCIAL STATEMENTS
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
The following financial statements of the Company and its subsidiaries required to be included in Item 15(a)(1) of Form 10-K are listed below:
| | | | | | | | |
| | Page |
Audited Consolidated Financial Statements: | | |
| | |
| | |
| | |
| | |
| | |
| | |
Supplementary Financial Data:
The supplementary financial data of the Registrant and its subsidiaries required to be included in Item 15(a)(2) of Form 10-K have been omitted as not applicable or because the required information is included in the Consolidated Financial Statements or in the notes thereto.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Nuverra Environmental Solutions, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Nuverra Environmental Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations, and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
In 2019 the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification (“ASC”) Topic No. 842.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Long-Lived Assets
As described in Note 8 to the consolidated financial statements, the Company’s management performed an impairment analysis for certain long-lived assets and concluded that the carrying values of the asset groups associated with the landfill in the Rocky Mountain division and trucking equipment in the Southern division were not recoverable as the carrying value exceeded management’s estimate of future undiscounted cash flows for these asset groups. As a result of that analysis, the Company recorded an impairment charge of $15.6 million during the year ended December 31, 2020. 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).
The principal consideration for our determination that performing procedures relating to the impairment assessment is a critical audit matter are that there was significant judgment by management when developing the fair value measurement of the asset groups. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence relating to management’s discounted cash flow estimates and significant assumptions, including forecasted sales growth, gross margin, terminal growth rate and discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.
The primary procedures we performed to address this critical audit matter included:
•Testing management’s process for developing the fair value estimates and reperforming calculations for mathematical accuracy.
•Evaluating the appropriateness of the discounted cash flow estimates, including significant estimates of asset group determination, forecasted sales growth, estimated useful lives, and discount rate.
•Testing the completeness, accuracy, and relevance of the underlying historical data used in the discounted cash flow model.
•Professionals with specialized skill and knowledge were used to assist in the evaluation of the discounted cash flow approach and discount rates used.
/s/ Moss Adams LLP
Phoenix, Arizona
March 16, 2021
We have served as the Company’s auditor since 2017.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
| | | | | | | | | | | |
| December 31, | | December 31, |
| 2020 | | 2019 |
| Assets | | | |
| Cash and cash equivalents | $ | 12,880 | | | $ | 4,788 | |
| Restricted cash | 2,820 | | | 922 | |
| Accounts receivable, net | 15,427 | | | 26,493 | |
| Inventories | 2,852 | | | 3,177 | |
| Prepaid expenses and other receivables | 3,119 | | | 3,264 | |
| | | |
| Other current assets | 0 | | | 231 | |
| Assets held for sale | 778 | | | 2,664 | |
| Total current assets | 37,876 | | | 41,539 | |
| Property, plant and equipment, net | 151,164 | | | 190,817 | |
| Operating lease assets | 1,691 | | | 2,886 | |
| Equity investments | 35 | | | 39 | |
| Intangibles, net | 194 | | | 640 | |
| | | |
| | | |
| Other assets | 106 | | | 178 | |
| | | |
| Total assets | $ | 191,066 | | | $ | 236,099 | |
| Liabilities and Shareholders’ Equity | | | |
| Liabilities: | | | |
| Accounts payable | $ | 5,130 | | | $ | 5,633 | |
| Accrued and other current liabilities | 9,550 | | | 10,064 | |
| Current portion of long-term debt | 2,433 | | | 6,430 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Total current liabilities | 17,113 | | | 22,127 | |
| Deferred income taxes | 120 | | | 91 | |
| Long-term debt | 31,673 | | | 30,005 | |
| Noncurrent operating lease liabilities | 1,360 | | | 1,457 | |
| Long-term contingent consideration | 500 | | | 500 | |
| | | |
| Asset retirement obligations | 8,017 | | | 7,487 | |
| | | |
| Total liabilities | 58,783 | | | 61,667 | |
| Commitments and contingencies | 0 | | 0 |
| Stockholders’ equity: | | | |
| Preferred stock $0.01 par value (1,000 shares authorized, 0 shares issued and outstanding at December 31, 2020 and 2019) | 0 | | | 0 | |
| Common stock, $0.01 par value (75,000 shares authorized, 15,833 shares issued and 15,772 outstanding at December 31, 2020, and 15,781 issued and 15,735 outstanding at December 31, 2019) | 158 | | | 158 | |
| Additional paid-in capital | 339,663 | | | 337,628 | |
| Treasury stock, at cost (60 and 46 shares at December 31, 2020 and December 31, 2019, respectively) | (477) | | | (436) | |
| Accumulated deficit | (207,061) | | | (162,918) | |
| Total shareholders’ equity | 132,283 | | | 174,432 | |
| Total liabilities and shareholders’ equity | $ | 191,066 | | | $ | 236,099 | |
The accompanying notes are an integral part of these statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Revenue: | | | | | |
| Service revenue | $ | 102,810 | | | $ | 152,541 | | | $ | 181,793 | |
| Rental revenue | 7,477 | | | 15,697 | | | 15,681 | |
| Total revenue | 110,287 | | | 168,238 | | | 197,474 | |
| Costs and expenses: | | | | | |
| Direct operating expenses | 87,299 | | | 131,019 | | | 158,896 | |
| General and administrative expenses | 18,960 | | | 20,864 | | | 38,510 | |
| Depreciation and amortization | 28,614 | | | 36,183 | | | 46,434 | |
| Impairment of long-lived assets | 15,579 | | | 766 | | | 4,815 | |
| Impairment of goodwill | 0 | | | 29,518 | | | 0 | |
| Other, net | 0 | | | (10) | | | 1,119 | |
| Total costs and expenses | 150,452 | | | 218,340 | | | 249,774 | |
| Operating loss | (40,165) | | | (50,102) | | | (52,300) | |
| Interest expense, net | (4,070) | | | (5,227) | | | (5,973) | |
| Other income, net | 216 | | | 502 | | | 896 | |
| | | | | |
| Reorganization items, net | (111) | | | (200) | | | (1,679) | |
| Loss before income taxes | (44,130) | | | (55,027) | | | (59,056) | |
| Income tax (expense) | (13) | | | 90 | | | (207) | |
| | | | | |
| | | | | |
| Net loss | $ | (44,143) | | | $ | (54,937) | | | $ | (59,263) | |
| | | | | |
| Loss per common share: | | | | | |
| | | | | |
| | | | | |
| Net loss per basic common share | $ | (2.80) | | | $ | (3.50) | | | $ | (5.01) | |
| | | | | |
| | | | | |
| | | | | |
| Net loss per diluted common share | $ | (2.80) | | | $ | (3.50) | | | $ | (5.01) | |
| | | | | |
| Weighted average shares outstanding: | | | | | |
| Basic | 15,764 | | | 15,676 | | | 11,829 | |
| Diluted | 15,764 | | | 15,676 | | | 11,829 | |
The accompanying notes are an integral part of these statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | Common Stock | | Additional
Paid-In
Capital | | Treasury Stock | | Accumulated Deficit |
| Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2017 | | $ | 242,973 | | | 11,696 | | | $ | 117 | | | $ | 290,751 | | | 0 | | | $ | 0 | | | $ | (47,895) | |
| Stock-based compensation | | 12,717 | | | — | | | — | | | 12,717 | | | — | | | — | | | — | |
| Issuance of common stock to employees (par value $0.01) | | 0 | | | 537 | | | 5 | | | (5) | | | — | | | — | | | — | |
| Net loss | | (59,263) | | | — | | | — | | | — | | | — | | | — | | | (59,263) | |
| Balance at December 31, 2018 | | 196,427 | | | 12,233 | | | 122 | | | 303,463 | | | 0 | | | 0 | | | (107,158) | |
| Adjustment due to adoption of ASC 842, Leases | | (823) | | | — | | | — | | | — | | | — | | | — | | | (823) | |
| Stock-based compensation | | 2,026 | | | — | | | — | | | 2,026 | | | — | | | — | | | — | |
| Issuance of common stock for Rights Offering (par value $0.01) | | 32,175 | | | 3,382 | | | 34 | | | 32,141 | | | — | | | — | | | — | |
| Issuance of common stock to employees (par value $0.01) | | 0 | | | 166 | | | 2 | | | (2) | | | — | | | — | | | — | |
| Treasury stock acquired through surrender of shares for tax withholding | | (436) | | | — | | | — | | | — | | | (46) | | | (436) | | | — | |
| Net loss | | (54,937) | | | — | | | — | | | — | | | — | | | — | | | (54,937) | |
| Balance at December 31, 2019 | | 174,432 | | | 15,781 | | | 158 | | | 337,628 | | | (46) | | | (436) | | | (162,918) | |
| Issuance of common stock to employees and directors (par value $0.01) | | 0 | | | 52 | | | — | | | — | | | | | — | | | — | |
| Treasury stock acquired through surrender of shares for tax withholding | | (41) | | | — | | | — | | | — | | | (14) | | | (41) | | | — | |
| Stock-based compensation | | 2,035 | | | — | | | — | | | 2,035 | | | — | | | — | | | — | |
| Net loss | | (44,143) | | | — | | | — | | | — | | | — | | | — | | | (44,143) | |
| Balance at December 31, 2020 | | $ | 132,283 | | | 15,833 | | | $ | 158 | | | $ | 339,663 | | | (60) | | | $ | (477) | | | $ | (207,061) | |
The accompanying notes are an integral part of these consolidated financial statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (44,143) | | | $ | (54,937) | | | $ | (59,263) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 28,614 | | | 36,183 | | | 46,434 | |
| Amortization of debt issuance costs, net | 95 | | | 328 | | | 186 | |
| Accrued interest added to debt principal | 0 | | | 0 | | | 119 | |
| Stock-based compensation | 2,035 | | | 2,026 | | | 12,717 | |
| Impairment of long-lived assets | 15,579 | | | 766 | | | 4,815 | |
| Impairment of goodwill | 0 | | | 29,518 | | | 0 | |
| Gain on sale of UGSI | 0 | | | 0 | | | (75) | |
| Gain on disposal of property, plant and equipment | (1,646) | | | (1,967) | | | (895) | |
| Bad debt recoveries | (141) | | | (22) | | | (328) | |
| Change in fair value of derivative warrant liability | 0 | | | (34) | | | (443) | |
| | | | | |
| Deferred income taxes | 29 | | | (90) | | | 265 | |
| Other, net | 768 | | | 340 | | | 355 | |
| | | | | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | 11,207 | | | 4,921 | | | 1,798 | |
| Prepaid expenses and other receivables | 145 | | | (729) | | | 800 | |
| Accounts payable and accrued liabilities | 58 | | | (11,014) | | | 3,634 | |
| Other assets and liabilities, net | 565 | | | 1,230 | | | (670) | |
| Net cash provided by operating activities | 13,165 | | | 6,519 | | | 9,449 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Proceeds from the sale of property, plant and equipment | 3,225 | | | 6,979 | | | 19,140 | |
| Purchases of property, plant and equipment | (3,390) | | | (8,243) | | | (12,241) | |
| Proceeds from the sale of UGSI | 0 | | | 0 | | | 75 | |
| Cash paid for acquisitions, net of cash acquired | 0 | | | 0 | | | (42,292) | |
| Net cash used in investing activities | (165) | | | (1,264) | | | (35,318) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Proceeds from Equipment loan | 13,000 | | | 0 | | | 0 | |
| Payments on Commercial real estate loan | (68) | | | 0 | | | 0 | |
| Proceeds from Commercial real estate loan | 10,000 | | | 0 | | | 0 | |
| Proceeds from paycheck protection program loan | 4,000 | | | 0 | | | 0 | |
| Proceeds from First and Second Lien Term Loans | 0 | | | 0 | | | 10,000 | |
| Payments on First and Second Lien Term Loans | (27,021) | | | (4,949) | | | (13,434) | |
| Proceeds from Revolving Facility | 115,028 | | | 184,912 | | | 226,371 | |
| Payments on Revolving Facility | (115,028) | | | (184,912) | | | (226,371) | |
| Proceeds from Bridge Term Loan | 0 | | | 0 | | | 32,500 | |
| Payments on Bridge Term Loan | 0 | | | (31,382) | | | 0 | |
| Payments for debt issuance costs | (928) | | | 0 | | | (167) | |
| Proceeds from the issuance of stock | 0 | | | 31,057 | | | 0 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Payments on finance leases and other financing activities | (1,993) | | | (2,229) | | | (1,856) | |
| Net cash (used in) provided by financing activities | (3,010) | | | (7,503) | | | 27,043 | |
| Change in cash, cash equivalents and restricted cash | 9,990 | | | (2,248) | | | 1,174 | |
| | | | | |
| Cash and cash equivalents, beginning of period | 4,788 | | | 7,302 | | | 5,488 | |
| Restricted cash, beginning of period | 922 | | | 656 | | | 1,296 | |
| Cash, cash equivalents and restricted cash, beginning of period | 5,710 | | | 7,958 | | | 6,784 | |
| Cash and cash equivalents, end of period | 12,880 | | | 4,788 | | | 7,302 | |
| Restricted cash, end of period | 2,820 | | | 922 | | | 656 | |
| Cash, cash equivalents and restricted cash, end of period | $ | 15,700 | | | $ | 5,710 | | | $ | 7,958 | |
| | | | | |
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for interest | $ | 3,718 | | | $ | 4,259 | | | $ | 4,540 | |
| Cash paid for taxes, net | 162 | | | 236 | | | 668 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Property, plant and equipment purchases in accounts payable | 503 | | | 467 | | | 786 | |
| Common stock issued to settle Bridge Term Loan | 0 | | | 1,118 | | | 0 | |
| Conversion of accrued interest on principal debt balance | 0 | | | 0 | | | 119 | |
| | | | | |
| Deferred financing costs in accounts payable and accrued liabilities | 0 | | | 0 | | | 441 | |
The accompanying notes are an integral part of these statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Nature of Business Operations
Nuverra Environmental Solutions, Inc., a Delaware corporation, together with its subsidiaries (collectively, “Nuverra,” the “Company,” “we,” “us,” or “our”) provides water logistics and oilfield services to customers focused on the development and ongoing production of oil and natural gas from shale formations in the United States. Our business operations are organized into 3 geographically distinct divisions: the Rocky Mountain division, the Northeast division, and the Southern division. Within each division, we provide water transport services, disposal services, and rental and other services associated with the drilling, completion, and ongoing production of shale oil and natural gas. These services and the related revenues are further described in Note 4.
Rocky Mountain Division
The Rocky Mountain division is our Bakken Shale area business, which is predominantly an oil producing region. We have operations in various locations throughout North Dakota and Montana, including yards in Dickinson, Williston, Watford City, Tioga, Stanley, and Beach, North Dakota, as well as Sidney, Montana. Additionally, we operate a financial support office in Minot, North Dakota.
Water Transport Services
We manage a fleet of trucks in the Rocky Mountain division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities.
In the Rocky Mountain division, we own an inventory of lay flat temporary hose as well as related pumps and associated equipment used to move fresh water from water sources to operator locations for use in completion activities. We employ specially trained field personnel to manage and operate this business. For customers who have secured their own source of fresh water, we provide and operate the lay flat temporary hose equipment to move the fresh water to the drilling and completion location. We may also use third-party sources of fresh water in order to provide the water to customers as a package that includes our water transport service.
Disposal Services
We manage a network of owned and leased salt water disposal wells. Our salt water disposal wells in the Rocky Mountain division are operated under the Landtech brand. Additionally, we operate a landfill facility near Watford City, North Dakota that handles the disposal of drill cuttings and other oilfield waste generated from drilling and completion activities in the region.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Rocky Mountain division. These assets include tanks, loaders, manlifts, light towers, winch trucks, and other miscellaneous equipment used in drilling and completion activities. In the Rocky Mountain division, we also provide oilfield labor services, also called “roustabout work,” where our employees move, set-up and maintain the rental equipment for customers, in addition to providing other oilfield labor services.
Northeast Division
The Northeast division is comprised of the Marcellus and Utica Shale areas, both of which are predominantly natural gas producing basins. The Marcellus and Utica Shale areas are located in the northeastern United States, primarily in Pennsylvania, West Virginia, New York and Ohio. We have operations in various locations throughout Pennsylvania, West Virginia, and Ohio, including yards in Masontown and Wheeling, West Virginia, Williamsport and Wellsboro, Pennsylvania, and Cambridge and Cadiz, Ohio.
Water Transport Services
We manage a fleet of trucks in the Northeast division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region, or to other customer locations for reuse in completing other wells. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities.
Disposal Services
We manage a network of owned and leased salt water disposal wells. Our salt water disposal wells in the Northeast division are operated under the Nuverra, Heckmann, and Clearwater brands.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Northeast division. These assets include tanks and winch trucks used in drilling and completion activities.
Southern Division
The Southern division is comprised of the Haynesville Shale area, a predominantly natural gas producing basin, which is located across northwestern Louisiana and eastern Texas, and extends into southwestern Arkansas. We have operations in various locations throughout eastern Texas and northwestern Louisiana, including a yard in Frierson, Louisiana. Additionally, we operate a corporate support office in Houston, Texas.
Water Transport Services
We manage a fleet of trucks in the Southern division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water to operator locations for use in well completion activities.
In the Southern division, we also own and operate an underground twin pipeline network for the collection of produced water for transport to interconnected disposal wells and the delivery of fresh water from water sources to operator locations for use in well completion activities.
Disposal Services
We manage a network of owned and leased salt water disposal wells that are not connected to our pipeline in the Southern division.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Southern division. These assets include tanks and winch trucks used in drilling and completion activities.
Note 2 - Basis of Presentation
Basis of Presentation
In our opinion, the consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth herein. All dollar and share amounts in the footnote tabular presentations are in thousands, except per share amounts and unless otherwise noted.
We have not included a statement of comprehensive income as there were no transactions to report in the 2020, 2019, or 2018 periods presented.
Use of Estimates
Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared using the most current and best available information, however actual results could differ from those estimates.
Principles of Consolidation
Our consolidated financial statements include the accounts of Nuverra and our subsidiaries. All intercompany accounts, transactions and profits are eliminated in consolidation.
Note 3 - Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are carried at cost, which approximates market value.
Restricted Cash
On the Effective Date, we entered into a $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 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 served as collateral on the Revolving Facility, all amounts collected were initially recorded to “Restricted cash” on the consolidated balance sheet as these funds are not available for operations until our Credit Agreement Lenders released the funds to us approximately one day later. As such, our restricted cash balance was generally anywhere between $0.2 million and $2.0 million at any given time depending upon recent collections.
On November 16, 2020, we entered into a Loan Agreement (the “Master Loan Agreement”) with First International Bank & Trust, a North Dakota banking corporation (the “Lender”), for: (i) a $13.0 million equipment term loan (the “Equipment Loan”); (ii) a $10.0 million real estate term loan (the “CRE Loan”); (iii) a $5.0 million operating line of credit (the “Operating LOC Loan”); and a (iv) $4.839 million letter of credit facility (the “Letter of Credit Facility”), which may be collectively may be referred to as the “Loans”. The Master Loan Agreement also requires the Company deposit into a reserve account held by the Lender (the “Reserve Account”) the sum of $2.5 million and make additional monthly deposits of $100,000 into the Reserve Account. In connection with the closing of the Loans, the Company repaid all outstanding obligations in full under the First Lien Credit Agreement and Second Lien Term Loan Agreement (as defined below) totaling $12.6 million and $8.3 million, respectively. Funds held in the Reserve Account are not accessible by the Company and are pledged as additional security for the CRE Loan, the Operating LOC Loan and the Letter of Credit Facility. We had a restricted cash balance of $2.8 million and $0.9 million as of December 31, 2020 and 2019, respectively.
Accounts Receivable
Accounts receivable are recognized and carried at original billed and unbilled amounts less allowances for estimated uncollectible amounts and estimates for potential credits. Inherent in the assessment of these allowances are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, our compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. We write off trade receivables when we determine that they have become uncollectible. Bad debt expense is reflected as a component of “General and administrative expenses” in the consolidated statements of operations.
Unbilled accounts receivable result from revenue earned for services rendered where customer billing is still in progress at the balance sheet date. Such amounts totaled approximately $4.5 million and $10.5 million at December 31, 2020 and 2019, respectively.
The following table summarizes activity in the allowance for doubtful accounts:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Balance at beginning of period | $ | 1,265 | | | $ | 1,590 | | | $ | 1,921 | |
| Bad debt (recoveries) expense | (141) | | | (22) | | | (328) | |
| Write-offs, net | (96) | | | (303) | | | (3) | |
| Balance at end of period | $ | 1,028 | | | $ | 1,265 | | | $ | 1,590 | |
Inventories
Inventories consist of bulk fuel and parts to repair equipment such as trucks, trailers, rental equipment and disposal wells, which are used for completion activities. Inventory costs are determined under the weighted-average method.
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amounts of our accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments.
Our derivative warrant liability is adjusted to reflect the estimated fair value periodically, with any decrease or increase in the estimated fair value recorded in “Other income, net” in the consolidated statements of operations. We used Level 3 inputs for the valuation methodology of the derivative liabilities. See Note 13 and Note 14 for disclosures on the fair value of our derivative warrants.
The fair value of our Operating LOC Loan, Equipment Loan and CRE Loan, and other debt obligations including a vehicle term loan, equipment finance loan and finance leases secured by various properties and equipment, bears interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value. See Note 12 for disclosures on the fair value of our debt instruments at December 31, 2020.
Property, Plant and Equipment
Property and equipment is recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets ranging from two to thirty-nine years. Our landfill is depreciated using the units-of-consumption method based on estimated remaining airspace. Leasehold improvements are depreciated over the life of the lease or the life of the asset, whichever is shorter. The range of useful lives for the components of property, plant and equipment are as follows:
| | | | | |
Buildings | 15-39 years |
Building and land improvements | 5-20 years |
Pipelines | 10-30 years |
Disposal wells | 3-10 years |
Machinery and equipment | 2-15 years |
Equipment under finance leases | 4-6 years |
Motor vehicles and trailers | 3-10 years |
Rental equipment | 5-10 years |
Office equipment | 3-7 years |
Expenditures for betterments that increase productivity and/or extend the useful life of an asset are capitalized. Maintenance and repair costs are charged to expense as incurred. Upon disposal, the related cost and accumulated depreciation of the assets are removed from their respective accounts, and any gains or losses are included in “Direct operating expenses” in the consolidated statements of operations.
Debt Issuance Costs
We capitalize costs associated with the issuance of debt and amortize them as additional interest expense over the lives of the respective debt instrument on a straight-line basis, which approximates the effective interest method. Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The unamortized balance of debt issuance costs presented in “Long-term debt” was $0.9 million and $0.1 million at December 31, 2020 and 2019, respectively.
Deferred initial up-front commitment fees paid by a borrower to a lender represent the benefit of being able to access capital over the contractual term, and therefore, meet the definition of an asset. There were 0 debt issuance costs that met the definition of an asset as of December 31, 2020 and 2019.
Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill is not amortized but is subject to annual impairment tests. Our goodwill was tested for impairment annually at October 1st and more frequently if events or circumstances lead to a determination that it was more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines it was not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test was unnecessary. In the event a determination was made that it was more likely than not that the fair value of a reporting unit was less than its carrying value, the goodwill impairment test was performed. The first step of the test, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit was not considered to be impaired. If the carrying amount of a reporting unit exceeded its fair value, since we adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, an impairment charge was recorded based on the excess of a reporting unit’s carrying amount over its fair value.
When we reviewed goodwill for impairment as of October 1, 2019, due to indicators of potential impairment, we determined that it was more likely than not that the fair value of our reporting units were less than their carrying value. As a result, we completed the goodwill impairment test and determined that the fair value of all 3 reporting units was less than the carrying amount, resulting in a goodwill impairment charge of $29.5 million during the year ended December 31, 2019. See Note 8 for further details on the goodwill impairment during 2019.
Intangible Assets
Intangible assets with finite lives are amortized over their estimated useful lives using either the straight-line method or an accelerated method based upon estimated future cash flows. Intangible assets consist of disposal permits and trade names. See Note 9 for additional information.
Impairment of Long-Lived Assets and Intangible Assets with Finite Useful Lives
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 amount of such assets may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of such assets to the sum of the estimated undiscounted future cash flows expected to be generated by the assets. Cash flow estimates are based upon, among other things, historical results adjusted to reflect the best estimate of future market rates, utilization levels, and operating performance. Estimates of cash flows may differ from actual cash flows due to various factors, including changes in economic conditions or changes in an asset’s operating performance. Long-lived assets are grouped at the business line level within each basin for purposes of assessing their recoverability as we concluded that the basin level is the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. For assets that do not pass the recoverability test, the asset group’s fair value is compared to the carrying amount. If the asset group’s fair value is less than the carrying amount, impairment losses are recorded for the amount by which the carrying amount of such assets exceeds the fair value. See Note 8 for additional information.
We also record impairment charges for assets that are held for sale. In accordance with applicable accounting guidance, assets that are held for sale are recorded at the lower of net book value or fair value less costs to sell. These assets are reclassified to a separate line on the consolidated balance sheet called “Assets held for sale.” Upon reclassification, we cease to recognize depreciation expense on the assets. If the fair value of the assets reclassified as held for sale is lower than the net book value, we record the appropriate impairment charge to write the asset down to fair value (See Note 8 for additional information).
Asset Retirement Obligations
Retirement obligations associated with long-lived assets are those for which there is an obligation for closure costs and/or site remediation costs at the end of the assets’ useful lives. We have asset retirement obligations associated with our salt water disposal wells and landfills. We record the fair value of estimated asset retirement obligations in the period incurred in “Other long-term liabilities” in the accompanying consolidated balance sheets. The offset to the liability is capitalized as part of the related long-lived assets’ carrying value. These obligations are initially estimated based on discounted cash flow estimates and are accreted to full value over time through charges to interest expense (See Note 15 for additional information). The asset retirement costs included in the long-lived assets’ carrying value are depreciated on a straight-line basis for salt water disposal wells and a units-of-consumption basis for landfill costs over the assets’ respective useful lives.
Leases
We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carryforward the historical lease classification. In addition, we have made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We will continue to recognize those lease payments in the consolidated statement of operations on a straight-line basis over the lease term. Lease terms within our lessee arrangements may include options to extend or renew when it is reasonably certain that we will exercise such options. Variable lease payments such as royalties and taxes are recognized in profit and loss and are disclosed as “variable lease cost” in the period they are incurred.
Revenue Recognition
Revenues are generated upon the performance of contracted services under formal and informal contracts with direct customers. Taxes assessed on sales transactions are excluded from revenue. See Note 4 for a detailed discussion on our revenue recognition.
Concentration of Customer Risk
Three of our customers comprised 34%, 31% and 30% of our consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively, and 27%, 32% and 36% of our consolidated accounts receivable at December 31, 2020, 2019 and 2018, respectively.
We depend on our customers’ willingness to make operating and capital expenditures to explore, develop and produce oil and natural gas in the United States. These expenditures are generally dependent on current oil and natural gas prices and the industry’s view of future oil and natural gas prices, including the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. Any decline in oil and natural gas prices could result in reductions in our customers’ operating and capital expenditures. Declines in these expenditures could result in project modifications, delays or cancellations, general business disruptions, delays in, or nonpayment of, amounts owed to us, increased exposure to credit risk and bad debts, and a general reduction in demand for our services. These effects could have a material adverse effect on our financial condition, results of operations and cash flows.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases including temporary differences related to assets acquired in business combinations. Deferred tax assets are also recognized for net operating loss, capital loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which realization of the related benefits is not more likely than not.
We measure and record tax contingency accruals in accordance with GAAP, which prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return. Only positions meeting the “more likely than not” recognition threshold may be recognized or continue to be recognized. A tax position is measured at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. See Note 19 for further details on our income taxes.
Share-Based Compensation
We granted equity-classified awards to certain of our employees and directors and we account for the awards based on fair value measurement guidance. Generally, awards of stock options granted to employees vest in equal increments over a three-year service period from the date of grant and awards of restricted stock awards or units vest over a one, two or three year service period from the date of grant. The grant date fair value of the award is recognized to expense on a straight-line basis over the requisite service period. See Note 18 for additional information.
Advertising
Advertising costs are expensed as incurred. Advertising expense was approximately $0.1 million, $0.3 million and $0.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Liquidity
The Company continues to incur operating losses, and we anticipate losses to continue into the near future. Additionally, due to the coronavirus disease 2019 (“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. Due to the uncertainty of future oil and natural gas prices and the continued effects of the COVID-19 outbreak, for the foreseeable future we anticipate our customers’ crude or natural gas liquids drilling and completion activity to continue to operate at lower levels.
In order to mitigate these conditions, the Company implemented various initiatives during 2020 that positively impacted our operations, including personnel and salary reductions, other changes to our operating structure to achieve additional cost reductions, and the sale of certain assets. With the goal of improving liquidity, on November 16, 2020, the Company entered into the Master Loan Agreement with Lender for (i) the Equipment Loan; (ii) the CRE Loan; (iii) the Operating LOC Loan; and (iv) the Letter of Credit Facility. As the result of this new arrangement, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under the First Lien Credit Agreement and the Second Lien Term Loan Credit Agreement. In addition, on January 25, 2021, the Letter of Credit Facility was amended in order to increase by $510,000 the maximum availability under the Letter of Credit Facility. As amended, the Letter of Credit Facility provides for the issuance of letters of credit of up to $5.349 million in aggregate face amount and is evidenced by an Amended and Restated Promissory Note (Letter of Credit Loan) dated January 25, 2021. All other terms of the Letter of Credit Facility remain unchanged.
We believe that as a result of the cost reduction initiatives and the extended maturity dates of our new credit facilities, 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.
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements
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 adopted this Topic 740 on January 1, 2021. We believe the adoption of the new tax standard will not have a material effect on our consolidated financial statements.
In June 2016, the FASB issued 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 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.
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815–40). ASU No. 2020-06 simplifies the accounting for certain convertible instruments, amends the guidance for the derivatives scope exception for contracts in an entity’s own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. The standard may be adopted using either a retrospective or modified retrospective method. The new standard will be effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We do not expect the adoption of the new standard to have a material effect on our consolidated financial statements.
In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs. The amendments to ASU No. 2020-08 clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. For public business entities, the amendments take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. All entities should apply the amendments in ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. We do not expect the adoption of the new standard to have a material effect on our consolidated financial statements.
In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. The standard is part of a standing FASB project designed to address minor improvements to GAAP that are deemed necessary by the board. The project makes it possible to update the codification for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or structure of guidance, and other minor changes. The amendments in Sections B and C of ASU No. 2020-10 are effective for annual periods beginning after December 15, 2020 for public business entities. Early application of the amendments is permitted for public business entities for any annual or interim period for which financial statements have not been issued. We do not expect the adoption of the new standard to have a material effect on our consolidated financial statements.
Note 4 - Revenue
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 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 December 31, 2020. The contract asset is included in “Other current assets” on the consolidated balance sheets.
| | | | | | | | | | | | | |
| | | 2020 | | 2019 |
| Balance at the beginning of the period (January 1) | | | $ | 231 | | | $ | 0 | |
| Balance at the end of the period (December 31) | | | 0 | | | 231 | |
| Increase/(decrease) | | | $ | (231) | | | $ | 231 | |
Disaggregated Revenues
The following tables present our revenues disaggregated by revenue source for each reportable segment for the years ended December 31, 2020, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Rocky Mountain | | Northeast | | Southern | | Corporate/Other | | Total |
| Water Transport Services | $ | 39,997 | | | $ | 24,301 | | | $ | 8,935 | | | $ | 0 | | | $ | 73,233 | |
| Disposal Services | 8,241 | | | 8,551 | | | 7,669 | | | 0 | | | 24,461 | |
| Other Revenue | 3,806 | | | 1,200 | | | 110 | | | 0 | | | 5,116 | |
| Total Service Revenue | 52,044 | | | 34,052 | | | 16,714 | | | 0 | | | 102,810 | |
| | | | | | | | | |
| Rental Revenue | 7,349 | | | 121 | | | 7 | | | 0 | | | 7,477 | |
| | | | | | | | | |
| Total Revenue | $ | 59,393 | | | $ | 34,173 | | | $ | 16,721 | | | $ | 0 | | | $ | 110,287 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Rocky Mountain | | Northeast | | Southern | | Corporate/Other | | Total |
| Water Transport Services | $ | 64,265 | | | $ | 29,944 | | | $ | 10,275 | | | $ | 0 | | | $ | 104,484 | |
| Disposal Services | 17,778 | | | 12,491 | | | 10,150 | | | 0 | | | 40,419 | |
| Other Revenue | 6,126 | | | 1,279 | | | 233 | | | 0 | | | 7,638 | |
| Total Service Revenue | 88,169 | | | 43,714 | | | 20,658 | | | 0 | | | 152,541 | |
| | | | | | | | | |
| Rental Revenue | 15,383 | | | 287 | | | 27 | | | 0 | | | 15,697 | |
| | | | | | | | | |
| Total Revenue | $ | 103,552 | | | $ | 44,001 | | | $ | 20,685 | | | $ | 0 | | | $ | 168,238 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| Rocky Mountain | | Northeast | | Southern | | Corporate/Other | | Total |
| Water Transport Services | $ | 84,312 | | | $ | 35,134 | | | $ | 19,777 | | | $ | 0 | | | $ | 139,223 | |
| Disposal Services | 17,660 | | | 6,409 | | | 5,636 | | | 0 | | | 29,705 | |
| Other Revenue | 10,718 | | | 1,776 | | | 371 | | | 0 | | | 12,865 | |
| Total Service Revenue | 112,690 | | | 43,319 | | | 25,784 | | | 0 | | | 181,793 | |
| | | | | | | | | |
| Rental Revenue | 15,068 | | | 245 | | | 368 | | | 0 | | | 15,681 | |
| | | | | | | | | |
| Total Revenue | $ | 127,758 | | | $ | 43,564 | | | $ | 26,152 | | | $ | 0 | | | $ | 197,474 | |
Water Transport Services
The majority of our revenues are from the removal and disposal of produced water and flowback water 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 transfer 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 into 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. 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. 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 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. As of January 1, 2019, the Company is recognizing the revenues from rental equipment under ASC 842, Leases,as a lessor. As the rental service period for our equipment is very short term in nature and does not include any sales-type or direct financing leases, nor any variable rental components, the adoption of ASC 842 in 2019 did not have a material impact upon our consolidated statements of operations.
Note 5 - 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 14 years, with one lease having a term of 99 years. Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis. Some of our vehicle leases include residual value guarantees. It is probable that we will owe approximately $2.5 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:
| | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended |
| Lease Cost | | Classification | | December 31,
2020 | | December 31,
2019 |
| Operating lease cost (a) | | General and administrative expenses | | $ | 2,088 | | | $ | 3,034 | |
| Finance lease cost: | | | | | | |
| Amortization of leased assets | | Depreciation and amortization | | 2,294 | | | 2,797 | |
| Interest on lease liabilities | | Interest expense, net | | 561 | | | 538 | |
| Variable lease cost | | General and administrative expenses | | 2,839 | | | 4,184 | |
| Sublease income | | Other income, net | | (94) | | | (90) | |
| Total net lease cost | | | | $ | 7,688 | | | $ | 10,463 | |
(a) Includes short-term leases, which represented $0.4 million and $0.8 million of the balance for the years ended December 31, 2020 and December 31, 2019, respectively.
Supplemental balance sheet, cash flow and other information related to leases was as follows (in thousands, except lease term and discount rate):
| | | | | | | | | | | | | | | | | | | | |
| Leases | | Classification | | December 31,
2020 | | December 31,
2019 |
| Assets: | | | | | | |
| Operating lease assets | | Operating lease assets | | $ | 1,691 | | | $ | 2,886 | |
| Finance lease assets | | Property, plant and equipment, net of accumulated depreciation (a) | | 6,185 | | | 8,202 | |
| Total lease assets | | | | $ | 7,876 | | | $ | 11,088 | |
| | | | | | |
| Liabilities: | | | | | | |
| Current | | | | | | |
| Operating lease liabilities | | Accrued and other current liabilities | | $ | 331 | | | $ | 1,442 | |
| Finance lease liabilities | | Current portion of long-term debt | | 1,420 | | | 1,443 | |
| Noncurrent | | | | | | |
| Operating lease liabilities | | Noncurrent operating lease liabilities | | 1,360 | | | 1,457 | |
| Finance lease liabilities | | Long-term debt | | 6,161 | | | 7,341 | |
| Total lease liabilities | | | | $ | 9,272 | | | $ | 11,683 | |
(a) Finance lease assets are recorded net of accumulated amortization of $3.9 million and $1.7 million as of December 31, 2020 and December 31, 2019, respectively.
| | | | | | | | | | | | | | |
| Lease Term and Discount Rate | | December 31,
2020 | | December 31,
2019 |
| Weighted-average remaining lease term (in years): | | | | |
| Operating leases | | 39.9 | | 25.1 |
| Finance leases | | 3.2 | | 4.3 |
| | | | |
| Weighted-average discount rate: | | | | |
| Operating leases | | 10.08 | % | | 8.51 | % |
| Finance leases | | 6.77 | % | | 6.77 | % |
| | | | | | | | | | | | | | |
| | Year Ended |
| Supplemental Disclosure of Cash Flow Information and Other Information | | December 31,
2020 | | December 31,
2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 2,088 | | | $ | 3,034 | |
| Operating cash flows from finance leases | | 565 | | | 538 | |
| Financing cash flows from finance leases | | 1,501 | | | 1,793 | |
| | | | |
| Leased assets obtained in exchange for new operating lease liabilities | | $ | 0 | | | $ | 196 | |
| Leased assets obtained in exchange for new finance lease liabilities | | 470 | | | 9,469 | |
Maturities of lease liabilities were as follows:
| | | | | | | | | | | |
| December 31, 2020 |
| Operating
Leases (a) | | Finance
Leases (b) |
| 2021 | $ | 489 | | | $ | 1,901 | |
| 2022 | 347 | | | 1,832 | |
| 2023 | 200 | | | 3,447 | |
| 2024 | 189 | | | 383 | |
| 2025 | 189 | | | 423 | |
| Thereafter | 6,514 | | | 1,062 | |
| Total lease payments | 7,928 | | | 9,048 | |
| Less amount representing executory costs (c) | 0 | | | 0 | |
| Net lease payments | 7,928 | | | 9,048 | |
| Less amount representing interest | (6,237) | | | (1,467) | |
| Present value of total lease liabilities | 1,691 | | | 7,581 | |
| Less current lease liabilities | (331) | | | (1,420) | |
| Long-term lease liabilities | $ | 1,360 | | | $ | 6,161 | |
(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, and have elected to continue to include executory costs for both leases that commenced before and after the effective date of ASC 842.
Disclosures related to periods prior to adoption of ASC 842
Lease expense under operating leases was approximately $4.6 million during the year ended December 31, 2018.
Note 6 - Acquisition of Clearwater
On October 5, 2018, we completed the acquisition of Clearwater Three, LLC, Clearwater Five, LLC, and Clearwater Solutions, LLC (collectively, “Clearwater”) for an initial purchase price of $42.3 million, subject to customary working capital adjustments (the “Clearwater Acquisition”). Clearwater is a supplier of waste water disposal services used by the oil and gas industry in the Marcellus and Utica shale areas. Clearwater has 3 salt water disposal wells in service, all of which are located in Ohio. This acquisition expanded our service offerings in the Marcellus and Utica shale areas in our Northeast division not only by providing additional disposal capacity, but also by providing synergies for trucking.
Consideration consisted of $42.3 million in cash which was funded primarily by a $32.5 million bridge loan (the “Bridge Term Loan”) that was repaid during 2019 with proceeds from an offering to our shareholders to purchase shares of our common stock on a pro rata basis with an aggregate offering price of $32.5 million (the “Rights Offering”). The Bridge Term Loan was extended pursuant to the Bridge Term Loan Agreement, entered October 5, 2018 (the “Bridge Term Loan Credit Agreement”), with the lenders party thereto (the “Bridge Term Loan Lenders”) and Wilmington Savings Fund Society, FSB, as administrative agent (“Wilmington”). In addition, our First Lien Credit Agreement Lenders provided us with $10.0 million in additional proceeds under the First Lien Term Loan which was used to finance a portion of the Clearwater Acquisition. See Note 16 on Equity for further details on the Rights Offering.
During 2019, we recorded an adjustment for the backstop fee for the Rights Offering (see Note 16 for further details) to additional paid-in-capital which was previously expensed and resulted in a credit of $0.3 million to general and administrative costs in the accompanying consolidated statements of operations. Total adjusted transaction costs for the Clearwater Acquisition were $1.1 million, the majority of which were recorded during the year ended December 31, 2018. The results of operations for the Clearwater Acquisition were not material to our consolidated statement of operations for the year ended December 31, 2018.
Under the acquisition method of accounting, the total purchase price was allocated to the identifiable assets acquired and the liabilities assumed based on our preliminary valuation estimates of the fair values as of the acquisition date. The final working capital was agreed upon during the three months ended March 31, 2019, which resulted in no changes to the purchase price allocation.
Pro forma financial information is not presented as fiscal 2018 revenues and earnings of the Clearwater Acquisition were not material to our consolidated statements of operations.
Note 7 - Property, Plant and Equipment, Net
Property, plant and equipment consist of the following:
| | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2020 | | 2019 |
| Land | $ | 7,819 | | | $ | 8,454 | |
| Buildings | 20,010 | | | 26,401 | |
| Building, leasehold and land improvements | 6,718 | | | 8,022 | |
| Pipelines | 67,278 | | | 67,249 | |
| Disposal wells | 78,046 | | | 76,518 | |
| Landfill | 1,074 | | | 5,587 | |
| Machinery and equipment | 17,029 | | | 20,430 | |
| Equipment under finance leases | 10,072 | | | 9,932 | |
| Motor vehicles and trailers | 35,164 | | | 39,679 | |
| Rental equipment | 19,227 | | | 20,605 | |
| Office equipment | 3,227 | | | 3,930 | |
| 265,664 | | | 286,807 | |
| Less accumulated depreciation | (114,947) | | | (98,003) | |
| Construction in process | 447 | | | 2,013 | |
| Property, plant and equipment, net | $ | 151,164 | | | $ | 190,817 | |
| | | |
For the years ended December 31, 2020, 2019 and 2018, depreciation expense was $28.2 million, $35.7 million and $46.2 million, respectively. See Note 8 for discussion on impairment charges recorded for long-lived assets during the years ended December 31, 2020, 2019 and 2018.
Note 8 - Assets Held for Sale and Impairment
Impairment Charges
Impairment charges recorded for the years ended December 31, 2020, 2019 and 2018 by reportable segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Rocky Mountain | | Northeast | | Southern | | Corporate/Other | | Total |
| Year Ended December 31, 2020 | | | | | | | | | | |
| Impairment of property, plant and equipment, net | | $ | 12,183 | | | $ | 0 | | | $ | 3,396 | | | $ | 0 | | | $ | 15,579 | |
| Impairment of intangibles, net | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 12,183 | | | $ | 0 | | | $ | 3,396 | | | $ | 0 | | | $ | 15,579 | |
| | | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | | | | | |
| Impairment of property, plant and equipment, net | | $ | 120 | | | $ | 646 | | | $ | 0 | | | $ | 0 | | | $ | 766 | |
| Impairment of goodwill | | 4,922 | | | 21,861 | | | 2,735 | | | 0 | | | 29,518 | |
| Total | | $ | 5,042 | | | $ | 22,507 | | | $ | 2,735 | | | $ | 0 | | | $ | 30,284 | |
| | | | | | | | | | |
| Year Ended December 31, 2018 | | | | | | | | | | |
| Impairment of property, plant and equipment, net | | $ | 0 | | | $ | 69 | | | $ | 4,414 | | | $ | 332 | | | $ | 4,815 | |
| Total | | $ | 0 | | | $ | 69 | | | $ | 4,414 | | | $ | 332 | | | $ | 4,815 | |
The fair values of each of the reporting units as well as the related assets and liabilities utilized to determine the impairment were measured using Level 3 inputs as described in Note 14.
Assets Held for Sale
During the year ended December 31, 2020, certain property classified as “Assets held for sale” on the 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 2020, related to the Rocky Mountain division, which is included in “Impairment of long-lived assets” on our consolidated statements of operations.
During the year ended December 31, 2019, management approved plans to sell real properties located in 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 consolidated balance sheet during year ended December 31, 2019. As the fair value of the real property reclassified as held for sale in the Rocky Mountain and Northeast divisions was lower than its net book value, impairment charges of $0.8 million were recorded during the year ended December 31, 2019, which is included in “Impairment of long-lived assets” on our consolidated statements of operations. Of the impairment charges recorded during the year ended December 31, 2019, $0.7 million related to the Northeast division and $0.1 million related to the Rocky Mountain division.
During the year ended December 31, 2018, management approved plans to sell certain assets located in the Southern division as a result of exiting the Eagle Ford shale area. As a result, management began to actively market these assets, which were expected to sell within one year. See Note 10 for additional details on the exit of the Eagle Ford shale area. In addition, management approved the sale of certain assets, primarily frac tanks, located in the Northeast division, that were expected to sell within one year. As the fair value of these assets reclassified as held for sale was lower than the net book value, impairment charges of $4.8 million were recorded, which is included in “Impairment of long-lived assets” on our consolidated statements of operations. Of the impairment charges recorded during the year ended December 31, 2018, $4.4 million related to the Southern division for the Eagle Ford exit, $0.3 million related to the Corporate division for the sale of certain real property in Texas approved to be sold as part of the Eagle Ford exit, and $0.1 million related to the Northeast division.
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. During 2020, there was a significant decline in oil prices due to the impacts of the outbreak of COVID-19 and the oil supply conflict between two major oil producing countries, 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 year ended December 31, 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 year ended December 31, 2020 as the carrying value exceeded fair value, which is included in “Impairment of long-lived assets” on our 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. Of the impairment charges recorded during the year ended December 31, 2020, $11.6 million related to the Rocky Mountain division and $3.4 million related to the Southern division.
There were no indicators of impairment for our long-lived assets during the years ended December 31, 2019 and 2018.
Impairment of Goodwill
As of October 1, 2019, and prior to the annual goodwill impairment test, our goodwill balance by reportable operating segment was $21.9 million for the Northeast division, $4.9 million for the Rocky Mountain division, and $2.7 million for the Southern division. The goodwill balance was comprised of $27.1 million that was recorded as a result of fresh start accounting adjustments upon emergence from chapter 11 in 2017, and $2.4 million recorded as a result of the acquisition of Clearwater in 2018.
Upon completing the qualitative analysis, due to a decline in demand and pricing for our services and a decline in the market price of our common stock, we determined that potential indicators of impairment existed during 2019. Therefore, at October 1, 2019, we performed Step One of the goodwill impairment test for all 3 reporting units. To measure the fair value of the 3 reporting units, we used a combination of the discounted cash flow method and the guideline public company method. Based upon the results of the first step of the goodwill impairment test, we concluded that the fair value of all 3 reporting units was less than the carrying value of each reporting unit. Due to the adoption of ASU No. 2017-04, if the carrying amount of a reporting unit exceeds its fair value an impairment charge is recorded based on the excess of a reporting unit’s carrying amount over its fair value. The difference in the carrying value over the fair value for all divisions exceeded the existing goodwill balance recorded for each reporting unit. As a result, during the three months ended December 31, 2019, we recorded total goodwill impairment charges of $29.5 million, of which $21.9 million related to the Northeast division, $4.9 million for the Rocky Mountain division, and $2.7 million for the Southern division. This impairment charge is shown as “Impairment of goodwill” in the consolidated statements of operations.
Note 9 - Goodwill and Intangible Assets
Goodwill
The changes in the carrying value of goodwill for the year ended December 31, 2019 are as follows:
| | | | | |
| December 31,
2019 |
Balance at beginning of period | $ | 29,518 | |
| |
Impairment of goodwill | (29,518) | |
Balance at end of period | $ | 0 | |
As previously discussed in Note 8, we recorded goodwill impairment charges of $29.5 million for the Northeast, Rocky Mountain and Southern divisions during the year ended December 31, 2019. As of December 31, 2019, 0 goodwill is outstanding.
Intangible Assets
The following table provides intangible assets subject to amortization as of December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross Carrying
Amount | | | | Accumulated
Amortization | | Net Book
Value | | Remaining
Useful Life
(Years) |
| Disposal permits | $ | 540 | | | | | $ | (346) | | | $ | 194 | | | 4.8 |
| Trade name | 799 | | | | | (799) | | | 0 | | | 0.0 |
| Total intangible assets | $ | 1,339 | | | | | $ | (1,145) | | | $ | 194 | | | 4.8 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Gross Carrying
Amount | | | | Accumulated
Amortization | | Net Book
Value | | 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 $14.0 thousand during the year ended December 31, 2020 due to the sale of disposal permits in the Northeast division. The disposal permits are related to the Rocky Mountain, Northeast and Southern divisions. The trade name is from the acquisition of Clearwater in the Northeast division in 2018 (as previously discussed in Note 6), and was fully amortized as of December 31, 2020. The remaining weighted average useful lives shown are calculated based on the net book value and remaining amortization period of each respective intangible asset.
For the years ended December 31, 2020, 2019 and 2018, amortization expense was $0.4 million, $0.5 million and $0.2 million, respectively, and is characterized as a component of “Depreciation and amortization” in the consolidated statements of operations.
As of December 31, 2020, future amortization expense of intangible assets is estimated to be:
| | | | | |
| 2021 | $ | 52 | |
| 2022 | 47 | |
| 2023 | 33 | |
| 2024 | 22 | |
| 2025 | 20 | |
| Thereafter | 20 | |
| Total | $ | 194 | |
Note 10 - Reorganization Items and Exit Costs
Reorganization Items, net
Reorganization items, net represents liabilities settled, net of amounts incurred subsequent to the chapter 11 filing as a direct result of the Plan and are classified as “Reorganization items, net” in our consolidated statements of operations.
The following table summarizes reorganization items, net for the years ended December 31, 2020, 2019 and 2018:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Professional and insurance fees | $ | (111) | | | $ | (200) | | | $ | (246) | |
| Other costs (a) | 0 | | | 0 | | | (1,433) | |
| Reorganization items, net | $ | (111) | | | $ | (200) | | | $ | (1,679) | |
(a) Includes approximately $1.3 million in chapter 11 fees paid to the US Trustee during the year ended December 31, 2018.
Eagle Ford Shale Area
On March 1, 2018, the Board of Directors (the “Board”) determined it was in the best interests of the Company to cease our operations in the Eagle Ford shale area in order to focus on other opportunities. The Board considered a number of factors in making this determination, including among other things, the historical and projected financial performance of our operations in the Eagle Ford shale area, pricing for our services, capital requirements and projected returns on additional capital investment, competition, scope and scale of our operations, and recommendations from management. We substantially exited the Eagle Ford shale area as of June 30, 2018.
The total costs of the exit recorded during the year ended December 31, 2018 were $1.1 million, and included severance and termination benefits, lease exit costs, and other exit costs related to the movement of vehicles, tanks and rental fleet. All costs related to the Southern operating segment and are reflected in “Other, net” in the consolidated statements of operations.
There is no remaining liability for the Eagle Ford exit as of December 31, 2019.
Note 11 - Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following at December 31, 2020 and December 31, 2019:
| | | | | | | | | | | |
| December 31, | | December 31, |
| 2020 | | 2019 |
| Accrued payroll and employee benefits | $ | 2,353 | | | $ | 1,837 | |
| Accrued insurance | 2,263 | | | 2,569 | |
| Accrued operating costs | 2,683 | | | 2,653 | |
| Accrued taxes | 1,282 | | | 695 | |
| Accrued legal | 294 | | | 295 | |
| Accrued interest | 56 | | | 179 | |
| | | |
| Accrued other | 288 | | | 394 | |
| | | |
| Current operating lease liabilities | 331 | | | 1,442 | |
| Total accrued and other current liabilities | $ | 9,550 | | | $ | 10,064 | |
Note 12 - Debt
Debt consisted of the following at December 31, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2020 | | December 31, 2019 |
| Interest Rate | | Maturity Date | | Unamortized Debt Issuance Costs (k) | | | | Carrying Value of Debt (m) | | Carrying Value of Debt (m) |
| Operating LOC Loan (a) | 7.00% | | Nov. 2021 | | $ | 181 | | | | | $ | 0 | | | $ | 0 | |
| Equipment Loan (b) | 3.14% | | Nov. 2025 | | 398 | | | | | 13,000 | | | 0 | |
| CRE Loan (c) | 6.50% | | Nov. 2032 | | 349 | | | | | 9,932 | | | 0 | |
| Letter of Credit Facility (d) | 7.00% | | May 2022 | | 0 | | | | | 0 | | | 0 | |
| First Lien Term Loan (e) | 8.25% | | May 2022 | | 0 | | | | | 0 | | | 18,008 | |
| Second Lien Term Loan (f) | 11.00% | | Nov. 2022 | | 0 | | | | | 0 | | | 9,013 | |
| PPP Loan (g) | 1.00% | | May 2022 | | 0 | | | | 4,000 | | | 0 | |
| Vehicle Term Loan (h) | 5.27% | | Dec. 2021 | | 0 | | | | | 363 | | | 725 | |
| Equipment Finance Loan (i) | 6.50% | | Nov. 2022 | | 0 | | | | | 158 | | | 0 | |
| Finance leases (j) | 6.77% | | Various | | 0 | | | | | 7,581 | | | 8,784 | |
| Total debt | | | | | $ | 928 | | | | | 35,034 | | | 36,530 | |
| Debt issuance costs presented with debt (k) | | | | | | (928) | | | (95) | |
| Total debt, net | | | | | | | | | 34,106 | | | 36,435 | |
| Less: current portion of long-term debt (l) | | | | | | (2,433) | | | (6,430) | |
| Long-term debt | | | | | | | | | $ | 31,673 | | | $ | 30,005 | |
_____________________
(a) Interest on the Operating LOC Loan accrues at an annual rate equal to the Prime Rate of plus 3.75%, with an interest floor of 7.00%.
(b) Interest on the Equipment Loan accrues at an annual rate equal to the LIBOR Rate plus 3.00%.
(c) Interest on the CRE Loan accrues at an annual rate equal to the Federal Home Loan Bank Rate of Des Moines three-year advance rate plus 4.50%, with an interest rate floor of 6.50%.
(d) The interest rate presented represented the interest rate on the $4.839 million letter of credit facility.
(e) Interest on the First Lien Term Loan accrued at an annual rate equal to the LIBOR Rate plus 7.25%. This loan was paid in full in November 2020.
(f) Interest on the Second Lien Term Loan (as defined below) accrued at an annual rate equal to 11.0%, payable in cash, in arrears, on the first day of each month. This loan was paid in full in November 2020.
(g) Interest on the PPP Loan (as defined below) accrues at an annual rate of 1.00%.
(h) Interest on the Vehicle Term Loan (as defined below) accrues at an annual rate of 5.27%.
(i) Interest on the Equipment Finance Loan (as defined below) accrues at an annual rate of 6.50%.
(j) Our finance leases include finance lease arrangements related to fleet purchases and real property with a weighted-average annual interest rate of approximately 6.77%, which mature in varying installments between 2020 and 2029.
(k) The debt issuance costs as of December 31, 2020 resulted from refinancing the debt with First International Bank.
(l) The principal payments due within one year for the CRE Loan, Vehicle Term Loan, Equipment Finance Loan and finance leases are included in current portion of long-term debt as of December 31, 2020.
(m) Our Operating LOC Loan, Equipment Loan, CRE Loan, Vehicle Term Loan, Equipment Finance Loan and finance leases bear interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value.
Indebtedness
As of December 31, 2020, we had $35.0 million of indebtedness outstanding, consisting of $13.0 million under the Equipment Loan, $9.9 million under the CRE Loan, $4.0 million under the PPP Loan, $0.4 million under the Vehicle Term Loan (defined below), $0.2 million under the Equipment Finance Loan (defined below), and $7.6 million of finance leases for vehicle financings and real property leases.
As further described below, our Operating LOC Loan, CRE Loan, and Equipment Loan contain certain affirmative and negative covenants, including a minimum debt service coverage ratio (“DSCR”), beginning December 31, 2021, as well as other terms and conditions that are customary for loans of this type. As of December 31, 2020, we were in compliance with all covenants.
Master Loan Agreement
On November 16, 2020, the Company entered into the Master Loan Agreement with Lender. Pursuant to the Master Loan Agreement, Lender agreed to extend to the Company: (i) the Equipment Loan that is subject to the Main Street Priority Loan Facility (the “MSPLF”) as established by the Board of Governors of the Federal Reserve System under Section 13(3) of the Federal Reserve Act; (ii) the CRE Loan; (iii) the Operating LOC Loan; and (iv) the Letter of Credit Facility. On November 18, 2020, the Company was advised by Lender that the Equipment Loan had been approved as a MSPLF, and the Loans were funded and closed on November 20, 2020. In connection with the closing of the Loans, the Company repaid all outstanding obligations in full under the First Lien Credit Agreement and Second Lien Term Loan Agreement totaling $12.6 million and $8.3 million, respectively.
On January 25, 2021, the Letter of Credit Facility was amended in order to increase by $510,000 the maximum availability under the Letter of Credit Facility. As amended, the Letter of Credit Facility provides for the issuance of letters of credit of up to $5.349 million in aggregate face amount, and all other terms of the Letter of Credit Facility remain unchanged.
The terms of the Master Loan Agreement provide for customary events of default, including, among others, those relating to a failure to make payment, bankruptcy, breaches of representations and covenants, and the occurrence of certain events. Pursuant to the Master Loan Agreement, the Company must maintain a minimum DSCR of 1.35 to 1.00 beginning December 31, 2021 and annually on December 31 of each year thereafter. The DSCR means the ratio of (i) Adjusted EBITDA to (ii) the annual debt service obligations (less subordinated debt annual debt service) of the Company, calculated based on the actual four quarters ended on the applicable December 31 measurement date. If the DSCR falls below 1.35 to 1.00, then in addition to all other rights and remedies available to Lender, the interest rates on the CRE Loan, the Operating LOC Loan and the Letter of Credit Facility will increase by 1.5% until the minimum DSCR is maintained. The Company may cure a failure to comply with the DSCR by issuing equity interests in the Company for cash and applying the proceeds to the applicable Adjusted EBITDA measurement.
In addition, the Master Loan Agreement limits capital expenditures to $7.5 million annually and requires the Company to maintain a positive working capital position of at least $7.0 million at all times. The Master Loan Agreement also requires the Company deposit into the Reserve Account the sum of $2.5 million and make additional monthly deposits of $100 thousand into the Reserve Account. Funds held in the Reserve Account are not accessible by the Company and are pledged as additional security for the CRE Loan, the Operating LOC Loan and the Letter of Credit Facility.
Equipment Loan
The Equipment Loan is evidenced by that certain Promissory Note (Equipment Loan) executed by the Company in the original principal amount of $13.0 million. The Equipment Loan bears interest at a rate of one-month US dollar LIBOR plus 3.00%. Interest payments during the first year will be deferred and added to the loan balance and principal payments during the first two years will be deferred. Monthly amortization of principal will commence on December 1, 2022, with principal amortization payments due in annual installments of 15% on November 16, 2023, 15% on November 16, 2024, and the remaining 70% on the maturity date of November 16, 2025. The Equipment Loan, plus accrued and unpaid interest, may be prepaid at any time at par. The entire outstanding principal balance of the Equipment Loan together with all accrued and unpaid interest is due and payable in full on November 16, 2025. In connection with the Equipment Loan, the Company paid a $130 thousand origination fee to Lender and a $130 thousand origination fee to MSPLF.
The Equipment Loan includes all covenants and certifications required by the MSPLF, including, without limitation, the MSPLF Borrower Certifications and Covenants Instructions and Guidance. In connection with the same, the Company delivered a Borrower Certifications and Covenants (the “MS Certifications and Covenants”) to MS Facilities LLC, a Delaware limited liability company, a special purpose vehicle of the Federal Reserve. Under the MS Certifications and Covenants, the Company is subject to certain restrictive covenants during the period that the Equipment Loan is outstanding and, with respect to certain of those restrictive covenants, for an additional one year period after the Equipment Loan is repaid, including restrictions on the Company’s ability to repurchase stock, pay dividends or make other distributions and limitations on executive compensation and severance arrangements. The Equipment Loan is secured by a first lien security interest in all equipment and titled vehicles of the Company and its subsidiaries.
CRE Loan
The CRE Loan is evidenced by that certain Promissory Note (Real Estate) executed by the Company in the original principal amount of $10.0 million.The CRE Loan bears interest at the Federal Home Loan Bank Rate of Des Moines three-year advance rate plus 4.50% with an interest rate floor of 6.50%. The CRE Loan has a twelve-year maturity. The Company is required to make monthly principal and interest payments, and monthly escrow deposits for real estate taxes and insurance. The entire outstanding principal balance of the CRE Loan together with all accrued and unpaid interest is due and payable in full on November 13, 2032. In connection with the CRE Loan, the Company paid a $150 thousand origination fee to Lender.
The CRE Loan is secured by a first lien real estate mortgage on certain real estate owned by the Company and its subsidiaries and by the Reserve Account. The Company will incur a declining prepayment premium of 6%, 5%, 4%, 3%, 2%, and 1% of the outstanding principal balance of the CRE Loan over the first six years of the loan, respectively.The Company is not permitted to prepay the principal of the CRE Loan more than 5% per year without Lender’s prior written approval.
Operating LOC Loan
The Operating LOC Loan is evidenced by that certain Revolving Promissory Note (Operating Line of Credit Loan) executed by the Company in the original maximum principal amount of $5.0 million. The Operating LOC Loan bears interest at a variable rate, adjusting daily, equal to the Prime Rate plus 3.75%, with an interest rate floor of 7.00%. In connection with the Operating LOC Loan, the Company paid a $50 thousand origination fee to Lender. The Operating LOC Loan is currently undrawn and fully available to the Company.
The Operating LOC Loan is secured by a first lien security interest in all business assets of the Company and its subsidiaries, including without limitation all accounts receivable, inventory, trademarks and intellectual property licenses to which it is a party and by the Reserve Account. The entire outstanding principal balance of the Operating LOC Loan together with all accrued and unpaid interest is due and payable in full on November 14, 2021.
Letter of Credit Facility
The Letter of Credit Facility provides for the issuance of letters of credit of up to $4.839 million in aggregate face amount and is evidenced by that certain Promissory Note (Letter of Credit Loan) executed by the Company. Amounts drawn on letters of credit issued under the Letter of Credit Facility bear interest at a variable rate, adjusting daily, equal to the Prime Rate plus 3.75%, with an interest rate floor of 7.00%. The Letter of Credit Facility has a one-year final maturity on November 19, 2021.
On January 25, 2021, the Letter of Credit Facility was amended in order to increase by $510,000 the maximum availability thereunder. As amended, the Letter of Credit Facility provides for the issuance of letters of credit of up to $5.349 million in aggregate face amount and is evidenced by that certain Amended and Restated Promissory Note (Letter of Credit Loan), dated January 25, 2021, executed by the Company.
In connection with the Letter of Credit Facility, the Company is required to pay an annual fee equal to 3.00% of the maximum undrawn face amount of each letter of credit issued thereunder. The Letter of Credit Facility is secured by a first lien security interest in all business assets of the Company and its subsidiaries and by the Reserve Account.
First Lien Credit Agreement
On the Effective Date, pursuant to the Plan, the Company entered into the First Lien Credit Agreement by and among the First Lien Credit Agreement Lenders, 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 the Revolving Facility and the First Lien Term Loan. The First Lien Credit Agreement also contained an accordion feature that provided 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 First Lien Credit Agreement.
On October 5, 2018, in connection with the Clearwater Acquisition, we entered into a First Amendment to the Credit Agreement (the “First Amendment to the Credit Agreement”) with the First Lien Credit Agreement Lenders and the Credit Agreement Agent, which amended the First Lien Credit Agreement. Pursuant to the First Amendment to the Credit Agreement, the Credit Agreement Lenders provided us with an additional term loan under the First Lien Credit Agreement in the amount of $10.0 million, which was used to finance a portion of the Clearwater Acquisition.
On July 13, 2020, the Company entered into the Third Amendment to First Lien Credit Agreement (the “Third Amendment to First Lien Credit Agreement”) with the First Lien Credit Agreement Lenders and Credit Agreement Agent, which further amended the First Lien Credit Agreement to extend the maturity date from February 7, 2021 to May 15, 2022. In connection with the Third Amendment to First Lien Credit Amendment, on July 13, 2020, the Company repaid $2.5 million of the outstanding principal amount of the First Lien Term Loan.
The Company made a liquidated damages payment in the amount of $0.5 million and paid a deferred amendment fee of $325 thousand as a result of the repayment of indebtedness and termination of the First Lien Credit Agreement. The Company also deposited approximately $5.1 million as cash collateral to secure outstanding letters of credit, which will be released and refunded to the Company upon cancellation of such outstanding letters of credit as replacements are issued under the Letter of Credit Facility. In connection with the repayment of outstanding indebtedness by the Company, the Company was permanently released from all security interests, mortgages, liens and encumbrances under the First Lien Credit Agreement.
On November 20, 2020, in connection with the Master Loan agreement, all amounts outstanding under the First Lien Term Loan totaling $12.6 million were repaid in full, and all of the commitments and obligations under the First Lien Credit Agreement were terminated.
Second Lien Term Loan Credit Agreement
On the Effective Date, pursuant to the Plan, the Company also entered into the Second Lien Term Loan Agreement (the “Second Lien Term Loan Agreement”) by and among the lenders party thereto (the “Second Lien Term Loan Lenders”), Wilmington, 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 “Second Lien Term Loan”), of which $21.1 million was advanced on the Effective Date and up to an additional $5.7 million was 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.
On July 13, 2020, the Company entered into a Second Amendment to Credit Agreement with the lenders party thereto and Wilmington, which amended the Second Lien Term Loan Credit Agreement to extend the maturity date from October 7, 2021 to November 15, 2022.
On November 20, 2020, in connection with the Master Loan Agreement above, all amounts outstanding under the Second Lien Term Loan Agreement totaling $8.3 million were repaid in full, and all of the commitments and obligations under the Second Lien Term Loan Agreement were terminated. The Company did not incur any early termination penalties as a result of the repayment of indebtedness and termination of the Second Lien Term Loan Agreement. In connection with the repayment of outstanding indebtedness by the Company, the Company was permanently released from all security interests, mortgages, liens and encumbrances under the Second Lien Term Loan Credit Agreement.
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 applied for forgiveness of the PPP Loan during September 2020 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 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.
The Company obtained the consent of the lenders under each of the First Lien 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.
Vehicle Term Loan
On December 27, 2019, we entered into a Direct Loan Security Agreement (the “Vehicle Term Loan”) with PACCAR Financial Corp as the Secured Party. The Vehicle Term Loan was used to refinance 38 trucks that were previously recorded as finance leases with balloon payments that would have been due in January of 2020. The Vehicle Term Loan matures on December 27, 2021, when the entire unpaid principal balance and interest, plus any other accrued charges, shall become due and payable. The Vehicle Term Loan shall be repaid in installments of $31,879 beginning on January 27, 2020 and on the same day of each month thereafter, with interest accruing at an annual rate of 5.27%.
Equipment Finance Loan
On November 20, 2019, we entered into a Retail Installment Contract (the “Equipment Finance Loan”) with a secured party to finance $0.2 million of equipment. The Equipment Finance Loan matures on November 15, 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%.
Debt Maturities
The required principal payments and estimated interest payments for all borrowings for each of the five years and thereafter following the balance sheet date are as follows:
| | | | | | | | | | | |
| Principal | | Interest (a) |
| 2021 | $ | 2,433 | | | $ | 1,190 | |
| 2022 | 6,125 | | | 1,398 | |
| 2023 | 5,826 | | | 1,236 | |
| 2024 | 2,897 | | | 1,040 | |
| 2025 | 10,159 | | | 1,094 | |
| Thereafter | 7,594 | | | 1,806 | |
| Total | $ | 35,034 | | | $ | 7,764 | |
(a) Estimated interest on debt for all periods presented is calculated using interest rates available as of December 31, 2020 and includes fees for the unused portion of our Letter of Credit Facility.
Note 13 - Derivative Warrants
On the Effective Date, pursuant to the Plan, we issued to the holders of the 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 a term expiring seven years from the Effective Date. As of December 31, 2020 and 2019, the effective value of the outstanding warrant is 0.
Note 14 - Fair Value Measurements
Fair Value Measurements
Fair value represents an exit price, representing the amount 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.
Recurring Fair Value Measurements
Our liabilities that are required to be measured at fair value on a recurring basis in the consolidated balance sheets as of December 31, 2020 and December 31, 2019 are summarized below. The fair value hierarchy of the valuation techniques we utilized to determine such fair value included significant unobservable inputs (Level 3).
| | | | | | | | | | | |
| December 31, | | December 31, |
| 2020 | | 2019 |
| Derivative warrant liability (a) | $ | 0 | | | $ | 0 | |
(a) The fair value of our derivative warrant liability was 0 as of December 31, 2020 and 2019.
Non-Recurring Fair Value Measurements
Assets acquired and liabilities assumed in business combinations are measured at fair value on a nonrecurring basis using Level 3 inputs. See Note 6 for further discussion on the measurement of the assets and liabilities acquired in the acquisition of Clearwater.
In addition to our assets and liabilities that are measured at fair value on a recurring basis, we are required to measure certain assets and liabilities at fair value on a nonrecurring basis after initial recognition. Generally, assets, liabilities and reporting units are measured at fair value on a nonrecurring basis as a result of impairment reviews and any resulting impairment charge. In connection with our impairment of goodwill and long-lived assets described in Note 8, the fair value of our reporting units or asset groups is determined primarily using the cost and market approaches (Level 3).
Note 15 - Asset Retirement Obligations
At December 31, 2020 and 2019, we had approximately $8.0 million and $7.5 million, respectively, of asset retirement obligations related to our salt water disposal wells and landfills.
The following table provides a reconciliation of the beginning and ending balances of our asset retirement obligations as of December 31, 2020 and 2019:
| | | | | | | | | | | |
| December 31, | | December 31, |
| 2020 | | 2019 |
| Balance at beginning of period | $ | 7,486 | | | $ | 7,128 | |
| | | |
| Asset retirement obligations acquired | 0 | | | 130 | |
| Asset retirement obligations settled | (169) | | | (427) | |
| Changes in estimate | 0 | | | 0 | |
| Accretion expense | 762 | | | 780 | |
| Cash payments | (62) | | | (125) | |
| Balance at end of period | $ | 8,017 | | | $ | 7,486 | |
Note 16 - Equity
Preferred Stock
The Board is authorized to issue up to 1.0 million shares of preferred stock, par value $0.01, and to determine the powers, preferences, privileges, rights, including voting rights, qualifications, limitations and restrictions of those shares without further vote or act by the common stockholders. There was 0 preferred stock outstanding as of December 31, 2020 and December 31, 2019.
Series A Preferred Stock
The Board declared a dividend of 1 right (a “Right”) for each of the Company’s issued and outstanding shares of common stock, par value $0.01 per share (“Common Stock”). The dividend was paid to the stockholders of record at the close of business on January 4, 2021 (the “Record Date”). Each Right entitles the registered holder, subject to the terms of the Rights Agreement (as defined below), to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”), at a price of $7.02, subject to certain adjustments (as adjusted from time to time, the “Exercise Price”). The description and terms of the Rights are set forth in the Rights Agreement, dated as of December 21, 2020 (the “Rights Agreement”), between the Company and American Stock Transfer & Trust Company, LLC (the “Rights Agent”).
The Rights, which are not exercisable until the Distribution Date (as defined in the Rights Agreement), will expire prior to the earliest of (i) the close of business on December 21, 2021, unless extended prior to expiration (provided any such extension will be submitted to the stockholders of the Company for ratification at the next annual meeting following such extension); (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement; (iii) the time at which the Rights are exchanged pursuant to the Rights Agreement and (iv) the time at which the Rights are terminated upon the occurrence of certain transactions (the earliest of (i), (ii), (iii) and (iv) is referred to as the “Expiration Date”).
Each share of Preferred Stock will be entitled, when, as and if declared, to a preferential per share quarterly dividend payment equal to the greater of (i) $1.00 per share or (ii) 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, in each case, paid to holders of Common Stock during such period. Each share of Preferred Stock will entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Company. In the event of any merger, consolidation or other transaction in which shares of Common Stock are converted or exchanged, each share of Preferred Stock will be entitled to receive 1,000 times the amount received per one share of Common Stock.
Equity Issuances
During the years ended December 31, 2020, 2019 and 2018, we issued common stock for our stock-based compensation program which is discussed further in Note 18.
Rights Offering in 2018
As previously disclosed, we agreed, pursuant to the Bridge Term Loan Credit Agreement, to use our reasonable best efforts to effectuate and close the Rights Offering as soon as reasonably practicable following October 5, 2018, whereby we would 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. Holders who subscribed for all of their basic subscription rights also could elect to subscribe for additional shares pursuant to an over-subscription privilege.
In connection with the Rights Offering, we entered into a Backstop Commitment Letter on October 5, 2018 (the “Backstop Commitment Letter”) with certain backstop parties named therein (the “Backstop Parties”), pursuant to which the Backstop Parties agreed, subject to the terms and conditions in the Backstop Commitment Letter, to participate in the Rights Offering and agreed to acquire all unsubscribed shares remaining after stockholders exercised their over-subscription privilege. The Backstop Parties are our two largest shareholders that, in the aggregate, hold approximately 90% of our stock. In exchange for the commitments under the Backstop Commitment Letter, we paid to the Backstop Parties, in the aggregate, a nonrefundable cash payment equal to 1.0% of the full amount of the Rights Offering.
Pursuant to the Backstop Commitment Letter, we were required to file a registration statement with the SEC within 20 days following October 5, 2018. This initial Registration Statement on Form S-1 was filed with the SEC on October 25, 2018, with amendments to the Form S-1 filed on December 4, 2018 and December 7, 2018. The Registration Statement on Form S-1 respecting the Rights Offering was declared effective by the SEC on Friday, December 7, 2018. The Rights Offering launched at the close of business on December 10, 2018 and terminated, as to unexercised rights, at 5:00 p.m. New York City time on December 28, 2018.
We sold an aggregate of 3,381,894 shares of common stock at a purchase price of $9.61 per share in the Rights Offering. On January 2, 2019, we received the aggregate gross proceeds from the Rights Offering of $32.5 million and repaid in full the obligations under the Bridge Term Loan Credit Agreement. The shares of common stock subscribed for in the Rights Offering were distributed to applicable offering participants through our transfer agent or through the clearing systems of the Depository Trust Company, which commenced on January 2, 2019. Immediately after the issuance of the 3,381,894 shares for the Rights Offering which commenced on January 2, 2019, the Company had 15,614,981 common shares outstanding.
Note 17 - Earnings Per 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 years ended December 31, 2020, 2019 and 2018, 0 shares of common stock underlying restricted stock or warrants were included in the computation of diluted earnings per common share (“EPS”) because the inclusion of such shares would be anti-dilutive based on the net losses reported for those periods.
The following table presents the calculation of basic and diluted net loss per common share, as well as the anti-dilutive stock-based awards that were excluded from the calculation of diluted net loss per share for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Numerator: | | | | | |
| Net loss | $ | (44,143) | | | $ | (54,937) | | | $ | (59,263) | |
| | | | | |
| Denominator: | | | | | |
| Weighted average shares—basic | 15,764 | | | 15,676 | | | 11,829 | |
| Common stock equivalents | 0 | | | 0 | | | 0 | |
| Weighted average shares—diluted | 15,764 | | | 15,676 | | | 11,829 | |
| | | | | |
| Loss per common share: | | | | | |
| Net loss per basic common share | $ | (2.80) | | | $ | (3.50) | | | $ | (5.01) | |
| | | | | |
| Net loss per diluted common share | $ | (2.80) | | | $ | (3.50) | | | $ | (5.01) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Anti-dilutive stock-based awards excluded | 671 | | | 490 | | | 951 | |
Note 18 - Stock-Based Compensation
Award Plans
2017 Long Term Incentive Plan
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. As of December 31, 2020, approximately 771,000 shares were available for issuance under the Incentive Plan. NaN awards were granted under this plan during the year ended December 31, 2020.
2018 Restricted Stock Plan for Directors
Further, the Compensation Committee on February 22, 2018 adopted the 2018 Restricted Stock Plan for Directors (the “Director Plan”), which was ratified by the Company’s shareholders at the Company’s 2018 Annual Meeting. The Director
Plan provides for the grant of restricted stock to the non-employee directors of the Company. On December 18, 2020, our stockholders approved at our annual stockholder meeting an amendment to increase the number of shares that may be issued under the Director Plan to 250,000 shares of common stock from 100,000 shares. As of December 31, 2020, 150,000 shares were remaining available for issuance under the Director Plan.
Stock-Based Compensation Expense
The total stock-based compensation expense, net of estimated forfeitures, included in “General and administrative expenses” in the accompanying consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018 was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Restricted stock (a) | $ | 2,035 | | | $ | 2,026 | | | $ | 13,505 | |
| Stock options | 0 | | | 0 | | | (788) | |
| Total stock-based compensation expense | $ | 2,035 | | | $ | 2,026 | | | $ | 12,717 | |
(a) Includes restricted stock awards, performance-based restricted stock units, and time-based restricted stock units granted under the Incentive Plan and the Director Plan.
There was 0 income tax expense or benefit related to stock-based compensation recognized in the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018. At December 31, 2020, the total unrecognized stock-based compensation expense, net of estimated forfeitures, was $0.7 million and is expected to be recognized over a weighted average period of 1.6 years.
Restricted Stock Units and Restricted Stock
We measure the cost of employee services received in exchange for awards of restricted stock or restricted stock units based on the market value of our common shares at the date of grant. The fair value of the restricted stock or restricted stock units is amortized on a straight-line basis over the requisite service period. Certain restricted stock units are subject to a performance condition established at the date of grant. Actual results against the performance condition are measured at the end of the performance period, which typically coincides with the vesting period. For these awards with performance conditions, the fair value of the restricted stock units is amortized on a straight-line basis over the requisite service period based upon the fair market value on the date of grant, adjusted for the anticipated or actual achievement against the established performance condition. Shares of restricted stock and restricted stock units awards generally vest over a one, two or three year service period from the date of grant.
A summary of restricted stock units and restricted stock activity during the year ended December 31, 2020 is presented below:
| | | | | | | | | | | |
| Shares | | Weighted-Average
Grant-Date
Fair Value
(per share) |
| Non-vested at December 31, 2019 | 283 | | | $ | 10.06 | |
| Granted | 351 | | | 2.13 | |
| Vested | (283) | | | 10.06 | |
| Forfeited or canceled | 0 | | | 0 | |
| Non-vested at December 31, 2020 | 351 | | | $ | 2.13 | |
The total fair value of the shares vested during the years ended December 31, 2020 and 2019 was approximately $2.8 million and $1.6 million, respectively.
Note 19 - Income Taxes
The following table shows the components of the income tax benefit (expense) for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| Current income tax (expense) benefit: | | | | | |
| Federal | $ | 0 | | | $ | 0 | | | $ | 0 | |
| State | (39) | | | (57) | | | (55) | |
| Total Current | (39) | | | (57) | | | (55) | |
| Deferred income tax (expense) benefit: | | | | | |
| Federal | 8 | | | 56 | | | (34) | |
| State | 18 | | | 91 | | | (118) | |
| Total Deferred | 26 | | | 147 | | | (152) | |
| Total income tax benefit (expense) | $ | (13) | | | $ | 90 | | | $ | (207) | |
A reconciliation of the income tax benefit (expense) and the amount computed by applying the statutory federal income tax rate of 21% to loss from continuing operations before income taxes is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| U.S. federal income tax benefit at statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State and local income taxes, net of federal benefit | 2.0 | % | | 4.4 | % | | 3.1 | % |
| Compensation | (0.4) | % | | (0.5) | % | | (5.9) | % |
| Capital Loss Expiration | (100.4) | % | | 0 | % | | 0 | % |
| | | | | |
| Impairment of goodwill | 0 | % | | (2.0) | % | | 0 | % |
| | | | | |
| Fixed asset adjustments | 0 | % | | 0 | % | | (2.6) | % |
| Change in valuation allowance | 77.7 | % | | (27.0) | % | | (11.1) | % |
| Other | 0.1 | % | | 4.3 | % | | (4.9) | % |
| Benefit (expense) for income taxes | 0.0 | % | | 0.2 | % | | (0.4) | % |
Significant components of our deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows:
| | | | | | | | | | | |
| December 31, | | December 31, |
| 2020 | | 2019 |
| Deferred tax assets: | | | |
| Reserves | $ | 34 | | | $ | 300 | |
| Debt issuance costs | 0 | | | 49 | |
| Net operating losses | 75,777 | | | 69,446 | |
| Federal credit carryover | 0 | | | 56 | |
| Stock-based compensation | 393 | | | 284 | |
| | | |
| Intangible assets and goodwill | 8,103 | | | 9,200 | |
| Capital loss carry forward | 4,521 | | | 48,050 | |
| Other | 4,692 | | | 2,976 | |
| Subtotal | 93,520 | | | 130,361 | |
| Less: Valuation allowance | (74,459) | | | (108,882) | |
| Total deferred tax assets | 19,061 | | | 21,479 | |
| Deferred tax liabilities: | | | |
| Fixed assets | (18,893) | | | (20,990) | |
| | | |
| | | |
| Other | (288) | | | (580) | |
| Total deferred tax liabilities | (19,181) | | | (21,570) | |
| Net deferred tax liability | $ | (120) | | | $ | (91) | |
| | | |
| | | |
| | | |
| | | |
| | | |
As of December 31, 2020, we had net operating loss (“NOL”) carryforwards for federal income tax purposes of approximately $276.1 million, the majority of which expire in 2032 through 2037, state NOL carryforwards of approximately $327.2 million, which generally expire in 2021 through 2040, and capital loss carryforwards of approximately $4.5 million, which begin to expire in 2021. Pursuant to United States Internal Revenue Code Section 382, if we undergo an ownership change, the NOL carryforward limitations would impose an annual limit on the amount of the taxable income that may be offset by our NOLs generated prior to the ownership change. We have determined that an ownership change occurred on August 7, 2017 as a result of the chapter 11 reorganization. The limitation under Section 382 may result in federal NOLs expiring unused. Subject to the impact of those rules as a result of past or future restructuring transactions, we may be unable to use all or a significant portion of our NOLs to offset future taxable income.
As required by GAAP, we assess the recoverability of our deferred tax assets on a regular basis and record a valuation allowance for any such assets where recoverability is determined to be not more likely than not. As a result of our continued losses, we determined that our deferred tax liabilities were not sufficient to fully realize our deferred tax assets prior to the expiration of our NOLs, and accordingly, a valuation allowance continues to be required to be recorded against our deferred tax assets. We recorded a decrease of approximately $34.4 million to our valuation allowance during the year ended December 31, 2020 primarily due to the expiration of the capital loss carryforwards. We recorded an increase of approximately $13.5 million to our valuation allowance during the year ended December 31, 2019 primarily due to the increase in the deferred tax liability related to net operating losses due to current year activity.
A reconciliation of our valuation allowance on deferred tax assets for the years ended December 31, 2020 and 2019 is as follows:
| | | | | | | | | | | |
| Year Ended |
| December 31,
2020 | | December 31,
2019 |
| Balance at beginning of period | $ | 108,882 | | | $ | 95,347 | |
| Additions (Reductions) to valuation allowance | (34,423) | | | 13,535 | |
| Valuation allowance release, net | 0 | | | 0 | |
| Balance at end of period | $ | 74,459 | | | $ | 108,882 | |
As of December 31, 2020 and 2019 we did 0t have any unrecognized tax benefits.
We recognize potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. We did 0t have any accrued interest and penalties as of December 31, 2020 and 2019. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.
We are subject to the following significant taxing jurisdictions: U.S. federal, Pennsylvania, Louisiana, North Dakota, Ohio, Texas, West Virginia, and Arizona. We have had NOLs in various years for federal purposes and for many states. The statute of limitations for a particular tax year for examination by the Internal Revenue Service (“IRS”) is generally three years subsequent to the filing of the associated tax return. However, the IRS can adjust NOL carryovers up to three years subsequent to the last year in which the loss carryover is finally used. Accordingly, there are multiple years open to examination. The statute of limitations is generally three to four years for many of the states where we operate, however many states can also adjust NOL carryovers up to three to four years subsequent to the last year in which the loss carryover is finally used. The Company is currently not under income tax examination in any tax jurisdictions.
Note 20 - 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, supervisory control and data acquisition 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 environmental laws and regulations. The consolidated balance sheets at December 31, 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 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 an accrual as of December 31, 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.
Surety Bonds and Letters of Credit
At December 31, 2020 and 2019, we had surety bonds outstanding of approximately $4.2 million and $6.4 million, respectively, primarily to support financial assurance obligations related to our landfill and disposal wells. Additionally, at December 31, 2020 and 2019, we had outstanding irrevocable letters of credit totaling $4.9 million and $3.2 million, respectively, to support various agreements, leases and insurance policies.
Note 21 - 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 financial condition, 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. Based on information currently known to our management, we do not expect the outcome in any of these known legal proceedings, individually or collectively, to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Confirmation Order Appeal
On July 26, 2017, David Hargreaves, an individual holder of 2018 Notes, appealed the Confirmation Order to the District Court of the District of Delaware (the “District Court”) and filed a motion for a stay pending appeal from the District Court. Although the motion for a stay pending appeal was denied, the appeal remained pending and the District Court heard oral arguments in May 2018, and in August 2018, the District Court issued an order dismissing the appeal. Hargreaves subsequently appealed the District Court’s decision to the United States Court of Appeals for the Third Circuit (the “Appellate Court”). The parties filed appellate briefs in December 2018 and January 2019, and presented oral arguments to a three-judge panel of the Appellate Court in November 2020. On January 6, 2021, the Appellate Court issued a decision in favor of Nuverra, affirming the dismissal of the appeal. Hargreaves subsequently filed a petition for rehearing, either by the three-judge panel or en banc by the full Appellate Court, and on February 4, 2021 the Appellate Court issued an order denying the petition for rehearing. Hargreaves may appeal the decision to the Supreme Court of the United States.
Note 22 - Employee Benefit Plans
Effective September 1, 2013, we established a defined contribution 401(k) plan (the “401(k) Plan”) that is subject to the provisions of the Employee Retirement Income Security Act of 1974. The 401(k) Plan covers substantially all employees who have met certain eligibility requirements, except those employees working less than 25 hours per week. Employees may participate in the 401(k) Plan on the first day of the first month following 60 days of employment.
On April 1, 2017, we instituted a cash match equal to 100% of each participant’s annual contribution up to 3% of each participant’s annual compensation and 50% of each participant’s annual contribution up to an additional 2% of each participant’s annual compensation. In May 2020, we suspended our matching contribution to the 401(k) Plan. We may re-establish our matching contribution at any time at our discretion. The cash matching contributions to the 401(k) Plan were $0.5 million, $1.7 million, and $1.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Note 23 - Related Party and Affiliated Company Transactions
Related Party Transactions
For the years ended December 31, 2020 and 2019, we did not have any related party transactions.
Bridge Term Loan Agreement
In connection with the Clearwater Acquisition, on October 5, 2018, we entered into the Bridge Term Loan Credit Agreement with the Bridge Term Loan Lenders and Wilmington. 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. As of December 31, 2018, $32.5 million was outstanding on the Bridge Term Loan. The obligations under the Bridge Term Loan Credit Agreement were repaid in full on January 2, 2019. See Note 12 for additional discussion of the Bridge Term Loan Agreement.
Cost Method Investment - Underground Solutions, Inc.
During 2009, we acquired an approximate 7% investment in Underground Solutions, Inc. (“UGSI”) a supplier of water infrastructure pipeline products, whose chief executive officer, Andrew D. Seidel, was a member of our board of directors. Our interest in UGSI was accounted for as a cost method investment.
On February 18, 2016, Aegion Corporation (or “Aegion”) announced the completion of the acquisition of UGSI, whereby Aegion paid approximately $85.0 million to acquire UGSI. Our total proceeds as a result of the acquisition were approximately $5.2 million. In April of 2016, we received proceeds of $5.0 million, which exceeded our cost basis of approximately $3.2 million. As such during the three months ended June 30, 2016, we recognized a net gain on the sale of approximately $1.7 million, including approximately $0.1 million in costs incurred by us in the closing. During the three months ended September 30, 2016, the three months ended September 30, 2017, and three months ended March 31, 2018, we received additional proceeds of $53.0 thousand, $76.0 thousand, and $75.0 thousand, respectively, due to adjustments to the final closing working capital statement.
Note 24 - 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 3 operating divisions, which we consider to be operating and reportable segments of our operations: (1) the Rocky Mountain division comprising the Bakken shale area, (2) the Northeast division comprising the Marcellus and Utica shale areas and (3) the Southern division comprising the Haynesville 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 |
| Year Ended December 31, 2020 | | | | | | | | | |
| Revenue | $ | 59,393 | | | $ | 34,173 | | | $ | 16,721 | | | $ | 0 | | | $ | 110,287 | |
| Direct operating expenses | 49,245 | | | 26,040 | | | 12,014 | | | 0 | | | 87,299 | |
| General and administrative expenses | 4,728 | | | 1,804 | | | 858 | | | 11,570 | | | 18,960 | |
| Depreciation and amortization | 11,891 | | | 10,090 | | | 6,599 | | | 34 | | | 28,614 | |
| Operating loss | (18,654) | | | (3,761) | | | (6,146) | | | (11,604) | | | (40,165) | |
| Loss before income taxes | (19,173) | | | (4,188) | | | (6,355) | | | (14,414) | | | (44,130) | |
| Total assets (a) | 57,837 | | | 53,636 | | | 62,502 | | | 17,091 | | | 191,066 | |
| Total assets held for sale | 0 | | | 0 | | | 0 | | | 778 | | | 778 | |
| | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | | | | |
| Revenue | $ | 103,552 | | | $ | 44,001 | | | $ | 20,685 | | | $ | 0 | | | $ | 168,238 | |
| Direct operating expenses | 81,529 | | | 35,836 | | | 13,654 | | | 0 | | | 131,019 | |
| General and administrative expenses | 5,021 | | | 2,880 | | | 1,104 | | | 11,859 | | | 20,864 | |
| Depreciation and amortization | 16,982 | | | 10,755 | | | 8,410 | | | 36 | | | 36,183 | |
| Operating loss | (5,022) | | | (27,977) | | | (5,208) | | | (11,895) | | | (50,102) | |
| Loss before income taxes | (5,479) | | | (28,212) | | | (5,428) | | | (15,908) | | | (55,027) | |
| Total assets (a) | 93,504 | | | 64,023 | | | 70,841 | | | 7,731 | | | 236,099 | |
| Total assets held for sale | 1,751 | | | 135 | | | 0 | | | 778 | | | 2,664 | |
| | | | | | | | | |
| Year Ended December 31, 2018 | | | | | | | | | |
| Revenue | $ | 127,758 | | | $ | 43,564 | | | $ | 26,152 | | | $ | 0 | | | $ | 197,474 | |
| Direct operating expenses | 101,855 | | | 37,660 | | | 19,381 | | | 0 | | | 158,896 | |
| General and administrative expenses | 5,859 | | | 2,746 | | | 1,237 | | | 28,668 | | | 38,510 | |
| Depreciation and amortization | 22,826 | | | 12,148 | | | 11,397 | | | 63 | | | 46,434 | |
| Operating loss | (2,782) | | | (9,059) | | | (11,396) | | | (29,063) | | | (52,300) | |
| | | | | | | | | |
| Loss before income taxes | (2,781) | | | (9,370) | | | (11,576) | | | (35,329) | | | (59,056) | |
_____________________
(a) Total assets exclude intercompany receivables eliminated in consolidation.
(b) The Southern division includes results for the Eagle Ford Shale area through June 30, 2018. We substantially exited the Eagle Ford Shale area as of June 30, 2018. See Note 10 for further discussion.
Note 25 - Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial information for the years ended December 31, 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| 2020 | March 31, | | June 30, | | September 30, | | December 31, |
| Revenue | $ | 37,942 | | | $ | 24,466 | | | $ | 23,796 | | | $ | 24,083 | |
| Operating loss | (22,026) | | | (5,686) | | | (6,131) | | | (6,322) | |
| Net loss | (23,044) | | | (6,779) | | | (7,125) | | | (7,195) | |
| Earnings per common share: | | | | | | | |
| Net loss per basic common share | $ | (1.46) | | | $ | (0.43) | | | $ | (0.45) | | | $ | (0.46) | |
| Net loss per diluted common share | (1.46) | | | (0.43) | | | (0.45) | | | (0.46) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| 2019 | March 31, | | June 30, | | September 30, | | December 31, |
| Revenue | $ | 42,627 | | | $ | 45,240 | | | $ | 43,098 | | | $ | 37,273 | |
| Operating loss | (4,657) | | | (3,828) | | | (5,017) | | | (36,600) | |
| Net loss | (6,355) | | | (5,006) | | | (6,052) | | | (37,524) | |
| Earnings per common share: | | | | | | | |
| Net loss per basic common share | $ | (0.41) | | | $ | (0.32) | | | $ | (0.39) | | | $ | (2.39) | |
| Net loss per diluted common share | (0.41) | | | (0.32) | | | (0.39) | | | (2.39) | |
