Item 8. Financial Statements and Supplementary Data.
U.S. WELL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
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 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”.
Substantially all 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, LLC (“USWS Holdings”), and the Company’s only assets are equity interests representing 97% ownership of USWS Holdings as of December 31, 2020.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements and related notes have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Our operations are organized into a single business segment, which consists of hydraulic fracturing services, and we have one reportable geographical business segment, the United States.
Principles of Consolidation
The consolidated financial statements comprise the financial statements of the Company, its wholly owned subsidiaries, and 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, useful lives for depreciation and amortization 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 certain liability-classified share-based compensation, 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.
50
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity at the date of acquisition of three months or less. Cash and cash equivalents consist of cash on deposit with domestic banks and, at times, may exceed federally insured limits.
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, that are not readily available for immediate or general use are recorded in restricted cash in our consolidated balance sheets. The restricted cash in our consolidated balance sheet represents cash transferred into a trust account to support our workers’ compensation obligations and cash held for use in approved capital expenditures amounting to $513 and $1,056, respectively, as of December 31, 2020, and $513 and $7,097, respectively, as of December 31, 2019.
The following table provides a reconciliation of the amount of cash and cash equivalents reported on the consolidated balance sheets to the total of cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
3,693
|
|
|
$
|
33,794
|
|
Restricted cash
|
|
|
1,569
|
|
|
|
7,610
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
5,262
|
|
|
$
|
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 and used 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 December 31, 2020 and 2019, the Company had established inventory reserves of $315 and $579, respectively, for obsolete and slow-moving inventory. The following table shows the change in the inventory reserves:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Balance at beginning of period
|
|
$
|
579
|
|
|
$
|
572
|
|
Charges to costs and expenses
|
|
|
620
|
|
|
|
359
|
|
Recoveries and write-offs
|
|
|
(884
|
)
|
|
|
(352
|
)
|
Balance at end of period
|
|
$
|
315
|
|
|
$
|
579
|
|
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 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.
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
51
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.
Long-lived Assets
Long-lived assets, such as property and equipment and amortizable identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When making this assessment, the following factors are considered: current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors. We determine recoverability by evaluating whether the undiscounted estimated future net cash flows of the asset or asset group are less than its carrying value. When impairment is indicated, we proceed to Step 2 of the impairment test and measure the impairment as the amount by which the assets carrying value exceeds its fair value. Management considers several factors such as estimated future cash flows, appraisals, and current market value analysis in determining fair value. Assets are written down to fair value if the concluded current fair value is below the net carrying value. Impairment loss on long-lived assets of $147,543 was recorded during the first quarter of 2020 (refer to “Note 5 – Goodwill and Intangible Assets”).
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 of each year, 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.
Deferred Financing Costs
Costs incurred to obtain financing are capitalized and amortized to interest expense using the effective interest method over the contractual term of the debt. At the balance sheet date, deferred financing costs related to term loans are presented as a direct deduction from the debt liability, while deferred financing costs related to the revolver facility are presented as deferred financing costs, net, on the consolidated balance sheets.
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 December 31, 2020 and December 31, 2019:
Senior Secured Term Loan. The fair value of the Senior Secured Term Loan is $198.0 million and approximates carrying value
52
as of December 31, 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 December 31, 2020 and December 31, 2019, respectively.
Revenue Recognition
Effective January 1, 2019, the Company adopted ASC 606, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, using the modified retrospective method.
Under the standard, revenue recognition is 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. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore excluded from revenues in the Company’s financial statements.
The Company’s revenues consist of providing hydraulic fracturing services for either a pre-determined term or number of stages/wells to E&P companies operating in the onshore oil and natural gas basins of the United States. In the performance of these services, and at the request of our customers, we may also provide consumables such as chemicals and sand. Revenues are earned as services are rendered, which is generally on a per stage or daily rate basis. Customers are invoiced according to contract terms upon the completion of a well or monthly with payment due typically 30 days from invoice date.
Hydraulic fracturing is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of wellbores. The process involves the injection of water, sand, and chemicals under high pressure into shale formations. 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. A field ticket is created for each stage completed that records all services performed, including any chemicals and proppant we provided and consumed in completing the stage. The field ticket is signed by a customer representative and evidences the amounts to which the Company has a right to invoice and thus to recognize as revenue. 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.
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. The practical expedient permits an entity to recognize revenue in the amount to which it has a right to invoice the customer if that amount corresponds directly with the value to the customer of the entity’s performance completed to date. The Company believes that this is an accurate reflection of the value transferred to the customer as each incremental obligation is performed.
The Company has elected to expense sales commissions paid upon the successful signing of a new customer contract as incurred if the related contract will be fully satisfied within one year. For contracts that will not be fully satisfied within one year, these incremental costs of obtaining a contract with a customer will be recognized as a contract asset and amortized on a straight-line basis over the life 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 debtor. 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 $12,000 and $22 as of December 31, 2020 and 2019, respectively. The reserve was recorded due to growing uncertainty as to collectability of billed amounts from customers weakened by the economic downturn in 2020. The following table shows the change in allowance for doubtful accounts:
53
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Balance at beginning of period
|
|
$
|
22
|
|
|
$
|
189
|
|
Charges to costs and expenses
|
|
|
12,031
|
|
|
|
434
|
|
Recoveries and write-offs
|
|
|
(53
|
)
|
|
|
(601
|
)
|
Balance at end of period
|
|
$
|
12,000
|
|
|
$
|
22
|
|
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:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
11.2%
|
|
|
18.4%
|
|
Customer B
|
|
19.7%
|
|
|
*
|
|
Customer C
|
|
18.4%
|
|
|
*
|
|
Customer D
|
|
*
|
|
|
18.3%
|
|
Customer E
|
|
13.2%
|
|
|
*
|
|
Customer F
|
|
18.2%
|
|
|
*
|
|
Customer G
|
|
*
|
|
|
15.7%
|
|
|
|
|
|
|
|
|
|
|
An asterisk indicates that revenue is less than ten percent.
|
|
The following table shows the percentage of trade receivables from our significant customers:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
*
|
|
|
12.0%
|
|
Customer B
|
|
32.2%
|
|
|
10.3%
|
|
Customer C
|
|
17.0%
|
|
|
*
|
|
Customer D
|
|
*
|
|
|
12.1%
|
|
Customer E
|
|
*
|
|
|
*
|
|
Customer F
|
|
12.7%
|
|
|
*
|
|
Customer G
|
|
12.5%
|
|
|
34.5%
|
|
Customer H
|
|
*
|
|
|
15.9%
|
|
Customer I
|
|
13.5%
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
An asterisk indicates that trade receivable is less than ten percent.
|
|
Share-Based Compensation
Share based compensation is measured on the grant date and fair value is recognized as expense over the requisite service period, which is generally the vesting period of the award. The Company recognizes forfeitures as they occur rather than estimating expected forfeitures.
The fair value of time-based restricted stock, DSUs, or other performance incentive awards is determined based on the number of shares or units granted and the closing price of Class A common stock on the date of grant. The fair value of stock options is determined by applying the Black-Sholes model on the grant-date market value of the underlying Class A common stock. Restricted stock with market conditions is valued using a Monte Carlo simulation analysis.
54
Deferred compensation expense associated with liability-based awards, such as certain performance incentive awards that could be settled either in cash or through issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. However, the Company considers any delayed settlement as a post-vesting restriction which impacts the determination of the grant-date fair value of the award. The Company estimates fair value by using a risk-adjusted discount rate, which reflects the weighted average cost of capital of similarly traded public companies.
Fair Value of Preferred Stock
The fair value of Series A preferred stock at the date of issuance was estimated by calculating the present value of its one-year redemption cost to the Company and then discounted for lack of marketability.
The fair value of Series B preferred stock is the stated value, which is equal to the proceeds received from issuance.
Embedded Conversion Features
The Company evaluates embedded conversion features within a convertible instrument under ASC 815, Derivatives and Hedging, to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require treatment under ASC 815, the instrument is evaluated under ASC 470-20, Debt with Conversion and Other Options, for consideration of any beneficial conversion features.
The Company records a beneficial conversion feature (“BCF”) when the convertible instrument is issued with conversion features at fixed or adjustable rates that are below market value when issued. The BCF for convertible instruments is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value is generally calculated at the commitment date as the difference between the conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible. If certain other securities are issued with the convertible security, the proceeds are allocated among the different components. The portion of the proceeds allocated to the convertible security is divided by the contractual number of the conversion shares to determine the effective conversion price, which is used to measure the BCF. The effective conversion price is used to compute the intrinsic value. The value of the BCF is limited to the basis that is initially allocated to the convertible security.
The BCF for the convertible instrument is recorded as a reduction, or discount, to the carrying amount of the convertible instrument equal to the fair value of the conversion feature. The discount is then amortized as deemed dividends over the period from the date of the convertible instrument’s issuance to the earliest redemption date, provided that the convertible instrument is not currently redeemable but probable of becoming redeemable in the future.
Warrants Issued with Convertible Instruments
The Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method. The Company allocates the value of the proceeds received from a convertible instrument transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as discount or premium.
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. Our deferred tax calculation and valuation allowance requires us to make certain estimates about future operations. Changes in state or federal tax laws, as well as changes in our financial condition or the carrying value of existing assets and liabilities, could affect those estimates. The effect of a change in tax rates is recognized as income or expense in the period that the rate is enacted.
55
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 December 31, 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
Recently Adopted Accounting Pronouncements
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”), as modified by the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
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 August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which amended the disclosure requirements under ASC 820. This update clarifies and unifies the disclosure of Level 3 fair value instruments. ASU 2018-13 became effective for the Company beginning on January 1, 2020. The Company’s adoption of this standard did not have a material impact on the consolidated financial statements.
In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which improves and clarifies various financial instruments topics. ASU 2020-03 includes seven different issues, including the treatment of revolving debt arrangements, that describe the areas of improvement and the related amendments to GAAP that are intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. This new guidance became effective for the Company immediately upon issuance. The adoption of this guidance did not have a material impact on the consolidated financial statements.
In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) -
56
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.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20, ASU 2019-01 and ASU 2020-02 (collectively, Topic 842). Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. We expect to adopt Topic 842 using the effective date of January 1, 2022 as the date of our initial application of the standard. We are currently evaluating the impact of our adoption of Topic 842 on our consolidated financial statements. We expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of Topic 842, which will increase our total assets and total liabilities that we report relative to such amounts prior to adoption. The Company will use the modified retrospective with applied transition method upon adoption of the standard. Under this adoption method, all leases that are in effect and in existence as of, and after transition date will be applied as of the transition date, with a cumulative impact to retained earnings in that period. Prior period financial statements would be stated under the old guidance ASC 840 with no change to prior periods or disclosures associated with prior period.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which changes the impairment model for most financial assets and certain other instruments. Specifically, this new guidance requires using a forward-looking, expected loss model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This will replace the currently used model and may result in an earlier recognition of allowance for losses. In addition, in November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which clarifies guidance around how to report expected recoveries. The new guidance will be effective for emerging growth companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, requiring a customer in a cloud computing arrangement that is a service contract to follow the guidance in ASC 350-40 in determining the requirements for capitalizing implementation costs incurred to develop or obtain internal-use-software. The new guidance will be effective for emerging growth companies for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes specific exceptions to the general principles in Topic 740 in GAAP. The new guidance also improves the issuer’s application of income tax-related guidance and simplifies GAAP for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The new guidance will be effective for emerging growth companies for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022; however, early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
57
NOTE 4 – PREPAIDS AND OTHER CURRENT ASSETS
Prepaids and other current assets include the following:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Prepaid insurance
|
|
$
|
3,162
|
|
|
$
|
11,127
|
|
Recoverable costs from insurance
|
|
|
4,635
|
|
|
|
-
|
|
Income tax receivable
|
|
|
1,567
|
|
|
|
810
|
|
Other current assets
|
|
|
1,343
|
|
|
|
1,395
|
|
Total prepaid expenses and other current assets
|
|
$
|
10,707
|
|
|
$
|
13,332
|
|
During the third quarter of 2020, certain pieces of equipment were damaged. The Company has insurance coverage in place covering, among other things, property damage up to certain specified amounts and amounts. During the year ended December 31, 2020, the Company received $4,854 as insurance reimbursement. Recoverable costs from insurance as of December 31, 2020 was $4,635, which represents net book value of equipment damaged that we expect to recover from insurance.
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 31st 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 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.
As of December 31, 2020, the Company performed the qualitative analysis of the goodwill impairment assessment by reviewing relevant qualitative factors. The Company determined there were no events that would indicate the carrying amount of its goodwill may not be recoverable, and as such, no impairment charge was recorded.
Intangible Assets
Intangible assets consisted of the following:
|
|
Estimated
Useful
Life (in
years)
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
10
|
|
$
|
1,415
|
|
|
$
|
156
|
|
|
$
|
1,259
|
|
Patents
|
|
20
|
|
|
12,775
|
|
|
|
568
|
|
|
|
12,207
|
|
|
|
|
|
$
|
14,190
|
|
|
$
|
724
|
|
|
$
|
13,466
|
|
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 was $1,090 and $6,064 for the year ended December 31, 2020, and 2019,
58
respectively.
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.
As of December 31, 2020, the Company determined there were no events that would indicate the carrying amount of these assets may not be recoverable, and as such, no further impairment charge was recognized.
The estimated amortization expense for future periods is as follows:
Fiscal Year
|
|
Estimated
Amortization
Expense
|
|
2021
|
|
$
|
966
|
|
2022
|
|
|
966
|
|
2023
|
|
|
966
|
|
2024
|
|
|
966
|
|
2025
|
|
|
966
|
|
Thereafter
|
|
|
8,636
|
|
Total
|
|
$
|
13,466
|
|
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
|
|
Estimated
Useful
Life (in years)
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Fracturing equipment
|
|
1.5 to 25
|
|
$
|
263,869
|
|
|
$
|
651,162
|
|
Light duty vehicles
|
|
5
|
|
|
2,483
|
|
|
|
8,188
|
|
Furniture and fixtures
|
|
5
|
|
|
67
|
|
|
|
277
|
|
IT equipment
|
|
3
|
|
|
1,676
|
|
|
|
6,724
|
|
Auxiliary equipment
|
|
2 to 20
|
|
|
11,058
|
|
|
|
38,502
|
|
Leasehold improvements
|
|
Term of lease
|
|
|
287
|
|
|
|
725
|
|
|
|
|
|
|
279,440
|
|
|
|
705,578
|
|
Less: Accumulated depreciation and
amortization
|
|
|
|
|
(44,108
|
)
|
|
|
(263,968
|
)
|
Property and equipment, net
|
|
|
|
$
|
235,332
|
|
|
$
|
441,610
|
|
Depreciation and amortization expense related to property and equipment during the years ended December 31, 2020 and 2019 was $79,263 and $148,149, 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.
59
NOTE 7 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued payroll and benefits
|
|
$
|
7,208
|
|
|
$
|
9,356
|
|
Accrued taxes
|
|
|
5,380
|
|
|
|
9,817
|
|
Accrued interest
|
|
|
317
|
|
|
|
18,190
|
|
Other current liabilities
|
|
|
1,876
|
|
|
|
3,118
|
|
Accrued expenses and other current liabilities
|
|
$
|
14,781
|
|
|
$
|
40,481
|
|
NOTE 8 – NOTES PAYABLE
In 2020 and 2019, the Company entered into various premium finance agreements with a credit finance institution to pay the premiums on insurance policies for its directors’ and officers’ liability, general liability, workers’ compensation, umbrella, auto and pollution coverage needs. For the years ended December 31, 2020 and 2019, the aggregate amount of the premiums financed was $1,121 and $9,928, respectively, payable in equal monthly installments at an interest rate of 5.3% and 4.8%, respectively. These premium finance agreements had a total balance of $998 and $8,068 as of December 31, 2020 and 2019, respectively.
NOTE 9 – DEBT
Long-term debt consisted of the following:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Senior Secured Term Loan
|
|
$
|
246,250
|
|
|
$
|
250,000
|
|
ABL Credit Facility
|
|
|
23,710
|
|
|
|
40,090
|
|
PPP Loan
|
|
|
10,000
|
|
|
|
-
|
|
USDA Loan
|
|
|
21,996
|
|
|
|
-
|
|
Equipment financing
|
|
|
12,866
|
|
|
|
16,065
|
|
Capital leases
|
|
|
229
|
|
|
|
10,474
|
|
Total debt principal balance
|
|
|
315,051
|
|
|
|
316,629
|
|
Unamortized discount on debt and debt
issuance costs
|
|
|
(17,576
|
)
|
|
|
(9,449
|
)
|
Current maturities
|
|
|
(13,573
|
)
|
|
|
(22,288
|
)
|
Net Long-term debt
|
|
$
|
283,902
|
|
|
$
|
284,892
|
|
Senior Secured Term Loan
On May 7, 2019, the Company, USWS LLC, as the borrower, and all the other subsidiaries of the Company entered into a $250,000 Senior Secured Term Loan Credit Agreement (as amended, the “Senior Secured Term Loan”) with CLMG Corp., as administrative and collateral agent, and the lenders party thereto. The Company is required to make quarterly principal payments of 2.0% per annum of the initial principal balance, commencing on January 15, 2020, with final payment due at maturity on May 7, 2024. The Company recorded the related debt discount and debt issuance costs amounting to $5,000 and $5,758, respectively, as a direct deduction to the face amount of the Senior Secured Term Loan and records the amortization of debt discount and debt issue costs to interest expense based on the effective interest rate method over the term of the Senior Secured Term Loan.
The Senior Secured Term Loan bears interest at a variable rate per annum equal to the applicable LIBOR rate, subject to a 2.0% floor, plus 8.25%.
The Senior Secured Term Loan is not subject to financial covenants but is subject to certain non-financial covenants, including
60
but not limited to, reporting, insurance, notice and collateral maintenance covenants as well as limitations on the incurrence of indebtedness, permitted investments, liens on assets, dispositions of assets, paying dividends, transactions with affiliates, mergers and consolidations.
The Senior Secured Term Loan requires mandatory prepayments upon certain dispositions of property or issuance of other indebtedness, as defined, and quarterly a percentage of excess cash flow, if any, equal to 100% (depending on total debt outstanding) commencing in September 2019. Certain mandatory prepayments (excluding excess cash flows sweep) and optional prepayments are subject to a yield maintenance fee for the first two years and prepayment premium of 2% in year three and 1% in year four. Upon the final payment and termination of the Senior Secured Term Loan, we are subject to an exit fee equal to 2.0% of the principal amount of loans then outstanding and the aggregate optional prepayment of principal amounts repaid during the 120 days that occurred prior to such final payment.
On April 1, 2020, the Company, USWS LLC, as the borrower, and all the other subsidiaries of the Company entered into a Second Amendment (the “Second 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 Second 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 Second 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 Second 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.
In exchange for entering into the Second Term Loan Amendment, the lenders under the Senior Secured Term Loan received an extension fee comprised of a $20,000 cash payment, 1,050 shares of Series B preferred stock valued at $1,050 based on the stated liquidation preference of $1,000 per share, and 5,529,622 shares of Class A common stock valued at $1,438 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 to interest expense using the effective interest method over the remaining term of the Senior Secured Term Loan.
On July 30, 2020, the Company, USWS LLC, as the borrower, and all the other subsidiaries of the Company entered into a Third Amendment (the “Third 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 Third Term Loan Amendment, the agents and the lenders agreed to make certain modifications and amendments to the Senior Secured Term Loan to, among other things, consent to the entry into the PPP Loan (described within this section), subject to the amended terms and conditions specified for the same in the Third Term Loan Amendment.
Additionally, the Third Term Loan Amendment made certain modifications to the Senior Secured Term Loan which limits 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. In the Third Term Loan Amendment the Company further agreed to specific conditions and covenants regarding a turbine rental and services agreement entered on June 19, 2020 and which affect the equipment which is the subject thereof.
On November 12, 2020, the Company, USWS LLC, as the borrower, and all of the other subsidiaries of the Company entered into a Fourth Amendment (the “Fourth 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 Fourth Term Loan Amendment, the agents and the lenders agreed to make certain modifications and amendments to the Senior Secured Term Loan to, among other things, consent to entry into the USDA Loan (described within
61
this section), subject to the amended terms and conditions specified for the same in the Fourth Term Loan Amendment.
Additionally, the principal amortization schedule was modified as follows:
|
(1)
|
Commencing on December 31, 2020, required quarterly principal payment of $1,250 until September 30, 2025
|
|
(2)
|
Additional principal payment of $2,500 on May 31, 2021
|
|
(3)
|
Principal payment of $2,500 on September 30, 2021, subject to certain conditions as defined in the Fourth Term Loan Amendment
|
The Company accounted for the Second Term Loan Amendment and Fourth 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.
As of December 31, 2020, the outstanding principal balance of the Senior Secured Term Loan was $246,250, of which $10,000 was due within one year from the balance sheet date.
ABL Credit Facility
On May 7, 2019, the Company, USWS LLC, and all the other subsidiaries of the Company entered into a $75,000 ABL Credit Agreement (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. The ABL Credit Facility had original maturity date of February 6, 2024. The ABL Credit Facility is subject to a borrowing base which is calculated based on a formula referencing the eligible accounts receivables of the Borrower. Borrowings under the ABL Credit Facility bear interest at LIBOR, plus an applicable LIBOR rate margin of 1.5% to 2.0% or base rate margin of 0.5% to 1.0% as defined in the ABL Credit Facility. The unused portion of the ABL Credit Facility is subject to an unused commitment fee of 0.250% to 0.375%. The Company recorded the related debt issuance costs amounting to $1,205 as part of deferred financing costs, net in the consolidated balance sheets, and records the amortization as interest expense ratably over the term of the ABL Credit Facility.
All borrowings under the ABL Credit Facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties and certifications regarding sales of certain inventory, and to a borrowing base (described above). In addition, the ABL Credit Facility includes a springing consolidated fixed charge coverage ratio of 1.00 to 1.00 but only when a financial covenant trigger period is in effect as defined in the ABL Credit Facility. Borrowings under the ABL Credit Facility are fully and unconditionally guaranteed jointly and severally by the Company and its subsidiaries, other than future unrestricted subsidiaries.
In April, August, and November of 2020, the Company, USWS LLC, and all the other subsidiaries of the Company entered into the First Amendment (the “First ABL Amendment”), Second Amendment (the “Second ABL Amendment”), and Third Amendment (the “Third ABL Amendment”), respectively, 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 First ABL Amendment, the aggregate revolving commitment under the ABL Credit Facility was reduced from $75,000 to $60,000, the maturity date was extended 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.
Pursuant to the Second ABL Amendment, the aggregate revolving commitment under the ABL Credit Facility was reduced from $60,000 to $50,000 and certain modifications were made to eligible accounts in the borrowing base and to the applicable thresholds in the cash dominion trigger period and financial covenant trigger period, among other things. The Company’s
62
option to request an increase in commitments under the accordion feature was also removed under the terms of the Second ABL Amendment.
Pursuant to the Third ABL Amendment, the lenders agreed to make certain modifications and amendments to the ABL Credit Facility to, among other things, consent to entry into the USDA Loan (described within this section).
Based on ASC 470-50, Modifications and Extinguishments, the Company accounted for each of the First ABL Amendment and Second ABL Amendment as a modification of debt. Under the First ABL Amendment, 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 to interest expense over its remaining term. Under the Second ABL Amendment, the borrowing capacity of the amended ABL Credit Facility was less than the borrowing capacity of the old ABL Credit Facility. Accordingly, unamortized deferred financing cost amounting to $0.2 million, which was calculated in proportion to the decrease in the borrowing capacity of the old Credit Facility, was written off and recorded as interest expense in the consolidated statements of operations. Any fees in connection with the Second ABL Amendment 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 December 31, 2020, the borrowing base was $32,438 and the outstanding revolver loan balance was $23,710, classified as long-term debt in the consolidated balance sheets.
Paycheck Protection Program (PPP) Loan
In July 2020, the Company received an unsecured loan (the “PPP Loan”) amounting to $10,000 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 Coronavirus Aid, Relief and Economic Security Act (as amended, the “CARES Act”) 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, 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. Accordingly, the Company accounted for the PPP Loan as part of long-term debt in the consolidated balance sheets.
USDA Loan
On November 12, 2020, the Company, USWS LLC, and USWS Holdings entered into a Business Loan Agreement (the “USDA Loan”) with a commercial bank pursuant to the United States Department of Agriculture (“USDA”), Business & Industry Coronavirus Aid, Relief, and Economic Security Act Guaranteed Loan Program, in the aggregate principal amount of up to $25,000 for the purpose of providing long-term financing for eligible working capital.
The USDA loan bears interest of 5.75% per annum and is payable according to the following schedule:
|
(1)
|
36 monthly consecutive interest payments, beginning on December 12, 2020
|
|
(2)
|
83 monthly consecutive principal and interest payments beginning December 12, 2023
|
|
(3)
|
One final principal and interest payment of the remaining due on November 12, 2030
|
The Company recorded the related debt discount and debt issuance costs amounting to $506 and $558, respectively, as a direct deduction to the face amount of the USDA Loan and records the amortization of debt discount and debt issue costs to interest expense based on the effective interest rate method over the term of the USDA Loan.
The USDA Loan is secured by specific equipment collateral and is guaranteed by the USDA for up to 90% of the total proceeds.
The USDA Loan is subject to certain financial covenants. The Company is required to maintain a Debt Service Coverage Ratio (as defined in the USDA Loan) of not less than 1.25:1, to be monitored annually, beginning in calendar year 2021. Additionally, the Company is required to maintain a Debt to Net Worth Ratio (as defined in the USDA Loan) of not more than 9:1, to be monitored annually based upon year-end financial statements beginning in calendar year 2022.
63
As of December 31, 2020, the outstanding principal balance of the USDA Loan was $21,996, presented as long-term debt in the consolidated balance sheets. In January 2021, the Company received the remaining principal amount of $3,004.
Equipment Financing
In March 2020, the Company entered into an agreement to consolidate various individual equipment financing agreements, which represented substantially all our equipment financing notes, into four notes. The new notes are held by the same lender as the original equipment financing agreements. 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 December 31, 2020 was $12,866, 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 December 31, 2020 and December 31, 2019, respectively.
Payments of Debt Obligations due by Period
Presented below is a schedule of the repayment requirements of long-term debt as of December 31, 2020:
|
|
Principal Amount
|
|
|
|
of Long-term Debt
|
|
2021
|
|
$
|
13,573
|
|
2022
|
|
|
10,017
|
|
2023
|
|
|
9,203
|
|
2024
|
|
|
9,397
|
|
2025
|
|
|
256,503
|
|
Thereafter
|
|
|
16,358
|
|
Total
|
|
$
|
315,051
|
|
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 year ended December 31, 2020:
|
|
Shares
|
|
|
Amount
|
|
Series A preferred stock as of December 31, 2019
|
|
|
55,000
|
|
|
$
|
38,928
|
|
Deemed and imputed dividends on Series A preferred stock
|
|
|
-
|
|
|
|
11,666
|
|
Accrued Series A preferred stock dividends
|
|
|
-
|
|
|
|
7,214
|
|
Conversion of Series A preferred stock to Class A common stock
|
|
|
(5,000
|
)
|
|
|
(5,032
|
)
|
Series A preferred stock as of December 31, 2020
|
|
|
50,000
|
|
|
$
|
52,776
|
|
The Company is authorized to issue up to 10,000,000 shares of preferred stock, par value $0.0001 per share. On May 23, 2019, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (collectively, the “Purchasers”) to issue and sell in a private placement 55,000 shares of Series A preferred stock, which was a newly created series of convertible redeemable preferred stock of the Company, for an aggregate purchase price of $1,000 per share, for total gross proceeds of $55,000.
At the initial closing on May 24, 2019 (“Closing Date”), the Purchasers purchased all the Series A preferred stock and 2,933,333 initial warrants exercisable for shares of Class A common stock. Subject to there being Series A preferred stock outstanding, the Company will issue an additional 4,399,992 warrants to the Purchasers in quarterly installments of 488,888 warrants beginning nine months after the Closing Date. Crestview III USWS, L.P. and Crestview III USWS TE, LLC, two of the Purchasers, are part of an affiliate group which, prior to the Closing Date, held an aggregate 29.80% 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. During the year ended December 31, 2020, the Company issued 1,911,108 additional warrants to the Purchasers.
64
Holders of shares of Series A preferred stock are entitled to receive cumulative dividends, compounding and accruing quarterly in arrears, from the Closing Date until the second anniversary of the Closing Date, at an annual rate of 12.0%, and thereafter, 16% of the stated value of $1,000 per share, subject to increase in connection with the payment of dividends in kind. Dividends are payable, at the Company’s option, in cash from legally available funds or in kind by increasing the stated value of the outstanding Series A preferred stock by the amount per share of the dividend on February 24, May 24, August 24, and November 24 of each year. During the year ended December 31, 2020, the Company’s Board of Directors did not declare a dividend on the Series A preferred stock resulting in the dividends for these periods being paid-in-kind in accordance with the Series A preferred stock’s Certificate of Designations.
The Series A preferred stock is redeemable by the Company at any time for cash equal to the stated value per share on the date of redemption, except for a redemption occurring prior to the nine-month anniversary of the Closing Date, in which case the redemption price shall be $1,092.73 per share. If the Company notifies the holders that it has elected to redeem the Series A preferred stock, the holder may instead elect to convert such shares into Class A common stock. If the Company funds the redemption with proceeds of an equity offering within one year of the Closing Date, then any converting shares will convert at a ratio that is based on the higher of the price to the public in the offering or the ordinary conversion price of $6.67. Otherwise, such converting shares will convert by reference to the ordinary conversion price. In any event, the Series A preferred stock converting in response to a redemption notice will net settle for a combination of cash and Class A common stock.
Following the first anniversary of the Closing Date, each holder of Series A preferred stock may convert all or any portion of its shares of Series A preferred stock into Class A common stock based on the then-applicable liquidation preference at a conversion price of $6.67, subject to anti-dilution adjustments, at any time, but not more than once per quarter, so long as any conversion is for an underlying conversion value of Class A Common Stock of at least $1,000.
The Company has the option to force a conversion of any then outstanding shares of Series A preferred stock following the third anniversary of the Closing Date, and contingent upon (i) the closing price of the Company’s Class A common stock being greater than 130% of the Conversion Price for 20 trading days during any 30-day consecutive trading day period, (ii) the average daily trading volume of the Class A common stock exceeding 250,000 for 20 trading days and (iii) the Company having an effective registration statement on file with the Securities and Exchange Commission (“SEC”) covering resales of the underlying Class A common stock to be received upon such conversion.
On the Closing Date, the Company estimated the fair value of the warrants at $12,786 using the Black-Scholes option pricing model using the following primary assumptions: contractual term of 6.5 years, volatility rate of 53.0%, risk-free interest rate of 2.2% and expected dividend rate of 0%. Based on the warrant’s relative fair value to the fair value of the Series A preferred stock, $10,720, net of issuance costs, of the $12,786 aggregate value was allocated to the warrants, creating a corresponding preferred stock discount in the same amount.
Due to the reduction of allocated proceeds to Series A preferred stock, the effective conversion price was approximately $5.40 per share creating a beneficial conversion feature of $20,132 which further reduced the carrying value of the Series A preferred stock. Since the holders’ conversion option of the Series A preferred stock could only be exercisable after the first anniversary of the Closing Date, the discount resulting from the beneficial conversion feature was accreted over one year as deemed preferred dividends using the effective yield method, resulting in a corresponding increase in the carrying value of the Series A preferred stock over the same time period.
65
The Series A preferred stock had similar characteristics of an “Increasing Rate Security” as described by SEC Staff Accounting Bulletin Topic 5Q, Increasing Rate Preferred Stock. As a result, the discount on Series A preferred stock is considered an unstated dividend cost that is amortized over the period preceding commencement of the perpetual dividend using the effective interest method, by charging imputed dividend cost against retained earnings, or additional paid in capital in the absence of retained earnings, and increasing the carrying amount of the Series A preferred stock by a corresponding amount. The discount is therefore being amortized over two years using the effective yield method. The amortization in each period is the amount which, together with the stated dividend in the period, results in a constant rate of effective cost with regard to the carrying amount of the Series A preferred stock.
The Series A preferred stock was recorded as Mezzanine Equity, net of issuance cost, on the consolidated balance sheets because it has redemption features upon certain triggering events that are outside the Company’s control, such as change in control. The Company accounted for the warrants as a component of stockholders’ equity.
During the year ended December 31, 2020, one of the Purchasers converted 5,000 shares of Series A preferred stock and accrued dividends into 876,448 shares of Class A common stock pursuant to the certificate of designations authorizing and establishing the rights, preferences, and privileges of the Series A preferred stock. Accordingly, the Company recorded a reduction of $5,032 in the carrying value of the Series A preferred stock.
On December 31, 2020, there were 50,000 shares of Series A preferred stock outstanding and convertible into 9,146,254 shares of Class A common stock, and dividends accrued and outstanding with respect to the Series A preferred stock were $11,264 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 year ended December 31, 2020:
|
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
|
|
-
|
|
|
|
(1,413
|
)
|
Accrued Series B preferred stock dividends
|
|
-
|
|
|
|
2,049
|
|
Series B preferred stock as of December 31, 2020
|
|
22,050
|
|
|
$
|
22,686
|
|
On March 31, 2020, the Company entered into a purchase agreement with certain institutional investors (collectively, the “Series B 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 $21,000. On April 1, 2020 (the “Series B Closing Date”), the Series B Purchasers purchased the Series B preferred stock. Two of the Series B Purchasers were affiliates of Crestview Partners, 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 Company’s Second Amended and Restated Certificate of Incorporation 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.
Holders of the Series B Preferred Shares will receive distributions of 12.00% per annum on the then-applicable liquidation preference until May 24, 2021 and 16.00% per annum on the liquidation preference thereafter. Distributions are not required to be paid in cash and, if not paid in cash, will automatically accrue and be added to the liquidation preference.
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.
66
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 $1,000 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 SEC 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 consolidated balance sheets because it has redemption features upon certain triggering events that are outside the Company’s control, such as change in control.
On December 31, 2020, there were 22,050 shares of Series B preferred stock outstanding and convertible into 78,245,727 shares of Class A common stock, and dividends accrued and outstanding with respect to the Series B preferred stock was $2,049 and reflected in the carrying value of Series B preferred stock.
In February 2021, 762 shares of Series B preferred stock were converted into 2,745,778 shares of Class A common 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. The Company adopted and filed with the Secretary of State of the State of Delaware each of the Certificate of Designations for the Series A preferred stock and the Series B preferred stock as amendments to the Company’s Second Amended and Restated Certificate of Incorporation (as amended, the “Charter”) each on May 24, 2019 and March 31, 2020, to authorize and establish the rights, preferences and privileges of the Series A preferred stock and Series B preferred stock, respectively. 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. On December 31, 2020 and December 31, 2019, there were 72,515,342 and 62,857,624 shares of Class A common stock issued and outstanding, respectively. At December 31, 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 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, up to $10,275 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 sold 792,258 shares of Class A common stock for total net proceeds of $400 under this ATM Agreement as of December 31, 2020. The Company paid $12 in commissions with respect to this sale. In January 2021, we sold an additional 8,340,608 shares of Class A common stock for a total net proceeds of $5,679, after payment of $176 in commissions.
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
67
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.
During the year ended December 31, 2020, 3,197,756 shares of Class B common stock were converted to an equivalent number of shares of Class A common stock.
As of December 31, 2020 and 2019, there were 2,302,936 and 5,500,692 shares, respectively, of Class B common stock issued and outstanding.
Warrants
Pursuant to the Company’s initial public offering, 32,500,000 warrants (the “public warrants”) were issued and 15,500,000 warrants (the “private placement warrants”) were sold simultaneously to Matlin & Partners Acquisition Sponsor, LLC (the “Sponsor”) and Cantor Fitzgerald (the “Underwriter”). Each warrant entitles its holder to purchase one half of one share of Class A common stock at an exercise price of $5.75 per half share ($11.50 for full share equivalent), to be exercised only for a whole number of shares of our Class A common stock. The warrants became exercisable 30 days after the completion of the Transaction and expire five years after that date or earlier upon redemption or liquidation. Once the warrants became exercisable, the Company may redeem the outstanding warrants at a price of $0.01 per warrant upon a minimum of 30 days’ prior written notice of redemption, if the last sale price of the Company’s common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third business day before the Company sends the notice of redemption to the warrant holders. The private placement warrants, however, are nonredeemable so long as they are held by the Sponsor, the Underwriter or their permitted transferees.
In March 2019, the Company entered into privately negotiated warrant exchange agreements with certain warrant holders to exchange 10,864,391 public warrants for Class A common stock at a ratio of 0.13 Class A common shares per warrant. In April 2019, pursuant to a previously announced public warrant exchange offer on March 14, 2019, the Company exchanged an additional 11,640,974 public warrants for Class A common stock at a ratio of 0.13 Class A common shares per warrant.
See “Note 10 – Mezzanine Equity” for the discussion of warrants issued pursuant to the Series A preferred stock purchase agreement.
During the year ended December 31, 2020, certain warrant holders elected to forfeit 6,327,218 warrants for $0 consideration. As of December 31, 2020, there remained 3,667,417 public warrants and 15,500,000 private placement warrants outstanding, the total of both are exercisable for 9,583,709 shares of Class A common stock. In addition, as of December 31, 2020, 4,844,441 warrants were outstanding pursuant to the Series A preferred stock purchase agreement, and exercisable for 4,844,441 shares of Class A common stock.
Noncontrolling Interest
The Company’s noncontrolling ownership interest in consolidated subsidiaries is presented in the consolidated balance sheet within stockholders’ equity (deficit) as a separate component and represents approximately 3% ownership of USWS Holdings as of December 31, 2020.
Long-Term Incentive Plan
Pursuant to the U.S. Well Services, Inc. 2018 Stock Incentive Plan (the “LTIP”), there were an aggregate 8,160,500 shares of Class A common stock initially made available for issuance under the LTIP. On November 5, 2020, pursuant to the Amended and Restated U.S. Well Services, Inc. 2018 Stock Incentive Plan (the “A&R LTIP”), the Company made grants of deferred stock units and performance incentive awards to certain key employees of the Company. The A&R LTIP, which was approved by the Board of Directors, upon the recommendation of the Compensation Committee of the Board of Directors on September 1, 2020, is expected to be included in the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders for approval by the Company’s stockholders. Shares issued under the LTIP and A&R LTIP are further discussed in “Note 13 - Share-Based Compensation”. There were no shares available for issuance under the LTIP as of December 31, 2020.
68
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 and Series B preferred stock, conversion of Class B common stock, vesting of restricted shares of Class A common stock, and issuance of Class A common stock associated with the deferred stock units and certain performance awards.
Basic and diluted net income (loss) per share excludes the income (loss) attributable to and shares associated with the 1,609,677 Class A shares that are subject to cancellation on November 9, 2024 if certain market conditions have not been met. The Company included in the calculation accrued dividends on Series A and Series B preferred stock and related deemed and imputed dividends.
The following table sets forth the calculation of basic and diluted earnings (loss) per share for the periods indicated based on the weighted average number of shares of Class A common stock outstanding for the period:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Basic Net Income (Loss) Per Share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss attributable to U.S. Well Services, Inc.
|
|
$
|
(235,665
|
)
|
|
$
|
(93,913
|
)
|
Net loss attributable to cancellable Class A shares
|
|
|
5,713
|
|
|
|
2,915
|
|
Basic net loss attributable to U.S. Well Services, Inc. shareholders
|
|
|
(229,952
|
)
|
|
|
(90,998
|
)
|
Dividends accrued on Series A preferred stock
|
|
|
(7,214
|
)
|
|
|
(4,050
|
)
|
Dividends accrued on Series B preferred stock
|
|
|
(2,049
|
)
|
|
|
-
|
|
Deemed and imputed dividends on Series A preferred stock
|
|
|
(11,666
|
)
|
|
|
(11,206
|
)
|
Deemed dividends on Series B preferred stock
|
|
|
(564
|
)
|
|
|
-
|
|
Basic net loss attributable to U.S. Well Services, Inc. common
shareholders
|
|
$
|
(251,445
|
)
|
|
$
|
(106,254
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
66,400,924
|
|
|
|
51,853,183
|
|
Cancellable Class A common stock
|
|
|
(1,609,677
|
)
|
|
|
(1,609,677
|
)
|
Basic and diluted weighted average shares outstanding
|
|
|
64,791,247
|
|
|
|
50,243,506
|
|
Basic and diluted net income (loss) per share
attributable to Class A shareholders
|
|
$
|
(3.88
|
)
|
|
$
|
(2.11
|
)
|
A summary of securities excluded from the computation of diluted earnings per share is presented below for the applicable periods:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options
|
|
|
877,266
|
|
|
|
1,068,162
|
|
Anti-dilutive warrants
|
|
|
14,428,150
|
|
|
|
15,680,651
|
|
Anti-dilutive restricted stock
|
|
|
1,449,287
|
|
|
|
2,723,637
|
|
Anti-dilutive deferred stock units
|
|
|
8,911,858
|
|
|
|
-
|
|
Anti-dilutive Pool B awards
|
|
|
10,142,494
|
|
|
|
-
|
|
Anti-dilutive Class B common stock convertible into Class A
common stock
|
|
|
2,302,936
|
|
|
|
5,500,692
|
|
Anti-dilutive Series A preferred stock convertible into Class A
common stock
|
|
|
9,058,176
|
|
|
|
8,853,028
|
|
Anti-dilutive Series B preferred stock convertible into Class A
common stock
|
|
|
78,245,727
|
|
|
|
-
|
|
Potentially dilutive securities excluded as anti-dilutive
|
|
|
125,415,894
|
|
|
|
33,826,170
|
|
69
NOTE 13 – SHARE-BASED COMPENSATION
Share-based compensation expense consisted of the following:
|
|
Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Restricted stock
|
|
$
|
4,719
|
|
|
$
|
6,496
|
|
|
Unrestricted stock
|
|
|
-
|
|
|
|
418
|
|
|
Stock options
|
|
|
905
|
|
|
|
841
|
|
|
DSUs
|
|
|
984
|
|
|
|
-
|
|
|
Pool A awards
|
|
|
2,328
|
|
|
|
-
|
|
|
Pool B awards
|
|
|
1,120
|
|
|
|
-
|
|
|
Total
|
|
$
|
10,056
|
|
(1)
|
$
|
7,755
|
|
(2)
|
(1) $1,940 was presented as part of cost of services and $8,116 was presented as part of selling, general and
administrative expenses in the consolidated statement of operations.
(2) $2,513 was presented as part of cost of services and $5,242 was presented as part of selling, general and
administrative expenses in the consolidated statement of operations.
Restricted Stock
The following table summarizes restricted stock activity in 2020:
|
|
Number of
shares
|
|
|
Weighted-
average
grant-date
fair value
(per share data)
|
|
Non-vested restricted stock as of December 31, 2019
|
|
|
2,723,637
|
|
|
$
|
8.87
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(690,237
|
)
|
|
|
8.87
|
|
Forfeited
|
|
|
(584,113
|
)
|
|
|
8.91
|
|
Non-vested restricted stock as of December 31, 2020
|
|
|
1,449,287
|
|
|
$
|
8.85
|
|
In 2019, the Company granted shares of restricted Class A common stock (“restricted stock”) totaling 2,218,183 to certain employees of the Company pursuant to the LTIP. Restricted stock is subject to restrictions on transfer and is generally subject to a risk of forfeiture if the award recipient is no longer an employee of the Company prior to the lapse of the restriction. The restricted stock granted in 2019 had a total fair value of $19,764 and vests over four years in equal installments each year on the anniversary of the grant date.
The fair value of the restricted stock granted in 2019 was determined using the closing price of the Company’s Class A common stock on the grant date.
As of December 31, 2020, the total unrecognized compensation cost related to restricted stock was $7,345 which is expected to be recognized over a weighted-average period of 2.15 years.
Unrestricted stock
In 2019, the Company granted 46,875 shares of fully vested and unrestricted Class A common stock (“unrestricted stock”) under the LTIP to certain board members in exchange for their services as a director of the Company, in accordance with the existing compensation plan of the Board of Directors. The fair value of the unrestricted stock was $8.91 per share, which was determined using the closing price of the Company’s Class A common stock on the grant date.
70
Stock options
The following table summarizes stock option activity in 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
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(190,896
|
)
|
|
|
8.91
|
|
|
|
-
|
|
Outstanding as of December 31, 2020
|
|
|
877,266
|
|
|
$
|
8.91
|
|
|
|
5.21
|
|
Exercisable as of December 31, 2020
|
|
|
219,317
|
|
|
$
|
8.91
|
|
|
|
5.21
|
|
In 2019, the Company granted a total of 1,068,162 stock options under the LTIP to certain employees of the Company. The fair value of stock options on the date of grant was $3.95 per option, which was calculated using the Black-Scholes valuation model. These stock options were granted with seven-year terms and vest over four years in equal installments each year on the anniversary of the grant date. The expected term of the options granted was based on the safe harbor rule of the SEC Staff Accounting Bulletin No. 107 “Share-Based Payment” as the Company lacks historical exercise data to estimate the expected term of these options. The expected stock price volatility is calculated based on the Company’s peer group because the Company does not have sufficient historical data and will continue to use peer group volatility information until historical volatility of the Company is available to measure expected volatility for future grants. The exercise price for stock options granted equals the closing market price of the underlying stock on the date of grant. These options are time-based and are not based upon attainment of performance goals. The fair value of stock options on the grant date was $4,219 and recognized as compensation expense over the vesting period of four years.
As of December 31, 2020, the total unrecognized compensation cost related to stock options was $1,906 which is expected to be recognized over a weighted average period of 2.21 years.
Deferred Stock Units
In 2020, the Company granted 8,911,858 Deferred Stock Units (“DSUs”) to certain key employees of the Company pursuant to the A&R LTIP. Each DSU represents the right to receive one share of the Company’s Class A common stock. DSUs granted in 2020 had total fair value of $2,954, which was determined using the closing price of Class A common stock on each grant date. DSUs vest over three years in equal installments each year on the anniversary of the vesting effective date, subject to the grantee’s continuous service through each vesting period.
As of December 31, 2020, the total unrecognized compensation cost related to DSUs was $1,969 which is expected to be recognized over a weighted average period of 2 years.
Pool A Performance Award
In 2020, the Company made grants of Pool A Performance Awards (“Pool A Award”) to certain key employees of the Company. Each Pool A Award represents the right to receive, at the Company’s election, a fixed monetary amount either in cash or a variable number of shares of the Company’s Class A common stock based on its closing share price on the date of settlement. The Pool A Award became fully vested as of January 1, 2021 but settlement will not occur until the fifth anniversary of the grant date.
The Company accounts for the Pool A Award under liability accounting as a result of the fixed monetary amount that could be settled either in cash or a variable number of shares of the Company’s Class A common stock. The Company considers the delayed settlement as a post-vesting restriction which would impact the determination of grant-date fair value of the award.
71
The Pool A Award granted in 2020 had a total fair value of $2,328, which was estimated using a risk-adjusted discount rate, which reflects the weighted average cost of capital of similarly traded public companies.
As of December 31, 2020, we recorded Pool A Award liability of $2,328, presented as part of other long-term liabilities in the consolidated balance sheets. Subsequent changes in the fair value of the liability from December 31, 2020 through the date of settlement will be recorded as additional compensation cost.
Pool B Performance Award
In 2020, the Company made grants of Pool B Performance Awards (“Pool B Award”) to certain key employees of the Company. Each Pool B Award represents the right to receive, at the Company’s election, either a cash payment calculated in accordance with the award agreement, or a fixed number of shares of the Company’s Class A common stock. The Pool B Award granted in 2020 had total fair value of $3,362, which was determined using the closing price of Class A common stock on each grant date. The Pool B Award vests over three years in equal installments each year on the anniversary of the vesting effective date, subject to the grantee’s continuous services through each vesting period.
As of December 31, 2020, the total unrecognized compensation cost related to Pool B Award was $2,241, which is expected to be recognized over a weighted average period of 2 years.
NOTE 14 – EMPLOYEE BENEFIT PLAN
On March 1, 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. Our matching contributions were $976 and $3,843 for the years ended December 31, 2020 and 2019, respectively, and included in cost of services and selling, general and administrative expenses in the statements of operations.
NOTE 15 – INCOME TAXES
The Company’s net deferred tax assets are as follows:
|
|
December 31,
|
|
Deferred Tax Assets
|
|
2020
|
|
|
2019
|
|
Net Operating Loss Carryforward
|
|
$
|
56,788
|
|
|
$
|
30,485
|
|
Startup/Organization Expenses
|
|
|
177
|
|
|
|
163
|
|
Investment in Partnership
|
|
|
70,300
|
|
|
|
19,489
|
|
Interest Expense
|
|
|
1,652
|
|
|
|
911
|
|
Attributes/Other
|
|
|
137
|
|
|
|
186
|
|
Total Deferred Tax Assets
|
|
|
129,054
|
|
|
|
51,234
|
|
Less Valuation Allowance
|
|
|
(129,054
|
)
|
|
|
(51,234
|
)
|
Total Deferred Tax Assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
72
The income tax provision consists of the following:
|
|
Years ended December 31,
|
|
Current
|
|
2020
|
|
|
2019
|
|
Federal
|
|
$
|
(757
|
)
|
|
$
|
-
|
|
State
|
|
|
(67
|
)
|
|
|
(77
|
)
|
Total Current
|
|
|
(824
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total Deferred
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
(824
|
)
|
|
$
|
(77
|
)
|
A reconciliation of the federal income tax rate to the Company’s effective tax rate at December 31, 2020 is as follows:
Pre-tax book loss
|
|
$
|
247,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Provision (Benefit)
|
|
|
(51,983
|
)
|
|
|
-21.00
|
%
|
Noncontrolling Interest
|
|
|
(13,039
|
)
|
|
|
-5.27
|
%
|
Permanent Differences
|
|
|
1,755
|
|
|
|
0.71
|
%
|
State Income Taxes, net of Federal Benefit
|
|
|
(53
|
)
|
|
|
-0.02
|
%
|
NOL Carryback, effect of rate change
|
|
|
(289
|
)
|
|
|
-0.12
|
%
|
Return to Provision, Other
|
|
|
682
|
|
|
|
0.28
|
%
|
Valuation Allowance
|
|
|
62,103
|
|
|
|
25.09
|
%
|
Total Provision (Benefit)
|
|
$
|
(824
|
)
|
|
|
-0.33
|
%
|
As of December 31, 2020, the Company had total U.S. federal net operating loss ("NOL") carryforwards of $240,331 and state NOLs of $277,173 available to offset future taxable income. $28,387 of the federal NOLs would begin to expire in 2036 if unused. Federal NOLs generated after December 31, 2017 do not expire and the state rules vary by state. After consideration of all the information available, management has established a valuation allowance against the deferred tax assets of the Company's tax loss carryforwards to the extent it is not more likely than not they will be realized. As of December 31, 2020, the valuation allowance totaled $129,054.
In assessing the realization of the deferred tax assets, management considers whether it is more likely than not that some portion of all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the positive and negative evidence with respect to sources of taxable income for purposes of determining the realization of deferred tax assets. In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s NOLs may be subject to an annual limitation in the event of a change in control as defined under the regulations.
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.
We follow guidance issued by the Financial Accounting Standards Board (“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 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 December 31, 2020 or December 31, 2019. We record income tax-related interest and penalties,
73
if any, as a component of income tax expense. We did not incur any material interest or penalties on income taxes.
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.
The Company was named a defendant in a case filed on January 14, 2019 in the Superior Court of the State of Delaware styled Smart Sand, Inc. v. U.S. Well Services LLC, C.A. 19C-01-144 PRW. Smart Sand alleges that the Company breached a multi-year contract under which Smart Sand supplied frac sand to the Company. Smart Sand claims damages of approximately $54 million. The Company denies that it breached the contract, has alleged that Smart Sand breached the contract first, and has asserted counterclaims for the misuse of the Company’s confidential information. The Company also asserts that the contract contains unenforceable penalty provisions. The case was tried to the Court during December 2020 and when trial concluded, the Court requested post-trial briefing. No prediction can be made as to the outcome of the case at this time nor can the Company reasonably estimate the potential losses or range of losses resulting from this litigation.
In addition to the case noted above, the Company is involved in various pending or potential legal actions in the ordinary course of business. Management is unable to predict the ultimate outcome of these actions because of the inherent uncertainty of litigation. However, management believes that the most probable, ultimate resolution of the remaining matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
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 December 31, 2020, we estimated and accrued for a shortfall in quantities. This accrual is presented as part of accrued liabilities on the consolidated balance sheets.
As of December 31, 2020, the Company’s contracted volumes in dollars was $16,002. The Company’s minimum commitments was $13,393, which represents the aggregate amounts that we would be obligated to pay if we procured no additional proppant under the contracts after December 31, 2020.
Operating Lease Agreements
The Company has various operating leases for facilities with terms ranging from 24 to 76 months.
Rent expense was $2,359 and $2,646 for the years ended December 31, 2020 and 2019, respectively, of which $1,655 and $2,130, respectively, are recorded as part of cost of services and $704, and $516, respectively, are recorded as part of selling, general and administrative expenses in the consolidated statements of operations.
The following is a schedule of future minimum payments on non-cancellable operating leases as of December 31, 2020:
2021
|
|
$
|
1,114
|
|
2022
|
|
|
828
|
|
2023
|
|
|
308
|
|
2024
|
|
|
258
|
|
2025
|
|
|
67
|
|
Thereafter
|
|
|
-
|
|
Total future minimum rentals
|
|
$
|
2,575
|
|
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.
74
Self-insurance
The Company establishes a self-insured plan for employees’ healthcare benefits except for losses more than 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 as of December 31, 2020 and 2019 was $189 and $588, respectively, and was reported as accrued expenses in the consolidated balance sheets. We believe that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially more than the amounts already accrued for existing claims.
NOTE 17 – RELATED PARTY TRANSACTIONS
On May 24, 2019, Crestview Partners purchased 20,000 shares of Series A preferred stock for a total payment of $20,000. Along with the Series A preferred stock, Crestview received 1,066,666 initial warrants with the right to receive additional warrants. During the year ended December 31, 2020, Crestview received 711,112 additional warrants.
On April 1, 2020, Crestview Partners purchased 11,500 shares of Series B preferred stock for a total payment of $11,500. The TCW Group, Inc. purchased 6,500 shares of Series B preferred stock for a total payment of $6,500 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 $1,878.
75