|
|
Item 1.
|
Financial Statements.
|
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2016
|
|
2015
|
|
|
|
(Note 1)
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
303
|
|
|
$
|
39,309
|
|
Restricted cash
|
5,504
|
|
|
4,250
|
|
Accounts receivable, net of allowance for doubtful accounts of $2.5 and $3.5 million at June 30, 2016 and December 31, 2015, respectively
|
19,996
|
|
|
42,188
|
|
Inventories
|
2,606
|
|
|
2,985
|
|
Prepaid expenses and other receivables
|
3,407
|
|
|
3,377
|
|
Other current assets
|
4,189
|
|
|
2,372
|
|
Assets held for sale
|
2,902
|
|
|
—
|
|
Total current assets
|
38,907
|
|
|
94,481
|
|
Property, plant and equipment, net of accumulated depreciation of $222.7 and $209.1 million at June 30, 2016 and December 31, 2015, respectively
|
366,322
|
|
|
406,188
|
|
Equity investments
|
574
|
|
|
3,750
|
|
Intangibles, net
|
15,562
|
|
|
16,867
|
|
Other assets
|
573
|
|
|
1,333
|
|
Total assets
|
$
|
421,938
|
|
|
$
|
522,619
|
|
Liabilities and Shareholders' Deficit
|
|
|
|
Accounts payable
|
$
|
6,173
|
|
|
$
|
6,907
|
|
Accrued liabilities
|
21,476
|
|
|
29,843
|
|
Current contingent consideration
|
—
|
|
|
8,628
|
|
Current portion of long-term debt
|
56,427
|
|
|
499,709
|
|
Derivative warrant liability
|
6,201
|
|
|
—
|
|
Total current liabilities
|
90,277
|
|
|
545,087
|
|
Deferred income taxes
|
317
|
|
|
270
|
|
Long-term debt
|
394,174
|
|
|
11,758
|
|
Long-term contingent consideration
|
8,500
|
|
|
—
|
|
Other long-term liabilities
|
3,723
|
|
|
3,775
|
|
Total liabilities
|
496,991
|
|
|
560,890
|
|
Commitments and contingencies
|
|
|
|
Shareholders' deficit:
|
|
|
|
Common stock
|
131
|
|
|
30
|
|
Additional paid-in capital
|
1,402,191
|
|
|
1,369,921
|
|
Treasury stock
|
(19,809
|
)
|
|
(19,800
|
)
|
Accumulated deficit
|
(1,457,566
|
)
|
|
(1,388,422
|
)
|
Total shareholders' deficit
|
(75,053
|
)
|
|
(38,271
|
)
|
Total liabilities and shareholders' deficit
|
$
|
421,938
|
|
|
$
|
522,619
|
|
The accompanying notes are an integral part of these statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
Non-rental revenue
|
$
|
31,369
|
|
|
$
|
85,530
|
|
|
$
|
75,395
|
|
|
$
|
192,540
|
|
Rental revenue
|
2,609
|
|
|
6,897
|
|
|
5,558
|
|
|
18,999
|
|
Total revenue
|
33,978
|
|
|
92,427
|
|
|
80,953
|
|
|
211,539
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Direct operating expenses
|
30,283
|
|
|
71,574
|
|
|
68,900
|
|
|
159,573
|
|
General and administrative expenses
|
14,204
|
|
|
9,697
|
|
|
21,656
|
|
|
22,397
|
|
Depreciation and amortization
|
15,206
|
|
|
18,296
|
|
|
31,051
|
|
|
35,778
|
|
Impairment of long-lived assets
|
2,664
|
|
|
—
|
|
|
2,664
|
|
|
—
|
|
Other, net
|
—
|
|
|
429
|
|
|
—
|
|
|
1,112
|
|
Total costs and expenses
|
62,357
|
|
|
99,996
|
|
|
124,271
|
|
|
218,860
|
|
Operating loss
|
(28,379
|
)
|
|
(7,569
|
)
|
|
(43,318
|
)
|
|
(7,321
|
)
|
Interest expense, net
|
(13,973
|
)
|
|
(12,452
|
)
|
|
(26,018
|
)
|
|
(25,040
|
)
|
Other income, net
|
2,771
|
|
|
400
|
|
|
2,929
|
|
|
721
|
|
Loss on extinguishment of debt
|
(284
|
)
|
|
(1,011
|
)
|
|
(674
|
)
|
|
(1,011
|
)
|
Loss from continuing operations before income taxes
|
(39,865
|
)
|
|
(20,632
|
)
|
|
(67,081
|
)
|
|
(32,651
|
)
|
Income tax (expense) benefit
|
(773
|
)
|
|
(15
|
)
|
|
(828
|
)
|
|
9
|
|
Loss from continuing operations
|
(40,638
|
)
|
|
(20,647
|
)
|
|
(67,909
|
)
|
|
(32,642
|
)
|
Loss from discontinued operations, net of income taxes
|
(1,290
|
)
|
|
(2,089
|
)
|
|
(1,235
|
)
|
|
(1,168
|
)
|
Net loss attributable to common shareholders
|
$
|
(41,928
|
)
|
|
$
|
(22,736
|
)
|
|
$
|
(69,144
|
)
|
|
$
|
(33,810
|
)
|
|
|
|
|
|
|
|
|
Net loss per common share attributable to common shareholders:
|
|
|
|
|
|
|
|
Basic and diluted loss from continuing operations
|
$
|
(0.60
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(1.42
|
)
|
|
$
|
(1.18
|
)
|
Basic and diluted loss from discontinued operations
|
(0.02
|
)
|
|
(0.08
|
)
|
|
(0.03
|
)
|
|
(0.04
|
)
|
Net loss per basic and diluted common share
|
$
|
(0.62
|
)
|
|
$
|
(0.83
|
)
|
|
$
|
(1.45
|
)
|
|
$
|
(1.22
|
)
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing net loss per basic and diluted common share
|
67,699
|
|
|
27,679
|
|
|
47,803
|
|
|
27,546
|
|
The accompanying notes are an integral part of these statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30,
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(69,144
|
)
|
|
$
|
(33,810
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
Income from discontinued operations, net of income taxes
|
—
|
|
|
(906
|
)
|
Loss on the sale of TFI
|
1,235
|
|
|
2,074
|
|
Depreciation and amortization of intangible assets
|
31,051
|
|
|
35,778
|
|
Amortization of debt issuance costs, net
|
2,587
|
|
|
2,438
|
|
Stock-based compensation
|
656
|
|
|
1,516
|
|
Impairment of long-lived assets
|
2,664
|
|
|
—
|
|
Gain on sale of UGSI
|
(1,694
|
)
|
|
—
|
|
Loss (gain) on disposal of property, plant and equipment
|
727
|
|
|
(1,312
|
)
|
Bad debt expense
|
254
|
|
|
(208
|
)
|
Change in fair value of derivative warrant liability
|
(1,023
|
)
|
|
—
|
|
Loss on extinguishment of debt
|
674
|
|
|
1,011
|
|
Deferred income taxes
|
48
|
|
|
1
|
|
Other, net
|
(33
|
)
|
|
316
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts receivable
|
21,938
|
|
|
47,719
|
|
Prepaid expenses and other receivables
|
(146
|
)
|
|
(5,273
|
)
|
Accounts payable and accrued liabilities
|
118
|
|
|
(8,113
|
)
|
Other assets and liabilities, net
|
(2,506
|
)
|
|
1,105
|
|
Net cash (used in) provided by operating activities from continuing operations
|
(12,594
|
)
|
|
42,336
|
|
Net cash used in operating activities from discontinued operations
|
—
|
|
|
(708
|
)
|
Net cash (used in) provided by operating activities
|
(12,594
|
)
|
|
41,628
|
|
Cash flows from investing activities:
|
|
|
|
Proceeds from the sale of TFI
|
—
|
|
|
78,897
|
|
Proceeds from the sale of property, plant and equipment
|
5,995
|
|
|
3,448
|
|
Purchases of property, plant and equipment
|
(2,133
|
)
|
|
(10,807
|
)
|
Proceeds from the sale of UGSI
|
4,979
|
|
|
—
|
|
Change in restricted cash
|
(1,254
|
)
|
|
(4,250
|
)
|
Net cash provided by investing activities from continuing operations
|
7,587
|
|
|
67,288
|
|
Net cash used in investing activities from discontinued operations
|
—
|
|
|
(181
|
)
|
Net cash provided by investing activities
|
7,587
|
|
|
67,107
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds from revolving credit facility
|
76,979
|
|
|
—
|
|
Payments on revolving credit facility
|
(130,667
|
)
|
|
(81,647
|
)
|
Proceeds from term loan
|
24,000
|
|
|
—
|
|
Payments for deferred financing costs
|
(985
|
)
|
|
—
|
|
Payments on vehicle financing and other financing activities
|
(3,326
|
)
|
|
(7,765
|
)
|
Net cash used in financing activities from continuing operations
|
(33,999
|
)
|
|
(89,412
|
)
|
Net cash used in financing activities from discontinued operations
|
—
|
|
|
(105
|
)
|
Net cash used in financing activities
|
(33,999
|
)
|
|
(89,517
|
)
|
Net (decrease) increase in cash and cash equivalents
|
(39,006
|
)
|
|
19,218
|
|
Cash and cash equivalents - beginning of period
|
39,309
|
|
|
15,416
|
|
Cash and cash equivalents - end of period
|
303
|
|
|
34,634
|
|
Less: cash and cash equivalents of discontinued operations - end of period
|
—
|
|
|
—
|
|
Cash and cash equivalents of continuing operations - end of period
|
$
|
303
|
|
|
$
|
34,634
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
Cash paid for interest
|
$
|
21,430
|
|
|
$
|
21,787
|
|
Cash paid for taxes, net
|
37
|
|
|
209
|
|
The accompanying notes are an integral part of these statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements of Nuverra Environmental Solutions, Inc. and its subsidiaries (collectively, “Nuverra,” the “Company,” “we,” “us,” or “our”) are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). Our condensed consolidated balance sheet as of
December 31, 2015
, included herein, has been derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (or "GAAP"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 14, 2016.
All dollar and share amounts in the footnote tabular presentations are in thousands, except per share amounts and unless otherwise noted. Unless stated otherwise, any reference to statement of operations items in these accompanying condensed consolidated financial statements refers to results from continuing operations.
Reclassifications
Certain reclassifications and adjustments have been made to prior period amounts in the accompanying condensed consolidated balance sheets and notes thereto in order to conform to the current year’s presentation including:
|
|
•
|
As of January 1, 2016, and further discussed below under "Significant Accounting Policies," we retrospectively adopted, for all comparative periods presented, ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, and ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
. As a result,
$6.8 million
of our unamortized debt issuance costs related to our
9.875%
Senior Notes due 2018 (the "2018 Notes),
12.5%
/
10.0%
Senior Secured Second Lien Notes due 2021 (the "2021 Notes") and
$24.0 million
term loan (the "Term Loan") have been presented in “Long-term debt” on the condensed consolidated balance sheet as of
June 30, 2016
. Further,
$8.7 million
of unamortized debt issuance costs related to our 2018 Notes have been reclassified from “Other assets” to “Current portion of long-term debt” on the condensed consolidated balance sheet as of December 31, 2015. Additionally, as the debt associated with our asset-based revolving credit facility is presented as short-term, the related debt issuance costs of
$1.7 million
and
$2.2 million
as of
June 30, 2016
and December 31, 2015, respectively, have been reclassified from "Other assets" to "Other current assets" on the condensed consolidated balance sheets. The total assets for the Corporate/Other segment reported in Note 15 have been adjusted for this reclassification.
|
Going Concern
Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the condensed consolidated financial statements, we had an accumulated deficit at
June 30, 2016
, and a net loss for the
six months ended
June 30, 2016
and
2015
. These factors, coupled with our large outstanding debt balance, raise substantial doubt about our ability to continue as a going concern. We are attempting to generate sufficient revenues and reduce costs; however, our cash position may not be sufficient to support our daily operations if we are not successful. While we have executed a comprehensive strategy to restructure our indebtedness, improve liquidity and reduce costs, including cash interest expense, to sustain operations through the prolonged depression in oil and natural gas prices and the corresponding impact on our business operations, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to generate sufficient liquidity to meet our obligations and operating needs. While we were, and remain, in compliance with our existing debt arrangements, we recognize that absent an improvement in oil prices, it is likely that we will not have enough liquidity, including cash on hand, to service our debt, operations, and avoid covenant violations. See the "Exchange Offer" and "Term Loan" discussion in Note 8 and the "Subsequent Events Related to Restructuring" discussion in Note 18 for details on our debt restructuring in 2016.
The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Significant Accounting Policies
As of January 1, 2016, we retrospectively adopted, for all comparative periods presented, ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, and ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
. The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The current condensed consolidated balance sheet as of
June 30, 2016
presents
$6.8 million
of our unamortized debt issuance costs related to our 2018 Notes, 2021 Notes and Term Loan in “Long-term debt.” In order to conform to the current financial statement presentation,
$8.7 million
of unamortized debt issuance costs related to our 2018 Notes have been reclassified from “Other assets” to “Current portion of long-term debt” on the condensed consolidated balance sheet as of December 31, 2015. The guidance in ASU 2015-15 prescribes that 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, while debt issuance costs in the scope of ASU 2015-03 do not. As such, we will continue to present the costs associated with our asset-based revolving credit facility as an asset. Deferred issuance costs associated with our asset-based revolving credit facility of
$1.7 million
and
$2.2 million
as of
June 30, 2016
and December 31, 2015, respectively, are included in “Other current assets” on the condensed consolidated balance sheets as this debt is considered short-term.
On March 10, 2016, we entered into an amendment to our guaranty and security agreement related to our asset-based revolving credit facility ("ABL Facility"), which is described in further detail in Note 8 under "ABL Facility Amendments." This amendment implemented a daily cash sweep of our collection lockbox and certain depository accounts, the proceeds of which are required to be applied against the outstanding balance of the ABL Facility. As a result of the sweep occurring one day in arrears, we had an ending balance of
$0.1 million
in our collection lockbox and certain depository accounts on June 30, 2016, which we have classified as "Restricted cash" on the condensed consolidated balance sheet as this cash is not available for operations and was subsequently swept by the lender on July 1, 2016, and applied against the outstanding balance under the ABL Facility.
There have been no other material changes or developments in our significant accounting policies or evaluation of accounting estimates and underlying assumptions or methodologies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
Note 2 - Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”). The amendments in this update will be added to the ASC as Topic 606, Revenue from Contracts with Customers, and replaces the guidance in Topic 605. The underlying principle of the guidance in this update is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. This new revenue standard also calls for more detailed disclosures and provides guidance for transactions that weren’t addressed completely, such as service revenue and contract modifications which may be applied retrospectively or modified retrospectively. In August 2015, the FASB issued ASU No. 2015-14, Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date
("ASU 2015-14"). The guidance in ASU 2015-14 delays the effective date for the new revenue recognition guidance outlined in ASU 2014-09 to reporting periods beginning after December 15, 2017, which for us is the reporting period starting January 1, 2018. We are reviewing the guidance in ASU 2014-09 and have not yet assessed the impact, if any, on our consolidated financial statements and have not determined our method of adoption.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern
(“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, companies will have reduced diversity in the timing and content of footnote disclosures than under today’s guidance. ASU 2014-15 is effective for reporting periods beginning after December 15, 2016, which for us is the reporting period starting January 1, 2017, with early adoption permitted. We are reviewing the guidance in ASU 2014-15 and evaluating the impact this new guidance may have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
("ASU 2016-02"), which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, using a modified retrospective approach. Early adoption of ASU 2016-09 is permitted. We are evaluating the effect that ASU 2016-02 will have on our
consolidated financial statements and related disclosures
.
Based upon the current effective date, the new guidance would first apply to our reporting period starting January 1, 2019.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"), which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period, however early adoption is permitted. We are currently evaluating the guidance in ASU 2016-09 to determine our adoption method and the effect it will have on our consolidated financial statements.
Note 3 - Earnings Per Common Share
Basic and diluted loss per common share from continuing operations, basic and diluted loss per common share from discontinued operations and net loss per basic and diluted common share have been computed using the weighted average number of shares of common stock outstanding during the period.
For the
three and six months ended
June 30, 2016
and
2015
,
no
shares of common stock underlying stock options, restricted stock, or warrants were included in the computation of diluted earnings per common share ("EPS") from continuing operations because the inclusion of such shares would be anti-dilutive based on the net losses from continuing operations reported for those periods. Accordingly, for the
six
month periods ended
June 30, 2016
and
2015
,
no
shares of common stock underlying stock options, restricted stock, or warrants were included in the computations of diluted EPS from income from discontinued operations or diluted EPS from net loss per common share, because such shares were excluded from the computation of diluted EPS from continuing operations for those periods.
The following table presents the calculation of basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(40,638
|
)
|
|
$
|
(20,647
|
)
|
|
(67,909
|
)
|
|
(32,642
|
)
|
Loss from discontinued operations
|
(1,290
|
)
|
|
(2,089
|
)
|
|
(1,235
|
)
|
|
(1,168
|
)
|
Net loss attributable to common shareholders
|
$
|
(41,928
|
)
|
|
$
|
(22,736
|
)
|
|
$
|
(69,144
|
)
|
|
$
|
(33,810
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares—basic
|
67,699
|
|
|
27,679
|
|
|
47,803
|
|
|
27,546
|
|
Common stock equivalents
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares—diluted
|
67,699
|
|
|
27,679
|
|
|
47,803
|
|
|
27,546
|
|
|
|
|
|
|
|
|
|
Net loss per common share attributable to common shareholders:
|
|
|
|
|
|
|
|
Basic and diluted loss from continuing operations
|
$
|
(0.60
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(1.42
|
)
|
|
$
|
(1.18
|
)
|
Basic and diluted loss from discontinued operations
|
(0.02
|
)
|
|
(0.08
|
)
|
|
(0.03
|
)
|
|
(0.04
|
)
|
Net loss per basic and diluted common share
|
$
|
(0.62
|
)
|
|
$
|
(0.83
|
)
|
|
$
|
(1.45
|
)
|
|
$
|
(1.22
|
)
|
|
|
|
|
|
|
|
|
Anti-dilutive stock-based awards excluded
|
508
|
|
|
799
|
|
|
508
|
|
|
799
|
|
In connection with our debt restructuring, which is discussed in further detail in Note 8, at the May 20, 2016 Special Meeting of Shareholders, our shareholders approved an amendment to our Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of our common stock, par value
$0.001
per share, from
50 million
to
350 million
.
The increase in our authorized shares of common stock provides us with sufficient common share capacity to issue shares of common stock in connection with our debt restructuring transactions. See the "Exchange Offer" discussion in Note 8 for the details on debt exchanged for common stock and the number of shares issued during the three months ended June 30, 2016.
Note 4 - Intangible Assets
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Remaining Useful Life (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Remaining Useful Life (Years)
|
Customer relationships
|
$
|
11,731
|
|
|
$
|
(7,574
|
)
|
|
$
|
4,157
|
|
|
5.8
|
|
$
|
11,731
|
|
|
$
|
(6,865
|
)
|
|
$
|
4,866
|
|
|
6.0
|
Disposal permits
|
1,269
|
|
|
(531
|
)
|
|
738
|
|
|
4.6
|
|
1,269
|
|
|
(451
|
)
|
|
818
|
|
|
5.2
|
Customer contracts
|
17,352
|
|
|
(6,685
|
)
|
|
10,667
|
|
|
10.3
|
|
17,352
|
|
|
(6,169
|
)
|
|
11,183
|
|
|
11.0
|
|
$
|
30,352
|
|
|
$
|
(14,790
|
)
|
|
$
|
15,562
|
|
|
8.8
|
|
$
|
30,352
|
|
|
$
|
(13,485
|
)
|
|
$
|
16,867
|
|
|
9.3
|
The remaining weighted average useful lives shown are calculated based on the net book value and remaining amortization period of each respective intangible asset.
Note 5 - Assets Held for Sale and Impairment of Long-Lived Assets
During the three months ended June 30, 2016, management approved plans to sell certain assets located in both the Northeast and Southern divisions, including trucks, tanks, and a parcel of land. During the three months ended June 30, 2016, we began to actively market these assets, which we expect to sell within one year. As all of the criteria for classification as assets held for sale were met, these assets are presented separately as "Assets held for sale" in our condensed consolidated balance sheet as of June 30, 2016.
In accordance with applicable accounting guidance, the assets were recorded at the lower of net book value or fair value less costs to sell. Upon reclassification we ceased to recognize depreciation expense on the assets. As the fair value of the assets was lower than its net book value, an impairment charge of
$2.7 million
was recognized during the three months ended June 30, 2016, and is included in "Impairment of long-lived assets" on our condensed consolidated statements of operations. Of the
$2.7 million
recorded,
$2.4 million
related to the Northeast division and
$0.3 million
related to the Southern division. The fair value of the assets was measured using third party quoted prices for similar assets (Level 3).
Additionally, 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. There were no indicators of potential impairment for the six months ended June 30, 2016 and 2015.
If reduced customer activity levels decrease demand for our services for a prolonged period of time, or if we make downward adjustments to our projections, our actual cash flows could be less than our estimated cash flows, which could result in future impairment charges for long-lived assets.
Note 6 - Fair Value Measurements
Measurements
Fair value represents an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
|
•
|
Level 1 — Observable inputs such as quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
|
|
|
•
|
Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
•
|
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Assets and liabilities measured at fair value on a recurring basis and the fair value hierarchy of the valuation techniques we utilized to determine such fair value included significant unobservable inputs (Level 3) and were as follows:
|
|
|
|
|
|
Fair Value
|
As of June 30, 2016
|
|
Assets: Cost method investment
|
$
|
—
|
|
Liabilities:
|
|
Derivative warrant liability
|
6,201
|
|
Contingent consideration
|
8,500
|
|
|
|
As of December 31, 2015
|
|
Assets: Cost method investment
|
$
|
3,169
|
|
Liabilities:
|
|
Derivative warrant liability
|
—
|
|
Contingent consideration
|
8,628
|
|
Derivative Warrant Liability
In connection with our debt restructuring as described in Note 8 under "Exchange Offer" and "Term Loan," we issued warrants with derivative features during the three months ended June 30, 2016. These instruments are accounted for as derivative liabilities as described further in Note 9.
Our derivative warrant liability is adjusted to reflect the estimated fair value at each quarter end, with any decrease or increase in the estimated fair value being recorded in "Other income, net" accordingly, as adjustments to the fair value of the derivative liabilities.
We used Level 3 inputs for the valuation methodology of the derivative liabilities. The estimated fair values were computed using a Monte Carlo simulation model. The key inputs in determining our derivative warrant liability included our stock price, the volatility of our stock price, and the risk free interest rate. Future changes in these factors could have a significant impact on the computed fair value of the derivative warrant liability. As such, we expect future changes in the fair value of the warrants to vary significantly from quarter to quarter.
The following table provides a reconciliation of the beginning and ending balances of the "Derivative warrant liability" presented in the condensed consolidated balance sheet for the three months ended June 30, 2016.
|
|
|
|
|
|
|
|
June 30, 2016
|
Balance at beginning of period
|
|
$
|
—
|
|
Issuance of warrants
|
|
7,229
|
|
Exercise of warrants
|
|
(5
|
)
|
Adjustments to estimated fair value
|
|
(1,023
|
)
|
Balance at end of period
|
|
$
|
6,201
|
|
Contingent Consideration
We are liable for certain contingent consideration payments in connection with the performance of various acquisitions. The fair values of the contingent consideration obligations were determined using a probability-weighted income approach at the acquisition date and are revalued at each reporting date or more frequently if circumstances dictate based on changes in the discount periods and rates, changes in the timing and amount of the revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the performance measurements upon which the obligations are based.
During the three months ended June 30, 2016, we determined that it would be unlikely that the required permits and certificates necessary for the issuance of a second special waste disposal permit to Ideal Oilfield Disposal, LLC would be issued within one year. As such, we reclassified the
$8.5 million
contingent consideration liability related to the Ideal Oilfield Disposal, LLC acquisition from current to long-term in the condensed consolidated balance sheet as of June 30, 2016. Changes to the fair
value of contingent consideration are recorded as "Other income, net" in the condensed consolidated statements of operations. The fair value measurement is based on significant inputs not observable in the market, which are referred to as Level 3 inputs.
Changes to contingent consideration obligations during the
six months ended
June 30, 2016
and the year ended
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Balance at beginning of period
|
$
|
8,628
|
|
|
$
|
9,824
|
|
Cash payments
|
—
|
|
|
(909
|
)
|
Changes in fair value of contingent consideration, net
|
(128
|
)
|
|
(287
|
)
|
Balance at end of period
|
$
|
8,500
|
|
|
$
|
8,628
|
|
Less: current portion
|
—
|
|
|
(8,628
|
)
|
Long-term contingent consideration
|
$
|
8,500
|
|
|
$
|
—
|
|
Other
In addition to our assets and liabilities that are measured at fair value on a recurring basis, we are required by GAAP 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 review of long-lived assets, we measure the fair value of our asset groups for those asset groups deemed not recoverable, based on Level 3 inputs consisting of the discounted future cash flows associated with the use and eventual disposition of the asset group.
Our cost method investment in Underground Solutions Inc. (or "UGSI") is measured at fair value on a nonrecurring basis when deemed necessary, using observable inputs such as trading prices of the stock, as well as using discounted cash flows, incorporating adjusted available market discount rate information and our estimates for liquidity risk. UGSI was acquired during the six months ended June 30, 2016, which is discussed in further detail in Note 14.
Note 7 - Accrued Liabilities
Accrued liabilities consisted of the following at
June 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Accrued payroll and employee benefits
|
$
|
2,564
|
|
|
$
|
5,839
|
|
Accrued insurance
|
5,389
|
|
|
5,896
|
|
Accrued legal and environmental costs
|
897
|
|
|
1,531
|
|
Accrued taxes (Note 11)
|
2,582
|
|
|
1,514
|
|
Accrued interest (Note 8)
|
1,079
|
|
|
8,516
|
|
Accrued operating costs
|
1,659
|
|
|
4,233
|
|
Accrued other
|
2,306
|
|
|
2,314
|
|
Accrued liability for pending Rights Offering (Note 18)
|
$
|
5,000
|
|
|
$
|
—
|
|
Total accrued liabilities
|
$
|
21,476
|
|
|
$
|
29,843
|
|
Note 8 - Debt
Debt consisted of the following at
June 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Interest Rate
|
|
Maturity Date
|
|
Unamortized Deferred Financing Costs (i)
|
|
Fair Value of Debt (h)
|
|
Carrying Value of Debt
|
|
Carrying Value of Debt
|
ABL Facility (a)
|
3.72%
|
|
Dec. 2016
|
|
$
|
1,723
|
|
|
$
|
48,144
|
|
|
$
|
48,144
|
|
|
$
|
101,832
|
|
2018 Notes (b)
|
9.875%
|
|
Apr. 2018
|
|
707
|
|
|
16,023
|
|
|
40,436
|
|
|
400,000
|
|
2021 Notes (c)
|
12.50%
|
|
Apr. 2021
|
|
5,999
|
|
|
141,012
|
|
|
335,742
|
|
|
—
|
|
Term Loan (d)
|
13.00%
|
|
Apr. 2018
|
|
120
|
|
|
24,665
|
|
|
24,665
|
|
|
—
|
|
Vehicle financings (e)
|
3.04%
|
|
Various
|
|
—
|
|
|
9,975
|
|
|
9,975
|
|
|
12,303
|
|
Note payable (f)
|
4.25%
|
|
Apr. 2019
|
|
—
|
|
|
5,635
|
|
|
5,635
|
|
|
6,492
|
|
Total debt
|
|
|
|
|
$
|
8,549
|
|
|
$
|
245,454
|
|
|
464,597
|
|
|
520,627
|
|
Original issue discount and premium for 2018 Notes (g)
|
|
|
|
(37
|
)
|
|
(452
|
)
|
Original issue discount and premium for 2021 Notes (g)
|
|
|
|
(356
|
)
|
|
—
|
|
Deferred financing costs presented with debt (i)
|
|
|
|
|
|
(6,826
|
)
|
|
(8,708
|
)
|
Debt discount for issuance of warrants (j)
|
|
|
|
|
|
(6,777
|
)
|
|
—
|
|
Total debt, net
|
|
|
|
|
|
|
|
|
450,601
|
|
|
511,467
|
|
Less: current portion of long-term debt (k)(l)
|
|
|
|
(56,427
|
)
|
|
(499,709
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
$
|
394,174
|
|
|
$
|
11,758
|
|
_____________________
|
|
(a)
|
The interest rate presented represents the interest rate on the
$85.0 million
ABL Facility at
June 30, 2016
.
|
|
|
(b)
|
The interest rate presented represents the coupon rate on our 2018 Notes, excluding the effects of deferred financing costs, original issue discounts and original issue premiums. Including the impact of these items, the effective interest rate on the 2018 Notes is approximately
11.0%
. Interest payments are due semi-annually on April 15 and October 15 of each year.
|
|
|
(c)
|
The interest rate presented represents the current coupon rate on our 2021 Notes, excluding the effects of deferred financing costs, original issue discounts and original issue premiums. Including the impact of these items, the effective interest rate on the 2021 Notes is approximately
11.9%
. Interest will be paid in kind semi-annually by increasing the principal amount payable and due at maturity and/or in cash as follows: interest payable on October 15, 2016 will be paid in kind at an annual rate of
12.5%
; interest payable after October 15, 2016 but on or before April 15, 2018 will be paid at a rate of
10%
with
50%
in kind and
50%
in cash; interest payable after April 15, 2018 will be paid in cash at a rate of
10%
until maturity.
|
|
|
(d)
|
The Term Loan accrues interest at a rate of
13%
compounded monthly and which is to be paid in kind by increasing the principal amount payable thereunder. Principal including the paid in kind interest is due April 15, 2018.
|
|
|
(e)
|
Vehicle financings consist of capital lease arrangements related to fleet purchases with a weighted-average annual interest rate of approximately
3.04%
, which mature in varying installments between
2016
and
2020
. Capital lease obligations were
$10.0 million
and
$12.3 million
at
June 30, 2016
and
December 31, 2015
, respectively.
|
|
|
(f)
|
During the three months ended June 30, 2015, we settled our
$11.0 million
financing obligation to acquire the remaining
49%
interest in Appalachian Water Services, LLC ("AWS") from the non-controlling interest holder with a
$4.0 million
cash payment and a
$7.4 million
note payable with principal and interest due in equal quarterly installments through April 2019.
|
|
|
(g)
|
As discussed in greater detail in the "Exchange Offer" section below, on April 15, 2016,
$327.2 million
in principal 2018 Notes were exchanged for new 2021 Notes. The note for note exchange was accounted for as a modification, and as a result
$57.3 thousand
and
$16.8 thousand
of the original issuance discount and premium, respectively, will continue to be amortized over the remaining term of the 2018 Notes, while
$0.5 million
and
$0.1 million
of the original issuance discount and premium, respectively, will be amortized over the term of the new 2021 Notes. Further, a total of
$32.3
|
million
in principal 2018 Notes were exchanged for common stock and
$45.8 thousand
and
$13.4 thousand
of the original issuance discount and premium, respectively, were included in the calculation of the gain/(loss) on extinguishment.
|
|
(h)
|
The estimated fair value of our 2018 Notes and our 2021 Notes is based on reported trading prices as of
June 30, 2016
. Our ABL Facility and vehicle financings bear interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value.
|
|
|
(i)
|
As discussed previously in Note 1, upon retrospective adoption of ASU 2015-03, we have presented the deferred financing costs associated with the 2018 Notes, 2021 Notes and Term Loan in the balance sheet as a direct deduction from the carrying amount of the debt liability as of
June 30, 2016
and
December 31, 2015
. In accordance with ASU 2015-15, the deferred financing costs related to the ABL Facility continue to be presented as an asset, and are included in "Other current assets" on the condensed consolidated balance sheets as of
June 30, 2016
and
December 31, 2015
. Additionally, as discussed in greater detail in the "Exchange Offer" section below, on April 15, 2016,
$327.2 million
in principal 2018 Notes were exchanged for new 2021 Notes. The note for note exchange was accounted for as a modification, and as a result
$0.8 million
of the original deferred financing costs associated with the 2018 Notes will continue to be amortized over the remaining term of the 2018 Notes, while
$6.3 million
will be amortized over the term of the new 2021 Notes. Further, a total of
$32.3 million
in principal 2018 Notes were exchanged for common stock and
$0.6 million
of the original deferred financing costs associated with the 2018 Notes were included in the calculation of the gain/(loss) on extinguishment.
|
|
|
(j)
|
The debt discount for issuance of warrants represents the initial fair value of the warrants issued in connection with the debt restructuring described in the "Exchange Offer" and "Term Loan" sections below, which will be amortized through interest expense over the terms of the new 2021 Notes and the Term Loan. As described further in Note 9, these warrants are accounted for as derivative liabilities.
|
|
|
(k)
|
As a result of the Eighth Amendment to our ABL Facility on June 29, 2016, which changed the scheduled maturity date from January 15, 2018 to December 31, 2016, the carrying value of the ABL Facility was reclassified to current liabilities in the consolidated balance sheet as of June 30, 2016. In addition, the principal payments due within one year for the vehicle financings and note payable are also classified as current.
|
|
|
(l)
|
The carrying value of the ABL Facility and the 2018 Notes were presented as current liabilities as of December 31, 2015 due to the probability of breaching one of the financial covenants at that date. In addition, the principal payments due within one year for the vehicle financings and note payable were also classified as current.
|
For a discussion of material changes and developments in our debt and its principal terms, see our discussion below regarding the "Exchange Offer," "Term Loan," and "ABL Facility Amendments," in addition to the discussion in Note 18 on "Subsequent Events Related to Restructuring - Rights Offering."
Indebtedness
Exchange Offer
On March 11, 2016, we entered into a Restructuring Support Agreement with holders of more than
80%
of the 2018 Notes relating to a debt restructuring and recapitalization plan (the “Restructuring”), subject to the satisfaction of certain closing conditions including shareholder approval of an amendment to our Amended and Restated Certificate of Incorporation, as amended, and minimum noteholder participation. On April 15, 2016, we closed our exchange offer (the “Exchange Offer”) relating to our 2018 Notes as part of the comprehensive restructuring of our outstanding indebtedness pursuant to the Restructuring Support Agreement.
Pursuant to the Exchange Offer, we offered to exchange our 2021 Notes and shares of our common stock at a conversion price per share of
$0.32
(the “Conversion Price”) for any and all of our 2018 Notes validly tendered and not properly withdrawn at or prior to the expiration date, with the exception of approximately
$31.4 million
in principal 2018 Notes owned by an entity controlled by Mark D. Johnsrud, our Chairman of the Board and Chief Executive Officer. We settled the Exchange Offer on April 15, 2016 by delivering to tendering holders of the 2018 Notes (i)
$327.2 million
in aggregate principal amount of the new 2021 Notes to those tendering holders electing to exchange for 2021 Notes and
$0.9 million
in shares of common stock converted at the Conversion Price to those tendering holders electing to exchange for common stock and (ii) a pro rata share (based on the aggregate principal amount of the 2018 Notes validly tendered) of penny warrants sufficient to purchase
10%
of shares of our common stock (the "Exchange Warrants"). In addition,
$31.4 million
in principal 2018 Notes held by an entity controlled by Mr. Johnsrud were canceled upon closing of the Exchange Offer, and converted to shares of our common stock on May 26, 2016 at the Conversion Price, following shareholder approval at the May 20, 2016 Special Meeting of Shareholders to approve an amendment to our Amended and Restated Certificate of Incorporation, as amended, to increase the number of
authorized shares of our common stock, par value
$0.001
per share, from
50 million
to
350 million
(the "Johnsrud Note Conversion"). As a result of the exchange, a total of
101,071,875
shares of common stock were issued, with
2,837,500
to tendering holders electing to exchange their 2018 Notes for common stock, and
98,234,375
for the Johnsrud Note Conversion.
The exchange of the
$327.2 million
in principal 2018 Notes for new 2021 Notes was accounted for as a debt modification, and all third party expenses related to the exchange were expensed to "General and administrative expenses" in the condensed consolidated statement of operations for the three months ended June 30, 2016. The exchange of the
$0.9 million
in principal 2018 Notes for common stock was accounted for as a debt extinguishment, which generated an immaterial loss on extinguishment recorded in "Loss on extinguishment of debt" in the condensed consolidated statement of operations for the three months ended June 30, 2016. Finally, the exchange of
$31.4 million
in principal 2018 Notes held by an entity controlled by Mr. Johnsrud for common stock was accounted as a capital transaction as Mr. Johnsrud is a related party, with the loss on extinguishment recorded in "Additional paid-in-capital" on the condensed consolidated balance sheet as of June 30, 2016. The Warrants issued in connection with the Exchange Offer are discussed in further detail in Note 9 on "Derivative Warrants."
In connection with the issuance of the new 2021 Notes, we entered into a new Indenture that governs the terms of the new 2021 Notes, dated as of April 15, 2016, between the Company, Wilmington Savings Fund Society, FSB, as Trustee, and the Guarantors party thereto. Pursuant to the new Indenture, the 2021 Notes will mature on April 15, 2021. Interest will be paid in kind semi-annually by increasing the principal amount payable and due at maturity and/or in cash as follows: interest payable on October 15, 2016 will be paid in kind at an annual rate of
12.5%
; interest payable after October 15, 2016 but on or before April 15, 2018 will be paid at a rate of
10%
with
50%
in kind and
50%
in cash; interest payable after April 15, 2018 will be paid in cash at a rate of
10%
until maturity. As a result, our annual cash interest payment obligations have been reduced by approximately
$17.8 million
for the remainder of 2016,
$17.9 million
for 2017 and
$8.6 million
through April 15, 2018. Interest on the 2021 Notes accrues from the most recent date interest has been paid, or if no interest has been paid, from and including the issue date. The 2021 Notes are secured by junior liens on the same collateral as our ABL Facility and rank equal in right of payment to all senior indebtedness and senior to all subordinated indebtedness of the Company. The 2021 Notes are guaranteed by our subsidiaries.
Upon settlement of the Exchange Offer, there remained outstanding approximately
$40.4 million
aggregate principal amount of 2018 Notes. Ongoing semi-annual interest expense with respect to the remaining 2018 Notes is approximately
$2.0 million
. In addition, based on the completion of the Exchange Offer, consents from each exchanging holder of the 2018 Notes for the waiver of certain provisions of the 2018 Notes Indenture became effective. The consents, among other things, waive substantially all of the restrictive covenants in the 2018 Notes Indenture and potential defaults arising from non-compliance with such waived covenants.
Term Loan
Concurrent to the Exchange Offer we entered into a
$24.0 million
Term Loan funded by certain holders of the 2018 Notes that were also parties to the Restructuring Support Agreement. The Term Loan accrues interest at a rate of
13%
compounded monthly to be paid in kind by increasing the principal amount payable thereunder. Principal including the paid in kind interest is due April 15, 2018. The Term Loan is subject to a minimum EBITDA covenant that is identical in all respects to the minimum EBITDA covenant applicable to the ABL Facility. To the extent actual EBITDA (as defined by the Term Loan) falls short of the minimum EBITDA targets, the Term Loan accrues interest at rate of
17%
. The Term Loan is secured by junior liens on the same collateral as our ABL Facility and guaranteed by our subsidiaries. In connection with the Term Loan, we entered into a warrant agreement with the lenders under the Term Loan, pursuant to which, as a commitment fee for entering into the Term Loan, the lenders received warrants to purchase up to
5%
of our then-outstanding stock at an exercise price of
$0.01
per share (the "Term Loan Warrants").
The Exchange Warrants and the Term Loan Warrants (collectively, the "Warrants") contain anti-dilution provisions which adjust the number of shares issuable upon exercise thereof in certain circumstances, including adjustments intended to preserve the proportion of outstanding common stock into which such Warrants are exercisable after giving effect to the Johnsrud Note Conversion, and the Rights Offering. The Warrants are discussed in greater detail in Note 9 on "Derivative Warrants" and the Rights Offering is discussed in Note 18 on "Subsequent Events Related to Restructuring - Rights Offering."
Proceeds from the Term Loan were applied to pay down a portion of the outstanding balance of the ABL Facility and were reborrowed by us to fund the scheduled interest payment on the 2018 Notes and pay related transaction fees and expenses.
On June 30, 2016, we entered into a First Amendment to Term Loan Credit Agreement (the “Term Loan Agreement Amendment”) by and among the Required Lenders (as defined therein) and the Company, which amends the Term Loan Credit Agreement, dated
as of April 15, 2016, by and among Wilmington Savings Fund Society, FSB, as administrative agent (the “Agent”), the lenders party thereto (the “Lenders”), and the Company, as borrower (the “Term Loan Agreement”).
The Term Loan Agreement Amendment amends the Term Loan Agreement by amending the minimum EBITDA financial maintenance covenant to conform to the revised minimum EBITDA financial maintenance covenant provided by the Eighth Amendment to Amended and Restated Credit Agreement (discussed below) through December 31, 2016, modifying the applicable periods for measurement and reducing the applicable amounts required to be achieved for each period. In connection with the Term Loan Agreement Amendment, we paid a non-refundable amendment fee in the amount of
$0.1 million
to the Lenders, pro-rata to their respective commitment amount under the Term Loan Agreement, which was capitalized as deferred financing costs during the three months ended June 30, 2016.
ABL Facility Amendments
On March 10, 2016, we entered into a Consent and Fifth Amendment to Amended and Restated Credit Agreement (the “Fifth ABL Facility Amendment”) and a Third Amendment to Amended and Restated Guaranty and Security Agreement (the "Third GSA Amendment") by and among Wells Fargo Bank, National Association as agent ("Agent"), the Lenders named therein (the “Lenders”), and the Company. Under the Fifth ABL Facility Amendment, the Lenders consented to the inclusion of a “going concern” qualification in the opinion from our registered public accounting firm, which is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Under the Third GSA Amendment, we consented to and implemented a daily cash sweep of our collection lockbox and depository accounts, the proceeds of which are required to be applied against the outstanding balance of the ABL Facility. The Third GSA Amendment also requires the segregation of all receipts and disbursements in separate bank accounts and limits the end of day balance in our operating bank account to an amount not to exceed
$1.0 million
.
On March 24, 2016, in connection with the Restructuring Support Agreement to implement the Restructuring, we entered into a Sixth Amendment to Amended and Restated Credit Agreement (the “Sixth ABL Facility Amendment”) by and among the Agent, the Lenders and the Company. Among other terms and conditions, the Sixth ABL Facility Amendment amended the ABL Facility as follows:
|
|
•
|
Reduced the maximum revolver commitments from
$125.0 million
to
$100.0 million
;
|
|
|
•
|
Replaced the leverage ratio financial maintenance covenant with a new minimum EBITDA financial maintenance covenant that will be tested monthly;
|
|
|
•
|
Amended the definition of “EBITDA” for purposes of the financial maintenance covenant to provide allowances for certain unusual or non-recurring fees, costs and expenses, with testing monthly beginning in April 2016;
|
|
|
•
|
Amended the definition of “Borrowing Base” (i) to set the eligible equipment advance rates based on net book value at
60%
and on Net Orderly Liquidation Value (as defined in the ABL Facility) at
80%
and (ii) to cap Borrowing Base availability attributable to eligible equipment at
75%
;
|
|
|
•
|
Increased the default rate upon the occurrence and continuation of an event of default from
2%
to
4%
;
|
|
|
•
|
Increased the applicable margin on LIBOR Rate and Base Rate Loans (each as defined in the ABL Facility) and the unused line fee;
|
|
|
•
|
Eliminated our ability to voluntarily reduce the commitments without termination of the ABL Facility;
|
|
|
•
|
Requires us to apply proceeds from the Restructuring transactions and related agreements to pay down the ABL Facility;
|
|
|
•
|
Amended the definition of “Permitted Disposition” to permit the sale of our equity investment in Underground Solutions, Inc., discussed further in Note 14, and to expand the permitted disposition general basket (which excludes the sale of machinery and equipment in the ordinary course of business) from
$5.0 million
to
$7.5 million
;
|
|
|
•
|
Applies a Permitted Disposition Reserve of
50%
against our availability for net cash proceeds in excess of
$7.5 million
made on or after March 10, 2016 for sales specifically related to the Permitted Disposition general basket; and
|
|
|
•
|
Amended certain definitions in connection with the Restructuring transactions, including “Change of Control”, “Permitted Indebtedness”, and “Permitted Liens”.
|
In addition, we agreed to certain make-whole fees that would be payable to the Lenders upon early termination of the ABL Facility as a result of acceleration, bankruptcy or otherwise, unless amounts outstanding under the ABL Facility are paid in full. In connection with the Sixth ABL Facility Amendment we incurred amendment fees of approximately
$0.6 million
which were
capitalized as deferred financing costs during the three months ended March 31, 2016. Further, we wrote off a portion of the unamortized deferred financing costs associated with our ABL Facility of approximately
$0.4 million
which are included in "Loss on extinguishment of debt" in the condensed consolidated statement of operations for the six months ended June 30, 2016.
On April 15, 2016, we entered into a Seventh Amendment to Amended and Restated Credit Agreement, dated April 15, 2016 (the “Seventh ABL Facility Amendment”), by and among the Agent, the Lenders and the Company to make conforming amendments in connection with the Restructuring transactions. Among other terms and conditions, the Seventh Amendment amends the ABL Facility to: (i) require that the we apply excess proceeds from asset sales to pay down the ABL Facility; (ii) prohibit us from optionally prepaying or acquiring other indebtedness, making any payment on subordinated indebtedness, or amending certain agreements and documents; and (iii) amend certain definitions in the ABL Facility.
On June 29, 2016, we entered into an Eighth Amendment to Amended and Restated Credit Agreement (the “Eighth ABL Facility Amendment”) by and among the Agent, the Lenders, and the Company, which further amends our ABL Facility. Among other terms and conditions, the Eighth ABL Facility Amendment amended the ABL Facility as follows:
|
|
•
|
Reduced the maximum revolver commitments from
$100.0 million
to
$85.0 million
;
|
|
|
•
|
Amended the minimum EBITDA financial maintenance covenant, modifying the applicable periods for measurement and reducing the applicable amounts required to be achieved for each period;
|
|
|
•
|
Changed the scheduled maturity date of the ABL Facility from January 15, 2018 to December 31, 2016;
|
|
|
•
|
Added a covenant requiring us to refinance the ABL Facility in full on or before September 30, 2016;
|
|
|
•
|
Requires us to consummate a rights offering on or before July 29, 2016, which was subsequently waived by the Lenders on August 5, 2016, and to apply the proceeds from the rights offering to pay down the ABL Facility, which must equal
$5.0 million
(with any shortfall to be covered by the
$5.0 million
backstop funds previously placed in escrow by Mark D. Johnsrud, the Company’s Chairman and Chief Executive Officer) - (see Note 18 for further updates and details on the Rights Offering);
|
|
|
•
|
Replaced the minimum fixed charge coverage ratio covenant with an immediate availability block in the amount of
$12.5 million
, increasing to
$15.0 million
upon receipt of the Rights Offering proceeds;
|
|
|
•
|
Establishes a Permitted Disposition Reserve equal to
50%
of the aggregate amount of net cash proceeds arising from Permitted Dispositions of any property (excluding the sale of machinery and equipment in the ordinary course of business) consummated after June 29, 2016;
|
|
|
•
|
Increased the applicable margin on LIBOR Rate and Base Rate Loans (as defined in the ABL Facility).
|
In connection with the Eighth ABL Facility Amendment we incurred amendment fees of approximately
$0.4 million
which were capitalized as deferred financing costs during the three months ended June 30, 2016. Further, we wrote off a portion of the unamortized deferred financing costs associated with our ABL Facility of approximately
$0.3 million
which are included in "Loss on extinguishment of debt" in the condensed consolidated statement of operations for the three months ended June 30, 2016.
Financial Covenants and Borrowing Limitations
The ABL Facility, as amended, requires, and any future credit facilities will likely require, us to comply with specified financial ratios that may limit the amount we can borrow under our ABL Facility. A breach of any of the covenants under the indenture governing the 2018 Notes and 2021 Notes (the “Indentures”), the ABL Facility, or the Term Loan, as applicable, could result in an event of default. Our ability to satisfy those covenants depends principally upon our ability to meet or exceed certain positive operating performance metrics including, but not limited to, earnings before interest, taxes, depreciation and amortization, or EBITDA, and ratios thereof, as well as certain balance sheet ratios. Any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions.
The ABL Facility and Term Loan contain certain financial covenants, including a minimum EBITDA covenant. The minimum EBITDA covenant requires us to meet a stated year-to-date EBITDA target (as defined by the ABL Facility). As of
June 30, 2016
, we remained in compliance with our debt covenants and availability under the ABL Facility was
$12.6 million
, after applying the availability block and other availability restrictions.
During the three months ended March 31, 2016, the Agent for the ABL Facility commenced a borrowing base redetermination involving a valuation of the net orderly liquidation value of our eligible machinery and equipment by a third party specialist. The redetermination resulted in an approximately
$21.0 million
decline in our borrowing base and availability under the ABL Facility. Due to this decrease in our borrowing base and the implementation of the daily sweep of our lockbox and certain depository bank accounts, we made cumulative payments of
$130.7 million
during the six months ended
June 30, 2016
, offset by borrowings of
$77.0 million
, thus reducing the amount outstanding under the ABL Facility from
$101.8 million
as of December 31, 2015 to
$48.1 million
as of
June 30, 2016
.
The ABL Facility's borrowing base limitations are based upon eligible accounts receivable and equipment. If the value of our eligible accounts receivable or equipment decreases for any reason, or if some portion of our accounts receivable or equipment is deemed ineligible under the terms of our ABL Facility, the amount we can borrow under the ABL Facility could be reduced. These limitations could have a material adverse impact on our liquidity and financial condition. In addition, the Agent for our ABL Facility has the periodic right to commission appraisals of the assets comprising our borrowing base, and we are obligated to reimburse the cost of up to four full appraisals including two field examinations, during any 12 consecutive months. If an appraisal results in a reduction of the borrowing base, we may be required to repay a portion of the amount outstanding under the ABL Facility in order to remain in compliance with applicable borrowing limitations. At
June 30, 2016
we had
$12.6 million
of net availability under the ABL Facility. During the remainder of 2016, we expect further deterioration to our ABL borrowing base due to declining accounts receivable and downward pressure on the orderly liquidation values of our machinery and equipment. During the six months ended
June 30, 2016
, we reduced the outstanding balance of the ABL Facility by
$53.7 million
, a portion of which was made to cover the borrowing base deterioration. There can be no assurance that we will have sufficient cash on hand or other sources of liquidity to make any such future repayments if necessary.
The Indentures contain restrictive covenants on the incurrence of senior secured indebtedness. To the extent that the fixed charge coverage ratio (as defined in the Indentures) is below
2.0
to 1.0, the Indentures prohibit our incurrence of new senior secured indebtedness under the ABL Facility or any other secured credit facility, at that point in time, to the greater of
$150.0 million
and the amount of debt as restricted by the secured leverage ratio, which is the ratio of secured debt to EBITDA, of
2.0
to 1.0, as determined pursuant to the Indentures. The
2.0
to 1.0 fixed charge coverage ratio and secured leverage ratio are incurrence covenants, not maintenance covenants. The covenants do not require repayment of existing borrowings incurred previously in accordance with the covenants, but rather limits new borrowings during any such period. As a result of the Eighth ABL Facility Amendment, our ability to incur new borrowings under the ABL Facility is limited to a maximum of
$85.0 million
irrespective of the permitted availability of up to
$150.0 million
under the Indentures.
The covenants described above are subject to important exceptions and qualifications. The continued effect of low oil and natural gas prices will negatively impact our compliance with our covenants, and we cannot guarantee that we will satisfy those requirements. If we do not obtain a long term waiver for any breached covenants, such breach would result in a default under the Indentures, ABL Facility or other debt obligations, or any future credit facilities we may enter into, which could allow all amounts outstanding thereunder to be declared immediately due and payable, subject to the terms and conditions of the documents governing such indebtedness. If we were unable to repay the accelerated amounts, our secured lenders could proceed against the collateral granted to them to secure such indebtedness. This would likely in turn trigger cross acceleration and cross-default rights under any other credit facilities and indentures. If the amounts outstanding under the 2018 Notes and 2021 Notes, or any other indebtedness outstanding at such time, were to be accelerated or were the subject of foreclosure actions, we cannot guarantee that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders. We cannot guarantee that we will be granted waivers or amendments to the Indentures governing the 2018 Notes and 2021 Notes, the ABL Facility, or such other debt obligations if for any reason we are unable to comply with our obligations thereunder. Any such limitations on borrowing under our ABL Facility could have a material adverse impact on our liquidity. Failure to comply with any of our debt obligations, or obtain waivers thereof, may cause us to seek relief under the United States Bankruptcy Code.
ABL Facility Refinancing Covenant and Maturity Date
Our ABL Facility contains a covenant requiring us to refinance the ABL Facility in full on or before September 30, 2016 and has a maturity date of December 31, 2016. There can be no assurances that we will be able to refinance the ABL Facility by September 30, 2016, or that any such refinancing would be available to us on attractive or acceptable terms. Any refinancing of the ABL Facility could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. If we fail to comply with our refinancing covenant, we would request a waiver from the Lenders or may be required to repay the outstanding balance of the ABL Facility. Failure to obtain a waiver or cure the default through repayment of the facility would create an event of cross default under our other credit facilities and indentures, including the Term Loan and the Indentures governing the 2018 Notes and 2021 Notes. There can be no assurance that the Lenders under the ABL Facility will grant a waiver of the covenant default or that the lenders under the Term Loan will grant a waiver of, or that the holders of our 2018 Notes and 2021 Notes will consent to, any cross default, and we currently do not have
sufficient liquidity, including cash on hand, to repay the outstanding balance of the ABL Facility or our other indebtedness. In the event that we are unable to timely refinance the ABL Facility, or obtain a waiver thereof, or repay the ABL Facility when due, we may need to seek relief under the United States Bankruptcy Code.
Note 9 - Derivative Warrants
On April 15, 2016, we closed our Exchange Offer relating to our 2018 Notes as part of the Restructuring, which included delivering to tendering holders of the 2018 Notes a pro rata share of penny warrants sufficient to purchase
10%
of shares of our common stock (the "Exchange Warrants"). Additionally, we entered into a warrant agreement with the lenders under the new
$24.0 million
Term Loan, pursuant to which, as a commitment fee for entering into the Term Loan, the lenders received warrants to purchase up to
5%
of our then-outstanding stock at an exercise price of
$0.01
per share (the "Term Loan Warrants"). The Exchange Warrants and the Term Loan Warrants (collectively, the "Warrants") contain anti-dilution provisions which adjust the number of shares issuable upon exercise thereof in certain circumstances, including adjustments intended to preserve the proportion of outstanding common stock into which such Warrants are exercisable after giving effect to the Johnsrud Note Conversion and the Rights Offering, which is described in Note 18 on "Subsequent Events Related to Restructuring - Rights Offering."
After giving effect to the anti-dilution adjustment following the Johnsrud Note Conversion, a total of
22.8 million
Warrants were issued during the three months ended June 30, 2016, with
15.1 million
Warrants for the exchange of 2018 Notes for new 2021 Notes,
0.1 million
Warrants for the exchange of 2018 Notes for common stock, and
7.6 million
Warrants for the Term Loan lenders. All Warrants were issued with an exercise price of
$0.01
and have a term of
ten
years.
The following table shows the Warrant activity for the three months ended June 30, 2016:
|
|
|
|
|
|
|
Number of Warrants
|
Outstanding as of March 31, 2016
|
|
—
|
|
Issued
|
|
22,815
|
|
Exercised
|
|
(19
|
)
|
Outstanding as of June 30, 2016
|
|
22,796
|
|
We accounted for Warrants in accordance with the accounting guidance for derivatives, which sets forth a two-step model to be applied in determining whether a financial instrument is indexed to an entity's own stock which would qualify such financial instruments for a scope exception. This scope exception specifies that a contract that would otherwise meet the definition of a derivative financial instrument would not be considered as such if the contract is both (i) indexed to the entity's own stock and (ii) classified in the shareholders' equity section of the entity's balance sheet. We determined that the Warrants were ineligible for equity classification due to the anti-dilution provisions set forth therein and describe above. As such, the Warrants have been recorded as derivative liabilities at fair value on the "Derivative warrant liability" line in the condensed consolidated balance sheet as of June 30, 2016. The Warrants are classified as a current liability in the condensed consolidated balance sheet as they can be exercised by the holders at any time.
As discussed previously in Note 6, the fair value of the derivative warrant liability was estimated using a Monte Carlo simulation model on the date of issue and is re-measured at each quarter end until expiration or exercise of the underlying warrants with the resulting fair value adjustment recored in "Other income, net" in the condensed consolidated statement of operations.
The fair value of the derivative warrant liability was estimated using the following model inputs:
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
At Issuance
|
|
|
June 30, 2016
|
|
April 15, 2016
|
Exercise price
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Closing stock price
|
|
$
|
0.26
|
|
|
$
|
0.37
|
|
Risk free rate
|
|
0.20
|
%
|
|
0.21
|
%
|
Expected volatility
|
|
120.0
|
%
|
|
242.0
|
%
|
Note 10 - Restructuring and Exit Costs
In March 2015, we initiated a plan to restructure our business in certain shale basins and reduce costs, including an exit from the Mississippian ("MidCon") shale area and the Tuscaloosa Marine Shale logistics business. Additionally, we closed certain yards within the Northeast and Southern divisions and transferred many of the related assets to our other operating locations, primarily in the Eagle Ford shale basin. The total costs of the restructuring recognized in 2015 were approximately
$7.1 million
, and included severance and termination benefits, lease exit costs, other exits costs related to the movement of vehicles and rental fleet, and an asset impairment charge.
There were
no
restructuring costs incurred during the
six months ended
June 30, 2016
. We recorded
$0.4 million
and
$1.1 million
in restructuring costs during the three and
six months ended
June 30, 2015
, which were included in "Other, net" in the accompanying condensed consolidated statements of operations. For the
six months ended
June 30, 2015
, approximately
$0.6 million
,
$0.1 million
and
$0.4 million
of the total charge was recorded in the Southern, Northeast and Corporate/Other operating segments, respectively.
The remaining liability for the restructuring and exit costs incurred represents lease exit costs under non-cancellable operating leases and totaled approximately
$0.2 million
as of
June 30, 2016
, which is included in "Accrued liabilities" in the condensed consolidated balance sheets. A rollforward of the liability from December 31, 2015 through
June 30, 2016
is as follows:
|
|
|
|
|
|
|
|
Lease Exit Costs
|
Balance accrued at December 31, 2015
|
|
$
|
180
|
|
Cash payments
|
|
(24
|
)
|
Balance accrued at June 30, 2016
|
|
$
|
156
|
|
Note 11 - Income Taxes
The following table shows the components of the income tax benefit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Current income tax (expense) benefit
|
$
|
(750
|
)
|
|
$
|
(15
|
)
|
|
$
|
(780
|
)
|
|
$
|
10
|
|
Deferred income tax expense
|
(23
|
)
|
|
—
|
|
|
(48
|
)
|
|
(1
|
)
|
Total income tax (expense) benefit
|
$
|
(773
|
)
|
|
$
|
(15
|
)
|
|
$
|
(828
|
)
|
|
$
|
9
|
|
The effective income tax rate for the
three and six months ended
June 30, 2016
was
1.9%
and
1.2%
, which differs from the federal statutory benefit rate of
35.0%
. The difference is primarily due to permanent differences, including income from the cancellation of debt which generated a cash tax liability under the alternative minimum tax ("AMT") provisions. Under the AMT provisions, the use of net operating losses ("NOLs") is limited to
90%
of a taxpayer's AMT income, thus generating tax on the remaining income. Once we use our NOLs and are paying regular tax, we will receive a credit for the AMT tax paid. The AMT liability as of June 30, 2016 was
$0.8 million
and is included with accrued taxes in the "Accrued liabilities" line on the condensed consolidated balance sheet.
The effective income tax rate for the
three and six months ended
June 30, 2015
was less than
0.1%
, which differs from the federal statutory rate of
35.0%
primarily due to the increase in the valuation allowance on deferred tax assets resulting from current year losses.
We have significant deferred tax assets, consisting primarily of NOLs, which have a limited life, generally expiring between the years 2029 and 2036 and capital losses, which have a five year carryforward expiring in 2020. We regularly assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred this year and in recent years. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future taxable income.
In light of our continued ordinary losses, at
June 30, 2016
we determined that our deferred tax liabilities were not sufficient to fully realize our deferred tax assets. Accordingly, a valuation allowance continues to be required against the portion of our
deferred tax assets that is not offset by deferred tax liabilities. Accordingly, we expect our effective income tax rate to be near
zero
for 2016.
Note 12 - Share-based Compensation
We may grant stock options, stock appreciation rights, restricted common stock and restricted stock units, performance shares and units, other stock-based awards and cash-based awards to our employees, directors, consultants and advisors pursuant to the Nuverra Environmental Solutions, Inc. 2009 Equity Incentive Plan (as amended, the “2009 Plan”).
The total grants awarded during the three and
six months ended
June 30, 2016
and
June 30, 2015
are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Stock option grants
|
|
—
|
|
|
8
|
|
|
—
|
|
|
711
|
|
Restricted stock grants
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Restricted stock unit grants
|
|
—
|
|
|
2
|
|
|
1
|
|
|
153
|
|
Total grants under the 2009 Plan
|
|
—
|
|
|
10
|
|
|
1
|
|
|
864
|
|
The total stock-based compensation cost included in "General and administrative expenses" in the accompanying condensed consolidated statements of operations for the three and
six months ended
June 30, 2016
and
June 30, 2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Stock options
|
|
$
|
65
|
|
|
$
|
106
|
|
|
$
|
149
|
|
|
$
|
254
|
|
Restricted stock
|
|
118
|
|
|
102
|
|
|
203
|
|
|
203
|
|
Restricted stock units
|
|
105
|
|
|
519
|
|
|
304
|
|
|
1,059
|
|
Total stock-based compensation expense
|
|
$
|
288
|
|
|
$
|
727
|
|
|
$
|
656
|
|
|
$
|
1,516
|
|
Note 13 - Legal Matters
Environmental Liabilities
We are subject to the environmental protection and health and safety laws and related rules and regulations of the United States and of the individual states, municipalities and other local jurisdictions where we operate. Our continuing operations are subject to rules and regulations promulgated by the Texas Railroad Commission, the Texas Commission on Environmental Quality, the Louisiana Department of Natural Resources, the Louisiana Department of Environmental Quality, the Ohio Department of Natural Resources, the Pennsylvania Department of Environmental Protection, the North Dakota Department of Health, the North Dakota Industrial Commission, Oil and Gas Division, the North Dakota State Water Commission, the Montana Department of Environmental Quality and the Montana Board of Oil and Gas, among others. These laws, rules and regulations address environmental, health and safety and related concerns, including water quality and employee safety. We have installed safety, monitoring and environmental protection equipment such as pressure sensors and relief valves, and have established reporting and responsibility protocols for environmental protection and reporting to such relevant local environmental protection departments as required by law.
We believe we are in material compliance with all applicable environmental protection laws and regulations in the United States and the states in which we operate. We believe that there are no unrecorded liabilities as of the periods reported herein in connection with our compliance with applicable environmental laws and regulations. The condensed consolidated balance sheets at
June 30, 2016
and
December 31, 2015
included accruals totaling
$0.5 million
and
$0.3 million
, respectively, for various environmental matters.
Litigation
There are various lawsuits, claims, investigations and proceedings that have been brought or asserted against us, which arise in the ordinary course of business, including actions with respect to securities and shareholder class actions, personal injury,
vehicular and industrial accidents, commercial contracts, legal and regulatory compliance, securities disclosure, labor and employment, and employee benefits and environmental matters, the more significant of which are summarized below. We record a provision for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter.
We believe that we have valid defenses with respect to legal matters pending against us. Based on our experience, we also believe that the damage amounts claimed in the lawsuits disclosed below are not necessarily a meaningful indicator of our potential liability. Litigation is inherently unpredictable, and it is possible that our results of operations or cash flow could be materially affected in any particular period by the resolution of one or more of the legal matters pending against us. We do not expect that the outcome of other current claims and legal actions not discussed below will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
AWS Arbitration Demand
On April 28, 2015, the holder of the non-controlling interest in AWS issued to us a Demand for Arbitration pursuant to the terms of the AWS operating agreement, relating to alleged breaches by us of certain of our obligations under the operating agreement. We entered into a settlement of this matter with the non-controlling interest holder in June 2015 whereby we purchased the remaining interest in AWS for
$4.0 million
in cash and a
$7.4 million
note payable with principal and interest due in equal quarterly installments through April 2019. If we fail to meet the payment terms of this obligation, or if we become insolvent or declare bankruptcy, all remaining outstanding balances on the note payable would become immediately due and payable. If such an acceleration were to occur, we would request a waiver from the non-controlling interest holder, but there can be no assurance that such waiver would be forthcoming or that we would have sufficient available liquidity to make any required repayment.
Note 14 - Related Party and Affiliated Company Transactions
Termination of Aircraft Lease Agreement
During the three months ended March 31, 2016, the aircraft lease agreement with an entity owned and controlled by Mark D. Johnsrud, our Chief Executive Officer and Chairman of our board of directors, was terminated. During the three months ended March 31, 2016, reimbursements payable to the entity in exchange for use of the aircraft, in the aggregate amount of
$45 thousand
, were paid in full. There were
no
remaining reimbursements payable to the entity as of March 31, 2016.
There have been no significant changes to the other related party transactions with Mr. Johnsrud for apartment rentals, purchases of fresh water for resale and use of land where certain of our saltwater disposal wells are situated as described in Note 19 to the consolidated financial statements in our 2015 Annual Report on Form 10-K.
Cost Method Investment - Underground Solutions, Inc.
On February 18, 2016, Aegion Corporation (or "Aegion") announced the completion of the acquisition of Underground Solutions, Inc. (or "UGSI"), an entity in which we held an approximate
7%
equity interest, whereby Aegion paid approximately
$85.0 million
to acquire UGSI. Our total proceeds will be 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. The remaining
$0.2 million
of proceeds are pending the review of final closing working capital adjustments. We expect to receive these funds in several installments through August 2017, which would increase our net gain on sale by approximately
$0.2 million
.
Note 15 - Segments
We evaluate business segment performance based on income (loss) before income taxes exclusive of corporate general and administrative costs and interest expense, which are not allocated to the segments. Our shale solutions business is comprised of
three
operating divisions, which we consider to be operating and reportable segments of our continuing operations: (1) the Northeast division comprising the Marcellus and Utica Shale areas, (2) the Southern division comprising the Haynesville, Eagle Ford, and Permian Basin Shale areas and (3) the Rocky Mountain division comprising the Bakken Shale area. Corporate/Other includes certain corporate costs and certain other corporate assets.
As discussed in Note 10, in March 2015, we initiated a plan to restructure our business in certain shale basins and reduce costs, including an exit from the Mississippian (or "MidCon") shale area. As a result, revenues and costs associated with revenue generating activities of the MidCon shale area were included in the Southern division for the three months ended March 31, 2015, with minimal or no revenue activity thereafter. As a result of our restructuring in the MidCon, some remaining operating
expenses for shut-down activities, as well as depreciation and amortization, were included in the Southern division during the three months ended June 30, 2015, and the three and six months ended June 30, 2016.
Financial information for our reportable segments related to continuing operations is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocky Mountain
|
|
Northeast
|
|
Southern
|
|
Corporate/ Other
|
|
Total
|
Three months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
18,952
|
|
|
$
|
7,688
|
|
|
$
|
7,338
|
|
|
$
|
—
|
|
|
$
|
33,978
|
|
Direct operating expenses
|
16,232
|
|
|
8,126
|
|
|
5,925
|
|
|
—
|
|
|
30,283
|
|
General and administrative expenses
|
1,695
|
|
|
339
|
|
|
973
|
|
|
11,197
|
|
|
14,204
|
|
Depreciation and amortization
|
7,792
|
|
|
3,426
|
|
|
3,919
|
|
|
69
|
|
|
15,206
|
|
Operating loss
|
(6,767
|
)
|
|
(6,556
|
)
|
|
(3,790
|
)
|
|
(11,266
|
)
|
|
(28,379
|
)
|
Loss from continuing operations before income taxes
|
(6,818
|
)
|
|
(6,669
|
)
|
|
(3,825
|
)
|
|
(22,553
|
)
|
|
(39,865
|
)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Revenue
|
43,857
|
|
|
20,465
|
|
|
16,631
|
|
|
—
|
|
|
80,953
|
|
Direct operating expenses
|
35,790
|
|
|
19,694
|
|
|
13,416
|
|
|
—
|
|
|
68,900
|
|
General and administrative expenses
|
3,547
|
|
|
1,529
|
|
|
1,893
|
|
|
14,687
|
|
|
21,656
|
|
Depreciation and amortization
|
15,871
|
|
|
7,309
|
|
|
7,733
|
|
|
138
|
|
|
31,051
|
|
Operating loss
|
(11,351
|
)
|
|
(10,420
|
)
|
|
(6,722
|
)
|
|
(14,825
|
)
|
|
(43,318
|
)
|
Loss from continuing operations before income taxes
|
(11,470
|
)
|
|
(10,600
|
)
|
|
(6,751
|
)
|
|
(38,260
|
)
|
|
(67,081
|
)
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
|
|
|
|
|
|
|
|
Total assets (a)
|
232,531
|
|
|
60,696
|
|
|
116,536
|
|
|
12,175
|
|
|
421,938
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
Revenue
|
47,601
|
|
|
27,411
|
|
|
17,415
|
|
|
—
|
|
|
92,427
|
|
Direct operating expenses
|
36,107
|
|
|
21,996
|
|
|
13,471
|
|
|
—
|
|
|
71,574
|
|
General and administrative expenses
|
1,322
|
|
|
1,021
|
|
|
1,219
|
|
|
6,135
|
|
|
9,697
|
|
Depreciation and amortization
|
8,801
|
|
|
4,060
|
|
|
5,195
|
|
|
240
|
|
|
18,296
|
|
Operating income (loss)
|
1,371
|
|
|
295
|
|
|
(2,468
|
)
|
|
(6,767
|
)
|
|
(7,569
|
)
|
Income (loss) from continuing operations before income taxes
|
1,805
|
|
|
(200
|
)
|
|
(2,628
|
)
|
|
(19,609
|
)
|
|
(20,632
|
)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
Revenue
|
117,011
|
|
|
54,724
|
|
|
39,804
|
|
|
—
|
|
|
211,539
|
|
Direct operating expenses
|
84,532
|
|
|
43,492
|
|
|
31,549
|
|
|
—
|
|
|
159,573
|
|
General and administrative expenses
|
3,378
|
|
|
2,925
|
|
|
3,297
|
|
|
12,797
|
|
|
22,397
|
|
Depreciation and amortization
|
17,538
|
|
|
7,987
|
|
|
9,843
|
|
|
410
|
|
|
35,778
|
|
Operating income (loss)
|
11,563
|
|
|
197
|
|
|
(5,482
|
)
|
|
(13,599
|
)
|
|
(7,321
|
)
|
Income (loss) from continuing operations before income taxes
|
11,902
|
|
|
(187
|
)
|
|
(5,563
|
)
|
|
(38,803
|
)
|
|
(32,651
|
)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
Total assets (a)
|
263,871
|
|
|
76,472
|
|
|
128,482
|
|
|
53,794
|
|
|
522,619
|
|
_____________________
(a) Total assets exclude intercompany receivables eliminated in consolidation.
Note 16 - Discontinued Operations
Our former industrial solutions operating and reportable segment, Thermo Fluids, Inc. ("TFI"), has been classified as discontinued operations since the sale process with various prospective acquirers began in fourth quarter of 2013.
On April 11, 2015, we completed the TFI disposition with Safety-Kleen, Inc. ("Safety-Kleen"), a subsidiary of Clean Harbors, Inc., whereby Safety-Kleen acquired TFI for
$85.0 million
in an all-cash transaction, subject to working capital adjustments. Pursuant to the purchase agreement,
$4.3 million
of the purchase price was deposited into an escrow account to satisfy our indemnification obligations under the purchase agreement. Any remaining balance in the escrow account after indemnifications and completing the post-closing working capital reconciliation will be released to us
18
months following the closing date, unless both parties mutually agree to release the remaining balance prior to such date. The
$4.3 million
was reported as "Restricted cash" in our condensed consolidated balance sheet as of December 31, 2015.
The post-closing working capital reconciliation was completed during the three months ended June 30, 2016, and as a result we recorded an additional loss on the sale of TFI of
$1.3 million
, bringing the total loss on sale to
$1.5 million
. A total of
$3.8 million
was released from escrow, of which
$2.5 million
was returned to us and
$1.3 million
was paid to Safety-Kleen for the post-closing adjustment and certain indemnification claims. As of June 30, 2016,
$0.4 million
remained in escrow to satisfy indemnification obligations and is expected to be released to us during the three months ended December 31, 2016, if there are no further indemnification claims.
We recorded losses related to the sale of TFI of
$1.3 million
and
$2.1 million
for the three months ended
June 30, 2016
, and
June 30, 2015
, respectively, and
$1.2 million
and
$1.2 million
for the
six months ended
June 30, 2016
, and
June 30, 2015
, respectively, as a component of "Loss from discontinued operations, net of income taxes" in our condensed consolidated statements of operations.
The following table provides selected financial information of discontinued operations related to TFI (and includes TFI's results through the sale on April 11, 2015):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue
|
$
|
—
|
|
|
$
|
1,603
|
|
|
$
|
—
|
|
|
$
|
19,100
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations before income taxes
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
—
|
|
|
$
|
1,171
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(265
|
)
|
(Loss) income from discontinued operations - before sale
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
—
|
|
|
$
|
906
|
|
Loss on sale of TFI
|
(1,290
|
)
|
|
(2,074
|
)
|
|
(1,235
|
)
|
|
(2,074
|
)
|
Loss from discontinued operations
|
$
|
(1,290
|
)
|
|
$
|
(2,089
|
)
|
|
$
|
(1,235
|
)
|
|
$
|
(1,168
|
)
|
Note 17 - Subsidiary Guarantors
Our obligations under the 2018 Notes and 2021 Notes are jointly and severally, fully and unconditionally guaranteed by certain of our subsidiaries. Pursuant to the terms of the Indenture, the guarantees are full and unconditional, but are subject to release under the following circumstances:
|
|
•
|
in connection with any sale, disposition or transfer of all or substantially all of the assets to a person that is not the Company or a subsidiary guarantor;
|
|
|
•
|
in connection with any sale, disposition or transfer of all of the capital stock of that subsidiary guarantor to a person that is not the Company or a subsidiary guarantor;
|
|
|
•
|
if we designate any restricted subsidiary that is a subsidiary guarantor to be an unrestricted subsidiary; or
|
|
|
•
|
upon legal defeasance or the discharge of our obligations under the Indenture.
|
Although the guarantees are subject to release under the above described circumstances, we have concluded they are still deemed full and unconditional for purposes of Rule 3-10 of Regulation S-X because these circumstances are customary, and accordingly, we concluded that we may rely on Rule 3-10 of Regulation S-X, as the other requirements of Rule 3-10 have been met.
The following tables present consolidating financial information for Nuverra Environmental Solutions, Inc. (“Parent”) and its
100%
wholly-owned subsidiaries (the “Guarantor Subsidiaries”) as of
June 30, 2016
and
December 31, 2015
and for the
three and six months ended
June 30, 2016
and
2015
. During the three months ended December 31, 2015, Nuverra Rocky Mountain Pipeline, LLC (or "RMP") was released from all obligations including as guarantor for our debt obligations. However, because RMP's individual results are not material as there are no active contracts for new pipelines, we have not separately presented RMP as a Non-Guarantor, but rather continued to include RMP in the Guarantor Subsidiaries column. These condensed consolidating financial statements have been prepared from our financial information on the same basis of accounting as our condensed consolidated financial statements. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions.
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
303
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
303
|
|
Restricted cash
|
5,400
|
|
|
104
|
|
|
—
|
|
|
5,504
|
|
Accounts receivable, net
|
—
|
|
|
19,996
|
|
|
—
|
|
|
19,996
|
|
Deferred income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other current assets
|
3,651
|
|
|
6,551
|
|
|
—
|
|
|
10,202
|
|
Assets held for sale
|
—
|
|
|
2,902
|
|
|
—
|
|
|
2,902
|
|
Total current assets
|
9,354
|
|
|
29,553
|
|
|
—
|
|
|
38,907
|
|
Property, plant and equipment, net
|
2,483
|
|
|
363,839
|
|
|
—
|
|
|
366,322
|
|
Equity investments
|
11,552
|
|
|
574
|
|
|
(11,552
|
)
|
|
574
|
|
Intangible assets, net
|
—
|
|
|
15,562
|
|
|
—
|
|
|
15,562
|
|
Other
|
400,904
|
|
|
79,491
|
|
|
(479,822
|
)
|
|
573
|
|
Total assets
|
$
|
424,293
|
|
|
$
|
489,019
|
|
|
$
|
(491,374
|
)
|
|
$
|
421,938
|
|
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
1,278
|
|
|
$
|
4,895
|
|
|
$
|
—
|
|
|
$
|
6,173
|
|
Accrued liabilities
|
9,607
|
|
|
11,869
|
|
|
—
|
|
|
21,476
|
|
Current portion of long-term debt
|
48,144
|
|
|
8,283
|
|
|
—
|
|
|
56,427
|
|
Derivative warrant liability
|
6,201
|
|
|
—
|
|
|
—
|
|
|
6,201
|
|
Total current liabilities
|
65,230
|
|
|
25,047
|
|
|
—
|
|
|
90,277
|
|
Deferred income taxes
|
(32,208
|
)
|
|
32,525
|
|
|
—
|
|
|
317
|
|
Long-term debt
|
386,847
|
|
|
7,327
|
|
|
—
|
|
|
394,174
|
|
Long-term contingent consideration
|
—
|
|
|
8,500
|
|
|
—
|
|
|
8,500
|
|
Other long-term liabilities
|
79,477
|
|
|
404,068
|
|
|
(479,822
|
)
|
|
3,723
|
|
Total shareholders' deficit
|
(75,053
|
)
|
|
11,552
|
|
|
(11,552
|
)
|
|
(75,053
|
)
|
Total liabilities and shareholders' deficit
|
$
|
424,293
|
|
|
$
|
489,019
|
|
|
$
|
(491,374
|
)
|
|
$
|
421,938
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
40,660
|
|
|
$
|
(1,351
|
)
|
|
$
|
—
|
|
|
$
|
39,309
|
|
Restricted cash
|
4,250
|
|
|
—
|
|
|
—
|
|
|
4,250
|
|
Accounts receivable, net
|
—
|
|
|
42,188
|
|
|
—
|
|
|
42,188
|
|
Other current assets
|
2,654
|
|
|
6,080
|
|
|
—
|
|
|
8,734
|
|
Total current assets
|
47,564
|
|
|
46,917
|
|
|
—
|
|
|
94,481
|
|
Property, plant and equipment, net
|
2,609
|
|
|
403,579
|
|
|
—
|
|
|
406,188
|
|
Equity investments
|
43,542
|
|
|
581
|
|
|
(40,373
|
)
|
|
3,750
|
|
Intangible assets, net
|
—
|
|
|
16,867
|
|
|
—
|
|
|
16,867
|
|
Other
|
404,620
|
|
|
72,137
|
|
|
(475,424
|
)
|
|
1,333
|
|
Total assets
|
$
|
498,335
|
|
|
$
|
540,081
|
|
|
$
|
(515,797
|
)
|
|
$
|
522,619
|
|
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
172
|
|
|
$
|
6,735
|
|
|
$
|
—
|
|
|
$
|
6,907
|
|
Accrued liabilities
|
13,824
|
|
|
16,019
|
|
|
—
|
|
|
29,843
|
|
Current contingent consideration
|
—
|
|
|
8,628
|
|
|
—
|
|
|
8,628
|
|
Current portion of long-term debt
|
492,671
|
|
|
7,038
|
|
|
—
|
|
|
499,709
|
|
Total current liabilities
|
506,667
|
|
|
38,420
|
|
|
—
|
|
|
545,087
|
|
Deferred income taxes
|
(32,488
|
)
|
|
32,758
|
|
|
—
|
|
|
270
|
|
Long-term debt
|
—
|
|
|
11,758
|
|
|
—
|
|
|
11,758
|
|
Other long-term liabilities
|
62,427
|
|
|
416,772
|
|
|
(475,424
|
)
|
|
3,775
|
|
Total shareholders' deficit
|
(38,271
|
)
|
|
40,373
|
|
|
(40,373
|
)
|
|
(38,271
|
)
|
Total liabilities and shareholders' deficit
|
$
|
498,335
|
|
|
$
|
540,081
|
|
|
$
|
(515,797
|
)
|
|
$
|
522,619
|
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
JUNE 30, 2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Revenue
|
$
|
—
|
|
|
$
|
33,978
|
|
|
$
|
—
|
|
|
$
|
33,978
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Direct operating expenses
|
—
|
|
|
30,283
|
|
|
—
|
|
|
30,283
|
|
General and administrative expenses
|
11,197
|
|
|
3,007
|
|
|
—
|
|
|
14,204
|
|
Depreciation and amortization
|
69
|
|
|
15,137
|
|
|
—
|
|
|
15,206
|
|
Impairment of long-lived assets
|
—
|
|
|
2,664
|
|
|
—
|
|
|
2,664
|
|
Total costs and expenses
|
11,266
|
|
|
51,091
|
|
|
—
|
|
|
62,357
|
|
Operating loss
|
(11,266
|
)
|
|
(17,113
|
)
|
|
—
|
|
|
(28,379
|
)
|
Interest expense, net
|
(13,720
|
)
|
|
(253
|
)
|
|
—
|
|
|
(13,973
|
)
|
Other income, net
|
1,023
|
|
|
55
|
|
|
—
|
|
|
1,078
|
|
(Loss) income from equity investments
|
(15,629
|
)
|
|
(1
|
)
|
|
17,323
|
|
|
1,693
|
|
Loss on extinguishment of debt
|
(284
|
)
|
|
—
|
|
|
—
|
|
|
(284
|
)
|
Loss from continuing operations before income taxes
|
(39,876
|
)
|
|
(17,312
|
)
|
|
17,323
|
|
|
(39,865
|
)
|
Income tax expense
|
(762
|
)
|
|
(11
|
)
|
|
—
|
|
|
(773
|
)
|
Loss from continuing operations
|
(40,638
|
)
|
|
(17,323
|
)
|
|
17,323
|
|
|
(40,638
|
)
|
Loss from discontinued operations, net of income taxes
|
(1,290
|
)
|
|
—
|
|
|
—
|
|
|
(1,290
|
)
|
Net loss attributable to common shareholders
|
$
|
(41,928
|
)
|
|
$
|
(17,323
|
)
|
|
$
|
17,323
|
|
|
$
|
(41,928
|
)
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
JUNE 30, 2015
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Revenue
|
$
|
—
|
|
|
$
|
92,427
|
|
|
$
|
—
|
|
|
$
|
92,427
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Direct operating expenses
|
—
|
|
|
71,574
|
|
|
—
|
|
|
71,574
|
|
General and administrative expenses
|
6,135
|
|
|
3,562
|
|
|
—
|
|
|
9,697
|
|
Depreciation and amortization
|
240
|
|
|
18,056
|
|
|
—
|
|
|
18,296
|
|
Other, net
|
392
|
|
|
37
|
|
|
—
|
|
|
429
|
|
Total costs and expenses
|
6,767
|
|
|
93,229
|
|
|
—
|
|
|
99,996
|
|
Operating loss
|
(6,767
|
)
|
|
(802
|
)
|
|
—
|
|
|
(7,569
|
)
|
Interest expense, net
|
(11,831
|
)
|
|
(621
|
)
|
|
—
|
|
|
(12,452
|
)
|
Other income, net
|
—
|
|
|
406
|
|
|
—
|
|
|
406
|
|
(Loss) income from equity investments
|
(1,027
|
)
|
|
(6
|
)
|
|
1,027
|
|
|
(6
|
)
|
Loss on extinguishment of debt
|
(1,011
|
)
|
|
—
|
|
|
—
|
|
|
(1,011
|
)
|
Loss from continuing operations before income taxes
|
(20,636
|
)
|
|
(1,023
|
)
|
|
1,027
|
|
|
(20,632
|
)
|
Income tax (expense) benefit
|
(26
|
)
|
|
11
|
|
|
—
|
|
|
(15
|
)
|
Loss from continuing operations
|
(20,662
|
)
|
|
(1,012
|
)
|
|
1,027
|
|
|
(20,647
|
)
|
Loss from discontinued operations, net of income taxes
|
(2,074
|
)
|
|
(15
|
)
|
|
—
|
|
|
(2,089
|
)
|
Net loss attributable to common shareholders
|
$
|
(22,736
|
)
|
|
$
|
(1,027
|
)
|
|
$
|
1,027
|
|
|
$
|
(22,736
|
)
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX
MONTHS ENDED
JUNE 30, 2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Revenue
|
$
|
—
|
|
|
$
|
80,953
|
|
|
$
|
—
|
|
|
$
|
80,953
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Direct operating expenses
|
—
|
|
|
68,900
|
|
|
—
|
|
|
68,900
|
|
General and administrative expenses
|
14,687
|
|
|
6,969
|
|
|
—
|
|
|
21,656
|
|
Depreciation and amortization
|
138
|
|
|
30,913
|
|
|
—
|
|
|
31,051
|
|
Impairment of long-lived assets
|
—
|
|
|
2,664
|
|
|
—
|
|
|
2,664
|
|
Total costs and expenses
|
14,825
|
|
|
109,446
|
|
|
—
|
|
|
124,271
|
|
Operating loss
|
(14,825
|
)
|
|
(28,493
|
)
|
|
—
|
|
|
(43,318
|
)
|
Interest expense, net
|
(25,478
|
)
|
|
(540
|
)
|
|
—
|
|
|
(26,018
|
)
|
Other income, net
|
1,023
|
|
|
218
|
|
|
—
|
|
|
1,241
|
|
(Loss) income from equity investments
|
(27,161
|
)
|
|
(6
|
)
|
|
28,855
|
|
|
1,688
|
|
Loss on extinguishment of debt
|
(674
|
)
|
|
—
|
|
|
—
|
|
|
(674
|
)
|
Loss from continuing operations before income taxes
|
(67,115
|
)
|
|
(28,821
|
)
|
|
28,855
|
|
|
(67,081
|
)
|
Income tax expense
|
(794
|
)
|
|
(34
|
)
|
|
—
|
|
|
(828
|
)
|
Loss from continuing operations
|
(67,909
|
)
|
|
(28,855
|
)
|
|
28,855
|
|
|
(67,909
|
)
|
Loss from discontinued operations, net of income taxes
|
(1,235
|
)
|
|
—
|
|
|
—
|
|
|
(1,235
|
)
|
Net loss attributable to common shareholders
|
$
|
(69,144
|
)
|
|
$
|
(28,855
|
)
|
|
$
|
28,855
|
|
|
$
|
(69,144
|
)
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX
MONTHS ENDED
JUNE 30, 2015
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Revenue
|
$
|
—
|
|
|
$
|
211,539
|
|
|
$
|
—
|
|
|
$
|
211,539
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Direct operating expenses
|
—
|
|
|
159,573
|
|
|
—
|
|
|
159,573
|
|
General and administrative expenses
|
12,797
|
|
|
9,600
|
|
|
—
|
|
|
22,397
|
|
Depreciation and amortization
|
410
|
|
|
35,368
|
|
|
—
|
|
|
35,778
|
|
Other, net
|
392
|
|
|
720
|
|
|
—
|
|
|
1,112
|
|
Total costs and expenses
|
13,599
|
|
|
205,261
|
|
|
—
|
|
|
218,860
|
|
Operating (loss) income
|
(13,599
|
)
|
|
6,278
|
|
|
—
|
|
|
(7,321
|
)
|
Interest expense, net
|
(24,193
|
)
|
|
(847
|
)
|
|
—
|
|
|
(25,040
|
)
|
Other income, net
|
—
|
|
|
748
|
|
|
—
|
|
|
748
|
|
Income (loss) from equity investments
|
7,055
|
|
|
(27
|
)
|
|
(7,055
|
)
|
|
(27
|
)
|
Loss on extinguishment of debt
|
(1,011
|
)
|
|
—
|
|
|
—
|
|
|
(1,011
|
)
|
(Loss) income from continuing operations before income taxes
|
(31,748
|
)
|
|
6,152
|
|
|
(7,055
|
)
|
|
(32,651
|
)
|
Income tax benefit (expense)
|
12
|
|
|
(3
|
)
|
|
—
|
|
|
9
|
|
(Loss) income from continuing operations
|
(31,736
|
)
|
|
6,149
|
|
|
(7,055
|
)
|
|
(32,642
|
)
|
(Loss) income from discontinued operations, net of income taxes
|
(2,074
|
)
|
|
906
|
|
|
—
|
|
|
(1,168
|
)
|
Net (loss) income attributable to common shareholders
|
$
|
(33,810
|
)
|
|
$
|
7,055
|
|
|
$
|
(7,055
|
)
|
|
$
|
(33,810
|
)
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX
MONTHS ENDED
JUNE 30, 2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Consolidated
|
Cash flows from operating activities:
|
|
|
|
|
|
Net cash (used in) provided by operating activities from continuing operations
|
$
|
(13,529
|
)
|
|
$
|
935
|
|
|
$
|
(12,594
|
)
|
Net cash used in operating activities from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
Net cash (used in) provided by operating activities
|
(13,529
|
)
|
|
935
|
|
|
(12,594
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
Proceeds from the sale of property and equipment
|
25
|
|
|
5,970
|
|
|
5,995
|
|
Purchase of property, plant and equipment
|
—
|
|
|
(2,133
|
)
|
|
(2,133
|
)
|
Proceeds from the sale of UGSI
|
4,979
|
|
|
—
|
|
|
4,979
|
|
Change in restricted cash
|
(1,150
|
)
|
|
(104
|
)
|
|
(1,254
|
)
|
Net cash provided by investing activities from continuing operations
|
3,854
|
|
|
3,733
|
|
|
7,587
|
|
Net cash used in investing activities from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
Net cash provided by investing activities
|
3,854
|
|
|
3,733
|
|
|
7,587
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from revolving credit facility
|
76,979
|
|
|
—
|
|
|
76,979
|
|
Payments on revolving credit facility
|
(130,667
|
)
|
|
—
|
|
|
(130,667
|
)
|
Proceeds from term loan
|
24,000
|
|
|
—
|
|
|
24,000
|
|
Payments for deferred financing costs
|
(985
|
)
|
|
—
|
|
|
(985
|
)
|
Payments on vehicle financing and other financing activities
|
(9
|
)
|
|
(3,317
|
)
|
|
(3,326
|
)
|
Net cash used in financing activities from continuing operations
|
(30,682
|
)
|
|
(3,317
|
)
|
|
(33,999
|
)
|
Net cash used in financing activities from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
Net cash used in financing activities
|
(30,682
|
)
|
|
(3,317
|
)
|
|
(33,999
|
)
|
Net (decrease) increase in cash
|
(40,357
|
)
|
|
1,351
|
|
|
(39,006
|
)
|
Cash and cash equivalents - beginning of period
|
40,660
|
|
|
(1,351
|
)
|
|
39,309
|
|
Cash and cash equivalents - end of period
|
303
|
|
|
—
|
|
|
303
|
|
Less: cash and cash equivalents of discontinued operations - end of period
|
—
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents of continuing operations - end of period
|
$
|
303
|
|
|
$
|
—
|
|
|
$
|
303
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX
MONTHS ENDED
JUNE 30, 2015
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor Subsidiaries
|
|
Consolidated
|
Cash flows from operating activities:
|
|
|
|
|
|
Net cash provided by operating activities from continuing operations
|
$
|
26,605
|
|
|
$
|
15,731
|
|
|
$
|
42,336
|
|
Net cash used in operating activities from discontinued operations
|
—
|
|
|
(708
|
)
|
|
(708
|
)
|
Net cash provided by operating activities
|
26,605
|
|
|
15,023
|
|
|
41,628
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Proceeds from TFI sale
|
78,897
|
|
|
—
|
|
|
78,897
|
|
Proceeds from the sale of property and equipment
|
255
|
|
|
3,193
|
|
|
3,448
|
|
Purchase of property, plant and equipment
|
—
|
|
|
(10,807
|
)
|
|
(10,807
|
)
|
Change in restricted cash
|
(4,250
|
)
|
|
—
|
|
|
(4,250
|
)
|
Net cash provided by (used in) investing activities from continuing operations
|
74,902
|
|
|
(7,614
|
)
|
|
67,288
|
|
Net cash used in investing activities from discontinued operations
|
—
|
|
|
(181
|
)
|
|
(181
|
)
|
Net cash provided by (used in) investing activities
|
74,902
|
|
|
(7,795
|
)
|
|
67,107
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Payments on revolving credit facility
|
(81,647
|
)
|
|
—
|
|
|
(81,647
|
)
|
Payments on vehicle financing and other financing activities
|
(134
|
)
|
|
(7,631
|
)
|
|
(7,765
|
)
|
Net cash used in financing activities from continuing operations
|
(81,781
|
)
|
|
(7,631
|
)
|
|
(89,412
|
)
|
Net cash used in financing activities from discontinued operations
|
—
|
|
|
(105
|
)
|
|
(105
|
)
|
Net cash used in financing activities
|
(81,781
|
)
|
|
(7,736
|
)
|
|
(89,517
|
)
|
Net increase (decrease) in cash
|
19,726
|
|
|
(508
|
)
|
|
19,218
|
|
Cash and cash equivalents - beginning of period
|
13,801
|
|
|
1,615
|
|
|
15,416
|
|
Cash and cash equivalents - end of period
|
33,527
|
|
|
1,107
|
|
|
34,634
|
|
Less: cash and cash equivalents of discontinued operations - end of period
|
—
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents of continuing operations - end of period
|
$
|
33,527
|
|
|
$
|
1,107
|
|
|
$
|
34,634
|
|
Note 18 - Subsequent Events Related to Restructuring
Rights Offering
As part of the Restructuring, we plan to pursue an equity rights offering (the “Rights Offering”) in the second half of 2016, in which all holders of our common stock will be granted the right to participate. Each shareholder who participates in the Rights Offering will have the right to subscribe for a pro-rata share of
$5.0 million
of common stock exercisable at a
20%
discount to the Conversion Price (or
$0.256
). Mr. Johnsrud has agreed to backstop the Rights Offering by committing to purchase rights that are not exercised by other shareholders in order to ensure that the Company receives the additional liquidity, in exchange for a backstop fee of
5%
payable in the form of additional common stock issued at
$0.32
per share. On April 15, 2016, the Company and Mr. Johnsrud entered into an Escrow Agreement, pursuant to which Mr. Johnsrud deposited
$5.0 million
for the purpose of securing Mr. Johnsrud’s backstop obligations under the Rights Offering. The
$5.0 million
in escrow is included in "Restricted cash" with a corresponding liability recorded in "Accrued liabilities" on the condensed consolidated balance sheet as of June 30, 2016.
On July 29, 2016, the Company and Mr. Johnsrud entered into an amendment to the Escrow Agreement, pursuant to which the Company and Mr. Johnsrud agreed to an irrevocable early release of the
$5.0 million
in escrow securing the backstop obligation, which was used to pay down the ABL Facility. In exchange for the release of the
$5.0 million
, we deposited into an escrow account
20,312,500
shares of our common stock, which represents shares underlying the subscription rights to be distributed in the Rights Offering and the shares to be provided to Mr. Johnsrud for the backstop fee. The shares in the escrow account will be released to Mr. Johnsrud upon the consummation of the Rights Offering or the occurrence of other specified events, including failure to consummate the Rights Offering. Upon consummation of the Rights Offering, the shares of common
stock released to Mr. Johnsrud from escrow will be reduced by the aggregate number of shares subscribed for in the Rights Offering and the corresponding number of shares of common stock underlying the backstop fee payable to Mr. Johnsrud. Any shares not distributed from escrow to Mr. Johnsrud will be returned to the Company. In addition, Mr. Johnsrud will receive the aggregate amount of gross proceeds raised, if any, from subscribing shareholders in the Rights Offering to offset the early release of his backstop obligation from escrow. The Escrow Shares will be deemed voted for and against any matters submitted to our shareholders in the same proportion as the vote of the common stock of the Company on any such matter.
ABL Facility Amendment
On August 5, 2016, we entered into a Ninth Amendment (the "Ninth Amendment") to the ABL Facility by and among the Agent, the Lenders, and the Company. The Ninth Amendment amended the ABL Facility by removing the requirement to consummate the Rights Offering by a date certain, and required us to remit to Agent by August 5, 2016 the
$5.0 million
deposited into escrow by Mr. Johnsrud. In connection with the amendment to the Escrow Agreement discussed above, the
$5.0 million
backstop obligation was released from escrow and irrevocably funded to us and we timely remitted such funds to the Agent in order to comply with the Ninth Amendment.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Special Note about Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related notes thereto. See “Forward-Looking Statements” on page 3 of this Quarterly Report and “Risk Factors” included herein on page 48 and in our filings with the SEC for a description of important factors that could cause actual results to differ from expected results.
Company Overview
Nuverra Environmental Solutions, Inc. (“Nuverra,” the “Company,” “we,” “us,” or “our”) is among the largest companies in the United States dedicated to providing comprehensive, full-cycle environmental solutions to customers focused on the development and ongoing production of oil and natural gas from shale formations. Nuverra’s strategy is to provide one-stop, total environmental solutions, including delivery, collection, treatment, recycling, and disposal of water, wastewater, waste fluids, hydrocarbons, and restricted solids that are part of the drilling, completion, and ongoing production of shale oil and natural gas.
We operate in shale basins where customer exploration and production (“E&P”) activities are predominantly focused on shale oil and natural gas as follows:
• Oil shale areas: includes our operations in the Bakken, Eagle Ford and Permian Basin Shale areas.
• Natural gas shale areas: includes our operations in the Marcellus, Utica and Haynesville Shale areas.
Nuverra supports its customers’ demand for diverse, comprehensive and regulatory compliant environmental solutions required for the safe and efficient drilling, completion and production of oil and natural gas from shale formations. Current services, as well as prospective services in which Nuverra has made investments, include (i) fluid logistics via water procurement, delivery, collection, storage, treatment, recycling and disposal, (ii) solid drilling waste collection, treatment, recycling and disposal, (iii) permanent and portable pipeline facilities, water infrastructure services and equipment rental services, and (iv) other ancillary services for E&P companies focused on the extraction of oil and natural gas resources.
To meet our customers’ environmental needs, Nuverra utilizes a broad array of assets to provide comprehensive environmental solutions. Our logistics assets include trucks and trailers, temporary and permanent pipelines, temporary and permanent storage facilities, ancillary rental equipment, treatment facilities, and liquid and solid waste disposal sites. We continue to expand our suite of solutions to customers who demand environmental compliance and accountability from their service providers.
As a result of our historical acquisition activity to expand our presence in existing shale basins, access new markets and to expand the breadth and scope of services we provide, we have accumulated a large level of indebtedness. Due to the continued decline in oil and natural gas prices, and the resulting decrease in drilling and completion activities, there is less demand for our services. The decrease in demand for our services, which we expect to continue throughout the second half of 2016, impacts our overall liquidity and our ability to generate sufficient cash to meet our debt obligations and operating needs. Additionally, if the decrease in demand for our services continues for a prolonged period of time, or if we make downward adjustments to our projections, our actual cash flows could be less than our estimated cash flows, which could result in future impairment charges for long-lived assets.
In response to our financial results and concerns about long-term liquidity, we have executed a restructuring of our indebtedness, intended to improve liquidity, defer cash interest expense, and preserve value for holders of our common stock. See Note 8 and Note 18 of the Notes to the Condensed Consolidated Financial Statements for a further discussion of our restructuring transactions.
Trends Affecting Our Operating Results
Our results are driven by demand for our services, which are in turn affected by E&P spending trends in the shale areas in which we operate, in particular the level of drilling activity (which impacts the amount of environmental waste products being managed) and active wells (which impacts the amount of produced water being managed). In general, drilling activity in the oil and natural gas industry is affected by the market prices (or anticipated prices) for those commodities. Persistent low natural gas prices over the past several years have resulted in dramatically reduced drilling activity in “dry” gas shale areas such as the Haynesville and Marcellus Shale areas where natural gas is the predominant natural resource. In addition, the low natural gas prices have in the past caused many natural gas producers to curtail capital budgets and these cuts in spending curtailed drilling
programs, as well as discretionary spending on well services in certain shale areas, and accordingly reduced demand for our services in these areas. The oil and "wet" gas basins such as the Eagle Ford, Permian Basin, Utica and Bakken shale areas experienced a dramatic decline in oil prices that began in the fourth quarter of 2014, which substantially reduced drilling and completion activity in these areas since that time. We continued to see decreased activity levels in the six months ended June 30, 2016, and anticipate that the decrease in demand for our services will continue throughout the remainder of 2016.
Our results are also driven by a number of other factors, including (i) our available inventory of equipment, which we have built through acquisitions and capital expenditures over the past several years, (ii) transportation costs, which are affected by fuel costs, (iii) utilization rates for our equipment, which are also affected by the level of our customers’ drilling and production activities and competition, and our ability to relocate our equipment to areas in which oil and natural gas exploration and production activities are growing, (iv) the availability of qualified drivers (or alternatively, subcontractors) in the areas in which we operate, particularly in the Bakken and Marcellus/Utica Shale areas, (v) labor costs, which have been generally increasing through the periods discussed due to tight labor market conditions and increased government regulation, including the Affordable Care Act, (vi) developments in governmental regulations, (vii) seasonality and weather events and (viii) our health, safety and environmental performance record.
The following table summarizes our total revenues, loss from continuing operations before income taxes, loss from continuing operations and EBITDA (defined below) for the
six
months ended
June 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue - from predominantly oil shale areas (a)
|
$
|
21,304
|
|
|
$
|
63,811
|
|
|
$
|
49,773
|
|
|
$
|
151,248
|
|
Revenue - from predominantly gas shale areas (b)
|
12,674
|
|
|
28,616
|
|
|
31,180
|
|
|
60,291
|
|
Total revenue
|
$
|
33,978
|
|
|
$
|
92,427
|
|
|
$
|
80,953
|
|
|
$
|
211,539
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
$
|
(39,865
|
)
|
|
$
|
(20,632
|
)
|
|
(67,081
|
)
|
|
(32,651
|
)
|
Loss from continuing operations
|
(40,638
|
)
|
|
(20,647
|
)
|
|
(67,909
|
)
|
|
(32,642
|
)
|
EBITDA (c, d)
|
(10,686
|
)
|
|
10,116
|
|
|
(10,012
|
)
|
|
28,167
|
|
_________________________
|
|
(a)
|
Represents revenues that are derived from predominantly oil-rich areas consisting of the Bakken, Eagle Ford and Permian Basin Shale areas. Note that the Utica Shale area was previously included in the oil shale areas until the three months ended September 30, 2015 when it was reclassified as a gas shale area.
|
|
|
(b)
|
Represents revenues that are derived from predominantly gas-rich areas consisting of the Marcellus, Utica and Haynesville Shale areas. Note that the Utica Shale area was previously included in the oil shale areas until the three months ended September 30, 2015 when it was reclassified as a gas shale area.
|
|
|
(c)
|
Defined as consolidated net income (loss) from continuing operations before net interest expense, income taxes and depreciation and amortization. EBITDA is not a recognized measure under generally accepted accounting principles in the United States (or “GAAP”). See the reconciliation between loss from continuing operations and EBITDA under “Liquidity and Capital Resources - EBITDA”.
|
|
|
(d)
|
The Company's debt covenants referred to in Note 8 of the Notes to the Condensed Consolidated Financial Statements are based on EBITDA adjusted for certain items as defined.
|
The results reported in the accompanying condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our 2015 Annual Report on Form 10-K.
For trends affecting our business and the markets in which we operate see “Trends Affecting Our Operating Results” in the preceding paragraphs, “Risk Factors — Risks Related to Our Company” in Part I, Item 1A of our 2015 Annual Report on Form 10-K, and the Risk Factors identified on page 48 herein.
Results of Operations
Three Months Ended
June 30, 2016
Compared to the Three Months Ended
June 30, 2015
The following table sets forth for each of the periods indicated our statements of operations data and expresses revenue and expense data as a percentage of total revenues for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Percent of Revenue
|
|
|
|
|
|
June 30,
|
|
June 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016 vs 2015
|
Non-rental revenue
|
$
|
31,369
|
|
|
$
|
85,530
|
|
|
92.3
|
%
|
|
92.5
|
%
|
|
$
|
(54,161
|
)
|
|
(63.3
|
)%
|
Rental revenue
|
2,609
|
|
|
6,897
|
|
|
7.7
|
%
|
|
7.5
|
%
|
|
(4,288
|
)
|
|
(62.2
|
)%
|
Total revenue
|
33,978
|
|
|
92,427
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
(58,449
|
)
|
|
(63.2
|
)%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses
|
30,283
|
|
|
71,574
|
|
|
89.1
|
%
|
|
77.4
|
%
|
|
(41,291
|
)
|
|
(57.7
|
)%
|
General and administrative expenses
|
14,204
|
|
|
9,697
|
|
|
41.8
|
%
|
|
10.5
|
%
|
|
4,507
|
|
|
46.5
|
%
|
Depreciation and amortization
|
15,206
|
|
|
18,296
|
|
|
44.8
|
%
|
|
19.8
|
%
|
|
(3,090
|
)
|
|
(16.9
|
)%
|
Impairment of long-lived assets
|
2,664
|
|
|
—
|
|
|
7.8
|
%
|
|
—
|
%
|
|
2,664
|
|
|
100.0
|
%
|
Other, net
|
—
|
|
|
429
|
|
|
—
|
%
|
|
0.5
|
%
|
|
(429
|
)
|
|
(100.0
|
)%
|
Total costs and expenses
|
62,357
|
|
|
99,996
|
|
|
183.5
|
%
|
|
108.2
|
%
|
|
(37,639
|
)
|
|
(37.6
|
)%
|
Operating loss
|
(28,379
|
)
|
|
(7,569
|
)
|
|
(83.5
|
)%
|
|
(8.2
|
)%
|
|
(20,810
|
)
|
|
274.9
|
%
|
Interest expense, net
|
(13,973
|
)
|
|
(12,452
|
)
|
|
(41.1
|
)%
|
|
(13.5
|
)%
|
|
(1,521
|
)
|
|
12.2
|
%
|
Other income, net
|
2,771
|
|
|
400
|
|
|
8.2
|
%
|
|
0.4
|
%
|
|
2,371
|
|
|
592.8
|
%
|
Loss on extinguishment of debt
|
(284
|
)
|
|
(1,011
|
)
|
|
(0.8
|
)%
|
|
(1.1
|
)%
|
|
727
|
|
|
(71.9
|
)%
|
Loss from continuing operations before income taxes
|
(39,865
|
)
|
|
(20,632
|
)
|
|
(117.3
|
)%
|
|
(22.3
|
)%
|
|
(19,233
|
)
|
|
93.2
|
%
|
Income tax expense
|
(773
|
)
|
|
(15
|
)
|
|
(2.3
|
)%
|
|
—
|
%
|
|
(758
|
)
|
|
5,053.3
|
%
|
Loss from continuing operations
|
(40,638
|
)
|
|
(20,647
|
)
|
|
(119.6
|
)%
|
|
(22.3
|
)%
|
|
(19,991
|
)
|
|
96.8
|
%
|
Loss from discontinued operations, net of income taxes
|
(1,290
|
)
|
|
(2,089
|
)
|
|
(3.8
|
)%
|
|
(2.3
|
)%
|
|
799
|
|
|
(38.2
|
)%
|
Net loss attributable to common shareholders
|
$
|
(41,928
|
)
|
|
$
|
(22,736
|
)
|
|
(123.4
|
)%
|
|
(24.6
|
)%
|
|
$
|
(19,192
|
)
|
|
84.4
|
%
|
Non-Rental Revenue
Non-rental revenue consists of fees charged to customers for the sale and transportation of fresh water and saltwater by our fleet of logistics assets, and/or through water midstream assets owned by us, to customer sites for use in drilling and completion activities and from customer sites to remove and dispose of flowback and produced water originating from oil and natural gas wells. Non-rental revenue also includes fees for solids management services. Non-rental revenue for the three months ended
June 30, 2016
was
$31.4 million
, down
$54.2 million
, or
63.3%
, from
$85.5 million
in the prior year period. Lower drilling and completion activities in all divisions, as well as pricing pressures, led to lower non-rental revenue as compared to the same period in the prior year. The primary driver of the decreased demand was a 53% decline in average operating oil rigs from those operating in the same period in the prior year.
Rental Revenue
Rental revenue consists of fees charged to customers over the term of the rental for use of equipment owned by us, as well as other fees charged to customers for items such as delivery and pickup. Rental revenue for the three months ended
June 30, 2016
was
$2.6 million
, down
$4.3 million
, or
62.2%
, from
$6.9 million
in the prior year period. The decrease was the result of lower utilization of our equipment rental fleet in conjunction with the reduction in drilling and completion activities due to depressed oil prices.
Direct Operating Expenses
Direct operating expenses for the three months ended
June 30, 2016
decreased
$41.3 million
to
$30.3 million
compared to the prior year period. The decrease in direct operating expenses is attributable to lower revenues as a result of decreased activities,
as well as our continued focus on our cost-management initiatives implemented during 2015. Additionally, direct operating expenses during the three months ended
June 30, 2016
and
June 30, 2015
included a loss on the sale of assets of $1.8 million and a gain on the sale of assets of $0.7 million, respectively.
General and Administrative Expenses
General and administrative expenses for the three months ended
June 30, 2016
amounted to
$14.2 million
, an increase of
$4.5 million
from
$9.7 million
in the prior year period. The increase is primarily driven by legal and professional fees of $8.4 million incurred in connection with the restructuring of our indebtedness, partially offset by lower compensation and benefit expenses as a result of headcount reductions in response to the decrease in drilling and completion activities.
Depreciation and Amortization
Depreciation and amortization for the three months ended
June 30, 2016
was
$15.2 million
, down
$3.1 million
, or
16.9%
, from
$18.3 million
in the prior year period. The decrease is primarily attributable to a lower depreciable asset base as we have reduced capital spending and sold underutilized or non-core assets as a result of lower oil prices and decreased activities by our customers.
Impairment of long-lived assets
During the three months ended June 30, 2016, management approved plans to sell certain assets located in both the Northeast and Southern divisions, including trucks, tanks, and a parcel of land. These assets qualified to be classified as assets-held-for-sale and as a result the assets were recorded at the lower of net book value or fair value less costs to sell, resulting in a long-lived asset impairment charge of
$2.7 million
for the three months ended
June 30, 2016
. There were no impairment charges for long-lived assets recorded during the three months ended June 30, 2015.
Other, net
We recorded charges of approximately
$0.4 million
in the
six months ended
June 30, 2015
related to our plan to restructure our business in certain shale basins and reduce costs, including an exit from the Mississippian (or "MidCon") shale area and the Tuscaloosa Marine Shale logistics business. There were no similar costs incurred during the three months ended
June 30, 2016
.
Interest Expense, net
Interest expense, net during the three months ended
June 30, 2016
was
$14.0 million
, up
$1.5 million
or
12.2%
from
$12.5 million
in the prior year period. The increase in interest expense compared to the prior year period is primarily attributable to the restructuring of our indebtedness during the three months ended June 30, 2016. As part of this plan, a portion of our 2018 Notes were exchanged for new 2021 Notes whereby the interest due on October 15, 2016 is payable in kind at an annual rate of
12.5%
. Additionally, we entered into a new $24.0 million Term Loan with interest payable in kind at
13%
compounded monthly. (See Note 8 and 18 in the Notes the Condensed Consolidated Financial Statements for further details and discussions surrounding our debt restructuring.)
Other Income, net
Other income, net was
$2.8 million
for the three months ended
June 30, 2016
compared to
$0.4 million
in the prior year period. The increase is primarily attributable to the gain on the sale of Underground Solutions, Inc. ("UGSI") of $1.7 million during the three months ended June 30, 2016 (see Note 14 in the Notes to the Condensed Consolidated Financial Statements). Additionally, we recorded a $1.0 million gain associated with the change in fair value of the derivative warrant liability. In connection with our debt restructuring, during the three months ended June 30, 2016 we issued warrants with derivative features. 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 6, Note 8, and Note 9 in the Notes to the Condensed Consolidated Financial Statements for further details on the warrants.)
Loss on extinguishment of debt
During the three months ended June 30, 2016, we amended our ABL Facility which reduced the maximum revolver commitment from $100.0 million to $85.0 million and changed the scheduled maturity date to December 31, 2016. As a result of the decrease in the borrowing capacity,
we wrote off a portion of the unamortized deferred financing costs associated with our ABL Facility of approximately
$0.3 million
. (See "Liquidity and Capital Resources - ABL Facility Amendments" later in this section for further discussion on the amendment.)
Income Taxes
Income tax expense was
$0.8 million
in the three months ended
June 30, 2016
, compared to
$15.0 thousand
in the prior year period. The primary item impacting income taxes for the three-month period ended
June 30, 2016
was the permanent differences, which includes income from the cancellation of debt which generated a cash tax liability under the alternative minimum tax ("AMT") provisions. Under the AMT provisions, the use of net operating losses ("NOLs") is limited to 90% of a taxpayer's AMT income, thus generating tax on the remaining income. Once use our NOLs and are paying regular tax, we will receive a credit for the AMT tax paid.
We have significant deferred tax assets, consisting primarily of net operating losses (“NOLs”), which have a limited life, generally expiring between the years 2029 and 2036 and capital losses, which have a five year carryforward expiring in 2020. Management regularly assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred this quarter and in recent years. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future taxable income.
In light of our continued ordinary losses, at
June 30, 2016
we determined that our deferred tax liabilities were not sufficient to fully realize our deferred tax assets. Accordingly, a valuation allowance continues to be required against the portion of our deferred tax assets that is not offset by deferred tax liabilities. Accordingly, we expect our effective income tax rate to be near zero for 2016.
Six Months Ended
June 30, 2016
Compared to the
Six Months Ended
June 30, 2015
The following table sets forth for each of the periods indicated our statements of operations data and expresses revenue and expense data as a percentage of total revenues for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Percent of Revenue
|
|
|
|
|
|
June 30,
|
|
June 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016 versus 2015
|
Non-rental revenue
|
$
|
75,395
|
|
|
$
|
192,540
|
|
|
93.1
|
%
|
|
91.0
|
%
|
|
$
|
(117,145
|
)
|
|
(60.8
|
)%
|
Rental revenue
|
5,558
|
|
|
18,999
|
|
|
6.9
|
%
|
|
9.0
|
%
|
|
(13,441
|
)
|
|
(70.7
|
)%
|
Total revenue
|
80,953
|
|
|
211,539
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
(130,586
|
)
|
|
(61.7
|
)%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses
|
68,900
|
|
|
159,573
|
|
|
85.1
|
%
|
|
75.4
|
%
|
|
(90,673
|
)
|
|
(56.8
|
)%
|
General and administrative expenses
|
21,656
|
|
|
22,397
|
|
|
26.8
|
%
|
|
10.6
|
%
|
|
(741
|
)
|
|
(3.3
|
)%
|
Depreciation and amortization
|
31,051
|
|
|
35,778
|
|
|
38.4
|
%
|
|
16.9
|
%
|
|
(4,727
|
)
|
|
(13.2
|
)%
|
Impairment of long-lived assets
|
2,664
|
|
|
—
|
|
|
3.3
|
%
|
|
—
|
%
|
|
2,664
|
|
|
100.0
|
%
|
Other, net
|
—
|
|
|
1,112
|
|
|
—
|
%
|
|
0.5
|
%
|
|
(1,112
|
)
|
|
(100.0
|
)%
|
Total costs and expenses
|
124,271
|
|
|
218,860
|
|
|
153.5
|
%
|
|
103.5
|
%
|
|
(94,589
|
)
|
|
(43.2
|
)%
|
Operating loss
|
(43,318
|
)
|
|
(7,321
|
)
|
|
(53.5
|
)%
|
|
(3.5
|
)%
|
|
(35,997
|
)
|
|
491.7
|
%
|
Interest expense, net
|
(26,018
|
)
|
|
(25,040
|
)
|
|
(32.1
|
)%
|
|
(11.8
|
)%
|
|
(978
|
)
|
|
3.9
|
%
|
Other income, net
|
2,929
|
|
|
721
|
|
|
3.6
|
%
|
|
0.3
|
%
|
|
2,208
|
|
|
306.2
|
%
|
Loss on extinguishment of debt
|
(674
|
)
|
|
(1,011
|
)
|
|
(0.8
|
)%
|
|
(0.5
|
)%
|
|
337
|
|
|
(33.3
|
)%
|
Loss from continuing operations before income taxes
|
(67,081
|
)
|
|
(32,651
|
)
|
|
(82.9
|
)%
|
|
(15.4
|
)%
|
|
(34,430
|
)
|
|
105.4
|
%
|
Income tax (expense) benefit
|
(828
|
)
|
|
9
|
|
|
(1.0
|
)%
|
|
—
|
%
|
|
(837
|
)
|
|
(9,300.0
|
)%
|
Loss from continuing operations
|
(67,909
|
)
|
|
(32,642
|
)
|
|
(83.9
|
)%
|
|
(15.4
|
)%
|
|
(35,267
|
)
|
|
108.0
|
%
|
Loss from discontinued operations, net of income taxes
|
(1,235
|
)
|
|
(1,168
|
)
|
|
(1.5
|
)%
|
|
(0.6
|
)%
|
|
(67
|
)
|
|
5.7
|
%
|
Net loss attributable to common shareholders
|
$
|
(69,144
|
)
|
|
$
|
(33,810
|
)
|
|
(85.4
|
)%
|
|
(16.0
|
)%
|
|
$
|
(35,334
|
)
|
|
104.5
|
%
|
Non-Rental Revenue
Non-rental revenue for the
six months ended
June 30, 2016
was
$75.4 million
, down
$117.1 million
, or
60.8%
from
$192.5 million
in the prior year period. Lower drilling and completion activities in all divisions, as well as pricing pressures, led to lower non-rental revenue as compared to the same period in the prior year. The primary driver of the decreased demand was a 58% decline in average operating oil rigs from those operating in the same period in the prior year.
Rental Revenue
Rental revenue for the
six months ended
June 30, 2016
was
$5.6 million
, down
$13.4 million
, or
70.7%
, from
$19.0 million
in the prior year period. Similar to the three month comparative periods, the decrease was the result of lower utilization of our equipment rental fleet, in conjunction with the reduction in drilling and completion activities due to depressed oil prices.
Direct Operating Expenses
Direct operating expenses for the
six months ended
June 30, 2016
were
$68.9 million
, compared to
$159.6 million
in the prior year period. The decrease in direct operating expenses is attributable to lower revenues as a result of decreased activities, as well as our continued focus on our cost-management initiatives implemented during 2015. Additionally, direct operating expenses during the
six months ended
June 30, 2016
and
June 30, 2015
included a loss on the sale of assets of $0.7 million and a gain on the sale of assets of $1.3 million, respectively.
General and Administrative Expenses
General and administrative expenses for the
six months ended
June 30, 2016
amounted to
$21.7 million
, down
$0.7 million
from
$22.4 million
in the prior year period. The decrease in general and administrative expenses during the
six months ended
June 30, 2016
is primarily attributable to lower compensation and benefit expenses as a result of headcount reductions in response to the decrease in drilling and completion activities, offset by $8.4 million in legal and professional fees incurred in connection with the restructuring of our indebtedness.
Depreciation and Amortization
Depreciation and amortization for the
six months ended
June 30, 2016
was
$31.1 million
, down approximately
$4.7 million
from
$35.8 million
in the prior year period. The decrease is primarily attributable to a lower depreciable asset base as we have reduced capital spending and sold underutilized or non-core assets as a result of lower oil prices and decreased activities by our customers.
Impairment of long-lived assets
During the
six months ended
June 30, 2016, management approved plans to sell certain assets located in both the Northeast and Southern divisions, including trucks, tanks, and a parcel of land. These assets qualified to be classified as assets-held-for-sale and as a result the assets were recorded at the lower of net book value or fair value less costs to sell, resulting in a long-lived asset impairment charge of
$2.7 million
for the
six months ended
June 30, 2016
. There were no impairment charges for long-lived assets recorded during the
six months ended
June 30, 2015.
Other, net
We recorded charges of approximately
$1.1 million
in the
six months ended
June 30, 2015
related to our plan to restructure our business in certain shale basins and reduce costs, including an exit from the MidCon shale area and the Tuscaloosa Marine Shale logistics business. There were no similar costs incurred during the
six months ended
June 30, 2016
.
Interest Expense, net
Interest expense, net during the
six months ended
June 30, 2016
was
$26.0 million
, or
$1.0 million
higher than the
$25.0 million
in the prior year period. The increase is primarily due to the restructuring of our indebtedness during the three months ended June 30, 2016. As part of this plan, a portion of our 2018 Notes were exchanged for new 2021 Notes whereby the interest due on October 15, 2016 is payable in kind at an annual rate of
12.5%
. Additionally, we entered into a new $24.0 million Term Loan with interest payable in kind at
13%
compounded monthly. (See Note 8 and 18 in the Notes the Condensed Consolidated Financial Statements for further details and discussions surrounding our debt restructuring.)
Other Income, net
Other income, net was
$2.9 million
for the
six months ended
June 30, 2016
, up
$2.2 million
compared to
$0.7 million
in the prior year period. The increase is primarily attributable to the gain on the sale of UGSI of $1.7 million during the three months ended June 30, 2016 (see Note 14 in the Notes to the Condensed Consolidated Financial Statements). Additionally, we
recorded a $1.0 million gain associated with the change in fair value of the derivative warrant liability. In connection with our debt restructuring, during the three months ended June 30, 2016 we issued warrants with derivative features. 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 6, Note 8, and Note 9 in the Notes to the Condensed Consolidated Financial Statements for further details on the warrants.)
Loss on Extinguishment of Debt
Loss on extinguishment of debt was
$0.7 million
for the
six months ended
June 30, 2016
compared to
$1.0 million
in the prior year period.
During the six months ended June 30, 2016, we executed two amendments to our ABL Facility, and as a result, we collectively wrote off
$0.7 million
million
of unamortized deferred financing costs associated with the ABL Facility. See "Liquidity and Capital Resources - ABL Facility Amendments" later in this section for further discussion on the amendments. During the
six months ended
June 30, 2015
, i
n connection with the closing of the Thermo Fluids, Inc (or "TFI") disposition in April 2015, we amended our ABL Facility and wrote off a portion of the unamortized deferred financing costs associated with the ABL Facility of $1.0 million.
Income Taxes
The income tax expense for the
six months ended
June 30, 2016
was
$0.8 million
compared to a benefit of
$9.0 thousand
in the prior year period. The primary items impacting income taxes for the six month period ended June 30, 2016 were permanent differences, which includes income from the cancellation of debt which generated a cash tax liability under the alternative minimum tax ("AMT") provisions. Under the AMT provisions, the use of net operating losses ("NOLs") is limited to 90% of a taxpayer's AMT income, thus generating tax on the remaining income. Once use our NOLs and are paying regular tax, we will receive a credit for the AMT tax paid.
Liquidity and Capital Resources
Cash Flows and Liquidity
Our primary source of capital is from borrowings available under our ABL Facility, with additional sources of capital in prior years from debt and equity accessed through the capital markets. Our historical acquisition activity was highly capital intensive and required significant investments in order to expand our presence in existing shale basins, access new markets and to expand the breadth and scope of services we provide. Additionally, we have historically issued equity as consideration in acquisition transactions. Our sources of capital for 2016 have included cash generated by our operations, restructuring transactions, asset sales and borrowings under our ABL Facility to the extent our borrowing base and financial covenants permit such borrowings. Additional sources of cash for the second half of 2016 may include additional asset sales, sale/leaseback transactions, additional debt or equity financing and reductions in our operating costs.
We have incurred operating losses of
$40.6 million
and
$67.9 million
for the
three and six months ended
June 30, 2016
, respectively, and operating losses of
$20.6 million
and
$32.6 million
for the
three and six months ended
June 30, 2015
, respectively. Cash used in operating activities was
$12.6 million
for the
six months ended
June 30, 2016
. At
June 30, 2016
, we had cash and cash equivalents of
$0.3 million
, and
$12.6 million
of net availability under the ABL Facility.
Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the condensed consolidated financial statements, we had an accumulated deficit at
June 30, 2016
, and a net loss for the
six months ended
June 30, 2016
and
2015
. These factors, coupled with our large outstanding debt balance, raise substantial doubt about our ability to continue as a going concern. We are attempting to generate sufficient revenues and reduce costs; however, our cash position may not be sufficient to support our daily operations if we are not successful. While we have executed a comprehensive strategy to restructure our indebtedness, improve liquidity and reduce costs, including cash interest expense, to sustain operations through the prolonged depression in oil and natural gas prices and the corresponding impact on our business operations, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to generate sufficient liquidity to meet our obligations and operating needs. While we were, and remain, in compliance with our existing debt arrangements, we recognize that absent an improvement in oil prices, it is likely that we will not have enough liquidity, including cash on hand, to service our debt, operations, and pay-down debt to avoid covenant violations. Failure to comply with any of our debt obligations, or obtain waivers thereof, may cause us to seek relief under the United States Bankruptcy Code. See Note 8 and Note 18 in the Notes to the Condensed Consolidated Financial Statements for details on management's debt restructuring in 2016.
Given the current macro environment and depressed oil and natural gas prices, we anticipate lower revenues and reductions in costs from operations to continue through the second half of 2016. We used cash on hand and liquidity from our restructuring transactions to repay a portion of our ABL Facility in order to maintain compliance with our ABL Facility financial covenants
and to cover the deterioration to our ABL Facility borrowing base due to declining accounts receivable and downward pressure on the orderly liquidation values of our machinery and equipment. If there is further deterioration to our ABL Facility borrowing base, in the event our cash on hand is not adequate to cover any shortfall, we would be required to seek alternate sources of debt at higher rates of interest, and such debt may not be available to us. See Note 8 and Note 18 in the Notes to the Condensed Consolidated Financial Statements for details on management's debt restructuring in 2016.
In addition, our ABL Facility contains a covenant requiring us to refinance the ABL Facility in full on or before September 30, 2016. There can be no assurances that we will be able to refinance the ABL Facility by September 30, 2016, that such refinancing will be available on attractive or acceptable terms, or that such refinancing would provide us with sufficient liquidity to service our debt obligations and operations through the prolonged decline in oil and natural gas prices. In the event we are unable to refinance our ABL Facility, or refinance on terms attractive or acceptable to us, it is likely we would not have sufficient liquidity to service our debt obligations and operations. This would likely cause us to seek relief under the United States Bankruptcy Code. See Note 8 in the Notes to the Condensed Consolidated Financial Statements for details on our ABL Facility refinancing covenant.
The following table summarizes our sources and uses of cash from continuing operations for the
six months ended
June 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30,
|
Net cash (used in) provided by continuing operations:
|
|
2016
|
|
2015
|
Operating activities
|
|
$
|
(12,594
|
)
|
|
42,336
|
|
Investing activities
|
|
7,587
|
|
|
67,288
|
|
Financing activities
|
|
(33,999
|
)
|
|
(89,412
|
)
|
Net (decrease) increase in cash and cash equivalents from continuing operations
|
|
$
|
(39,006
|
)
|
|
$
|
20,212
|
|
As of
June 30, 2016
, we had cash and cash equivalents of
$0.3 million
, a decrease of
$39.0 million
from
December 31, 2015
. The primary reason for the decrease in cash and cash equivalents is due to net repayments of
$53.7 million
on our ABL Facility and the execution of an amendment to our guaranty and security agreement related to our ABL Facility in March 2016, which is described in further detail later in this section under "ABL Facility Amendments." This amendment implemented a daily cash sweep of our collection lockbox and certain depository accounts, the proceeds of which are required to be applied against the outstanding balance of the ABL Facility. We had an ending balance of
$0.1 million
in our collection lockbox and certain depository accounts on
June 30, 2016
, which we have classified as "Restricted cash" on the condensed consolidated balance sheet as this cash is not available for operations and was subsequently swept by the lender on July 1, 2016. The amendment also requires the segregation of all receipts and disbursements in separate bank accounts and limits the end of day balance in our operating bank account to an amount not to exceed $1.0 million.
Operating Activities
Net cash used in operating activities was
$12.6 million
for the
six months ended
June 30, 2016
. The net loss from continuing operations, after adjustments for non-cash items, used cash of
$32.0 million
, compared to cash provided of
$6.9 million
in the corresponding
2015
period. Changes in operating assets and liabilities provided
$19.4 million
in cash primarily due to a decrease in accounts receivable as a result of lower activity levels and billings in the current year, offset by an increase in other current assets. The non-cash items and other adjustments included
$31.1 million
of depreciation and amortization of intangible assets, amortization of debt issuance costs of
$2.6 million
, a long-lived asset impairment charge of
$2.7 million
, write off of deferred financing costs of
$0.7 million
, stock-based compensation of
$0.7 million
, and a
$0.7 million
loss on disposal of property, plant and equipment, partially offset by a
$1.7 million
gain on the sale of UGSI and a
$1.0 million
gain resulting from the change in the fair value of the derivative warrant liability.
Net cash provided by operating activities was
$42.3 million
for the
six months ended
June 30, 2015
. The net loss from continuing operations, after adjustments for non-cash items, provided cash of
$6.9 million
. Changes in operating assets and liabilities provided
$35.4 million
primarily due to a decrease in accounts receivable as a result of increased efforts on collections which was partially offset by a decrease in accounts payable and accrued liabilities and an increase in prepaid expenses and other receivables. The non-cash items and other adjustments included
$35.8 million
of depreciation and amortization of intangible assets, amortization of debt issuance costs of
$2.4 million
, stock-based compensation of
$1.5 million
and write off of deferred financing costs of
$1.0 million
, partially offset by a
$1.3 million
gain on disposal of property, plant and equipment.
Investing Activities
Net cash provided by investing activities was
$7.6 million
for the
six months ended
June 30, 2016
, which primarily consisted of
$6.0 million
of proceeds from the sale of property, plant and equipment and
$5.0 million
in proceeds from the sale of UGSI, partially offset by
$2.1 million
of purchases of property, plant and equipment and a
$1.3 million
increase in restricted cash. The increase in restricted cash during the six months ended June 30, 2016 is a result of the $5.0 million deposited in escrow for the purpose of securing the backstop obligations under the Rights Offering for Mark D. Johnsrud, our Chairman of the Board and Chief Executive Officer, offset by the release of funds from escrow as a result of the completion of the post-closing working capital reconciliation related to the sale of TFI.
Net cash provided by investing activities was
$67.3 million
for the
six months ended
June 30, 2015
and consisted primarily of
$78.9 million
of proceeds from the sale of TFI and
$3.4 million
of proceeds from the sale of property, plant and equipment, partially offset by
$10.8 million
of purchases of property, plant and equipment.
Financing Activities
Net cash used in financing activities was
$34.0 million
for the
six months ended
June 30, 2016
and was primarily comprised of
$53.7 million
of net repayments under ABL Facility and
$3.3 million
of payments on vehicle financing and other financing activities, offset by
$24.0 million
in proceeds from the issuance of the new Term Loan.
Net cash used by financing activities was
$89.4 million
for the
six months ended
June 30, 2015
and consisted of
$81.6 million
of payments under our ABL Facility and
$7.8 million
of payments on vehicle financing and other financing activities.
Capital Expenditures
Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. Due to the difficult 2016 macro environment and the corresponding impact of depressed oil and natural gas prices, we have sought to maximize liquidity by limiting our capital expenditures to only those deemed critical to our ongoing operations and those necessary to support our key growth initiatives. In addition, we offset the cash impact of these expenditures by selling underutilized or non-core assets. Cash required for capital expenditures (related to continuing operations) for the
six months ended
June 30, 2016
totaled
$2.1 million
compared to
$10.8 million
for the
six months ended
June 30, 2015
. These capital expenditures were partially offset by proceeds received from the sale of under-utilized or non-core assets of
$6.0 million
and
$3.4 million
in the
six months ended
June 30, 2016
and
2015
, respectively. Historically, a portion of our transportation-related capital requirements were financed through capital leases, which are excluded from the capital expenditures figures cited above. Such equipment additions under capital leases totaled approximately
$2.9 million
for the
six months ended
June 30, 2015
. We had no new equipment additions under capital leases in the
six months ended
June 30, 2016
. We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale areas in which we operate. Our planned capital expenditures for the remainder of 2016 are expected to be financed through cash flow from operations, borrowings under existing or new credit facilities if available, capital leases, other financing structures, or a combination of the foregoing.
Indebtedness
We are highly leveraged and a substantial portion of our liquidity needs result from debt service requirements and from funding our costs of operations and capital expenditures. As of
June 30, 2016
, we had
$464.6 million
of indebtedness outstanding, consisting of
$40.4 million
of 2018 Notes,
$335.7 million
of 2021 Notes,
$24.7 million
under a Term Loan,
$48.1 million
under the ABL Facility, and
$15.6 million
of capital leases for vehicle financings and a note payable for the purchase of the remaining interest in AWS.
Exchange Offer
On March 11, 2016, we entered into a Restructuring Support Agreement with holders of more than
80%
of the 2018 Notes relating to a debt restructuring and recapitalization plan (the “Restructuring”), subject to the satisfaction of certain closing conditions including shareholder approval of an amendment to our Amended and Restated Certificate of Incorporation, as amended, and minimum noteholder participation. On April 15, 2016, we closed our exchange offer (the “Exchange Offer”) relating to our 2018 Notes as part of the comprehensive restructuring of our outstanding indebtedness pursuant to the Restructuring Support Agreement.
Pursuant to the Exchange Offer, we offered to exchange our 2021 Notes and shares of our common stock at a conversion price per share of
$0.32
(the “Conversion Price”) for any and all of our 2018 Notes validly tendered and not properly withdrawn at or prior to the expiration date, with the exception of approximately
$31.4 million
in principal 2018 Notes owned by an entity
controlled by Mark D. Johnsrud, our Chairman of the Board and Chief Executive Officer. We settled the Exchange Offer on April 15, 2016 by delivering to tendering holders of the 2018 Notes (i)
$327.2 million
in aggregate principal amount of the new 2021 Notes to those tendering holders electing to exchange for 2021 Notes and
$0.9 million
in shares of common stock converted at the Conversion Price to those tendering holders electing to exchange for common stock and (ii) a pro rata share (based on the aggregate principal amount of the 2018 Notes validly tendered) of penny warrants sufficient to purchase
10%
of shares of our common stock (the "Exchange Warrants"). In addition,
$31.4 million
in principal 2018 Notes held by an entity controlled by Mr. Johnsrud were canceled upon closing of the Exchange Offer, and converted to shares of our common stock on May 26, 2016 at the Conversion Price, following shareholder approval at the May 20, 2016 Special Meeting of Shareholders to approve an amendment to our Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of our common stock, par value
$0.001
per share, from
50 million
to
350 million
(the "Johnsrud Note Conversion"). As a result of the exchange, a total of 101,071,875 shares of common stock were issued, with 2,837,500 to tendering holders electing to exchange their 2018 Notes for common stock, and 98,234,375 for the Johnsrud Note Conversion.
The exchange of the
$327.2 million
in principal 2018 Notes for new 2021 Notes was accounted for as a debt modification, and all third party expenses related to the exchange were expensed to "General and administrative expenses" in the condensed consolidated statement of operations for the three months ended June 30, 2016. The exchange of the
$0.9 million
in principal 2018 Notes for common stock was accounted for as a debt extinguishment, which generated an immaterial loss on extinguishment recorded in "Loss on extinguishment of debt" in the condensed consolidated statement of operations for the three months ended June 30, 2016. Finally, the exchange of
$31.4 million
in principal 2018 Notes held by an entity controlled by Mr. Johnsrud for common stock was accounted as a capital transaction as Mr. Johnsrud is a related party, with the loss on extinguishment recorded in "Additional paid-in-capital" on the condensed consolidated balance sheet as of June 30, 2016. The Warrants issued in connection with the Exchange Offer are discussed in further detail in Note 9 on "Derivative Warrants."
In connection with the issuance of the new 2021 Notes, we entered into a new Indenture that governs the terms of the new 2021 Notes, dated as of April 15, 2016, between the Company, Wilmington Savings Fund Society, FSB, as Trustee, and the Guarantors party thereto. Pursuant to the new Indenture, the 2021 Notes will mature on April 15, 2021. Interest will be paid in kind semi-annually by increasing the principal amount payable and due at maturity and/or in cash as follows: interest payable on October 15, 2016 will be paid in kind at an annual rate of
12.5%
; interest payable after October 15, 2016 but on or before April 15, 2018 will be paid at a rate of
10%
with
50%
in kind and
50%
in cash; interest payable after April 15, 2018 will be paid in cash at a rate of
10%
until maturity. As a result, our annual cash interest payment obligations have been reduced by approximately
$17.8 million
for the remainder of 2016,
$17.9 million
for 2017 and
$8.6 million
through April 15, 2018. Interest on the 2021 Notes accrues from the most recent date interest has been paid, or if no interest has been paid, from and including the issue date. The 2021 Notes are secured by junior liens on the same collateral as our ABL Facility and rank equal in right of payment to all senior indebtedness and senior to all subordinated indebtedness of the Company. The 2021 Notes are guaranteed by our subsidiaries.
Upon settlement of the Exchange Offer, there remained outstanding approximately
$40.4 million
aggregate principal amount of 2018 Notes. Ongoing semi-annual interest expense with respect to the remaining 2018 Notes is approximately
$2.0 million
. In addition, based on the completion of the Exchange Offer, consents from each exchanging holder of the 2018 Notes for the waiver of certain provisions of the 2018 Notes Indenture became effective. The consents, among other things, waive substantially all of the restrictive covenants in the 2018 Notes Indenture and potential defaults arising from non-compliance with such waived covenants.
Term Loan
Concurrent to the Exchange Offer we entered into a
$24.0 million
Term Loan funded by certain holders of the 2018 Notes that were also parties to the Restructuring Support Agreement. The Term Loan accrues interest at a rate of
13%
compounded monthly to be paid in kind by increasing the principal amount payable thereunder. Principal including the paid in kind interest is due April 15, 2018. The Term Loan is subject to a minimum EBITDA covenant that is identical in all respects to the minimum EBITDA covenant applicable to the ABL Facility. To the extent actual EBITDA (as defined by the Term Loan) falls short of the minimum EBITDA targets, the Term Loan accrues interest at rate of
17%
. The Term Loan is secured by junior liens on the same collateral as our ABL Facility and guaranteed by our subsidiaries. In connection with the Term Loan, we entered into a warrant agreement with the lenders under the Term Loan, pursuant to which, as a commitment fee for entering into the Term Loan, the lenders received warrants to purchase up to
5%
of our then-outstanding stock at an exercise price of
$0.01
per share (the "Term Loan Warrants").
The Exchange Warrants and the Term Loan Warrants (collectively, the "Warrants") contain anti-dilution provisions which adjust the number of shares issuable upon exercise thereof in certain circumstances, including adjustments intended to preserve the
proportion of outstanding common stock into which such Warrants are exercisable after giving effect to the Johnsrud Note Conversion, and the Rights Offering. The Warrants are discussed in greater detail in Note 9 on "Derivative Warrants" and the Rights Offering is discussed in Note 18 on "Subsequent Events Related to Restructuring - Rights Offering."
Proceeds from the Term Loan were applied to pay down a portion of the outstanding balance of the ABL Facility and were reborrowed by us to fund the scheduled interest payment on the 2018 Notes and pay related transaction fees and expenses.
On June 30, 2016, we entered into a First Amendment to Term Loan Credit Agreement (the “Term Loan Agreement Amendment”) by and among the Required Lenders (as defined therein) and the Company, which amends the Term Loan Credit Agreement, dated as of April 15, 2016, by and among Wilmington Savings Fund Society, FSB, as administrative agent (the “Agent”), the lenders party thereto (the “Lenders”), and the Company, as borrower (the “Term Loan Agreement”).
The Term Loan Agreement Amendment amends the Term Loan Agreement by amending the minimum EBITDA financial maintenance covenant to conform to the revised minimum EBITDA financial maintenance covenant provided by the Eighth Amendment to Amended and Restated Credit Agreement (discussed below) through December 31, 2016, modifying the applicable periods for measurement and reducing the applicable amounts required to be achieved for each period. In connection with the Term Loan Agreement Amendment, we paid a non-refundable amendment fee in the amount of
$0.1 million
to the Lenders, pro-rata to their respective commitment amount under the Term Loan Agreement, which was capitalized as deferred financing costs during the three months ended June 30, 2016.
ABL Facility Amendments
On March 10, 2016, we entered into a Consent and Fifth Amendment to Amended and Restated Credit Agreement (the “Fifth ABL Facility Amendment”) and a Third Amendment to Amended and Restated Guaranty and Security Agreement (the "Third GSA Amendment") by and among Wells Fargo Bank, National Association as agent ("Agent"), the Lenders named therein (the “Lenders”), and the Company. Under the Fifth ABL Facility Amendment, the Lenders consented to the inclusion of a “going concern” qualification in the opinion from our registered public accounting firm, which is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Under the Third GSA Amendment, we consented to and implemented a daily cash sweep of our collection lockbox and depository accounts, the proceeds of which are required to be applied against the outstanding balance of the ABL Facility. The Third GSA Amendment also requires the segregation of all receipts and disbursements in separate bank accounts and limits the end of day balance in our operating bank account to an amount not to exceed
$1.0 million
.
On March 24, 2016, in connection with the Restructuring Support Agreement to implement the Restructuring, we entered into a Sixth Amendment to Amended and Restated Credit Agreement (the “Sixth ABL Facility Amendment”) by and among the Agent, the Lenders and the Company. Among other terms and conditions, the Sixth ABL Facility Amendment amended the ABL Facility as follows:
|
|
•
|
Reduced the maximum revolver commitments from
$125.0 million
to
$100.0 million
;
|
|
|
•
|
Replaced the leverage ratio financial maintenance covenant with a new minimum EBITDA financial maintenance covenant that will be tested monthly;
|
|
|
•
|
Amended the definition of “EBITDA” for purposes of the financial maintenance covenant to provide allowances for certain unusual or non-recurring fees, costs and expenses, with testing monthly beginning in April 2016;
|
|
|
•
|
Amended the definition of “Borrowing Base” (i) to set the eligible equipment advance rates based on net book value at
60%
and on Net Orderly Liquidation Value (as defined in the ABL Facility) at
80%
and (ii) to cap Borrowing Base availability attributable to eligible equipment at
75%
;
|
|
|
•
|
Increased the default rate upon the occurrence and continuation of an event of default from
2%
to
4%
;
|
|
|
•
|
Increased the applicable margin on LIBOR Rate and Base Rate Loans (each as defined in the ABL Facility) and the unused line fee;
|
|
|
•
|
Eliminated our ability to voluntarily reduce the commitments without termination of the ABL Facility;
|
|
|
•
|
Requires us to apply proceeds from the Restructuring transactions and related agreements to pay down the ABL Facility;
|
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|
•
|
Amended the definition of “Permitted Disposition” to permit the sale of our equity investment in Underground Solutions, Inc., discussed further in Note 14, and to expand the permitted disposition general basket (which excludes the sale of machinery and equipment in the ordinary course of business) from
$5.0 million
to
$7.5 million
;
|
|
|
•
|
Applies a Permitted Disposition Reserve of
50%
against our availability for net cash proceeds in excess of
$7.5 million
made on or after March 10, 2016 for sales specifically related to the Permitted Disposition general basket; and
|
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|
•
|
Amended certain definitions in connection with the Restructuring transactions, including “Change of Control”, “Permitted Indebtedness”, and “Permitted Liens”.
|
In addition, we agreed to certain make-whole fees that would be payable to the Lenders upon early termination of the ABL Facility as a result of acceleration, bankruptcy or otherwise, unless amounts outstanding under the ABL Facility are paid in full. In connection with the Sixth ABL Facility Amendment we incurred amendment fees of approximately
$0.6 million
which were capitalized as deferred financing costs during the three months ended March 31, 2016. Further, we wrote off a portion of the unamortized deferred financing costs associated with our ABL Facility of approximately
$0.4 million
which are included in "Loss on extinguishment of debt" in the condensed consolidated statement of operations for the six months ended June 30, 2016.
On April 15, 2016, we entered into a Seventh Amendment to Amended and Restated Credit Agreement, dated April 15, 2016 (the “Seventh ABL Facility Amendment”), by and among the Agent, the Lenders and the Company to make conforming amendments in connection with the Restructuring transactions. Among other terms and conditions, the Seventh Amendment amends the ABL Facility to: (i) require that the we apply excess proceeds from asset sales to pay down the ABL Facility; (ii) prohibit us from optionally prepaying or acquiring other indebtedness, making any payment on subordinated indebtedness, or amending certain agreements and documents; and (iii) amend certain definitions in the ABL Facility.
On June 29, 2016, we entered into an Eighth Amendment to Amended and Restated Credit Agreement (the “Eighth ABL Facility Amendment”) by and among the Agent, the Lenders, and the Company, which further amends our ABL Facility. Among other terms and conditions, the Eighth ABL Facility Amendment amended the ABL Facility as follows:
|
|
•
|
Reduced the maximum revolver commitments from
$100.0 million
to
$85.0 million
;
|
|
|
•
|
Amended the minimum EBITDA financial maintenance covenant, modifying the applicable periods for measurement and reducing the applicable amounts required to be achieved for each period;
|
|
|
•
|
Changed the scheduled maturity date of the ABL Facility from January 15, 2018 to December 31, 2016;
|
|
|
•
|
Added a covenant requiring us to refinance the ABL Facility in full on or before September 30, 2016;
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|
•
|
Requires us to consummate a rights offering on or before July 29, 2016, which was subsequently waived by the Lenders on August 5, 2016, and to apply the proceeds from the rights offering to pay down the ABL Facility, which must equal
$5.0 million
(with any shortfall to be covered by the backstop obligation funds previously placed in escrow by Mark D. Johnsrud, the Company’s Chairman and Chief Executive Officer) - (see Note 18 for further updates and details on the Rights Offering);
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|
•
|
Replaced the minimum fixed charge coverage ratio covenant with an immediate availability block in the amount of $12.5 million, increasing to
$15.0 million
upon receipt of the Rights Offering proceeds;
|
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|
•
|
Establishes a Permitted Disposition Reserve equal to 50% of the aggregate amount of net cash proceeds arising from Permitted Dispositions of any property (excluding the sale of machinery and equipment in the ordinary course of business) consummated after June 29, 2016;
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|
•
|
Increased the applicable margin on LIBOR Rate and Base Rate Loans (as defined in the ABL Facility).
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In connection with the Eighth ABL Facility Amendment we incurred amendment fees of approximately
$0.4 million
which were capitalized as deferred financing costs during the three months ended June 30, 2016. Further, we wrote off a portion of the unamortized deferred financing costs associated with our ABL Facility of approximately
$0.3 million
which are included in "Loss on extinguishment of debt" in the condensed consolidated statement of operations for the three months ended June 30, 2016.
Financial Covenants and Borrowing Limitations
The ABL Facility, as amended, requires, and any future credit facilities will likely require, us to comply with specified financial ratios that may limit the amount we can borrow under our ABL Facility. A breach of any of the covenants under the indenture governing the 2018 Notes and 2021 Notes (the “Indentures”), the ABL Facility, or the Term Loan, as applicable, could result in
an event of default. Our ability to satisfy those covenants depends principally upon our ability to meet or exceed certain positive operating performance metrics including, but not limited to, earnings before interest, taxes, depreciation and amortization, or EBITDA, and ratios thereof, as well as certain balance sheet ratios. Any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions.
The ABL Facility and Term Loan contain certain financial covenants, including a minimum EBITDA covenant. The minimum EBITDA covenant requires us to meet a stated year-to-date EBITDA target (as defined by the ABL Facility). As of
June 30, 2016
, we remained in compliance with our debt covenants and availability under the ABL Facility was
$12.6 million
, after applying the availability block and other availability restrictions.
During the three months ended March 31, 2016, the Agent for the ABL Facility commenced a borrowing base redetermination involving a valuation of the net orderly liquidation value of our eligible machinery and equipment by a third party specialist. As a result, the lenders applied an
$21.0 million
reserve against our availability based on the estimated decline to our borrowing base. Due to the application of this reserve against our availability and due to the implementation of the daily sweep of our lockbox and certain depository bank accounts, we made cumulative payments of
$130.7 million
during the six months ended
June 30, 2016
, offset by borrowings of
$77.0 million
, thus reducing the amount outstanding under the ABL Facility from
$101.8 million
as of December 31, 2015 to
$48.1 million
as of
June 30, 2016
.
The ABL Facility's borrowing base limitations are based upon eligible accounts receivable and equipment. If the value of our eligible accounts receivable or equipment decreases for any reason, or if some portion of our accounts receivable or equipment is deemed ineligible under the terms of our ABL Facility, the amount we can borrow under the ABL Facility could be reduced. These limitations could have a material adverse impact on our liquidity and financial condition. In addition, the Agent for our ABL Facility has the periodic right to commission appraisals of the assets comprising our borrowing base, and we are obligated to reimburse the cost of up to four full appraisals including two field examinations, during any 12 consecutive months. If an appraisal results in a reduction of the borrowing base, we may be required to repay a portion of the amount outstanding under the ABL Facility in order to remain in compliance with applicable borrowing limitations. At
June 30, 2016
we had
$12.6 million
of net availability under the ABL Facility. During the remainder of 2016, we expect further deterioration to our ABL borrowing base due to declining accounts receivable and downward pressure on the orderly liquidation values of our machinery and equipment. During the six months ended
June 30, 2016
, we reduced the outstanding balance of the ABL Facility by
$53.7 million
, a portion of which was made to cover the borrowing base deterioration. There can be no assurance that we will have sufficient cash on hand or other sources of liquidity to make any such future repayments if necessary.
The Indentures contain restrictive covenants on the incurrence of senior secured indebtedness. To the extent that the fixed charge coverage ratio (as defined in the Indentures) is below
2.0
to 1.0, the Indentures prohibit our incurrence of new senior secured indebtedness under the ABL Facility or any other secured credit facility, at that point in time, to the greater of
$150.0 million
and the amount of debt as restricted by the secured leverage ratio, which is the ratio of secured debt to EBITDA, of
2.0
to 1.0, as determined pursuant to the Indentures. The
2.0
to 1.0 fixed charge coverage ratio and secured leverage ratio are incurrence covenants, not maintenance covenants. The covenants do not require repayment of existing borrowings incurred previously in accordance with the covenants, but rather limits new borrowings during any such period. As a result of the Eighth ABL Facility Amendment, our ability to incur new borrowings under the ABL Facility is limited to a maximum of
$85.0 million
irrespective of the permitted availability of up to
$150.0 million
under the Indentures.
The covenants described above are subject to important exceptions and qualifications. The continued effect of low oil and natural gas prices will negatively impact our compliance with our covenants, and we cannot guarantee that we will satisfy those requirements. If we do not obtain a long term waiver for any breached covenants, such breach would result in a default under the Indentures, ABL Facility or other debt obligations, or any future credit facilities we may enter into, which could allow all amounts outstanding thereunder to be declared immediately due and payable, subject to the terms and conditions of the documents governing such indebtedness. If we were unable to repay the accelerated amounts, our secured lenders could proceed against the collateral granted to them to secure such indebtedness. This would likely in turn trigger cross acceleration and cross-default rights under any other credit facilities and indentures. If the amounts outstanding under the 2018 Notes and 2021 Notes, or any other indebtedness outstanding at such time, were to be accelerated or were the subject of foreclosure actions, we cannot guarantee that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders. We cannot guarantee that we will be granted waivers or amendments to the Indentures governing the 2018 Notes and 2021 Notes, the ABL Facility, or such other debt obligations if for any reason we are unable to comply with our obligations thereunder. Any such limitations on borrowing under our ABL Facility could have a material adverse impact on our liquidity. Failure to comply with any of our debt obligations, or obtain waivers thereof, may cause us to seek relief under the United States Bankruptcy Code.
ABL Facility Refinancing Covenant and Maturity Date
Our ABL Facility contains a covenant requiring us to refinance the ABL Facility in full on or before September 30, 2016 and has a maturity date of December 31, 2016. There can be no assurances that we will be able to refinance the ABL Facility by September 30, 2016, or that any such refinancing would be available to us on attractive or acceptable terms. Any refinancing of the ABL Facility could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. If we fail to comply with our refinancing covenant, we would request a waiver from the Lenders or may be required to repay the outstanding balance of the ABL Facility. Failure to obtain a waiver or cure the default through repayment of the facility would create an event of cross default under our other credit facilities and indentures, including the Term Loan and the Indentures governing the 2018 Notes and 2021 Notes. There can be no assurance that the Lenders under the ABL Facility will grant a waiver of the covenant default or that the lenders under the Term Loan will grant a waiver of, or that the holders of our 2018 Notes and 2021 Notes will consent to, any cross default, and we currently do not have sufficient liquidity, including cash on hand, to repay the outstanding balance of the ABL Facility or our other indebtedness. In the event that we are unable to timely refinance the ABL Facility, or obtain a waiver thereof, or repay the ABL Facility when due, we may need to seek relief under the United States Bankruptcy Code.
EBITDA
As a supplement to the financial statements in this Quarterly Report on Form 10-Q, which are prepared in accordance with GAAP, we also present EBITDA. EBITDA is consolidated net income (loss) from continuing operations before net interest expense, income taxes and depreciation and amortization. We present EBITDA because we believe this information is useful to financial statement users in evaluating our financial performance. We also use EBITDA to evaluate our financial performance, make business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. EBITDA is not a measure of performance calculated in accordance with GAAP, may not necessarily be indicative of cash flow as a measure of liquidity or ability to fund cash needs, and there are material limitations to its usefulness on a stand-alone basis. EBITDA does not include reductions for cash payments for our obligations to service our debt, fund our working capital and pay our income taxes. In addition, certain items excluded from EBITDA such as interest, income taxes, depreciation and amortization are significant components in understanding and assessing our financial performance. All companies do not calculate EBITDA in the same manner and our presentation may not be comparable to those presented by other companies. Financial statement users should use EBITDA in addition to, and not as an alternative to, net income (loss) as defined under and calculated in accordance with GAAP.
The table below provides a reconciliation between loss from continuing operations, as determined in accordance with GAAP, and EBITDA (in thousands):
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|
|
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|
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|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Loss from continuing operations
|
$
|
(40,638
|
)
|
|
$
|
(20,647
|
)
|
|
$
|
(67,909
|
)
|
|
$
|
(32,642
|
)
|
Depreciation and amortization
|
15,206
|
|
|
18,296
|
|
|
31,051
|
|
|
35,778
|
|
Interest expense, net
|
13,973
|
|
|
12,452
|
|
|
26,018
|
|
|
25,040
|
|
Income tax expense (benefit)
|
773
|
|
|
15
|
|
|
828
|
|
|
(9
|
)
|
EBITDA
|
$
|
(10,686
|
)
|
|
$
|
10,116
|
|
|
$
|
(10,012
|
)
|
|
$
|
28,167
|
|
Off Balance Sheet Arrangements
As of
June 30, 2016
, we did not have any off-balance-sheet arrangements other than operating leases that have or are reasonably likely to have a current or future effect on the our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies
There have been no significant changes to our Critical Accounting Policies in the
six months ended
June 30, 2016
from those disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements
See Note 2 in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a description of accounting pronouncements recently issued that could potentially impact our consolidated financial statements.