NUVERRA ENVIRONMENTAL SOLUTIONS, INC. Special Note about Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying unaudited
Condensed Consolidated Financial Statements and related notes thereto. See
"Forward-Looking Statements" on page 5 of this Quarterly Report on Form 10-Q
("Quarterly Report") and "Risk Factors" included in our Annual Report on Form
10-K for the year ended December 31, 2019 , filed with the SEC on March 10,
2020 (the "2019 Annual Report on Form 10-K"), as well as the updated risk factor
below in "Part II - Other Information Item 1A. Risk Factors", and in our other
filings with the United States Securities and Exchange Commission ("SEC") for a
description of important factors that could cause actual results to differ from
expected results.
Company Overview
Nuverra Environmental Solutions, Inc. and its subsidiaries (collectively,
"Nuverra," the "Company," "we," "us," or "our") are providers of water logistics
and oilfield services to customers focused on the development and ongoing
production of oil and natural gas from shale formations in the United States .
Our business operations are organized into three geographically distinct
divisions: the Rocky Mountain division, the Northeast division, and the Southern
division. Within each division, we provide water transport services, disposal
services, and rental and other services associated with the drilling,
completion, and ongoing production of shale oil and natural gas. These services
and the related revenues are further described in Note 3 in the Notes to the
Condensed Consolidated Financial Statements herein.
The Rocky Mountain division is ourBakken Shale area business. The Bakken and underlyingThree Forks shale formations are the two primary oil producing reservoirs currently being developed in this geographic region, which covers westernNorth Dakota , easternMontana , northwesternSouth Dakota and southernSaskatchewan . We have operations in various locations throughoutNorth Dakota andMontana , including yards inDickinson ,Williston ,Watford City ,Tioga ,Stanley , andBeach, North Dakota , as well asSidney, Montana . Additionally, we operate a financial support office inMinot, North Dakota . As ofJune 30, 2020 , we had 252 employees in the Rocky Mountain division.
Water Transport Services
We manage a fleet of 195 trucks in the Rocky Mountain division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities. In the Rocky Mountain division, we own an inventory of lay flat temporary hose as well as related pumps and associated equipment used to move fresh water from water sources to operator locations for use in completion activities. We employ specially trained field personnel to manage and operate this business. For customerswho have secured their own source of fresh water, we provide and operate the lay flat temporary hose equipment to move the fresh water to the drilling and completion location. We may also use third-party sources of fresh water in order to provide the water to customers as a package that includes our water transport service. Disposal Services We manage a network of 20 owned and leased salt water disposal wells with current capacity of approximately 82 thousand barrels of water per day, and permitted capacity of 104 thousand barrels of water per day. Our salt water disposal wells in the Rocky Mountain division are operated under the Landtech brand. Additionally, we operate a landfill facility nearWatford City, North Dakota that handles the disposal of drill cuttings and other oilfield waste generated from drilling and completion activities in the region.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Rocky Mountain division. These assets include tanks, loaders, manlifts, light towers, winch trucks, and other miscellaneous equipment used in drilling and completion
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--------------------------------------------------------------------------------activities. In the Rocky Mountain division, we also provide oilfield labor services, also called "roustabout work," where our employees move, set-up and maintain the rental equipment for customers, in addition to providing other oilfield labor services.
Northeast Division
The Northeast division is comprised of the Marcellus andUtica Shale areas, both of which are predominantly natural gas producing basins. The Marcellus andUtica Shale areas are located in the northeasternUnited States , primarily inPennsylvania ,West Virginia ,New York andOhio . We have operations in various locations throughoutPennsylvania ,West Virginia , andOhio , including yards inMasontown, West Virginia ,Somerset andWellsboro, Pennsylvania , andCadiz, Ohio . Additionally, we operate a corporate support office nearPittsburgh, Pennsylvania . As ofJune 30, 2020 , we had 183 employees in the Northeast division.
Water Transport Services
We manage a fleet of 180 trucks in the Northeast division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region, or to other customer locations for reuse in completing other wells. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities.
Disposal Services
We manage a network of 13 owned and leased salt water disposal wells with current capacity of approximately 25 thousand barrels of water per day, and permitted capacity of approximately 32 thousand barrels of water per day in the Northeast division. Our salt water disposal wells in the Northeast division are operated under the Nuverra, Heckmann, and Clearwater brands.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Northeast division. These assets include tanks and winch trucks used in drilling and completion activities.
Southern Division
The Southern division is comprised of theHaynesville Shale area, a predominantly natural gas producing basin, which is located across northwesternLouisiana and easternTexas , and extends into southwesternArkansas . We have operations in various locations throughout easternTexas and northwesternLouisiana , including a yard inFrierson, Louisiana . Additionally, we operate a corporate support office inHouston, Texas . As ofJune 30, 2020 , we had 66 employees in the Southern division.
Water Transport Services
We manage a fleet of 42 trucks in the Southern division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water to operator locations for use in well completion activities. In the Southern division, we also own and operate a 60-mile underground twin pipeline network for the collection of produced water for transport to interconnected disposal wells and the delivery of fresh water from water sources to operator locations for use in well completion activities. The pipeline network can currently handle disposal volumes up to approximately 68 thousand barrels per day with 6 disposal wells attached to the pipeline and is scalable up to approximately 106 thousand barrels per day.
Disposal Services
We manage a network of 7 owned and leased salt water disposal wells that are not connected to our pipeline with current capacity of approximately 42 thousand barrels of water per day, and permitted capacity of approximately 100 thousand barrels of water per day, in the Southern division.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Southern division. These assets include tanks and winch trucks used in drilling and completion activities.
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--------------------------------------------------------------------------------Trends Affecting Our Operating Results
Impact of COVID-19 and Oil Price Declines
InMarch 2020 , the coronavirus disease 2019 ("COVID-19") outbreak was labeled as a global pandemic by theWorld Health Organization and has since spread to most regions of the world. DuringMarch 2020 , COVID-19 spread throughoutthe United States , and federal, state and local governments implemented significant actions to mitigate the public health crisis, including many state and local governments mandating shelter in place and stay at home orders, which required many businesses to close, except those deemed essential services. Additionally, the federal government implemented stringent travel restrictions. These actions resulted in a significant decline in airline travel and car usage, which negatively impacted the demand for refined products, such as gasoline and jet fuel, and consequently the demand for crude oil. InMay 2020 , many states began easing restrictions on businesses allowing them to reopen and operate under municipality mandated safety guidelines. However, inJune 2020 , increases in COVID-19 cases acrossthe United States were reported and certain states have responded by re-imposing restrictions on many businesses. During this time, the demand for crude oil has continued to be depressed. Nuverra and our customers are considered an essential business in every state that we operate. As a result, we have been able to continue performing our services in areas with virus related restrictions. Many areas that we operate in are relatively removed from high population areas and many of the job functions we perform can be completed with minimal personal contact. Any back office support staff that was able to work remotely from home has done so. In combination, these factors have resulted in minimal business interruptions during the first half of 2020. Additionally, beginning in earlyMarch 2020 , the global oil markets were negatively impacted by an oil supply conflict occurring when theOrganization of Petroleum Exporting Countries and other oil producing nations ("OPEC+") were initially unable to reach an agreement on production levels for crude oil, at which pointSaudi Arabia andRussia initiated efforts to aggressively increase crude production. The result was an oversupply of oil, which put downward pressure on the price of crude oil. The convergence of these events created a dramatic decline in the demand for oil. The resulting impact to oil prices during the first half of 2020 was significant, with the price per barrel of West Texas Intermediate ("WTI") crude oil plummeting 56% duringMarch 2020 . WTI oil spot prices decreased from a high of$63 per barrel in early January to a low of$14 per barrel in late March, including negative pricing for a short period and had an average price of$28 per barrel for the second quarter of 2020. The physical markets for crude oil showed signs of distress as spot prices were negatively impacted by the lack of available storage capacity. This significantly increased the volatility in oil prices. OPEC+ agreed inApril 2020 to further cut production, which is anticipated to continue through at leastJuly 2020 . The effect of the production cuts began to ease storage supply issues and stabilize crude oil markets. WTI crude oil prices have steadily risen sinceMay 2020 and were close to$40 per barrel at the end ofJune 2020 . Despite the improvement in the crude oil markets, drilling and completion activity inthe United States and our markets remains depressed. While we experienced minimal impact in the first quarter of 2020, we experienced a significant decline in activity in the second quarter of 2020. We expect the significant decline in activity, coupled with downward pricing pressure to continue for the remainder of fiscal 2020. In anticipation of a meaningful and sustained decline in our revenues, during the first quarter of 2020, we implemented a number of initiatives to adjust our cost structure, including:
• Adjusted salaries for all exempt and non-exempt non-contracted employees
between 10% and 20%;
• Headcount reduction of approximately 100 employees, including changes made
earlier in the first quarter of 2020;
• Reduced Chief Executive Officer's salary by 25%, Chief Operating Officer
salary by 20% and two other executives' salaries between 10% and 20%;
• Reduced the compensation program for the non-employee Board of Directors
by 25%;
• Materially scaled back operations in two completions-related businesses
and closed one location; and
• Reduced other non-critical operating expenses.
These initiatives are expected to reduce annual costs by approximately$11.0 million , and will allow us to be more competitive across all of our business operations. Additionally, we implemented a significant reduction in our capital expenditures budget. We continue to actively review our organizational structure, and we are evaluating additional steps to further enhance our cash flow generation capability. Additionally, our liquidity may be negatively impacted depending on how quickly consumer demand and oil prices return to more normalized levels. A lack of confidence in our industry on the part of the financial markets may result in a lack of access to capital, any of which could lead to reduced liquidity, an event of default, inability to draw on amounts available under our$30.0 million 30 -------------------------------------------------------------------------------- senior secured revolving credit facility (the "Revolving Facility") and our delayed draw under the Second Lien Term Loan (as defined below), the possible acceleration of or repayment of our outstanding debt, or a limited ability to refinance our debt. While we are not able to estimate the full impact of the COVID-19 outbreak and oil price declines on our financial condition and future results of operations, we expect that this situation will have an adverse effect on our reported results for the remainder of fiscal 2020 and possibly beyond.
Other Trends Affecting Operating Results
We continue to monitor several industry trends in the shale basins in which we operate. Our results are affected by capital expenditures made by the exploration and production operators in the shale basins in which we operate. These capital expenditures determine the level of drilling and completion activity, which impacts the amount and volume of produced water, water for fracking, flowback water, drill cuttings and rental equipment requirements that create demand for our services. The primary drivers of these expenditures are current or anticipated prices of crude oil and natural gas. Prices trended lower during 2019 and continued to decline considerably during the first half of 2020. The average price per barrel of WTI crude oil was$28.00 for the three months endedJune 30, 2020 as compared to$60.03 for the three months endedJune 30, 2019 . The average price of natural gas as measured by theHenry Hub Natural Gas Index was$1.70 for the three months endedJune 30, 2020 compared to$2.57 for the three months endedJune 30, 2019 . See "Impact of COVID-19 and Oil Price Declines" above for further discussion. The rapid drop in crude prices occurred primarily in March andApril 2020 . InMay 2020 , OPEC+ began cutting oil production, which began to positively impact crude prices. As a result, inJune 2020 crude oil prices ranged between$35 and$40 per barrel, but prices were still below levels from earlier in 2020. The drop in crude prices had minimal impact on the first quarter of 2020 operating results as our customers had little time to adjust activity levels. However, our customers' drilling and completion activity fell substantially during the second quarter of 2020, with many customers shutting in or lowering production as a result of spot crude prices falling below the cash costs of production in many basins and wells. Producers have shut-in production on a scale not seen in prior downturns and have been slower to bring wells back on line than anticipated. We expect crude oil prices to remain low for the foreseeable future, so we anticipate our customers' crude or natural gas liquids drilling and completion activity to continue to operate at lower levels. DuringJune 2020 , per theNorth Dakota Industrial Commission , approximately 28% of daily crude oil production in the Bakken shale region was estimated to have been shut-in, contributing to a reduction of approximately 405,000 barrels per day. The curtailed production dropped the volumes of produced water accordingly. This has had and will continue to have a dramatic negative effect on our produced water business in the Rocky Mountain division. Additionally, in earlyJuly 2020 , a Unites States court ruling ordered the shutdown of the Dakota Access Pipeline ("DAPL") over concerns on the environmental impact of the pipeline. The DAPL is a major transporter of oil volumes from the Bakken shale area. Although transport of product from the Bakken shale area historically has also occurred by rail and other means, which is a higher transportation cost than the DAPL, there can be no assurance that there will be sufficient future takeaway capacity. Though an appeals court has allowed the DAPL to continue to operate in the near term, the pending closure of the DAPL has customers cautious about returning to more normal business volumes and/or deferring capital expenditure projects until the litigation has been adjudicated. As a result, the recovery of the Rocky Mountain region will likely be slower than other oil producing basins. The reduction in customer activity related to commodity prices most directly impacts our services that cater to drilling and completion activities. This includes fresh water transportation via lay flat hose, our rental equipment business and our landfill business in the Rocky Mountain region. Additionally, a portion of our trucking and salt water disposal business comes from completion-related flowback work; however, the majority of this business is derived from produced water transportation and disposal from existing wells. As such, we anticipate meaningful reductions in revenue and profitability for the remainder of fiscal 2020. An additional important trend in recent years has been the focus ofWall Street and investors in the energy sector to encourage exploration and production operators to spend as a function of the cash flow they generate. Historically, as a result of accommodating debt and equity markets, exploration and production companies were able to spend in excess of the cash flow generated by the business. This shift in investor sentiment has brought increased capital discipline to exploration and production companieswho are careful to make more selective capital allocation decisions. The drop during 2020 in underlying commodity prices, net of hedging activities, will impact our customers' underlying cash flows and therefore their drilling plans. Additionally, following the drop in commodity prices and the impact of COVID-19, a number of our customers witnessed a material drop in their public stock prices and a number of our customers received debt rating downgrades. We believe this trend will make it more difficult for our customers to raise new sources of capital and therefore may further limit their ability to spend capital on future drilling and completion activities. 31 -------------------------------------------------------------------------------- Lastly, during the first half of 2020, we have seen continued reuse and water sharing in the Northeast. Some of our customers are using produced and flowback water for fracking as they have determined it is more economical to transport produced water to sites than it is to dispose of the water. Operators are also sharing water with other operators to avoid disposal. This work still requires trucking services, but is generally shorter haul work done at an hourly rate which negatively impacts our revenues.
Other Factors Affecting Our Operating Results
Our results are also driven by a number of other factors, including
(i) availability of our equipment, which we have built through acquisitions and
capital expenditures, (ii) transportation costs, which are affected by fuel
costs, (iii) utilization rates for our equipment, which are also affected by the
level of our customers' drilling and production activities, competition, and our
ability to relocate our equipment to areas in which oil and natural gas
exploration and production activities are growing, (iv) the availability of
qualified employees (or alternatively, subcontractors) in the areas in which we
operate, (v) labor costs, (vi) changes in governmental laws and regulations at
the federal, state and local levels, (vii) seasonality and weather events,
(viii) pricing and (ix) our health, safety and environmental performance record.
While we have agreements in place with certain of our customers to establish
pricing for our services and various other terms and conditions, these
agreements typically do not contain minimum volume commitments or otherwise
require the customer to use us. Accordingly, our customer agreements generally
provide the customer the ability to change the relationship by either
in-sourcing some or all services we have historically provided or by contracting
with other service providers. As a result, even with respect to customers with
which we have an agreement to establish pricing, the revenue we ultimately
receive from that customer, and the mix of revenue among lines of services
provided, is unpredictable and subject to variation over time.
The results reported in the accompanying condensed consolidated financial
statements should not be regarded as necessarily indicative of results that may
be expected for the entire year. The condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, including the notes thereto, contained in our 2019 Annual Report
on Form 10-K .
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Results of Operations:
Three Months Ended
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):
Three Months Ended
June 30, Increase (Decrease)
2020 2019 2020 versus 2019
Revenue:
Service revenue $ 22,956 $ 41,238 $ (18,282 ) (44.3 )%
Rental revenue 1,510 4,002 (2,492 ) (62.3 )%
Total revenue 24,466 45,240 (20,774 ) (45.9 )%
Costs and expenses:
Direct operating expenses 18,551 34,517 (15,966 ) (46.3 )%
General and administrative expenses 4,445 5,280 (835 ) (15.8 )%
Depreciation and amortization 7,156 9,277 (2,121 ) (22.9 )%
Impairment of long-lived assets - - - NM
Other, net - (6 ) 6 (100.0 )%
Total costs and expenses 30,152 49,068 (18,916 ) (38.6 )%
Operating loss (5,686 ) (3,828 ) 1,858 (48.5 )%
Interest expense, net (1,116 ) (1,297 ) (181 ) (14.0 )%
Other income, net 38 152 (114 ) (75.0 )%
Reorganization items, net - 13 (13 ) (100.0 )%
Loss before income taxes (6,764 ) (4,960 ) 1,804 (36.4 )%
Income tax expense (15 ) (46 ) (31 ) (67.4 )%
Net loss $ (6,779 ) $ (5,006 ) $ 1,773 (35.4 )%
NM - Percentages over 100% are not displayed.
Service Revenue
Service revenue consists of fees charged to customers for water transport services, disposal services and other service revenues associated with the drilling, completion, and ongoing production of shale oil and natural gas.
On a consolidated basis, service revenue for the three months endedJune 30, 2020 was$23.0 million , down$18.3 million , or 44.3%, from$41.2 million in the prior year period. The decline was driven primarily by decreases in water transport services and disposal services in all three divisions. As the primary causes of the changes in service revenue are different for the various divisions, see "Segment Operating Results" below for further discussion.
Rental Revenue
Rental revenue consists of fees charged to customers for use of equipment owned by us, as well as other fees charged to customers for items such as delivery and pickup of equipment. Our rental business is primarily located in the Rocky Mountain division, however, we do have some rental equipment available in both the Northeast and Southern divisions. Rental revenue for the three months endedJune 30, 2020 was$1.5 million , down$2.5 million , or 62.3%, from$4.0 million in the prior year period due to lower utilization resulting from a significant decline in drilling and completion activity and return of rental equipment by our customers in the Rocky Mountain division due to lower commodity prices.
Direct Operating Expenses
The primary components of direct operating expenses are compensation costs, third-party hauling, fuel costs and repairs and maintenance costs.
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Direct operating expenses for the three months ended June 30, 2020 decreased
$16.0 million to $18.6 million from $34.5 million in the prior year period. The
decrease is primarily attributable to lower activity levels in water transport
services and disposal services and company-enacted cost cutting measures
resulting in a decline in compensation costs, third-party hauling costs and
fleet-related expenses, including fuel and maintenance and repair costs. See
"Segment Operating Results" below for further details on each division.
General and Administrative Expenses
General and administrative expenses for the three months endedJune 30, 2020 were$4.4 million , down$0.8 million , or 15.8%, from$5.3 million in the three months endedJune 30, 2019 due primarily to a decrease in compensation costs resulting from cost reduction initiatives implemented during 2020 partially offset by$0.8 million of costs related to a discontinued project.
Depreciation and Amortization
Depreciation and amortization for the three months endedJune 30, 2020 was$7.2 million , down 22.9% as compared to$9.3 million in the prior year period. The decrease is primarily attributable to a lower depreciable asset base due to impairment of long-lived assets, the sale of under-utilized or non-core assets and assets becoming fully depreciated partially offset by asset additions.
Impairment of Long-lived Asset
There were no impairment charges recorded during the three months ended
Interest Expense, net
Interest expense, net during the three months ended
Other Income, net During the three months endedJune 30, 2020 , we had other income, net of$38.0 thousand compared to$152.0 thousand in the prior year period. The three months endedJune 30, 2019 included a$0.1 million gain associated with the change in the fair value of the derivative warrant liability. There was no change in fair value of the derivative warrant liability during the three months endedJune 30, 2020 . We issued warrants with derivative features in connection with our chapter 11 filing in 2017. These instruments are accounted for as derivative liabilities with any decrease or increase in the estimated fair value recorded in "Other income, net." See Note 11 in the Notes to the Condensed Consolidated Financial Statements for further details on the warrants.
Reorganization Items, net
Expenses, gains and losses directly associated with the chapter 11 proceedings are reported as "Reorganization items, net" in the condensed consolidated statements of operations. For the three months endedJune 30, 2019 , these fees are primarily comprised of professional and insurance fees related to our 2017 chapter 11 filing. There were no reorganization items recorded during the three months endedJune 30, 2020 . Income Taxes Income tax expense for the three months endedJune 30, 2020 was$15.0 thousand compared to income tax expense of$46.0 thousand for the three months endedJune 30, 2019 . The primary item impacting income taxes for the three months endedJune 30, 2020 andJune 30, 2019 was the valuation allowance against our deferred tax assets. See Note 12 in the Notes to the Condensed Consolidated Financial Statements herein for additional information on income taxes. 34 --------------------------------------------------------------------------------
Segment Operating Results: Three Months Ended
The following table shows operating results for each of our segments for the
three months ended
Rocky Mountain Northeast Southern Corp/Other Total
Three months ended June 30, 2020
Revenue $ 12,222 $ 8,162 $ 4,082 $ - $ 24,466
Direct operating expenses 10,458 5,593 2,500 - 18,551
Operating loss (2,634 ) (397 ) (404 ) (2,251 ) (5,686 )
Three months ended June 30, 2019
Revenue $ 28,993 $ 10,720 $ 5,527 $ - $ 45,240
Direct operating expenses 22,354 8,607 3,556 - 34,517
Operating income (loss) 1,126 (1,437 ) (513 ) (3,004 ) (3,828 )
Change
Revenue $ (16,771 ) $ (2,558 ) $ (1,445 ) $ - $ (20,774 )
Direct operating expenses (11,896 ) (3,014 ) (1,056 ) - (15,966 )
Operating (loss) income (3,760 ) 1,040 109 753 (1,858 )
Rocky Mountain
The Rocky Mountain division has experienced a significant slowdown as compared
to the prior year, as evidenced by the rig count declining 82%, from 55 at
June 30, 2019 to 10 at June 30, 2020 . In addition, some producers have shut-in
wells due to the decline in oil price, which averaged $28.00 in the second
quarter of 2020 versus an average of $60.03 for the same period in the prior
year. Revenues for the Rocky Mountain division decreased by $16.8 million during
the three months ended June 30, 2020 as compared to the three months ended
June 30, 2019 , primarily due to a decrease in water transport revenues from
lower trucking volumes with third-party trucking activity being the most
negatively impacted. While company-owned trucking activity is more levered to
production water volumes, third-party trucking activity is more sensitive to
drilling and completion activity, which has declined to historically low levels,
thereby resulting in meaningful revenue reduction. Our rental and landfill
businesses are our two service lines most levered to drilling activity, and
therefore have declined by the highest percentage versus the prior period.
Rental revenues decreased by 62% in the current year due to lower utilization
resulting from a significant decline in drilling activity driving the return of
rental equipment. Additionally, we experienced a 74% decrease in disposal
volumes at our landfill as rigs working in the vicinity declined materially.
Well shut-ins and lower completion activity led to a 48% decrease in average
barrels per day disposed in our saltwater disposal wells during the current
year, with water from producing wells continuing to maintain a base level of
volume activity.
For the Rocky Mountain division, direct operating costs decreased by $11.9
million during the three months ended June 30, 2020 as compared to the three
months ended June 30, 2019 due primarily to lower activity levels for water
transport services and disposal services and company cost cutting initiatives.
The average number of drivers during the quarter decreased 25% from the prior
year.
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Northeast
Revenues for the Northeast division decreased by$2.6 million during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 due to decreases in both water transport services and disposal services. Natural gas prices, as measured by the Henry Hub Natural Gas Index, decreased 33.9% from an average of$2.57 for the three months endedJune 30, 2019 to an average of$1.70 for the three months endedJune 30, 2020 , contributing to a 52% rig count reduction in the Northeast operating area, from 75 atJune 30, 2019 to 36 atJune 30, 2020 . Additionally, as a result of the 53.4% decline in oil prices experienced during the period, many of our customerswho had historically focused on production of liquids-rich wells reduced activity levels and shut-in some production in our operating area due to lower realized prices for these products. This led to lower activity levels for both water transport services and disposal services despite the relatively lower decrease in natural gas prices versus crude oil prices. In addition to reduced drilling and completion activity due to commodity prices, our customers continued the industry trend of water reuse during completion activities. Water reuse inherently reduces trucking activity due to shorter hauling distances as water is being transported between well sites rather than to disposal wells. For our trucking services, total billable hours were down 11% from the prior year and pricing decreases also contributed to the decline. Disposal volumes decreased in our saltwater disposal wells resulting in a 15% decrease in average barrels per day. For the Northeast division, direct operating costs decreased by$3.0 million during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 due to a combination of lower activity levels for water transport and disposal services as well as company cost cutting initiatives. The average number of drivers during the quarter decreased 22% from the prior year. Operating loss improved by$1.0 million over the prior year period due primarily to$0.3 million in lower depreciation and amortization expense and a$0.3 million decrease in general and administrative expenses due to headcount and compensation reductions. Southern The Southern division experienced the lowest revenue decline relative to the other business units, driven by its focus on servicing customerswho are themselves focused on dry natural gas, which has experienced a relatively smaller impact from the 2020 downturn in commodity prices. Revenues for the Southern division decreased by$1.4 million during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 due primarily to lower disposal well volumes, whether connected to the pipeline or not, resulting from an activity slowdown in the region, as evidenced by fewer rigs operating in the area. Rig count declined 44% in the area, from 62 atJune 30, 2019 to 35 atJune 30, 2020 . Volumes received in our disposal wells not connected to our pipeline decreased by an average of 12,471 barrels per day (or 39%) during the current year and volumes received in the disposal wells connected to the pipeline decreased by an average of 7,092 barrels per day (or 16%) during the current year.
For the Southern division, direct operating costs decreased by
Corporate/Other
The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general and administrative costs for the three months endedJune 30, 2020 were$0.8 million lower than those reported for the three months endedJune 30, 2019 due primarily to headcount and compensation reductions and a$0.2 million decrease in stock-based compensation expense. 36 -------------------------------------------------------------------------------- Six Months EndedJune 30, 2020 Compared to the Six Months EndedJune 30, 2019 The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands): Six Months Ended June 30, Increase (Decrease) 2020 2019 2020 versus 2019 Revenue: Service revenue$ 57,427 $ 80,239 $ (22,812 ) (28.4 )% Rental revenue 4,981 7,628 (2,647 ) (34.7 )% Total revenue 62,408 87,867 (25,459 ) (29.0 )% Costs and expenses: Direct operating expenses 50,027 67,074 (17,047 ) (25.4 )% General and administrative expenses 9,369 10,755 (1,386 ) (12.9 )% Depreciation and amortization 15,145 18,412 (3,267 ) (17.7 )% Impairment of long-lived assets 15,579 117 15,462 NM Other, net - (6 ) 6 (100.0 )% Total costs and expenses 90,120 96,352 (6,232 ) (6.5 )% Operating loss (27,712 ) (8,485 ) 19,227 NM Interest expense, net (2,276 ) (2,718 ) (442 ) (16.3 )% Other income, net 180 177 3 1.7 % Reorganization items, net - (210 ) (210 ) (100.0 )% Loss before income taxes (29,808 ) (11,236 ) 18,572 NM Income tax expense (15 ) (125 ) (110 ) (88.0 )% Net loss$ (29,823 ) $ (11,361 ) $ 18,462 NM
NM - Percentages over 100% are not displayed.
Service Revenue
On a consolidated basis, service revenue for the six months endedJune 30, 2020 was$57.4 million , down$22.8 million , or 28.4%, from$80.2 million in the prior year period. The decrease in service revenue is primarily due to decreases in water transport services and disposal services in all three divisions. As the primary causes of the changes in service revenue are different for all three divisions, see "Segment Operating Results" below for further discussion. Rental Revenue Rental revenue for the six months endedJune 30, 2020 was$5.0 million , down$2.6 million as compared to the prior year period due primarily to lower utilization resulting from a significant decline in activity and return of rental equipment by our customers in the Rocky Mountain division. Direct Operating Expenses Direct operating expenses for the six months endedJune 30, 2020 were$50.0 million , down$17.0 million from$67.1 million in the prior year period. The decrease is primarily attributable to lower activity levels in water transport services and disposal services and company-enacted cost cutting measures resulting in a decline in compensation costs, third-party hauling costs and fleet-related expenses, including fuel and maintenance and repair costs. (See "Segment Operating Results" below for further details on each division.) 37 -------------------------------------------------------------------------------- General and Administrative Expenses General and administrative expenses for the six months endedJune 30, 2020 amounted to$9.4 million , down$1.4 million from$10.8 million in the prior year period. The decrease was primarily due to a decrease in compensation costs resulting from cost reduction initiatives implemented during 2020 and a$0.8 million decrease in stock-based compensation expense partially offset by$0.8 million of costs related to a discontinued project. Depreciation and Amortization Depreciation and amortization for the six months endedJune 30, 2020 was$15.1 million , down$3.3 million from$18.4 million in the prior year period. The decrease is primarily attributable to a lower depreciable asset base due to impairment of long-lived assets, the sale of under-utilized or non-core assets and assets becoming fully depreciated partially offset by asset additions. Impairment of long-lived assets Long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Due to the impacts of the outbreak of COVID-19 and the oil supply conflict between two major oil producing countries, there was a significant decline in oil prices during the first quarter of 2020, which resulted in a decrease in activities by our customers. As a result of these events, during the six months endedJune 30, 2020 , there were indicators that the carrying values of the assets associated with the landfill in the Rocky Mountain division and trucking equipment in the Southern division were not recoverable and as a result we recorded long-lived asset impairment charges of$15.0 million . We may face additional asset impairments in the future, along with other accounting charges, as demand for our services decreases in response to the COVID-19 pandemic and related factors. Additionally, during 2020, certain property classified as held for sale in the Rocky Mountain division was evaluated for impairment based on an accepted offer received by the Company for the sale of the property. As a result of that offer, an impairment charge of$0.6 million was recorded during the six months endedJune 30, 2020 to adjust the book value to match the fair value. During 2019, management approved plans to sell real property located in the Northeast and Rocky Mountain divisions. The real property qualified to be classified as held for sale and as a result was recorded at the lower of net book value or fair value less costs to sell, which resulted in a long-lived asset impairment charge of$0.1 million for the real property in the Northeast division during the six months endedJune 30, 2019 . Other, net During the six months endedJune 30, 2019 , we recorded a final adjustment to the accrued lease liabilities for the exit of theEagle Ford Shale area that occurred during the first half of 2018 as further payments were not required. Interest Expense, net Interest expense, net during the six months endedJune 30, 2020 was$2.3 million , or$0.4 million lower than the$2.7 million in the prior year period due to continued principal payments on the First and Second Lien Term Loans partially offset by additional finance leases as a result of heavy duty truck replacement project. Other Income, net Other income, net for the six months endedJune 30, 2020 was$0.2 million , consistent with the prior year period. The six months endedJune 30, 2019 included a$28.0 thousand gain associated with the change in the fair value of the derivative warrant liability. There was no change in fair value of the derivative warrant liability during the six months endedJune 30, 2020 . See Note 11 in the Notes to the Condensed Consolidated Financial Statements for further details on the warrants. Reorganization Items, net Expenses, gains and losses directly associated with the chapter 11 proceedings are reported as "Reorganization items, net" in the condensed consolidated statements of operations. For the six months endedJune 30, 2019 , these fees are primarily comprised of professional and insurance fees related to our 2017 chapter 11 filing. There were no reorganization items recorded during the six months endedJune 30, 2020 . Income Taxes Income tax expense for the six months endedJune 30, 2020 was$15.0 thousand as compared to$0.1 million for the six months endedJune 30, 2019 . The primary item impacting income taxes for the six months endedJune 30, 2020 andJune 30, 2019 was 38 -------------------------------------------------------------------------------- the valuation allowance against our deferred tax assets. See Note 12 in the Notes to the Condensed Consolidated Financial Statements herein for additional information on income taxes. Segment Operating Results: Six Months EndedJune 30, 2020 and 2019 The following table shows operating results for each of our segments for the six months endedJune 30, 2020 and 2019: Rocky Mountain Northeast Southern Corp/Other Total Six months endedJune 30, 2020 Revenue$ 35,690 $ 17,956 $ 8,762 $ -$ 62,408 Direct operating expenses 30,009 13,964 6,054 - 50,027 Impairment of long-lived assets 12,183 - 3,396 - 15,579 Operating loss (15,854 ) (2,159 )
(4,913 ) (4,786 ) (27,712 )
Six months endedJune 30, 2019 Revenue$ 53,870 $ 22,560 $ 11,437 $ -$ 87,867 Direct operating expenses 42,182 18,322 6,570 - 67,074 Impairment of long-lived assets - 117 - - 117 Operating income (loss) 830 (2,939 ) (176 ) (6,200 ) (8,485 ) Change Revenue$ (18,180 ) $ (4,604 ) $ (2,675 ) $ -$ (25,459 ) Direct operating expenses (12,173 ) (4,358 ) (516 ) - (17,047 ) Impairment of long-lived assets 12,183 (117 ) 3,396 - 15,462 Operating (loss) income (16,684 ) 780 (4,737 ) 1,414 (19,227 ) Rocky MountainThe Rocky Mountain division has experienced a significant slowdown as compared to the prior year, as evidenced by the rig count declining 82% from 55 atJune 30, 2019 to 10 atJune 30, 2020 . In addition, some producers have shut-in wells due to the decline in oil price, which averaged$36.82 in the first half of 2020 versus an average of$57.53 for the same period in the prior year. Revenues for the Rocky Mountain division decreased by$18.2 million during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 , primarily due to a decrease in water transport revenues from lower trucking volumes, with third-party trucking activity being the most negatively impacted. While company-owned trucking activity is more levered to production water volumes, third-party trucking activity is more sensitive to drilling and completion activity, which has declined to historically low levels, thereby resulting in meaningful revenue reduction. Our rental and landfill businesses are our two service lines most levered to drilling activity and therefore have declined by the highest percentage versus the prior period. Rental revenues decreased by 34% in the current year due to lower utilization resulting from a significant decline in drilling activity in the area driving the return of rental equipment. Additionally, we experienced a 37% decrease in disposal volumes at our landfill as rigs working in the vicinity declined materially. Well shut-ins and lower completion activity led to a 26% decrease in average barrels per day disposed in our saltwater disposal wells during the current year, with water from producing wells continuing to maintain a base level of volume activity. For the Rocky Mountain division, direct operating costs decreased by$12.2 million during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 due primarily to lower activity levels for water transport services and disposal services and company cost cutting initiatives. The average number of drivers during the quarter decreased 25% from the prior year.The Rocky Mountain division had a$15.9 million operating loss during the current year period, as opposed to$0.8 million in operating income in the prior year period, due primarily to a$12.2 million long-lived asset impairment charge (as previously discussed above in the consolidated results) partially offset by$2.3 million in lower depreciation and amortization expense. 39 --------------------------------------------------------------------------------
Northeast
Revenues for the Northeast division decreased by$4.6 million during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 due to decreases in both disposal services and water transport services. Natural gas prices, as measured by the Henry Hub Natural Gas Index, decreased 33.9% from an average of$2.74 for the six months endedJune 30, 2019 to an average of$1.81 for the six months endedJune 30, 2020 , contributing to a 52% rig count reduction in the Northeast operating area, from 75 atJune 30, 2019 to 36 atJune 30, 2020 . Additionally, as a result of the 36.0% decline in oil prices experienced during the period, many of our customerswho had historically focused on production of liquids-rich wells reduced activity levels and shut-in some production in our operating area due to lower realized prices for these products. This led to lower activity levels for both water transport services and disposal services despite the relatively lower decrease in natural gas prices versus crude oil prices. In addition to reduced drilling and completion activity due to commodity prices, our customers continued the industry trend of water reuse during completion activities. Water reuse inherently reduces trucking activity due to shorter hauling distances as water is being transported between well sites rather than to disposal wells. Disposal volumes decreased in our saltwater disposal wells resulting in a 15% decrease in average barrels per day. For our trucking services, total billable hours were down 7% from the prior year and pricing decreases also contributed to the decline. For the Northeast division, direct operating costs decreased by$4.4 million during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 due to a combination of decreases in disposal and water transport services as well as company cost cutting initiatives. The average number of drivers during the quarter decreased 22% from the prior year. Operating loss improved by$0.8 million over the prior year period primarily due to a$0.5 million decrease in general and administrative expenses due to headcount and compensation reductions and$0.4 million in lower depreciation and amortization expense. Southern The Southern division experienced the lowest revenue decline relative to the other business units, driven by its focus on servicing customerswho are themselves focused on dry natural gas, which has experienced a relatively smaller impact from the 2020 downturn in commodity prices. Revenues for the Southern division decreased by$2.7 million during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 due primarily to lower disposal well volumes, whether connected to the pipeline or not, resulting from an activity slowdown in the region, as evidenced by fewer rigs operating in the area. Rig count declined 44% in the area, from 62 atJune 30, 2019 to 35 atJune 30, 2020 . Volumes received in our disposal wells not connected to our pipeline decreased by an average of 9,711 barrels per day (or 30%) during the current year and volumes received in the disposal wells connected to the pipeline decreased by an average of 8,609 barrels per day (or 18%) during the current year. In the Southern division, direct operating costs decreased by$0.5 million during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 due to lower activity levels for water transport services and disposal services. The Southern division had$5.0 million in operating loss during the current year period, as opposed to a$0.2 million loss in the prior year period due primarily to a$3.4 million long-lived asset impairment charge (as previously discussed above in the consolidated results) partially offset by$0.6 million in lower depreciation and amortization expense.
Corporate/Other
The Corporate general and administrative costs for the six months endedJune 30, 2020 were$1.4 million lower than the six months endedJune 30, 2019 due primarily to a$0.8 million decrease in stock-based compensation expense and headcount and compensation reductions. 40 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash Flows and Liquidity
Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. Our sources of cash during the first half of 2020 have included cash generated by our operations, borrowings from the Revolving Facility, proceeds from our PPP Loan (as defined below) and asset sales. During the six months endedJune 30, 2020 andJune 30, 2019 , net cash provided by operating activities was$9.8 million and$4.5 million , respectively, and net loss was$29.8 million and$11.4 million , respectively. As ofJune 30, 2020 , our total indebtedness was$37.9 million and total liquidity was$23.0 million , consisting of$17.3 million of cash and available borrowings under the Revolving Facility and$5.7 million available as a delayed draw under the Second Lien Term Loan (as defined below). OnJuly 13, 2020 , the Company entered into an amendment of its$45.0 million First Lien Credit Agreement (the "First Lien Credit Agreement"), by and among the lenders party thereto,ACF FinCo I, LP , as administrative agent, and the Company, which includes among other terms and conditions, a prohibition on drawing on the Revolving Facility until the fixed charge coverage ratio ("FCCR") is above the established ratio at 1.00 to 1.00. Due to the COVID-19 outbreak, there is uncertainty surrounding the potential impact on our cash flows, results of operations and financial condition. We have proactively taken steps to reduce costs and continue to look at our operating structure to find additional cost reduction opportunities as discussed in "Trends Affecting Our Operating Results". The amendment of the First Lien Credit Agreement entered into onJuly 13, 2020 extended the maturity date of our Revolving Facility and First Lien Term Loan fromFebruary 7, 2021 toMay 15, 2022 . Prior to executing the amendment, the maturity date of our Revolving Facility and$17.2 million first lien term loan (the "First Lien Term Loan") wasFebruary 7, 2021 , at which time we would have been required to repay the outstanding principal amount of the Revolving Facility and approximately$15.0 million of the First Lien Term Loan, together with interest accrued and unpaid thereon. OnJuly 13, 2020 , the Company also entered into an amendment of its Second Lien Term Loan Credit Agreement (the "Second Lien Term Loan Credit Agreement"), which extended the maturity date fromOctober 7, 2021 toNovember 15, 2022 . See Note 18 in the notes to the consolidated financial statements for further discussion of the amendments. The Company continues to incur operating losses, and we anticipate losses to continue into the near future. Additionally, due to the COVID-19 outbreak, there has been a significant decline in oil and natural gas demand, which has negatively impacted our customers' demand for our services, resulting in uncertainty surrounding the potential impact on our cash flows, results of operations and financial condition. We expect crude oil prices to remain low for the foreseeable future, so we anticipate our customers' crude or natural gas liquids drilling and completion activity to continue to operate at lower levels. Due to the uncertainty of future oil and natural gas prices and the continued effects of the COVID-19 outbreak, there is substantial doubt as to the Company's ability to continue as a going concern within one year after the date that these financial statements are issued. In order to mitigate these conditions, the Company has undertaken various initiatives in the first half of 2020 that management believes will positively impact our operations, including personnel and salary reductions, other changes to our operating structure to achieve additional cost reductions, and the sale of certain assets. We believe that as a result of the cost reduction initiatives undertaken in the first half of 2020, our cash flow from operations, together with cash on hand and other available liquidity, will provide sufficient liquidity to fund operations for at least the next twelve months. Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
The following table summarizes our sources and uses of cash for the six months
ended
Six Months Ended
June 30,
Net cash provided by (used in): 2020 2019
Operating activities $ 9,825 $ 4,454
Investing activities (780 ) (494 )
Financing activities 1,038
(4,065 )
Net change in cash, cash equivalents and restricted cash
41
--------------------------------------------------------------------------------Operating Activities
Net cash provided by operating activities was$9.8 million for the six months endedJune 30, 2020 . The net loss, after adjustments for non-cash items, provided cash of$1.5 million , compared to$7.3 million in the corresponding 2019 period. Changes in operating assets and liabilities provided$8.3 million in cash primarily due to a decrease in accounts receivable partially offset by decreases in accounts payable and accrued liabilities. The non-cash items and other adjustments included long-lived asset impairment charges of$15.6 million ,$15.1 million of depreciation and amortization, and stock-based compensation expense of$0.6 million , partially offset by a$0.3 million gain on the sale of assets. Net cash provided by operating activities was$4.5 million for the six months endedJune 30, 2019 . The net loss, after adjustments for non-cash items, provided cash of$7.3 million . Changes in operating assets and liabilities used$2.8 million in cash primarily due to decreases in accounts payable and other accrued expenses. The non-cash items and other adjustments included$18.4 million of depreciation and amortization, stock-based compensation expense of$1.4 million , long-lived asset impairment charges of$0.1 million partially offset by a$1.7 million gain on the sale of assets.
Investing Activities
Net cash used in investing activities was$0.8 million for the six months endedJune 30, 2020 and primarily consisted of$2.3 million of purchases of property, plant and equipment partially offset by$1.5 million of proceeds from the sale of property, plant and equipment. Asset sales were primarily comprised of the disposition of two properties and under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our fleet upgrades for water transport and disposal services. Net cash used in investing activities was$0.5 million for the six months endedJune 30, 2019 and primarily consisted of$5.0 million of purchases of property, plant and equipment, partially offset by$4.5 million of proceeds from the sale of property, plant and equipment. Asset sales were primarily comprised of under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our truck fleet for water transport services.
Financing Activities
Net cash provided by financing activities was$1.0 million for the six months endedJune 30, 2020 and was primarily comprised of proceeds from the PPP Loan of$4.0 million partially offset by$1.9 million of payments on the First Lien Term Loan and Second Lien Term Loan and$1.1 million of payments on vehicle finance leases and other financing activities. Net cash used in financing activities was$4.1 million for the six months endedJune 30, 2019 and was primarily comprised of$31.4 million in cash payments for the$32.5 million bridge term loan,$2.5 million of payments on the First Lien Term Loan and Second Lien Term Loan and$1.2 million of payments on finance leases and other financing activities, partially offset by$31.1 million of proceeds received from the issuance of stock for the completed Rights Offering.
Capital Expenditures
Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. Cash required for capital expenditures for the six months endedJune 30, 2020 totaled$2.3 million compared to$5.0 million for the six months endedJune 30, 2019 . These capital expenditures were partially offset by proceeds received from the sale of under-utilized or non-core assets of$1.5 million and$4.5 million in the six months endedJune 30, 2020 and 2019, respectively. A portion of our transportation-related capital requirements are financed through finance leases (see Note 4 in the Notes to the Condensed Consolidated Financial Statements herein for further discussion of finance leases). We had$0.2 million and$6.7 million of equipment additions under finance leases during the six months endedJune 30, 2020 andJune 30, 2019 , respectively. We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale areas in which we operate. Due to the COVID-19 outbreak, we have implemented a significant reduction in our capital expenditures budget for fiscal 2020, as discussed above in "Trends Affecting Our Operating Results". Our planned capital expenditures for the remainder of 2020 could be financed through cash flow from operations, borrowings under the delayed draw of our Second Lien Term Loan, finance leases, other financing structures, or a combination of the foregoing. 42 --------------------------------------------------------------------------------
Indebtedness
As ofJune 30, 2020 , we had$37.9 million of indebtedness outstanding, consisting of$16.4 million under the First Lien Term Loan,$8.8 million under the second lien term loan facility (the "Second Lien Term Loan") pursuant to the Second Lien Term Loan Credit Agreement, datedAugust 7, 2017 , by and among the lenders party thereto, andWilmington Savings Fund Society , FSB, as administrative agent, and the Company,$4.0 million under the PPP Loan,$0.5 million under the Direct Loan Security Agreement withPACCAR Financial Corp as the secured party,$0.2 million under the Equipment Term Loan (as defined below) and$8.0 million of finance leases for vehicle financings and real property leases. Our Revolving Facility, First Lien Term Loan and Second Lien Term Loan contain certain affirmative and negative covenants, including a FCCR covenant, as well as other terms and conditions that are customary for revolving credit facilities and term loans of this type. OnJuly 13, 2020 , the Company entered into amendments of its First Lien Credit Agreement and Second Lien Term Loan Credit Agreement, which included among other terms and conditions, deferral of the measurement of the FCCR covenant until the second quarter of 2021. See Note 18 in the notes to the consolidated financial statements for further discussion of the amendments. As ofJune 30, 2020 , we were in compliance with all covenants.
Equipment Term Loan
OnNovember 20, 2019 , we entered into a Retail Installment Contract (the "Equipment Term Loan") with a secured party to finance$0.2 million of equipment. The Equipment Term Loan matures onNovember 2022 , and shall be repaid in monthly installments of approximately$7 thousand beginningDecember 2019 and then each month thereafter, with interest accruing at an annual rate of 6.50%.
Paycheck Protection Program
OnMay 8, 2020 , pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") enacted onMarch 27, 2020 , an indirect wholly-owned subsidiary of the Company (the "PPP Borrower") received proceeds of a loan (the "PPP Loan") fromFirst International Bank & Trust (the "PPP Lender") in the principal amount of$4.0 million . The PPP Loan is evidenced by a promissory note (the "Promissory Note"), datedMay 8, 2020 . The Promissory Note is unsecured, matures onMay 8, 2022 , bears interest at a rate of 1.00% per annum, and is subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration (the "SBA") under the CARES Act. Under the terms of the PPP, up to the entire principal amount of the PPP Loan, and accrued interest, may be forgiven if the proceeds are used for certain qualifying expenses over the covered period as described in the CARES Act and applicable implementing guidance issued by the SBA, subject to potential reduction based on the level of full-time employees maintained by the organization during the covered period as compared to a baseline period. InJune 2020 , the Paycheck Protection Program Flexibility Act of 2020 ("Flexibility Act") was signed into law, which amended the CARES Act. The Flexibility Act changed key provisions of the PPP, including, but not limited to, (i) provisions relating to the maturity of PPP loans, (ii) the deferral period covering PPP loan payments and (iii) the process for measurement of loan forgiveness. More specifically, the Flexibility Act provides a minimum maturity of five years for all PPP loans made on or after the date of the enactment of the Flexibility Act ("June 5, 2020 ") and permits lenders and borrowers to extend the maturity date of earlier PPP loans by mutual agreement. As of the date of this filing, the Company has not approached the PPP Lender to request an extension of the maturity date from two years to five years. The Flexibility Act also provides that if a borrower does not apply for forgiveness of a loan within 10 months after the last day of the measurement period ("covered period"), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. In addition, the Flexibility Act extended the length of the covered period from eight weeks to 24 weeks from receipt of proceeds, while allowing borrowers that received PPP loans beforeJune 5, 2020 to determine, at their sole discretion, a covered period of either eight weeks or 24 weeks. The PPP Borrower used the PPP Loan proceeds for designated qualifying expenses over the covered period and plans to apply for forgiveness of the PPP Loan in accordance with the terms of the PPP, but no assurance can be given that the PPP Borrower will obtain forgiveness of the PPP Loan in whole or in part. As such, the Company has classified the PPP loan as debt and it is included in long-term debt on the condensed consolidated balance sheet. With respect to any portion of the PPP Loan that is not forgiven, the PPP Loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the Promissory Note and cross-defaults on any other loan with the PPP Lender or other creditors. Upon a default under the 43 -------------------------------------------------------------------------------- Promissory Note, including the non-payment of principal or interest when due, the obligations of the PPP Borrower thereunder may be accelerated. In the event the PPP Loan is not forgiven, the principal amount of$4.0 million shall be repaid at maturity. The Company has obtained the consent of the lenders under each of the Credit Agreement and the Second Lien Term Loan Credit Agreement for the PPP Borrower to enter into and obtain the funds provided by the PPP Loan.
Off Balance Sheet Arrangements
As of
Critical Accounting Policies
There have been no significant changes to our Critical Accounting Policies
during the six months ended
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