The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS
U.S. Well Services, Inc. (the “Company”), f/k/a Matlin & Partners Acquisition Corp (“MPAC”), is a Houston, Texas-based technology-focused oilfield service company focused on hydraulic fracturing for oil and natural gas exploration and production (“E&P”) companies in the United States. The process of hydraulic fracturing involves pumping a pressurized stream of fracturing fluid—typically a mixture of water, chemicals and proppant—into a well casing or tubing in order to cause the underground mineral formation to fracture or crack. Fractures release trapped hydrocarbon particles and provide a conductive channel for the oil or natural gas to flow freely to the wellbore for collection. The propping agent or proppant, becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons from the reservoir to the well.
The Company’s fleets consist of mobile hydraulic fracturing units and other auxiliary heavy equipment to perform fracturing services. The Company has two designs for hydraulic fracturing units: (1) Conventional Fleets, which are powered by diesel fuel and utilize traditional internal combustion engines, transmissions, and radiators and (2) Clean Fleet®, which replaces the traditional engines, transmissions, and radiators with electric motors powered by electricity generated by natural gas-fueled turbine generators. Both designs utilize high-pressure hydraulic fracturing pumps mounted on trailers. The Company refers to the group of pump trailers and other equipment necessary to perform a typical fracturing job as a “fleet” and the personnel assigned to each fleet as a “crew”.
MPAC was incorporated in Delaware in March 2016 as a special purpose acquisition company, formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses.
On November 9, 2018, MPAC acquired USWS Holdings LLC, a Delaware limited liability company (“USWS Holdings”), pursuant to the Merger and Contribution Agreement, dated as of July 13, 2018, and subsequently amended (as amended, the “Merger and Contribution Agreement”). The acquisition, together with the other transactions contemplated by the Merger and Contribution Agreement are referred to herein as the “Transaction”. In connection with the closing of the Transaction, MPAC changed its name to U.S. Well Services, Inc.
Following the completion of the Transaction, substantially all of the Company’s assets and operations are held and conducted by U.S. Well Services, LLC (“USWS LLC”), a wholly owned subsidiary of USWS Holdings, and the Company’s only assets are equity interests representing 93% ownership of USWS Holdings as of June 30, 2020.
Unless the context otherwise requires, “the Company”, “we,” “us,” and “our” refer, for periods prior to the completion of the Transaction, to USWS Holdings and its subsidiaries and, for periods upon or after the completion of the Transaction, to U.S. Well Services, Inc. and its subsidiaries, including USWS Holdings and its subsidiaries.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by GAAP for annual financial statements and should be read in conjunction with the annual financial statements included in the Company's 2019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 5, 2020 (the “Annual Report”).
The accompanying unaudited condensed consolidated financial statements and accompanying notes present the consolidated financial position, results of operations, cash flows, and equity (deficit) of the Company as of the dates and for the periods presented. The interim data includes all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations expected for the entire fiscal year ended December 31, 2020.
8
Principles of Consolidation
The condensed consolidated financial statements comprise the financial statements of the Company, its wholly owned subsidiaries, and its subsidiaries that it controls due to ownership of a majority voting interest. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the Company. All significant intercompany balances and transactions are eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We regularly evaluate estimates and judgments based on historical experience and other relevant facts and circumstances. Significant estimates included in these financial statements primarily relate to allowance for doubtful accounts, allowance for inventory obsolescence, estimated useful lives and valuation of property and equipment and intangibles, impairment assessments of goodwill and long-lived assets, Level 2 inputs used in fair value estimation of term loans, and the assumptions used in our Black-Scholes and Monte Carlo option pricing models associated with the valuation of share-based compensation and certain equity instruments. Actual results could differ from those estimates.
Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements, or are reserved for a specific purpose, and not readily available for immediate or general use are recorded in restricted cash in our condensed consolidated balance sheets. The restricted cash in our condensed consolidated balance sheet represents cash transferred into a trust account to support our workers’ compensation obligations and cash held for use in capital expenditures related to approved fleet expansion in amounts of $0.5 million and a nominal amount, respectively, as of June 30, 2020, and $0.5 million and $7.1 million, respectively, as of December 31, 2019.
The following table provides a reconciliation of the amount of cash and cash equivalents reported on the condensed consolidated balance sheets to the total of cash and cash equivalents and restricted cash shown on the condensed consolidated statements of cash flows (in thousands):
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Cash and cash equivalents
|
|
$
|
3,423
|
|
|
$
|
33,794
|
|
Restricted cash
|
|
|
519
|
|
|
|
7,610
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
3,942
|
|
|
$
|
41,404
|
|
Inventory
Inventory consists of proppant, chemicals, and other consumable materials and supplies used in our high-pressure hydraulic fracturing operations. Inventories are stated at the lower of cost or net realizable value. Cost is determined principally on a first-in-first-out cost basis. All inventories are purchased for use by the Company in the delivery of its services with no inventory being sold separately to outside parties. Inventory quantities on hand are reviewed regularly and write-downs for obsolete inventory are recorded based on our forecast of the inventory item demand in the near future. As of June 30, 2020 and December 31, 2019, the Company had reserves of $0.2 million and $0.6 million, respectively, for obsolete and slow-moving inventory.
Property and Equipment
Property and equipment are carried at cost, with depreciation provided on a straight-line basis over their estimated useful lives. Expenditures for renewals and betterments that extend the lives of the assets are capitalized. Amounts spent for maintenance and repairs, which do not improve or extend the life of the related asset, are charged to expense as incurred.
The Company separately identifies and accounts for certain critical components of its hydraulic fracturing units including the engine, transmission, and pump, which requires us to separately estimate the useful lives of these components. For our other service equipment, we do not separately identify and track depreciation of specific original components. When we replace components of these assets, we typically have to estimate the net book values of the components that are retired, which are based primarily upon their replacement costs, their ages and their original estimated useful lives.
9
In the first quarter of 2020, our review of impairment of long-lived assets (refer to “Note 5 – Goodwill and Intangible Assets”) necessitated a review of the useful lives of our property and equipment. Current trends in hydraulic fracturing equipment operating conditions, such as increasing treating pressures and higher pumping rates, along with the increase in daily pumping time are shortening the useful life of certain critical components we use. We determined that the average useful life of fluid ends and fuel injectors is now less than one year, resulting in our determination that costs associated with the replacement of these components will no longer be capitalized, but instead expensed as they are used in operations. This change in accounting estimate was made effective in March 2020 and accounted for prospectively.
Goodwill
Goodwill is not amortized, but is reviewed for impairment annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. Judgements regarding indicators of potential impairment are based on market conditions and operational performance of the business.
As of December 31, or as required, the Company performs an impairment analysis of goodwill. The Company may assess its goodwill for impairment initially using a qualitative approach to determine whether conditions exist that indicate it is more likely than not that a reporting unit’s carrying value is greater than its fair value, and if such conditions are identified, then a quantitative analysis will be performed to determine if there is any impairment. The Company may also elect to perform a single step quantitative analysis in which the carrying amount of the reporting unit is compared to its fair value, which the Company estimates using a guideline public company method, a form of the market approach. The guideline public company method utilized the trading multiples of similarly traded public companies as they related to the Company’s operating metrics. An impairment charge would be recognized for the amount by which the carrying amount of the reporting unit exceeds the reporting unit’s fair value, and only limited to the total amount of goodwill allocated to the reporting unit.
Fair Value of Financial Instruments
Fair value is defined under Accounting Standards Codification (ASC) 820, Fair Value Measurement, as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are defined as follows:
Level 1–inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2–inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3–inputs are unobservable for the asset or liability.
The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of June 30, 2020 and December 31, 2019:
Senior Secured Term Loan. The fair value of the Senior Secured Term Loan is $222.4 million and approximates carrying value as of June 30, 2020 and December 31, 2019, respectively.
Equipment financing. The carrying value of the equipment financing approximates fair value as its terms are consistent with and comparable to current market rates as of June 30, 2020 and December 31, 2019, respectively.
Revenue Recognition
The Company recognizes revenue based on the customer’s ability to benefit from the services rendered in an amount that reflects the consideration expected to be received in exchange for those services.
The Company’s performance obligations are satisfied over time, typically measured in number of stages completed or the number of pumping days a fleet is available to pump for a customer in a month. All revenue is recognized when a contract with a customer exists, collectability of amounts subject to invoice is probable, the performance obligations under the contract have been satisfied over time, and the amount to which the Company has the right to invoice has been determined. A portion of the Company’s contracts contain variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which time the variability is resolved.
10
The Company has elected to use the “as invoiced” practical expedient to recognize revenue based upon the amount it has a right to invoice upon the completion of each performance obligation per the terms of the contract.
Accounts Receivable
Accounts receivable are recorded at their outstanding balances adjusted for an allowance for doubtful accounts. The allowance for doubtful accounts is determined by analyzing the payment history and credit worthiness of each customer. Receivable balances are charged off when they are considered uncollectible by management. Recoveries of receivables previously charged off are recorded as income when received. The Company held a reserve for doubtful accounts of $9.0 million and a nominal amount as of June 30, 2020 and December 31, 2019, respectively. The reserve was recorded due to growing uncertainty as to collectability of billed amounts from customers weakened by the recent collapse in crude oil prices. We are continuing to work with our customers on collecting these receivables.
Major Customer and Concentration of Credit Risk
The concentration of our customers in the oil and natural gas industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables.
The following table shows the percentage of revenues from our significant customers for the three and six months ended June 30, 2020 and 2019:
|
|
Three Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
*
|
|
|
17.2%
|
|
Customer B
|
|
19.0%
|
|
|
*
|
|
Customer C
|
|
24.1%
|
|
|
*
|
|
Customer D
|
|
*
|
|
|
16.1%
|
|
Customer E
|
|
26.5%
|
|
|
*
|
|
Customer F
|
|
30.4%
|
|
|
*
|
|
Customer G
|
|
*
|
|
|
19.9%
|
|
Customer I
|
|
*
|
|
|
12.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
17.2%
|
|
|
13.8%
|
|
Customer B
|
|
15.2%
|
|
|
*
|
|
Customer C
|
|
16.4%
|
|
|
*
|
|
Customer D
|
|
*
|
|
|
18.0%
|
|
Customer E
|
|
12.5%
|
|
|
*
|
|
Customer F
|
|
14.6%
|
|
|
*
|
|
Customer G
|
|
*
|
|
|
15.6%
|
|
Customer I
|
|
*
|
|
|
14.0%
|
|
|
|
|
|
|
|
|
|
|
An asterisk indicates that revenue is less than ten percent.
|
|
|
|
|
|
|
|
|
11
The following table shows the percentage of trade receivables from our significant customers as of June 30, 2020 and December 31, 2019:
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Customer A
|
|
*
|
|
|
12.0%
|
|
Customer B
|
|
22.6%
|
|
|
10.3%
|
|
Customer C
|
|
13.0%
|
|
|
*
|
|
Customer D
|
|
*
|
|
|
12.1%
|
|
Customer E
|
|
19.7%
|
|
|
*
|
|
Customer F
|
|
15.2%
|
|
|
*
|
|
Customer G
|
|
22.6%
|
|
|
34.5%
|
|
Customer H
|
|
*
|
|
|
15.9%
|
|
An asterisk indicates that trade receivable is less than ten percent.
Income Taxes
The Company, under ASC 740, uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and (ii) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized.
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at June 30, 2020. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
NOTE 3 – ACCOUNTING STANDARDS
Except as discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2020, as compared to the recent accounting pronouncements described in the Annual Report, that are of significance, or potential significance to the Company.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the second step of the previous two-step quantitative test of goodwill impairment. Under the new guidance, the quantitative test consists of a single step in which the carrying amount of the reporting unit is compared to its fair value. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the amount of the impairment would be limited to the total amount of goodwill allocated to the reporting unit. The guidance does not affect the existing option to perform the qualitative assessment for a reporting unit to determine whether the quantitative impairment test is necessary. The new guidance will be effective for emerging growth companies for fiscal years beginning after December 15, 2021; however, early adoption is permitted. The Company early adopted this guidance during the first quarter of 2020. The Company’s impairment analysis did not result in any impairment of goodwill.
In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) - Effective Dates for Certain Entities, which provided deferral of the effective dates for implementing previously issued Topic 606 and Topic 842 for one year to give some relief for businesses and the difficulties they are facing during the COVID-19 coronavirus pandemic. The Company adopted Topic 606 on January 1, 2019. We expect to adopt Topic 842 using the effective date of January 1, 2022 as the date of our initial application of the standard.
12
NOTE 4 – PREPAIDS AND OTHER CURRENT ASSETS
Prepaids and other current assets as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Prepaid insurance
|
|
$
|
6,424
|
|
|
$
|
11,127
|
|
Income tax receivable
|
|
|
1,567
|
|
|
|
810
|
|
Other current assets
|
|
|
1,599
|
|
|
|
1,395
|
|
Total prepaid expenses and other current assets
|
|
$
|
9,590
|
|
|
$
|
13,332
|
|
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of identifiable assets acquired and liabilities assumed. The Company performs an impairment analysis related to goodwill as of December 31 of each year, or when the Company identifies certain triggering events or circumstances that would more likely than not reduce the estimated fair value of the goodwill below its carrying amount.
In the first quarter of 2020, the Company performed an impairment analysis of goodwill and long-lived assets. This impairment analysis was triggered by the sudden and drastic decline in oil prices in March 2020 and the corresponding decrease in the Company’s stock price, operating results and revised forecasts.
The Company performed a quantitative goodwill impairment test, utilizing the single-step approach to compare the carrying value of the reporting unit to its estimated fair value. The estimated fair value of the reporting unit was determined using a guideline public company method, a form of the market approach. The guideline public company method utilized the trading multiples of similarly traded public companies as they related to our operating metrics. Based on the impairment test, the Company determined that goodwill was not impaired as the reporting unit’s carrying value, after accounting for the impairment charges of long-lived assets, did not exceed the reporting unit’s fair value.
Intangible Assets
A summary of intangible assets as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
Estimated
Useful
Life (in years)
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
10
|
|
|
1,415
|
|
|
|
52
|
|
|
|
1,363
|
|
Patents
|
|
20
|
|
|
12,776
|
|
|
|
202
|
|
|
|
12,574
|
|
|
|
|
|
$
|
14,191
|
|
|
$
|
254
|
|
|
$
|
13,937
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
10
|
|
|
3,132
|
|
|
|
913
|
|
|
|
2,219
|
|
Patents
|
|
20
|
|
|
22,955
|
|
|
|
3,348
|
|
|
|
19,607
|
|
|
|
|
|
$
|
26,087
|
|
|
$
|
4,261
|
|
|
$
|
21,826
|
|
The intangible assets are amortized over the period the Company expects to receive the related economic benefit. Amortization expense related to amortizable intangible assets for the three months ended June 30, 2020 and 2019 was $0.2 million and $1.9 million, respectively, and was included as part of depreciation and amortization in the condensed consolidated statements of operations. Amortization expense related to amortizable intangible assets for the six months ended June 30, 2020 and 2019 was $0.6 million and $3.8 million, respectively.
13
As discussed above, the Company identified a triggering event in the first quarter of 2020 and performed a quantitative impairment test on long-lived assets. The expected present value method, a form of the income approach, was utilized to determine the fair value of long-lived assets. This method is based on expected cash flows using a risk-adjusted discount rate, which reflects the weighted average cost of capital of similarly traded public companies. As a result of the impairment test performed, the Company recorded in the first quarter of 2020 an impairment charge of $7.2 million to reduce the carrying value of intangible assets from $21.4 million to $14.2 million, representing its fair value on the date of impairment.
The estimated amortization expense for future periods is as follows (in thousands):
Fiscal Year
|
|
Estimated
Amortization
Expense
|
|
Remainder of 2020
|
|
$
|
506
|
|
2021
|
|
|
1,014
|
|
2022
|
|
|
1,014
|
|
2023
|
|
|
1,014
|
|
2024
|
|
|
1,014
|
|
Thereafter
|
|
|
9,375
|
|
Total
|
|
$
|
13,937
|
|
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
Estimated
Useful
Life (in years)
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Fracturing equipment
|
|
1.5 to 25 years
|
|
$
|
258,759
|
|
|
$
|
651,162
|
|
Light duty vehicles
|
|
5 years
|
|
|
2,184
|
|
|
|
8,188
|
|
Furniture and fixtures
|
|
5 years
|
|
|
67
|
|
|
|
277
|
|
IT equipment
|
|
3 years
|
|
|
1,676
|
|
|
|
6,724
|
|
Auxiliary equipment
|
|
2 to 20 years
|
|
|
12,720
|
|
|
|
38,502
|
|
Leasehold improvements
|
|
Term of lease
|
|
|
287
|
|
|
|
725
|
|
|
|
|
|
|
275,693
|
|
|
|
705,578
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
(16,964
|
)
|
|
|
(263,968
|
)
|
Property and equipment, net
|
|
|
|
$
|
258,729
|
|
|
$
|
441,610
|
|
Depreciation and amortization expense for the three months ended June 30, 2020 and 2019 was $17.4 million and $40.3 million, respectively. Depreciation and amortization expense for the six months ended June 30, 2020 and 2019 was $49.4 million and $78.2 million, respectively.
As a result of the impairment test on long-lived assets described in “Note 5 – Goodwill and Intangible Assets,” the Company recorded in the first quarter of 2020 an impairment charge of $140.3 million to reduce the carrying value of property and equipment from $414.1 million to $273.8 million, representing its fair value on the date of impairment.
14
NOTE 7 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Accrued payroll and benefits
|
|
$
|
5,385
|
|
|
$
|
9,356
|
|
Accrued taxes
|
|
|
5,383
|
|
|
|
9,817
|
|
Accrued interest
|
|
|
238
|
|
|
|
18,190
|
|
Other current liabilities
|
|
|
2,069
|
|
|
|
3,118
|
|
Accrued expenses and other current liabilities
|
|
$
|
13,075
|
|
|
$
|
40,481
|
|
NOTE 8 – NOTES PAYABLE
Notes payable represents premium finance agreements with a credit finance institution to pay the premiums on insurance policies for the Company’s directors and officers’ liability, general liability, workers’ compensation, umbrella, auto and pollution coverage needs. These premium finance agreements had total balances of $4.0 million and $8.1 million as of June 30, 2020 and December 31, 2019, respectively.
NOTE 9 – DEBT
Long-term debt as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Senior Secured Term Loan
|
|
$
|
247,500
|
|
|
$
|
250,000
|
|
ABL Credit Facility
|
|
|
18,109
|
|
|
|
40,090
|
|
Equipment financing
|
|
|
14,553
|
|
|
|
16,065
|
|
Capital leases
|
|
|
7,658
|
|
|
|
10,474
|
|
Total debt principal balance
|
|
|
287,820
|
|
|
|
316,629
|
|
Unamortized discount on debt and debt issuance costs
|
|
|
(26,544
|
)
|
|
|
(9,449
|
)
|
Current maturities
|
|
|
(11,082
|
)
|
|
|
(22,288
|
)
|
Net Long-term debt
|
|
$
|
250,194
|
|
|
$
|
284,892
|
|
15
Senior Secured Term Loan
During the first quarter of 2020, the Company made principal and interest payments amounting to $2.5 million and $24.3 million, respectively. The interest payments consisted of $17.9 million of accrued interest as of December 31, 2019, and $6.4 million of interest incurred in the first quarter of 2020.
On April 1, 2020, the Company, USWS LLC, as the borrower, and all of the other subsidiaries of the Company entered into a Second Amendment (the “Term Loan Amendment”) to the senior secured term loan with CLMG Corp., as administrative and collateral agent, and the lenders party thereto.
Pursuant to the Term Loan Amendment, the interest rate on amounts outstanding under the senior secured term loan was reduced to 0.0% and scheduled principal amortization payments were suspended for the period beginning April 1, 2020 and ending March 31, 2022. Beginning April 1, 2022, the senior secured term loan, as amended by the Term Loan Amendment, will resume incurring interest at the applicable LIBOR rate, subject to a 2.0% floor, plus 8.25%, and scheduled principal amortization payments equal to 0.5% of the initial principal balance of the term loans will resume on a quarterly basis commencing June 30, 2022. Additionally, pursuant to the Term Loan Amendment, certain other covenants were amended including, but not limited to, covenants relating to collateral inspections and excess cash flow, and the maturity date of the senior secured term loan was extended to December 5, 2025.
The Company accounted for the Term Loan Amendment as a troubled debt restructuring under ASC 470-60, Troubled Debt Restructurings by Debtors, due to the level of concession provided by the lenders under the senior secured term loan. Under this guidance, the future undiscounted cash flows of the senior secured term loan, as amended, exceeded the carrying value, and accordingly, no gain was recognized and no adjustment was made to the carrying value of the debt. Interest expense on the amended senior secured term loan was computed using a new effective rate that equated the present value of the future cash payments specified by the new terms with the carrying value of the debt under the original terms.
In exchange for entering into the Term Loan Amendment, the lenders under the senior secured term loan received an extension fee comprised of a $20.0 million cash payment, 1,050 shares of Series B preferred stock valued at $1.1 million based on the stated liquidation preference of $1,000 per share, and 5,529,622 shares of Class A common stock valued at $1.4 million based on the closing price of the Class A common stock at the date of issuance. The Series B preferred stock issued to the lenders under the senior secured term loan had the same terms as the Series B preferred stock issued to certain institutional investors as described in Note 10 – Mezzanine Equity.
The total fair value of cash and non-cash consideration transferred to the lenders under the senior secured term loan were accounted for as discount on debt issuance and amortized using the effective interest method.
ABL Credit Facility
On April 1, 2020, the Company, USWS LLC, and all of the other subsidiaries of the Company entered into the First Amendment (the “ABL Amendment”) to the ABL Credit Facility with the lenders party thereto and Bank of America, N.A., as the administrative agent, swing line lender and letter of credit issuer.
Pursuant to the ABL Amendment, the aggregate revolving commitment under the ABL Credit Facility was reduced from $75.0 million to $60.0 million, the maturity date was extended from May 7, 2024 to April 1, 2025, and the interest rate margin applicable to borrowings under the ABL Credit Facility was increased by 0.50% per annum and a LIBOR floor of 1% was added. In addition, the borrowing base under the ABL Credit Facility was amended to include a FILO Amount (as defined in the ABL Amendment) which increases borrowing base availability by up to the lesser of (i) $4.0 million and (ii) 5.0% of the value of eligible accounts receivable, subject to scheduled monthly reductions. Loans under the ABL Credit Facility which are advanced in respect of the FILO Amount accrue interest at a rate that is 1.50% higher than the rate applicable to other loans under the ABL Credit Facility, and may be repaid only after all other loans under the ABL Credit Facility have been repaid.
Under ASC 470-50, Modifications and Extinguishments, the Company accounted for the ABL Amendment as a modification since the borrowing capacity of the amended ABL Credit Facility was greater than the borrowing capacity of the old ABL Credit Facility and there was no change in the lenders. Accordingly, any unamortized deferred financing costs associated with the old ABL Credit Facility and fees in connection with the amended ABL Credit Facility were deferred and amortized over its remaining term.
The ABL Credit Facility is subject to a borrowing base which is calculated based on a formula referencing the Company’s eligible accounts receivables. As of June 30, 2020, the borrowing base was $27.6 million and the outstanding revolver loan balance was $18.1 million, classified as long-term debt in the condensed consolidated balance sheets.
16
Equipment Financing
In March 2020, the Company entered into an agreement with a lender to consolidate various individual equipment financing agreements, which represented substantially all of our equipment financing notes, with the same lender into four notes. The amendments under the consolidated equipment financing agreements pertain to maturity date, interest rate, and date of first installment payment. The Company evaluated the debt modification in accordance with ASC 470-50 and concluded that the debt modification did not result in a substantially different debt, and accordingly, no gain or loss was recorded.
The total outstanding balance of the consolidated equipment financing agreements as of June 30, 2020 was $14.5 million, payable in equal monthly installments through May 1, 2024, at an interest rate of 5.7%.
The weighted average interest rate of amounts outstanding under the equipment financing agreements was 5.7% and 6.4% per annum as of June 30, 2020 and December 31, 2019, respectively.
Payments of Debt Obligations due by Period
Presented in the following table is a schedule of the repayment requirements of long-term debt as of June 30, 2020 (in thousands):
|
|
Principal Amount
|
|
|
|
of Long-term Debt
|
|
Remainder of 2020
|
|
$
|
9,345
|
|
2021
|
|
|
3,519
|
|
2022
|
|
|
7,462
|
|
2023
|
|
|
8,930
|
|
2024
|
|
|
6,705
|
|
Thereafter
|
|
|
251,859
|
|
Total
|
|
$
|
287,820
|
|
NOTE 10 – MEZZANINE EQUITY
Series A Redeemable Convertible Preferred Stock
The following table summarizes the Company’s Series A Redeemable Convertible Preferred Stock, par value $0.0001 per share (“Series A preferred stock”) activities for the six months ended June 30, 2020 (in thousands, except share amounts):
|
|
Shares
|
|
|
Amount
|
|
Series A preferred stock as of December 31, 2019
|
|
|
55,000
|
|
|
$
|
38,928
|
|
Deemed and imputed dividends on Series A preferred stock
|
|
|
-
|
|
|
|
10,753
|
|
Accrued Series A preferred stock dividends
|
|
|
-
|
|
|
|
3,596
|
|
Series A preferred stock as of June 30, 2020
|
|
|
55,000
|
|
|
$
|
53,277
|
|
In accordance with the Series A preferred stock purchase agreement, subject to there being Series A preferred stock outstanding, the Company will issue an additional 4,399,992 warrants to the purchasers of Series A preferred stock in quarterly installments of 488,888 warrants beginning nine months after May 24, 2019. During the six months ended June 30, 2020, the Company issued 977,776 additional warrants to the purchasers of Series A preferred stock.
As of June 30, 2020, 55,000 shares of Series A preferred stock were outstanding and convertible into 9,392,230 shares of Class A common stock, and dividends accrued and outstanding with respect to the Series A preferred stock were $7.6 million and reflected in the carrying value of Series A preferred stock.
Series B Redeemable Convertible Preferred Stock
The following table summarizes the Company’s Series B Redeemable Convertible Preferred Stock, par value $0.0001 per share (“Series B preferred stock”) activities for the six months ended June 30, 2020 (in thousands, except share amounts):
17
|
|
Shares
|
|
|
Amount
|
|
Series B preferred stock as of December 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
Proceeds from issuance of Series B preferred stock
|
|
|
21,000
|
|
|
|
21,000
|
|
Issuance of Series B preferred stock to senior secured term loan lenders
|
|
|
1,050
|
|
|
|
1,050
|
|
Issuance cost associated with Series B preferred stock
|
|
|
-
|
|
|
|
(1,404
|
)
|
Accrued Series B preferred stock dividends
|
|
|
-
|
|
|
|
666
|
|
Series B preferred stock as of June 30, 2020
|
|
|
22,050
|
|
|
$
|
21,312
|
|
On March 31, 2020, the Company entered into a purchase agreement (the “Purchase Agreement”) with certain institutional investors (collectively, the “Purchasers”), pursuant to which the Company agreed to issue and sell in a private placement 21,000 shares of Series B preferred stock, for an aggregate purchase price of $21.0 million. On April 1, 2020 (the “Series B Closing Date”), the Purchasers purchased the Series B preferred stock. Two of the purchasers of the Series B preferred stock were affiliates of Crestview, which held, prior to the issuance, an aggregate 36.67% ownership interest in the Company and is entitled to designate for nomination by the Company for election two directors to serve on the Company’s board of directors.
The Series B preferred stock ranks senior to the Class A common stock and Class B common stock and in parity with the Series A preferred stock, with respect to distributions. The Series B preferred stock has only specified voting rights, including with respect to the issuance or creation of senior securities, amendments to the Charter that negatively impact the rights of the Series B preferred stock and the payment of dividends on, or repurchase or redemption of, Class A common stock.
The Company has the option, but no obligation, to redeem the Series B preferred stock for cash. If the Company notifies the holders that it has elected to redeem the Series B preferred stock, a holder may instead elect to convert its shares of Series B preferred stock at the specified conversion price, which is initially $0.308 per share. The Series B preferred stock converted in response to a redemption notice will net settle for a combination of cash and Class A common stock.
Each holder of Series B preferred stock may convert all or any portion of its Series B preferred stock into Class A common stock based on the then-applicable liquidation preference, subject to anti-dilution adjustments, at any time, but not more than once per quarter, so long as any conversion is for at least $1.0 million based on the liquidation preference on the date of the conversion notice.
Following the eighteen-month anniversary of the Series B Closing Date, the Company may cause the conversion of all or any portion of the Series B preferred stock into Class A common stock if (i) the closing price of the Class A common stock is greater than 130% of the conversion price for 20 days over any 30-day trading period; (ii) the average daily trading volume of the Class A common stock exceeded 250,000 for 20 days over any 30-day trading period; and (iii) the Company has an effective registration statement on file with the Securities and Exchange Commission covering resales of the underlying Class A common stock to be received upon such conversion.
The Series B preferred stock was recorded as Mezzanine Equity, net of issuance cost, on the condensed consolidated balance sheets because it has redemption features upon certain triggering events that are outside the Company’s control, such as change in control.
As of June 30, 2020, 22,050 shares of Series B preferred stock were outstanding and convertible into 73,754,101 shares of Class A common stock, and dividends accrued and outstanding with respect to the Series B preferred stock was $0.7 million and reflected in the carrying value of Series B preferred stock.
NOTE 11 – STOCKHOLDERS’ EQUITY
Shares Authorized and Outstanding
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001 per share with such designation, rights and preferences as may be determined from time to time by the Company’s Board of Directors. See “Note 10 – Mezzanine Equity” for the discussion of preferred stock issued and outstanding.
Class A Common Stock
The Company is authorized to issue 400,000,000 shares of Class A common stock with a par value of $0.0001 per share. At June 30, 2020 and December 31, 2019, there were 68,361,213 and 62,857,624 shares of Class A common stock issued and outstanding, respectively. At June 30, 2020, 1,000,000 outstanding shares of Class A common stock were subject to cancellation on November 9, 2024, unless the closing price per share of the Class A common stock has equaled or exceeded $12.00 for any 20 trading days within
18
any 30-trading day period, and 609,677 outstanding shares of Class A common stock were subject to the same cancellation provision, but at a closing price per share of $13.50.
On June 26, 2020, the Company entered into an Equity Distribution Agreement (the “ATM Agreement”) with Piper Sandler & Co. relating to the Company’s shares of Class A common stock. In accordance with the terms of the ATM Agreement, the Company may offer and sell over a period of time and from time to time, up to $10.3 million of our Class A common stock. The ATM Agreement relates to an “at-the-market” offering program. Under the ATM Agreement, the Company will pay Piper Sandler an aggregate commission of up to 3% of the gross sales price per share of Class A common stock sold under the ATM Agreement. The Company did not sell any shares of Class A common stock under this ATM Agreement during the three months ended June 30, 2020.
Class B Common Stock
The Company is authorized to issue 20,000,000 shares of Class B common stock with a par value of $0.0001 per share. The shares of Class B common stock are non-economic; however, holders are entitled to one vote per share. Each share of Class B common stock, together with one unit of USWS Holdings, is exchangeable for one share of Class A common stock or, at the Company’s election, the cash equivalent to the market value of one share of Class A common stock.
As of June 30, 2020 and December 31, 2019, there were 5,014,897 and 5,500,692 shares of Class B common stock issued and outstanding, respectively.
On April 14, 2020, 485,795 shares of Class B common stock were converted to an equivalent number of shares of Class A common stock.
Warrants
As of June 30, 2020, 9,994,635 public warrants and 15,500,000 private placement warrants were outstanding, and exercisable for an aggregate of 12,747,318 shares of Class A common stock. In addition, as of June 30, 2020, 3,911,109 warrants were outstanding pursuant to the Series A preferred stock purchase agreement, and exercisable for 3,911,109 shares of Class A common stock.
Noncontrolling Interest
The Company’s noncontrolling ownership interest in consolidated subsidiaries is presented in the condensed consolidated balance sheet within shareholders’ equity as a separate component and represents approximately 7% ownership of USWS Holdings as of June 30, 2020.
Long-Term Incentive Plan
An aggregate of 8,160,500 shares of Class A common stock were initially available for issuance under the 2018 Long Term Incentive Plan (“LTIP”). Shares issued under the LTIP are further discussed in “Note 13 - Share-Based Compensation”. The aggregate number of shares available for issuance as of June 30, 2020 was 4,870,297.
NOTE 12 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional common shares that could have been outstanding assuming the exercise of stock options, exercise of warrants, conversion of Series A preferred stock, conversion of Class B common stock and vesting of restricted shares of Class A common stock.
Basic and diluted net income (loss) per share excludes the income (loss) attributable to and shares associated with the 1,609,677 shares of Class A common stock that are subject to cancellation on November 9, 2024 if certain market conditions have not been met. The Company has included in the calculation accrued dividends on Series A and Series B preferred stock and deemed dividends resulting from the amortization of discounts related to the Series A preferred stock.
19
The following table sets forth the calculation of basic and diluted earnings per share for the periods indicated based on the weighted average number of shares of Class A common stock outstanding for the period (in thousands, except share and per share amounts):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Basic Net Income ( Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to U.S. Well
Services, Inc.
|
|
$
|
(18,137
|
)
|
|
$
|
(21,479
|
)
|
|
$
|
(190,504
|
)
|
|
$
|
(43,751
|
)
|
Net loss attributable to cancellable
Class A common stock
|
|
|
438
|
|
|
|
672
|
|
|
|
4,835
|
|
|
|
1,402
|
|
Basic net loss attributable to U.S. Well
Services, Inc. shareholders
|
|
|
(17,699
|
)
|
|
|
(20,807
|
)
|
|
|
(185,669
|
)
|
|
|
(42,349
|
)
|
Dividends accrued on Series A preferred stock
|
|
|
(1,845
|
)
|
|
|
(660
|
)
|
|
|
(3,596
|
)
|
|
|
(660
|
)
|
Dividends accrued on Series B preferred stock
|
|
|
(666
|
)
|
|
|
-
|
|
|
|
(666
|
)
|
|
|
-
|
|
Deemed and imputed dividends on Series A
preferred stock
|
|
|
(4,504
|
)
|
|
|
(1,560
|
)
|
|
|
(10,753
|
)
|
|
|
(1,560
|
)
|
Basic net loss attributable to U.S. Well
Services, Inc. Class A common shareholders
|
|
$
|
(24,714
|
)
|
|
$
|
(23,027
|
)
|
|
$
|
(200,684
|
)
|
|
$
|
(44,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
66,620,619
|
|
|
|
51,455,923
|
|
|
|
63,424,948
|
|
|
|
50,240,247
|
|
Cancellable Class A common stock
|
|
|
(1,609,677
|
)
|
|
|
(1,609,677
|
)
|
|
|
(1,609,677
|
)
|
|
|
(1,609,677
|
)
|
Basic and diluted weighted average shares
outstanding
|
|
|
65,010,942
|
|
|
|
49,846,246
|
|
|
|
61,815,271
|
|
|
|
48,630,570
|
|
Basic and diluted net income (loss) per share
attributable to Class A common shareholders
|
|
$
|
(0.38
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(3.25
|
)
|
|
$
|
(0.92
|
)
|
A summary of securities excluded from the computation of diluted earnings per share is presented below for the applicable periods:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Dilutive earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options
|
|
|
877,266
|
|
|
|
1,068,162
|
|
|
|
877,266
|
|
|
|
1,068,162
|
|
Anti-dilutive warrants
|
|
|
16,658,427
|
|
|
|
15,680,651
|
|
|
|
16,658,427
|
|
|
|
15,680,651
|
|
Anti-dilutive restricted stock
|
|
|
1,675,825
|
|
|
|
2,748,183
|
|
|
|
1,675,825
|
|
|
|
2,748,183
|
|
Anti-dilutive Class B common stock convertible into Class A common stock
|
|
|
5,014,897
|
|
|
|
13,775,400
|
|
|
|
5,014,897
|
|
|
|
13,775,400
|
|
Anti-dilutive Series A preferred stock convertible into Class A common stock
|
|
|
9,392,230
|
|
|
|
8,344,828
|
|
|
|
9,392,230
|
|
|
|
8,344,828
|
|
Anti-dilutive Series B preferred stock convertible into Class A common stock
|
|
|
73,754,101
|
|
|
|
-
|
|
|
|
73,754,101
|
|
|
|
-
|
|
Potentially dilutive securities excluded as anti-dilutive
|
|
|
107,372,746
|
|
|
|
41,617,224
|
|
|
|
107,372,746
|
|
|
|
41,617,224
|
|
20
NOTE 13 – SHARE-BASED COMPENSATION
Share-based compensation expense consisted of the following (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Restricted stock
|
|
$
|
1,188
|
|
|
$
|
1,940
|
|
|
$
|
3,012
|
|
|
$
|
2,851
|
|
|
Unrestricted stock
|
|
|
-
|
|
|
|
104
|
|
|
|
-
|
|
|
|
208
|
|
|
Stock options
|
|
|
215
|
|
|
|
263
|
|
|
|
469
|
|
|
|
307
|
|
|
Total
|
|
$
|
1,403
|
|
(1)
|
$
|
2,307
|
|
(2)
|
$
|
3,481
|
|
(3)
|
$
|
3,366
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) $284 was presented as part of cost of services and $1,119 was presented as part of selling, general and administrative expenses in the condensed consolidated statement of operations.
|
(2) $774 was presented as part of cost of services and $1,533 was presented as part of selling, general and administrative expenses in the condensed consolidated statement of operations.
|
(3) $1,202 was presented as part of cost of services and $2,279 was presented as part of selling, general and administrative expenses in the condensed consolidated statement of operations.
|
(4) $1,078 was presented as part of cost of services and $2,288 was presented as part of selling, general and administrative expenses in the condensed consolidated statement of operations.
|
Restricted Stock
The following table summarizes the restricted stock activity for the six months ended June 30, 2020:
|
|
|
|
|
|
Weighted-
average
|
|
|
|
Unvested shares
|
|
|
grant-date
fair value per
share
|
|
Non-vested restricted stock as of December 31, 2019
|
|
|
2,723,637
|
|
|
$
|
8.87
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(690,237
|
)
|
|
|
8.87
|
|
Forfeited
|
|
|
(357,575
|
)
|
|
|
8.91
|
|
Non-vested restricted stock as of June 30, 2020
|
|
|
1,675,825
|
|
|
$
|
8.86
|
|
Stock Options
The following table summarizes the stock option activity for the six months ended June 30, 2020:
|
|
Number of
shares
|
|
|
Weighted
average
exercise price
(per share
data)
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Outstanding as of December 31, 2019
|
|
|
1,068,162
|
|
|
$
|
8.91
|
|
|
|
6.21
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(190,896
|
)
|
|
|
8.91
|
|
|
|
-
|
|
Outstanding as of June 30, 2020
|
|
|
877,266
|
|
|
$
|
8.91
|
|
|
|
5.71
|
|
Exercisable as of June 30, 2020
|
|
|
219,317
|
|
|
$
|
8.91
|
|
|
|
5.71
|
|
As of June 30, 2020, total unrecognized compensation cost related to stock-based compensation grants under the LTIP was $13.4 million. We expect to recognize these costs over a weighted average period of 2.6 years.
21
NOTE 14 – EMPLOYEE BENEFIT PLAN
In 2013, the Company established the U.S. Well Services 401(k) Plan. The Company matched 100% of employee contributions up to 6% of the employee’s salary, subject to cliff vesting after two years of service. At the end of the first quarter of 2020, the Company suspended its match of employee contributions. For the three months ended June 30, 2020 and 2019, matching contributions were $0.0 million and $1.6 million, respectively. For the six months ended June 30, 2020 and 2019, matching contributions were $1.0 million and $2.7 million, respectively. The matching contributions were included in cost of services and selling, general and administrative expenses in the condensed consolidated statement of operations.
NOTE 15 – INCOME TAXES
On March 27, 2020, the President signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) into law. The CARES Act contains several corporate income tax provisions, including, among other things, providing a 5-year carryback of net operating loss (“NOL”) tax carryforwards generated in tax years 2018, 2019, and 2020, removing the 80% taxable income limitation on utilization of those NOLs if carried back to prior tax years or utilized in tax years beginning before 2021, temporarily liberalizing the interest deductions rules under Section 163(j) of the Tax Cuts and Jobs Act of 2017, and making corporate alternative minimum tax credits immediately refundable. During the second quarter of 2020, the Company filed an application to carry back its 2018 NOLs, claiming a refund of approximately $0.8 million. The Company continues to evaluate other potential effects of the CARES Act.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions and is subject to examination by the taxing authorities.
The Company’s effective tax rate on continuing operations for the six months ended June 30, 2020 was (0.36)%. The difference between the effective tax rate and the U.S. federal statutory rate is due to state taxes, flow-through income not subject to tax, and a valuation allowance.
We follow guidance issued by the FASB in accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the condensed consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement.
We have considered our exposure under the standard at both the federal and state tax levels. We did not record any liabilities for uncertain tax positions as of June 30, 2020 or December 31, 2019. We record income tax-related interest and penalties, if any, as a component of income tax expense. We did not incur any material interest or penalties on income taxes.
After consideration of all of the information available, management determined that a valuation allowance was appropriate, as it is more likely than not that the Company will not utilize its net deferred tax assets.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Litigation
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Sand Purchase Agreements
The Company entered into agreements for the supply of proppant for use in its hydraulic fracturing operations. Under the terms of these agreements, the Company is subject to minimum purchase quantities on a monthly, quarterly, or annual basis at fixed prices or may pay penalties in the event of any shortfall. As of June 30, 2020, we estimated and accrued for a shortfall in quantities. This accrual is presented as part of accrued liabilities on the condensed consolidated balance sheets.
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The following is a schedule of the contracted volumes in dollars and minimum commitments under the proppant supply purchase agreements as of June 30, 2020 (in thousands):
|
|
|
|
|
|
Minimum
|
|
|
|
Contracted
|
|
|
Commitments
|
|
Remainder of 2020
|
|
$
|
15,516
|
|
|
$
|
8,054
|
|
2021
|
|
|
11,340
|
|
|
|
960
|
|
Total
|
|
$
|
26,856
|
|
|
$
|
9,014
|
|
The minimum commitments represent the aggregate amounts that we would be obligated to pay in the event we procured no additional proppant under the contracts subsequent to June 30, 2020.
During the first quarter of 2019, we became involved in a contract dispute with a proppant vendor resulting in the cancellation of the contract. Accordingly, as of June 30, 2020, we have excluded $47.1 million and $48.0 million of contracted and minimum commitments, respectively, related to this contract. The litigation involving the contract in dispute is in the discovery stage, and as such no prediction can be made as to the outcome of the case at this time and we are unable to reasonably estimate the potential losses or range of losses resulting from this litigation, if any.
Operating Lease Agreements
The Company has various operating leases for facilities with terms ranging from 24 to 76 months.
Rent expense for the three months ended June 30, 2020 and 2019 was $0.5 million and $0.7 million, respectively, of which $0.3 million and $0.6 million, respectively, are recorded as part of cost of services and $0.2 million, and $0.1 million, respectively, are recorded as part of selling, general and administrative expenses in the condensed consolidated statements of operations.
Rent expense for the six months ended June 30, 2020 and 2019 was $1.2 million and $1.3 million, respectively, of which $0.8 million and $1.1 million, respectively, are recorded as part of cost of services and $0.4 million and $0.2 million, respectively, are recorded as part of selling, general administrative expenses in the condensed consolidated statements of operations.
The following is a schedule of minimum future payments on non-cancellable operating leases as of June 30, 2020 (in thousands):
Remainder of 2020
|
|
$
|
850
|
|
2021
|
|
|
1,311
|
|
2022
|
|
|
1,066
|
|
2023
|
|
|
348
|
|
2024
|
|
|
258
|
|
Thereafter
|
|
|
67
|
|
Total minimum future rentals
|
|
$
|
3,900
|
|
On April 1, 2020, the Company entered into an agreement to extend the lease on one of its facilities. The extended term of the lease is for a period of 36 months commencing on April 1, 2020, with rent throughout the term totaling $0.7 million.
Capital Lease Agreements
The total amount of future minimum lease payments related to the capital leases as of June 30, 2020 was $7.9 million, all of which is due in the remainder of 2020. This amount includes imputed interest totaling $0.3 million.
Self-insurance
The Company established a self-insured plan for employees’ healthcare benefits except for losses in excess of varying threshold amounts. The Company charges to expense all actual claims made during each reporting period, as well as an estimate of claims incurred, but not yet reported. The amount of estimated claims incurred, but not reported was $0.4 million and $0.6 million as of June 30, 2020 and December 31, 2019, respectively, and was reported as accrued expenses in the condensed consolidated balance sheets. The Company believes that the liabilities recorded are appropriate based on the known facts and circumstances and does not expect further losses materially in excess of the amounts already accrued for existing claims.
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NOTE 17 – RELATED PARTY TRANSACTIONS
During the three and six months ended June 30, 2020, the Company purchased $0.4 million and $2.3 million, respectively, in chemicals used for its hydraulic fracturing operations from Rockwater Energy Solutions (“Rockwater”), a subsidiary of Select Energy Services (“Select Energy”). Rockwater is considered a related party since Select Energy and the Company share one board member and a common investor, Crestview Partners (“Crestview”). As of June 30, 2020 and December 31, 2019, the Company had $1.4 million and $3.2 million, respectively, in accounts payable owed to Rockwater.
On May 24, 2019, Crestview purchased 20,000 shares of Series A preferred stock for a total payment of $20.0 million. Along with the Series A preferred stock, Crestview received 1,066,666 initial warrants and the right to receive up to 1,600,002 additional warrants.
On April 1, 2020, Crestview purchased 11,500 shares of Series B preferred stock for a total payment of $11.5 million. The TCW Group, Inc. purchased 6,500 shares of Series B preferred stock for a total payment of $6.5 million and David Matlin, a member of the Company’s Board of Directors, purchased 1,878 shares of Series B preferred stock for a total payment of $1.9 million.
NOTE 18 – SUBSEQUENT EVENTS
Paycheck Protection Program Loan
In July 2020, the Company received an unsecured $10.0 million loan (the “PPP Loan”) that bears interest at a rate of 1.0% per annum and matures in five years under the Paycheck Protection Program from a commercial bank. The Paycheck Protection Program was established under the CARES Act, as amended, and is administered by the U.S. Small Business Administration. Under the terms of the CARES Act, loan recipients can apply for and be granted forgiveness for all or a portion of the loan. Forgiveness is determined, subject to certain limitations, based on the use of the loan proceeds for payroll costs, interest on mortgages or other debt obligations that were in place prior to February 15, 2020, rents and utilities. At least 60% of the proceeds must be used for payroll costs. No assurance can be given that the Company will obtain forgiveness of the PPP Loan either in whole or in part. Monthly principal and interest payments will commence after an initial deferral period as specified under the Paycheck Protection Program on any unforgiven loan proceeds. The lender under the Company’s ABL Credit Facility consented to the incurrence of the PPP Loan.
Third Amendment to the Senior Secured Term Loan Credit Agreement
On July 30, 2020, the Company entered into a Third Amendment to the Senior Secured Term Loan Credit Agreement to make certain modifications and amendments to the credit agreement in order to, among other things, formally document the consent obtained from the lender prior to entering into the PPP Loan. In addition, modifications to the Senior Secured Term Loan Credit Agreement were made which limit the Company’s ability to deploy and use collateral outside of the continental United States and other than in connection with oil and gas fracking and exploration without the prior consent of the Administrative Agent.
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