UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from [ ] to [ ]
Commission file number 001-38025
U.S. WELL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
81-1847117 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
organization) |
|
Identification No.) |
1360 Post Oak Boulevard, Suite 1800, Houston, TX |
|
77056 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code (832) 562-3730
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
CLASS A COMMON SHARES $0.0001, par value WARRANTS |
USWS USWSW |
NASDAQ Capital Market NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☐ |
|
Accelerated filer |
☒ |
Non-accelerated filer |
☐ |
|
Smaller reporting company |
☐ |
Emerging growth company |
☒ |
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ]Yes [X]No
As of May 1, 2020, the registrant had 68,364,500 shares of Class A Common Stock and 5,014,897 shares of Class B Common Stock outstanding.
|
|
Page No. |
PART I |
FINANCIAL INFORMATION |
|
Item 1. |
Financial Statements (Unaudited) |
|
|
2 |
|
|
3 |
|
|
4 |
|
|
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) |
6 |
|
7 |
|
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 |
|
28 |
||
29 |
||
|
|
|
30 |
||
30 |
||
30 |
||
32 |
||
32 |
||
32 |
||
32 |
||
33 |
||
|
34 |
1
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
9,068 |
|
|
$ |
33,794 |
|
Restricted cash |
|
|
519 |
|
|
|
7,610 |
|
Accounts receivable (net of allowance for doubtful accounts of $9,000 and $22 as of March 31, 2020 and December 31, 2019, respectively) |
|
|
89,853 |
|
|
|
79,542 |
|
Inventory, net |
|
|
9,619 |
|
|
|
9,052 |
|
Prepaids and other current assets |
|
|
12,386 |
|
|
|
13,332 |
|
Total current assets |
|
|
121,445 |
|
|
|
143,330 |
|
Property and equipment, net |
|
|
273,828 |
|
|
|
441,610 |
|
Intangible assets, net |
|
|
14,191 |
|
|
|
21,826 |
|
Goodwill |
|
|
4,971 |
|
|
|
4,971 |
|
Deferred financing costs, net |
|
|
1,164 |
|
|
|
1,045 |
|
TOTAL ASSETS |
|
$ |
415,599 |
|
|
$ |
612,782 |
|
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
75,063 |
|
|
$ |
70,170 |
|
Accrued expenses and other current liabilities |
|
|
18,492 |
|
|
|
40,481 |
|
Notes payable |
|
|
6,025 |
|
|
|
8,068 |
|
Current portion of long-term equipment financing |
|
|
2,755 |
|
|
|
5,564 |
|
Current portion of long-term capital lease obligation |
|
|
9,081 |
|
|
|
10,474 |
|
Current portion of long-term debt |
|
|
- |
|
|
|
6,250 |
|
Total current liabilities |
|
|
111,416 |
|
|
|
141,007 |
|
Long-term equipment financing |
|
|
12,002 |
|
|
|
10,501 |
|
Long-term debt |
|
|
285,752 |
|
|
|
274,391 |
|
Other long-term liabilities |
|
|
920 |
|
|
|
215 |
|
TOTAL LIABILITIES |
|
|
410,090 |
|
|
|
426,114 |
|
Commitments and contingencies (NOTE 16) |
|
|
|
|
|
|
|
|
MEZZANINE EQUITY |
|
|
|
|
|
|
|
|
Series A Redeemable Convertible Preferred Stock, par value $0.0001 per share; 55,000 shares authorized, issued and outstanding as of March 31, 2020 and December 31, 2019; aggregate liquidation preference of $60,801 and $59,050 as of March 31, 2020 and December 31, 2019, respectively |
|
|
46,928 |
|
|
|
38,928 |
|
STOCKHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Class A Common Stock, par value of $0.0001 per share; 400,000,000 shares authorized; 62,355,657 shares and 62,857,624 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively |
|
|
5 |
|
|
|
5 |
|
Class B Common Stock, par value of $0.0001 per share; 20,000,000 shares authorized; 5,500,692 shares issued and outstanding as of March 31, 2020 and December 31, 2019 |
|
|
1 |
|
|
|
1 |
|
Additional paid in capital |
|
|
242,143 |
|
|
|
248,302 |
|
Accumulated deficit |
|
|
(283,568 |
) |
|
|
(111,201 |
) |
Total stockholders' equity (deficit) attributable to U.S. Well Services, Inc. |
|
|
(41,419 |
) |
|
|
137,107 |
|
Noncontrolling interest |
|
|
- |
|
|
|
10,633 |
|
Total Stockholders' Equity (Deficit) |
|
|
(41,419 |
) |
|
|
147,740 |
|
TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY |
|
$ |
415,599 |
|
|
$ |
612,782 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
|
|
Three Months Ended March 31, |
|
||||||
|
|
2020 |
|
|
|
2019 |
|
||
Revenue |
|
$ |
112,035 |
|
|
|
$ |
139,772 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
Cost of services (excluding depreciation and amortization) |
|
|
85,153 |
|
|
|
|
109,681 |
|
Depreciation and amortization |
|
|
32,008 |
|
|
|
|
37,844 |
|
Selling, general and administrative expenses |
|
|
19,058 |
|
|
|
|
8,620 |
|
Impairment of long-lived assets |
|
|
147,543 |
|
|
|
|
- |
|
Loss on disposal of assets |
|
|
4,244 |
|
|
|
|
6,904 |
|
Loss from operations |
|
|
(175,971 |
) |
|
|
|
(23,277 |
) |
Interest expense, net |
|
|
(7,952 |
) |
|
|
|
(5,115 |
) |
Other income |
|
|
6 |
|
|
|
|
27 |
|
Loss before income taxes |
|
|
(183,917 |
) |
|
|
|
(28,365 |
) |
Income tax expense (benefit) |
|
|
(750 |
) |
|
|
|
124 |
|
Net loss |
|
|
(183,167 |
) |
|
|
|
(28,489 |
) |
Net loss attributable to noncontrolling interest |
|
|
(10,800 |
) |
|
|
|
(6,217 |
) |
Net loss attributable to U.S. Well Services, Inc. |
|
|
(172,367 |
) |
|
|
|
(22,272 |
) |
Dividends accrued on Series A preferred stock |
|
|
(1,751 |
) |
|
|
|
- |
|
Deemed and imputed dividends on Series A preferred stock |
|
|
(6,249 |
) |
|
|
|
- |
|
Net loss attributable to U.S. Well Services, Inc. common stockholders |
|
$ |
(180,367 |
) |
|
|
$ |
(22,272 |
) |
Loss per common share (See Note 12): |
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(3.00 |
) |
|
|
$ |
(0.45 |
) |
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
58,620 |
|
|
|
|
47,398 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(183,167 |
) |
|
$ |
(28,489 |
) |
Adjustments to reconcile net loss to cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
32,008 |
|
|
|
37,844 |
|
Impairment of long-lived assets |
|
|
147,543 |
|
|
|
- |
|
Provision for losses on accounts receivable |
|
|
9,031 |
|
|
|
- |
|
Provision for losses on inventory obsolescence |
|
|
37 |
|
|
|
12 |
|
Loss on disposal of assets |
|
|
4,244 |
|
|
|
6,904 |
|
Amortization of discount on debt |
|
|
221 |
|
|
|
749 |
|
Deferred financing costs amortization |
|
|
359 |
|
|
|
336 |
|
Share-based compensation expense |
|
|
2,078 |
|
|
|
1,059 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(19,342 |
) |
|
|
(26,115 |
) |
Inventory |
|
|
(603 |
) |
|
|
(2,044 |
) |
Prepaids and other current assets |
|
|
945 |
|
|
|
4,702 |
|
Accounts payable |
|
|
15,825 |
|
|
|
9,331 |
|
Accrued liabilities |
|
|
(2,702 |
) |
|
|
8,041 |
|
Accrued interest |
|
|
(18,036 |
) |
|
|
683 |
|
Net cash provided by (used in) operating activities |
|
|
(11,559 |
) |
|
|
13,013 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(35,017 |
) |
|
|
(52,442 |
) |
Proceeds from sale of property and equipment |
|
|
14,907 |
|
|
|
- |
|
Net cash used in investing activities |
|
|
(20,110 |
) |
|
|
(52,442 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility |
|
|
9,476 |
|
|
|
9,025 |
|
Repayment of revolving credit facility |
|
|
(2,381 |
) |
|
|
- |
|
Proceeds from issuance of long-term debt |
|
|
- |
|
|
|
35,000 |
|
Repayments of long-term debt |
|
|
(2,500 |
) |
|
|
- |
|
Repayments of notes payable |
|
|
(2,042 |
) |
|
|
(2,179 |
) |
Repayments of amounts under equipment financing |
|
|
(1,308 |
) |
|
|
(6,683 |
) |
Principal payments under finance lease obligation |
|
|
(1,393 |
) |
|
|
(4,379 |
) |
Deferred financing costs |
|
|
- |
|
|
|
(1,487 |
) |
Net cash provided by (used in) financing activities |
|
|
(148 |
) |
|
|
29,297 |
|
Net decrease in cash and cash equivalents and restricted cash |
|
|
(31,817 |
) |
|
|
(10,132 |
) |
Cash and cash equivalents and restricted cash, beginning of period |
|
|
41,404 |
|
|
|
30,036 |
|
Cash and cash equivalents and restricted cash, end of period |
|
$ |
9,587 |
|
|
$ |
19,904 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Supplemental cash flow disclosure: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
25,121 |
|
|
$ |
3,359 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Deemed and imputed dividends on Series A preferred stock |
|
|
6,249 |
|
|
|
- |
|
Accrued Series A preferred stock dividends |
|
|
1,751 |
|
|
|
- |
|
Changes in accrued and unpaid capital expenditures |
|
|
11,039 |
|
|
|
59,784 |
|
Assets under finance lease obligations |
|
|
- |
|
|
|
10,451 |
|
Financed equipment purchases |
|
|
- |
|
|
|
36,280 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
(unaudited)
|
|
Class A Common Stock |
|
|
Class B Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in |
|
|
Accumulated |
|
|
Noncontrolling |
|
|
Total |
|
||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Interest |
|
|
Equity |
|
||||||||
Balance, December 31, 2018 |
|
|
49,254,760 |
|
|
$ |
5 |
|
|
|
13,937,332 |
|
|
$ |
1 |
|
|
$ |
204,928 |
|
|
$ |
(17,383 |
) |
|
$ |
52,798 |
|
|
$ |
240,349 |
|
Adoption of ASC 606 as of January 1, 2019 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
95 |
|
|
|
27 |
|
|
|
122 |
|
Exercise of warrants |
|
|
1,412,372 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
Restricted stock granted to employees |
|
|
2,213,027 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Class A common stock granted to board members |
|
|
46,875 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
331 |
|
|
|
- |
|
|
|
87 |
|
|
|
418 |
|
Share-based compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
749 |
|
|
|
- |
|
|
|
206 |
|
|
|
955 |
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(22,272 |
) |
|
|
(6,217 |
) |
|
|
(28,489 |
) |
Balance, March 31, 2019 |
|
|
52,927,034 |
|
|
$ |
5 |
|
|
|
13,937,332 |
|
|
$ |
1 |
|
|
$ |
206,008 |
|
|
$ |
(39,560 |
) |
|
$ |
46,901 |
|
|
$ |
213,355 |
|
|
|
Class A Common Stock |
|
|
Class B Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in |
|
|
Accumulated |
|
|
Noncontrolling |
|
|
Total |
|
||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Interest |
|
|
Equity |
|
||||||||
Balance, December 31, 2019 |
|
|
62,857,624 |
|
|
$ |
5 |
|
|
|
5,500,692 |
|
|
$ |
1 |
|
|
$ |
248,302 |
|
|
$ |
(111,201 |
) |
|
$ |
10,633 |
|
|
$ |
147,740 |
|
Share-based compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,911 |
|
|
|
- |
|
|
|
167 |
|
|
|
2,078 |
|
Tax withholding related to vesting of share-based compensation |
|
|
(154,253 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(70 |
) |
|
|
- |
|
|
|
- |
|
|
|
(70 |
) |
Restricted stock forfeitures |
|
|
(347,714 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Deemed and imputed dividends on Series A preferred stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,249 |
) |
|
|
- |
|
|
|
- |
|
|
|
(6,249 |
) |
Accrued Series A preferred stock dividends |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,751 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,751 |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(172,367 |
) |
|
|
(10,800 |
) |
|
|
(183,167 |
) |
Balance, March 31, 2020 |
|
|
62,355,657 |
|
|
$ |
5 |
|
|
|
5,500,692 |
|
|
$ |
1 |
|
|
$ |
242,143 |
|
|
$ |
(283,568 |
) |
|
$ |
- |
|
|
$ |
(41,419 |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS
U.S. Well Services, Inc. (the “Company”), f/k/a Matlin & Partners Acquisition Corp (“MPAC”), is a Houston, Texas-based oilfield service provider of well stimulation services to the upstream oil and natural gas industry. The Company engages in high-pressure hydraulic fracturing in oil and natural gas basins in the United States. The fracturing process consists of pumping a specially formulated fluid into perforated well casing, tubing or open holes under high pressure, causing the underground formation to crack or fracture, allowing nearby hydrocarbons to flow more freely up the wellbore.
The Company’s fleets consist of mobile hydraulic fracturing units and other auxiliary heavy equipment to perform fracturing services. The Company has two designs for hydraulic fracturing units: (1) Conventional Fleets, which are powered by diesel fuel and utilize traditional internal combustion engines, transmissions, and radiators and (2) Clean Fleet®, which replaces the traditional engines, transmissions, and radiators with electric motors powered by electricity generated by natural gas-fueled turbine generators. Both designs utilize high-pressure hydraulic fracturing pumps mounted on trailers. The Company refers to the group of pump trailers and other equipment necessary to perform a typical fracturing job as a “fleet” and the personnel assigned to each fleet as a “crew”.
MPAC was incorporated in Delaware in March 2016 as a special purpose acquisition company, formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses.
On November 9, 2018, MPAC acquired USWS Holdings LLC, a Delaware limited liability company (“USWS Holdings”), pursuant to the Merger and Contribution Agreement, dated as of July 13, 2018, and subsequently amended (as amended, the “Merger and Contribution Agreement”). The acquisition, together with the other transactions contemplated by the Merger and Contribution Agreement are referred to herein as the “Transaction”. In connection with the closing of the Transaction, MPAC changed its name to U.S. Well Services, Inc.
Following the completion of the Transaction, substantially all of the Company’s assets and operations are held and conducted by U.S. Well Services, LLC (“USWS LLC”), a wholly owned subsidiary of USWS Holdings, and the Company’s only assets are equity interests representing 92% ownership of USWS Holdings as of March 31, 2020.
Unless the context otherwise requires, “the Company”, “we,” “us,” and “our” refer, for periods prior to the completion of the Transaction, to USWS Holdings and its subsidiaries and, for periods upon or after the completion of the Transaction, to U.S. Well Services, Inc. and its subsidiaries, including USWS Holdings and its subsidiaries.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by GAAP for annual financial statements and should be read in conjunction with the annual financial statements included in the Company's 2019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 5, 2020 (the “Annual Report”).
The accompanying unaudited condensed consolidated financial statements and accompanying notes present the consolidated financial position, results of operations, cash flows, and equity of the Company as of March 31, 2020 and December 31, 2019, and for the three months ended March 31, 2020 and 2019. The interim data includes all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim period. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations expected for the entire fiscal year ended December 31, 2020.
7
The condensed consolidated financial statements comprise the financial statements of the Company, its wholly owned subsidiaries, and its subsidiaries that it controls due to ownership of a majority voting interest. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the Company. All significant intercompany balances and transactions are eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We regularly evaluate estimates and judgments based on historical experience and other relevant facts and circumstances. Significant estimates included in these financial statements primarily relate to allowance for doubtful accounts, allowance for inventory obsolescence, estimated useful lives and valuation of property and equipment and intangibles, impairment assessments of goodwill and long-lived assets, Level 2 inputs used in fair value estimation of term loans, and the assumptions used in our Black-Scholes and Monte Carlo option pricing models associated with the valuation of share-based compensation and certain equity instruments. Actual results could differ from those estimates.
Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements, or are reserved for a specific purpose, and not readily available for immediate or general use are recorded in restricted cash in our condensed consolidated balance sheets. The restricted cash in our condensed consolidated balance sheet represents cash transferred into a trust account to support our workers’ compensation obligations and cash held for use in capital expenditures related to approved fleet expansion in amounts of $0.5 million and a nominal amount, respectively, as of March 31, 2020, and $0.5 million and $7.1 million, respectively, as of December 31, 2019.
The following table provides a reconciliation of the amount of cash and cash equivalents reported on the condensed consolidated balance sheets to the total of cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows (in thousands):
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
Cash and cash equivalents |
|
$ |
9,068 |
|
|
$ |
33,794 |
|
Restricted cash |
|
|
519 |
|
|
|
7,610 |
|
Cash and cash equivalents and restricted cash |
|
$ |
9,587 |
|
|
$ |
41,404 |
|
Inventory
Inventory consists of proppant, chemicals, and other consumable materials and supplies used in our high-pressure hydraulic fracturing operations. Inventories are stated at the lower of cost or net realizable value. Cost is determined principally on a first-in-first-out cost basis. All inventories are purchased for use by the Company in the delivery of its services with no inventory being sold separately to outside parties. Inventory quantities on hand are reviewed regularly and write-downs for obsolete inventory are recorded based on our forecast of the inventory item demand in the near future. As of March 31, 2020 and December 31, 2019, the Company had reserves of $0.4 million and $0.6 million, respectively, for obsolete and slow-moving inventory.
Property and Equipment
Property and equipment are carried at cost, with depreciation provided on a straight-line basis over their estimated useful lives. Expenditures for renewals and betterments that extend the lives of the assets are capitalized. Amounts spent for maintenance and repairs, which do not improve or extend the life of the related asset, are charged to expense as incurred.
The Company separately identifies and accounts for certain critical components of its hydraulic fracturing units including the engine, transmission, and pump, which requires us to separately estimate the useful lives of these components. For our other service equipment, we do not separately identify and track depreciation of specific original components. When we replace components of these assets, we typically have to estimate the net book values of the components that are retired, which are based primarily upon their replacement costs, their ages and their original estimated useful lives.
8
In the first quarter of 2020, our review of impairment of long-lived assets (refer to “Note 5 – Goodwill and Intangible Assets”) necessitated a review of the useful lives of our property and equipment. Current trends in hydraulic fracturing equipment operating conditions, such as increasing treating pressures and higher pumping rates, along with the increase in daily pumping time are shortening the useful life of certain critical components we use. We determined that the average useful life for 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 incurred. This change in accounting estimate was made effective in March 2020 and was accounted for prospectively.
Goodwill
Goodwill is not amortized, but is reviewed for impairment annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. Judgements regarding indicators of potential impairment are based on market conditions and operational performance of the business.
As of December 31, or as required, the Company performs an impairment analysis of goodwill. The Company may assess its goodwill for impairment initially using a qualitative approach to determine whether conditions exist that indicate it is more likely than not that a reporting unit’s carrying value is greater than its fair value, and if such conditions are identified, then a quantitative analysis will be performed to determine if there is any impairment. The Company may also elect to perform a single step quantitative analysis in which the carrying amount of the reporting unit is compared to its fair value, which the Company estimates using a guideline public company method, a form of the market approach. The guideline public company method utilized the trading multiples of similarly traded public companies as they related to the Company’s operating metrics. An impairment charge would be recognized for the amount by which the carrying amount of the reporting unit exceeds the reporting unit’s fair value, and only limited to the total amount of goodwill allocated to the reporting unit.
Fair Value of Financial Instruments
Fair value is defined under Accounting Standards Codification (ASC) 820, Fair Value Measurement, as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are defined as follows:
Level 1–inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2–inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3–inputs are unobservable for the asset or liability.
The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of March 31, 2020 and December 31, 2019:
Senior Secured Term Loan. The fair value of the Senior Secured Term Loan is $223.0 million and approximates carrying value as of March 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 March 31, 2020 and December 31, 2019.
Revenue Recognition
The Company recognizes revenue based on the customer’s ability to benefit from the services rendered in an amount that reflects the consideration expected to be received in exchange for those services.
The Company’s performance obligations are satisfied over time, typically measured in number of stages completed or the number of pumping days a fleet is available to pump for a customer in a month. All revenue is recognized when a contract with a customer exists, collectability of amounts subject to invoice is probable, the performance obligations under the contract have been satisfied over time, and the amount to which the Company has the right to invoice has been determined. A portion of the Company’s contracts contain variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which time the variability is resolved.
9
The Company has elected to use the “as invoiced” practical expedient to recognize revenue based upon the amount it has a right to invoice upon the completion of each performance obligation per the terms of the contract.
Accounts Receivable
Accounts receivable are recorded at their outstanding balances adjusted for an allowance for doubtful accounts. The allowance for doubtful accounts is determined by analyzing the payment history and credit worthiness of each customer. Receivable balances are charged off when they are considered uncollectible by management. Recoveries of receivables previously charged off are recorded as income when received. The Company held a reserve for doubtful accounts of $9.0 million and a nominal amount as of March 31, 2020 and December 31, 2019, respectively. The reserve was recorded as of March 31, 2020 due to growing uncertainty as to collectability of billed amounts from customers weakened by the recent collapse in crude oil prices. We are continuing to work with our customers on collecting these receivables.
Major Customer and Concentration of Credit Risk
The concentration of our customers in the oil and natural gas industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables.
The following table shows the percentage of revenues from our significant customers for the three months ended March 31, 2020 and 2019:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Customer A |
|
23.6% |
|
|
10.2% |
|
||
Customer B |
|
13.9% |
|
|
* |
|
||
Customer C |
|
13.8% |
|
|
* |
|
||
Customer D |
|
12.7% |
|
|
20.0% |
|
||
Customer E |
|
* |
|
|
15.5% |
|
||
Customer F |
|
* |
|
|
12.0% |
|
||
Customer G |
|
* |
|
|
10.9% |
|
||
|
|
|
|
|
|
|
|
|
An asterisk indicates that revenue is less than ten percent. |
|
|
|
|
|
|
|
|
The following table shows the percentage of trade receivables from our significant customers as of March 31, 2020 and December 31, 2019:
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
|
14.1% |
|
|
12.0% |
|
|
Customer B |
|
13.8% |
|
|
10.3% |
|
Customer C |
|
11.7% |
|
|
* |
|
Customer D |
|
16.7% |
|
|
12.1% |
|
Customer E |
|
* |
|
|
* |
|
Customer F |
|
* |
|
|
* |
|
Customer G |
|
9.7% |
|
|
34.5% |
|
Customer H |
|
12.7% |
|
|
15.9% |
|
An asterisk indicates that trade receivable is less than ten percent.
10
The Company, under ASC 740, uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and (ii) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized.
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at March 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.
Except as discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2020, as compared to the recent accounting pronouncements described in the Annual Report, that are of significance, or potential significance to the Company.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the second step of the previous two-step quantitative test of goodwill impairment. Under the new guidance, the quantitative test consists of a single step in which the carrying amount of the reporting unit is compared to its fair value. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the amount of the impairment would be limited to the total amount of goodwill allocated to the reporting unit. The guidance does not affect the existing option to perform the qualitative assessment for a reporting unit to determine whether the quantitative impairment test is necessary. The new guidance will be effective for emerging growth companies for fiscal years beginning after December 15, 2021; however, early adoption is permitted. The Company early adopted this guidance during the first quarter of 2020. The Company’s impairment analysis did not result in any impairment of goodwill.
NOTE 4 – PREPAIDS AND OTHER CURRENT ASSETS
Prepaids and other current assets as of March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
Prepaid insurance |
|
$ |
8,775 |
|
|
$ |
11,127 |
|
Income tax receivable |
|
|
1,567 |
|
|
|
810 |
|
Other current assets |
|
|
2,044 |
|
|
|
1,395 |
|
Total prepaid expenses and other current assets |
|
$ |
12,386 |
|
|
$ |
13,332 |
|
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of identifiable assets acquired and liabilities assumed. The Company performs impairment analysis related to goodwill as of December 31 of each year, or when the Company identifies certain triggering events or circumstances that would more likely than not reduce the estimated fair value of the goodwill below its carrying amount.
In the first quarter of 2020, the Company performed impairment reviews of goodwill and long-lived assets. The impairment reviews were triggered by the sudden and drastic decline in oil prices in March 2020 and the corresponding decrease in the Company’s stock price, operating results and revised forecasts.
11
The Company performed a quantitative goodwill impairment test, utilizing the single-step approach to compare the carrying value of the reporting unit to its estimated fair value. The estimated fair value of the reporting unit was determined using a guideline public company method, a form of the market approach. The guideline public company method utilized the trading multiples of similarly traded public companies as they related to our operating metrics. Based on the impairment test, the Company determined that goodwill was not impaired as the reporting unit’s carrying value, after accounting for the impairment charges of long-lived assets, did not exceed the reporting unit’s fair value.
Intangible Assets
A summary of intangible assets as of March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
Estimated Useful Life (in years) |
|
Gross Carrying Value |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
10 |
|
|
1,415 |
|
|
|
- |
|
|
|
1,415 |
|
Patents |
|
20 |
|
|
12,776 |
|
|
|
- |
|
|
|
12,776 |
|
|
|
|
|
$ |
14,191 |
|
|
$ |
- |
|
|
$ |
14,191 |
|
As of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
10 |
|
|
3,132 |
|
|
|
913 |
|
|
|
2,219 |
|
Patents |
|
20 |
|
|
22,955 |
|
|
|
3,348 |
|
|
|
19,607 |
|
|
|
|
|
$ |
26,087 |
|
|
$ |
4,261 |
|
|
$ |
21,826 |
|
The intangible assets are amortized over the period the Company expects to receive the related economic benefit. Amortization expense related to amortizable intangible assets for the three months ended March 31, 2020 and 2019 was $0.4 million and $1.9 million, respectively, and was included as part of depreciation and amortization in the condensed consolidated statements of operations.
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 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.
The estimated amortization expense for future periods is as follows (in thousands):
Fiscal Year |
|
Estimated Amortization Expense |
|
|
Remainder of 2020 |
|
$ |
760 |
|
2021 |
|
|
1,014 |
|
2022 |
|
|
1,014 |
|
2023 |
|
|
1,014 |
|
2024 |
|
|
1,014 |
|
Thereafter |
|
|
9,375 |
|
Total |
|
$ |
14,191 |
|
12
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment as of March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
Estimated Useful Life (in years) |
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
Fracturing equipment |
|
1.5 to 25 years |
|
$ |
257,728 |
|
|
$ |
651,162 |
|
Light duty vehicles |
|
5 years |
|
|
2,106 |
|
|
|
8,188 |
|
Furniture and fixtures |
|
5 years |
|
|
66 |
|
|
|
277 |
|
IT equipment |
|
3 years |
|
|
1,417 |
|
|
|
6,724 |
|
Auxiliary equipment |
|
2 to 20 years |
|
|
12,223 |
|
|
|
38,502 |
|
Leasehold improvements |
|
Term of lease |
|
|
288 |
|
|
|
725 |
|
|
|
|
|
|
273,828 |
|
|
|
705,578 |
|
Less: Accumulated depreciation and amortization |
|
|
|
|
- |
|
|
|
(263,968 |
) |
Property and equipment, net |
|
|
|
$ |
273,828 |
|
|
$ |
441,610 |
|
Depreciation and amortization expense for the three months ended March 31, 2020 and 2019 was $32.0 million and $37.8 million, respectively.
As a result of the impairment test on long-lived assets described in “Note 5 – Goodwill and Intangible assets,” the Company recorded 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.
NOTE 7 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
Accrued payroll and benefits |
|
$ |
10,282 |
|
|
$ |
9,356 |
|
Accrued taxes |
|
|
6,312 |
|
|
|
9,817 |
|
Accrued interest |
|
|
154 |
|
|
|
18,190 |
|
Other current liabilities |
|
|
1,744 |
|
|
|
3,118 |
|
Accrued expenses and other current liabilities |
|
$ |
18,492 |
|
|
$ |
40,481 |
|
NOTE 8 – NOTES PAYABLE
Notes payable represents premium finance agreements with a credit finance institution to pay the premiums on insurance policies for the Company’s directors and officers’ liability, general liability, workers’ compensation, umbrella, auto and pollution coverage needs. These premium finance agreements had total balances of $6.0 million and $8.1 million as of March 31, 2020 and December 31, 2019, respectively.
13
Long-term debt as of March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
Senior Secured Term Loan |
|
$ |
247,500 |
|
|
$ |
250,000 |
|
ABL Credit Facility |
|
|
47,185 |
|
|
|
40,090 |
|
Equipment financing |
|
|
14,757 |
|
|
|
16,065 |
|
Capital leases |