U.S. WELL SERVICES, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes in Item 1. "Financial Statements" contained herein and our audited consolidated financial statements as ofDecember 31, 2020 , included in our Amendment No. 1 to Annual Report on Form 10-K/A for the year endedDecember 31, 2020 (our "Amended Annual Report"), as filed with theSecurities and Exchange Commission (the "SEC") onMay 17, 2021 . The information provided below supplements, but does not form part of, our unaudited condensed consolidated financial statements. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this "Report") contains "forward-looking statements" as defined in Section 27A of the United States Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements usually relate to future events, conditions and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. Forward-looking statements are often identified by words such as "believes," "expects," "intends," "estimates," "projects," "anticipates," "will," "plans," "may," "should," "would," "foresee," or the negative thereof. The absence of these words, however, does not mean that these statements are not forward-looking. These statements are based on our current expectations, beliefs and assumptions concerning future developments and business conditions and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All of our forward-looking statements involve risks and uncertainties (some of which are significant or beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. These factors include geological, operating and economic factors and declining prices and market conditions, including reduced expected or realized oil and gas prices and demand for oilfield services and changes in supply or demand for maintenance, repair and operating products, equipment and service; the effectiveness of management's strategies and decisions; our ability to obtain financing, raise capital and continue as a going concern; our ability to implement our internal growth and acquisition growth strategies; our ability to convert to an all electric hydraulic fracturing service provider and to exit the diesel frac market; general economic and business conditions specific to our primary customers; our ability to collect accounts receivable; compliance with our debt agreements and equity-related securities; volatility in market prices; our ability to satisfy the continued listing requirements of Nasdaq with respect to our Class A common stock and warrants or to cure any continued listing standard deficiency with respect thereto; changes in government regulations; our ability to effectively integrate businesses we may acquire; new or modified statutory or regulatory requirements; availability of materials and labor; inability to obtain or delay in obtaining government or third-party approvals and permits; non-performance by third parties of their contractual obligations; unforeseen hazards such as natural disasters, catastrophes and severe weather conditions, including floods, hurricanes and earthquakes; public health crises, such as a pandemic, including the COVID-19 pandemic and new and potentially more contagious variants of COVID-19, such as the delta variant; acts of war or terrorist acts and the governmental or military response thereto; and cyber-attacks adversely affecting our operation. This Report identifies other factors that could cause such differences. There can be no assurance that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. Factors that could cause or contribute to such differences also include, but are not limited to, those discussed in our filings with theSEC , including under "Risk Factors" in this Report and in our Amended Annual Report. We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We assume no obligation and do not intend to update these forward-looking statements. Unless the context otherwise requires, references in this Report to the "Company", "USWS", "we", or "our" shall meanU.S. Well Services, Inc. and its subsidiaries.
Overview
We provide high-pressure, hydraulic fracturing services in oil and natural gas basins. Both our conventional and Clean Fleet® hydraulic fracturing fleets are among the most reliable and highest performing fleets in the industry, with the capability to meet the most demanding pressure and pump rate requirements. We operate in many of the active shale and unconventional oil and natural gas basins ofthe United States and our clients benefit from the performance and reliability of our equipment and personnel. Specifically, all of our fleets operate on a 24-hour basis and have the ability to withstand high utilization rates, which results in more efficient operations. Our senior management team has extensive industry experience providing pressure pumping services to exploration and production companies acrossNorth America . InMay 2021 , we announced our commitment to becoming an all-electric hydraulic fracturing service provider and that we expect to fully exit the diesel frac market by the end of 2021. As a result of this strategic transition, we expect to become the first publicly-traded, pure-play electric completions services provider. 28 --------------------------------------------------------------------------------
How the Company Generates Revenue
We generate revenue by providing hydraulic fracturing services to our customers. We own and operate a fleet of hydraulic fracturing units to perform these services. We seek to enter into contractual arrangements with our customers or fleet dedications, which establish pricing terms for a fixed duration. Under the terms of these agreements, we charge our customers base monthly rates, adjusted for activity and provision of materials such as proppant and chemicals, or we charge a variable rate based on the nature of the job including pumping time, well pressure, sand and chemical volumes and transportation.
Our Costs of Conducting Business
The principal costs involved in conducting our hydraulic fracturing services are
labor, maintenance, materials, and transportation costs. A large portion of our
costs are variable, based on the number and requirements of hydraulic fracturing
jobs. We manage our fixed costs, other than depreciation and amortization, based
on factors including industry conditions and the expected demand for our
services.
Materials include the cost of sand delivered to the basin of operations,
chemicals, and other consumables used in our operations. These costs vary based
on the quantity and quality of sand and chemicals utilized when providing
hydraulic fracturing services. Transportation represents the costs to transport
materials and equipment from receipt points to customer locations. Labor costs
include payroll and benefits related to our field crews and other employees.
Most of our employees are paid on an hourly basis. Maintenance costs include
preventative and other repair costs that do not require the replacement of major
components of our hydraulic fracturing fleets. Maintenance and repair costs are
expensed as incurred.
The following table presents our cost of services for the periods indicated (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Materials $ 6,737 $ 2,490 $ 15,453 $ 12,938
Transportation 3,220 1,427 6,259 10,970
Labor 24,003 10,172 47,689 43,281
Maintenance 14,916 6,746 31,511 22,617
Other (1) 10,376 8,176 20,971 24,359
Cost of services $ 59,252 $ 29,011 $ 121,883 $ 114,165 (1) Other consists of fuel, lubes, equipment rentals, travel and lodging costs
for our crews, site safety costs and other costs incurred in performing our
operating activities.
Significant Trends
The global health and economic crisis sparked by the COVID-19 pandemic and the
associated decrease in commodity prices has significantly impacted industry
activity since late in the first quarter of 2020. Weaker economic activity and
lower demand for crude oil, driven by the persistence of the COVID-19 pandemic,
adversely impacted our business, resulting in a reduction in our active fleet
count and fleet utilization levels throughout much of 2020. During the fourth
quarter of 2020, crude oil prices averaged $42 per barrel and since then have
been increasing, averaging approximately $66 per barrel during the second
quarter of 2021. As commodity prices have continued to improve demand for
hydraulic fracturing services and the number of working fracturing fleets have
also increased significantly.
In May 2021 , we announced our plan to exit the diesel frac market by the end of
2021 pursuant to our strategy of becoming an all-electric hydraulic fracturing
services provider. As a result, we have been executing on our plan to sell our
diesel fracturing equipment. We plan on using proceeds from these sales to
reduce outstanding indebtedness and for general corporate purposes, including
the buildout of our next-generation all-electric fracturing fleets.
Additionally, we expect the corresponding reduction of average active fleets to
have a short-term significant impact on our results of operations starting in
the third quarter of 2021 as we end our remaining contracts which utilize diesel
frac equipment. Specifically, we expect revenues, cost of services, and
depreciation to start declining in the third quarter of 2021, until such time we
are able to generate business activity from the new buildout of next-generation
all-electric fracturing fleets.
29
--------------------------------------------------------------------------------Results of Operations
Three months ended
(in thousands, except percentages)
Three Months Ended June 30,
2021 % (1) 2020 % (1) Variance % Variance
Revenue $ 78,799 100.0% $ 39,837 100.0% $ 38,962 97.8%
Costs and expenses:
Cost of services (excluding
depreciation
and amortization) 59,252 75.2% 29,011 72.8% 30,241 104.2%
Depreciation and amortization 9,836 12.5% 17,358 43.6% (7,522 ) (43.3)%
Selling, general and administrative
expenses 7,214 9.2% 5,220 13.1% 1,994 38.2% Litigation settlement 35,000 44.4% - 0.0% 35,000 100.0% Loss (gain) on disposal of assets (545 ) (0.7)% 853 2.1% (1,398 ) (163.9)% Loss from operations (31,958 ) (40.6)% (12,605 ) (31.6)% (19,353 ) *(2) Interest expense, net (7,333 ) (9.3)% (5,665 ) (14.2)% (1,668 ) 29.4% Change in fair value of warrant liabilities (136 ) (0.2)% (1,364 ) (3.4)% 1,228 *(2) Patent license sales 22,500 28.6% - 0.0% 22,500 100.0% Loss on extinguishment of debt (839 ) (1.1)% - 0.0% (839 ) *(2) Other income 23 0.0% 45 0.1% (22 ) *(2) Income tax expense (benefit) (27 ) (0.0)% 13 0.0% (40 ) *(2) Net loss$ (17,716 ) (22.5)%$ (19,602 ) (49.2)%$ 1,886 (9.6)%
(1) As a percentage of revenues. Percentage totals or differences in the above
table may not equal the sum or difference of the components due to rounding.
(2) Not meaningful. Revenue. The increase in revenue was primarily attributable to an increase in business activity due to economic recovery from the COVID-19 pandemic and depressed oil prices in the prior period. Our average active fleet count during the period increased to 9 fleets compared to 4 fleets in the prior comparable period. However, we expect revenue to decline in future quarters as we end our remaining diesel fracturing equipment-related contracts in the third quarter of 2021. Cost of services, excluding depreciation and amortization. The increase in cost of services, excluding depreciation and amortization, was attributable to the increase in business activity due to economic recovery from the COVID-19 pandemic and depressed oil prices in the prior period. Similar to revenue, we expect cost of services, excluding depreciation and amortization, to decline in future quarters as we end our remaining diesel fracturing equipment-related contracts in the third quarter of 2021. Depreciation and amortization. The decrease in depreciation and amortization was primarily due to the lower cost basis of depreciating long-lived assets because of impairment losses recorded in the first quarter of 2020. We expect depreciation and amortization to decline in future quarters as we execute on our plan to sell our diesel fracturing equipment. Litigation settlement. The Company was named as a defendant in a lawsuit filed inJanuary 2019 by a vendor alleging that the Company breached a multi-year contract. InJune 2021 , following entry of the final judgement by the court in favor of the vendor, the Company entered into a settlement agreement whereby it paid$35.0 million in cash. Selling, general and administrative expenses. The increase in selling, general, and administrative expenses was primarily attributable to reinstatement of salary levels during the second quarter of 2021 due to improved economic conditions as compared to the prior period. Additionally, there was an increase in share-based compensation expense during the second quarter of 2021 as compared to the prior period due to the equity awards issued in the fourth quarter of 2020. Loss (gain) on disposal of assets. The amount of loss on disposal of assets fluctuates period over period due to differences in the operating conditions of our hydraulic fracturing equipment, such as wellbore pressure and rate of barrels pumped per minute, that impact the timing of disposals of our hydraulic fracturing pump components and the amount of gain or loss recognized. InMay 2021 , the Company announced its plan to exit the diesel frac market and began selling its diesel fracturing equipment. As a result, we recognized a gain on disposal of assets during the second quarter of 2021 as compared to a loss on disposal of assets in the prior period. 30 -------------------------------------------------------------------------------- Interest expense, net. The increase was primarily attributable to the interest expense associated with the Convertible Senior Notes issued during the second quarter of 2021. Patent license sales. OnJune 24, 2021 , the Company issued$22.5 million in principal amount of a Convertible Senior Note that was convertible into a patent license agreement (the "License Agreement"). OnJune 29, 2021 , the holder exercised its right to convert the Convertible Senior Note in full and the Company entered into the License Agreement, which provides the licensee a five-year option to purchase up to 20 licenses to build and operate electric hydraulic fracturing fleets using the Company's patented Clean Fleet® technology. Upon entry into the License Agreement, the Company sold three licenses to build and operate three electric frac fleets, each valued at$7.5 million .
Six months ended
(in thousands, except percentages)
Six Months Ended June 30,
2021 % (1) 2020 % (1) Variance % Variance
Revenue $ 155,057 100.0% $ 151,872 381.2% $ 3,185 2.1%
Costs and expenses:
Cost of services (excluding
depreciation
and amortization) 121,883 78.6% 114,165 286.6% 7,718 6.8%
Depreciation and amortization 20,942 13.5% 49,366 123.9% (28,424 ) (57.6)%
Selling, general and administrative
expenses 14,604 9.4% 24,277 60.9% (9,673 ) (39.8)% Impairment of long-lived assets - 0.0% 147,543 370.4% (147,543 ) 100.0% Litigation settlement 35,000 22.6% - 0.0% 35,000 100.0% Loss on disposal of assets 1,891 1.2% 5,097 12.8% (3,206 ) (62.9)% Loss from operations (39,263 ) (25.3)% (188,576 ) (473.4)% 149,313 * (2) Interest expense, net (13,516 ) (8.7)% (13,621 ) (34.2)% 105 (0.8)% Change in fair value of warrant liabilities (7,287 ) (4.7)% 5,189 13.0% (12,476 ) *(2) Patent license sales 22,500 14.5% - 0.0% 22,500 100.0% Loss on extinguishment of debt (839 ) (0.5)% - 0.0% (839 ) *(2) Other income 52 0.0% 51 0.1% 1 * (2) Income tax expense (benefit) (27 ) (0.0)% (737 ) (1.9)% 710 * (2) Net loss$ (38,326 ) (24.7)%$ (196,220 ) (492.6)%$ 157,894 * (2)
(1) As a percentage of revenues. Percentage totals or differences in the above
table may not equal the sum or difference of the components due to rounding.
(2) Not meaningful. Revenue. The increase in revenue was primarily attributable to an increase in business activity due to economic recovery from the COVID-19 pandemic and depressed oil prices in the second quarter of 2020. Our average active fleet count during the period increased to 10 fleets compared to 8 fleets in the prior comparable period. However, we expect revenue to decline in future quarters as we end our remaining diesel fracturing equipment-related contracts in the third quarter of 2021. Cost of services, excluding depreciation and amortization. The increase in cost of services, excluding depreciation and amortization, was attributable to the increase in business activity due to economic recovery from the COVID-19 pandemic and depressed oil prices in the prior comparable period. Similar to revenue, we expect cost of services, excluding depreciation and amortization, to decline in future quarters as we end our remaining diesel fracturing equipment-related contracts in the third quarter of 2021. Depreciation and amortization. The decrease in depreciation and amortization was primarily due to the lower cost basis of depreciating long-lived assets because of impairment losses recorded in the first quarter of 2020. We expect depreciation and amortization to decline in future quarters as we execute on our plan to sell our diesel fracturing equipment. Selling, general and administrative expenses. The decrease in selling, general, and administrative expenses was primarily attributable to our recording of a bad debt reserve of$9.0 million in the first quarter of 2020 due to the economic downturn at the end of that prior period. 31 -------------------------------------------------------------------------------- Impairment of long-lived assets. As a result of impairment tests that we performed in the first quarter of 2020, we determined that the carrying value of long-lived assets exceeded their fair value. Therefore, we recorded an impairment charge of$147.5 million in the first quarter of 2020 to reduce the carrying value of property and equipment and finite-lived intangible assets to fair value. No such impairment charge was recorded during the six months endJune 30, 2021 . Loss on disposal of assets. The amount of loss on disposal of assets fluctuates period over period due to differences in the operating conditions of our hydraulic fracturing equipment, such as wellbore pressure and rate of barrels pumped per minute, that impact the timing of disposals of our hydraulic fracturing pump components and the amount of gain or loss recognized. The decrease in the loss on disposal of assets was primarily attributable to the assets sold during the second quarter of 2021 and the significant decrease in loss on disposal of assets related to fluid ends, due to a change in accounting estimate related to their useful life during the second quarter of 2020. Beginning in the second quarter of 2020, fluid ends are expensed as they were used in operations, due to their shortened useful life estimate. Litigation settlement. The Company was named as a defendant in a lawsuit filed inJanuary 2019 by a vendor alleging that the Company breached a multi-year contract. InJune 2021 , following entry of the final judgement by the court in favor of the vendor, the Company entered into a settlement agreement to pay$35.0 million in cash, among other things. The cash portion of the settlement agreement was paid inJune 2021 . Patent license sales. OnJune 24, 2021 , the Company issued$22.5 million in principal amount of a Convertible Senior Note that was convertible into the License Agreement. OnJune 29, 2021 , the holder exercised its right to convert the Convertible Senior Note in full and the Company entered into the License Agreement, which provides the licensee a five-year option to purchase up to 20 licenses to build and operate electric hydraulic fracturing fleets using the Company's patented Clean Fleet® technology. Upon entry into the License Agreement, the Company sold three licenses to build and operate three electric frac fleets, each valued at$7.5 million .
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash on the balance sheet, cash flow generated from operating activities, proceeds from the issuance of equity, proceeds from the issuance of Convertible Senior Notes, and borrowings and borrowing capacity under our ABL Credit Facility. We believe that our current cash position, working capital balance, favorable payment terms under our Senior Secured Term Loan, borrowing capacity under our ABL Credit Facility, and amounts raised from the issuance of Convertible Senior Notes and shares of Class A common stock under the ATM Agreement will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at least the next twelve months.
Senior Secured Term Loan and ABL Credit Facility
As ofJune 30, 2021 , our Senior Secured Term Loan is not subject to financial covenants but is subject to certain non-financial covenants, including but not limited to, reporting, insurance, notice and collateral maintenance covenants as well as limitations on the incurrence of indebtedness, permitted investments, liens on assets, asset dispositions, paying dividends, transactions with affiliates, mergers, consolidations and special purpose entities used for stand-alone equipment financings. In addition, all borrowings under our ABL Credit Facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties and certifications regarding sales of certain inventory, and to a borrowing base. As ofJune 30, 2021 , the borrowing base was$46.3 million and the outstanding revolver loan balance was$33.7 million . As ofJune 30, 2021 , we were in compliance with all of the covenants under our Senior Secured Term Loan and our ABL Credit Facility.
USDA Loan
InNovember 2020 , we entered into a Business Loan Agreement (the "USDA Loan") with a commercial bank pursuant to the United StatesDepartment of Agriculture, Business & Industry Coronavirus Aid , Relief, and Economic Security Act Guaranteed Loan Program, in the aggregate principal amount of up to$25.0 million for the purpose of providing long-term financing for eligible working capital. Interest payments are due monthly at the interest rate of 5.75% per annum beginning onDecember 12, 2020 but principal payments are not required untilDecember 12, 2023 . During the fourth quarter of 2020, we received proceeds amounting to$22.0 million under the USDA Loan. InJanuary 2021 , we received the remaining proceeds amounting to$3.0 million . The USDA Loan is subject to certain financial covenants. The Company is required to maintain a Debt Service Coverage Ratio (as defined in the USDA Loan) of not less than 1.25:1, to be monitored annually, beginning in calendar year 2021. Additionally, the Company is required to maintain a ratio of debt to net worth of not more than 9:1, to be monitored annually based upon year-end financial statements beginning in calendar year 2022. 32 --------------------------------------------------------------------------------
Convertible Senior Notes
InJune 2021 , we issued an aggregate of$125.5 million in principal amount of 16.0% Convertible Senior Secured (Third Lien) PIK Notes dueJune 2026 (the "Convertible Senior Notes") in exchange for cash and shares of Series A preferred stock. InJune 2021 , we received cash proceeds of$86.5 million . We used a portion of the proceeds to pay a litigation settlement of$35.0 million and expect that the remaining proceeds will be used for general corporate purposes, including capital growth. As ofJune 30, 2021 , we had$103.0 million of principal outstanding of the Convertible Senior Notes, which are convertible into the shares of the Company's Class A common stock. InJuly 2021 , we issued an additional$11.0 million in aggregate principal amount of Convertible Senior Notes under the Note Purchase Agreement to certain investors for cash.
ATM Agreement
OnJune 26, 2020 , the Company entered into an Equity Distribution Agreement (the "ATM Agreement") withPiper Sandler & Co. relating to the Company's Class A common stock. In accordance with the terms of the ATM Agreement, the Company may offer and sell shares of its Class A common stock over a period of time. The ATM Agreement relates to an "at-the-market" offering program. Under the ATM Agreement, the Company will pay Piper Sandler an aggregate commission of up to 3% of the gross sales price per share of Class A common stock sold under the ATM Agreement. OnMarch 19, 2021 , the Company increased the number of shares of Class A common stock that it may offer in accordance with the terms of the ATM Agreement by an additional$39.7 million in excess of the original amount of$10.3 million . During the six months endedJune 30, 2021 , the Company sold 15,006,317 shares of Class A common stock for total net proceeds of$13.6 million and paid$0.4 million in commissions under the ATM Agreement. Since inception onJune 26, 2020 throughJune 30, 2021 , the Company has sold a total of 15,798,575 shares of Class A common stock under the ATM Agreement for total net proceeds of$14.0 million and paid$0.4 million in commissions. Cash Flows (in thousands) Six Months Ended June 30, 2021 2020 Net cash provided by (used in): Operating activities$ (28,371 ) $ 21,513 Investing activities (16,288 ) (25,720 ) Financing activities 97,460 (33,255 ) Operating Activities. Net cash provided by (used in) operating activities primarily represents the results of operations exclusive of non-cash expenses, including depreciation, amortization, provision for losses on accounts receivable and inventory, interest, impairment losses, losses on disposal of assets, changes in fair value of warrant liabilities and share-based compensation and the impact of changes in operating assets and liabilities. Net cash used in operating activities was$28.4 million for the six months endedJune 30, 2021 primarily due to a litigation settlement of$35.0 million and$3.0 million of working capital payments from proceeds under our USDA Loan. Net cash provided by operating activities was$21.5 million for the six months endedJune 30, 2020 , primarily attributable to accelerated collections of accounts receivables, which was offset in part by interest payments of$24.3 million related to our Senior Secured Term Loan. Investing Activities. Net cash used in investing activities decreased by$9.4 million from the prior corresponding period, primarily due to reduced growth and maintenance capital expenditures due to the decline in business activity that occurred at the end of the first quarter of 2020 and continued into the second quarter of 2020. Net cash used in investing activities was$16.3 million for the six months endedJune 30, 2021 , primarily due to$24.8 million in purchases of property and equipment, which related to maintaining and supporting our existing hydraulic fracturing equipment and payments made to replace damaged property and equipment. This was offset in part by$6.4 million of insurance proceeds related to the damaged property and equipment and$2.1 million of proceeds from the sale of property and equipment. Net cash used in investing activities was$25.7 million for the six months endedJune 30, 2020 , primarily due to$40.8 million in purchases of property and equipment, consisting of$16.0 million related to maintaining and supporting our existing hydraulic fracturing equipment and$24.8 million related to growth. This was offset in part by proceeds of$15.0 million from the sale of certain property and equipment. 33
-------------------------------------------------------------------------------- Financing Activities. During the six months endedJune 30, 2021 , cash provided by financing activities reflected proceeds of$24.7 million under our ABL Credit Facility,$3.0 million of proceeds from issuance of long-term debt,$86.5 million of proceeds from the issuance of Convertible Senior Notes,$9.1 million of proceeds of notes payable and proceeds of$13.6 million from the issuance of common stock, offset in part by payments related to our ABL Credit Facility of$14.8 million , long-term debt of$12.6 million , notes payable of$3.7 million , equipment financing arrangements of$1.7 million and debt issuance costs of$6.6 million . During the six months endedJune 30, 2020 , cash used in financing activities reflected repayments related to our ABL Credit Facility of$33.4 million , repayment of long-term debt of$2.5 million , repayment of notes payable of$4.1 million , repayments of equipment financing agreements of$1.5 million , repayments of finance leases of$2.8 million and debt issuance costs of$20.1 million . This was offset by$19.9 million in net proceeds from the issuance of Series B preferred stock and$11.2 million of proceeds under our ABL Credit Facility. Capital Expenditures. Our business requires continual investments to upgrade or enhance existing property and equipment and to ensure compliance with safety and environmental regulations. Capital expenditures primarily relate to maintenance capital expenditures, growth capital expenditures and fleet enhancement capital expenditures. Maintenance capital expenditures include expenditures needed to maintain and to support our current operations. Growth capital expenditures include expenditures to generate incremental distributable cash flow. Fleet enhancement capital expenditures include expenditures on new equipment related to existing fleets that increase the productivity of the fleet. Capital expenditures for growth and fleet enhancement initiatives are discretionary. We classify maintenance capital expenditures as expenditures required to maintain or supplement existing hydraulic fracturing fleets. We budget maintenance capital expenditures based on historical run rates and current maintenance schedules. Growth capital expenditures relate to adding additional hydraulic fracturing fleets and are based on quotes obtained from equipment manufacturers and our estimate for the timing of placing orders, disbursing funds and receiving the equipment. Fleet enhancement capital expenditures relate to technology enhancements to existing fleets that increase their productivity and are based on quotes obtained from equipment manufacturers and our estimate for the timing of placing orders, disbursing funds and receiving the equipment. We continuously evaluate our capital expenditures and the amount we ultimately spend will depend on several factors, including expected industry activity levels and company initiatives. We intend to fund most of our capital expenditures, contractual obligations and working capital needs with cash on hand, cash generated from operations, borrowing capacity under our ABL Credit Facility and other financing sources.
Off-Balance Sheet Arrangements
We are a party to transactions, agreements or other contractual arrangements defined as "off-balance sheet arrangements" that could have a material future effect on our financial position, results of operations, liquidity, and capital resources. The most significant of these off-balance sheet arrangements include equipment and sand purchase commitments disclosed in "Note 17 - Commitments and Contingencies" in the Notes to Condensed Consolidated Financial Statements. We do not have a retained or contingent interest in assets transferred to an unconsolidated entity, we do not have any obligation under a contract that would be accounted for as a derivative instrument, and we do not have any interest in entities referred to as variable interest entities.
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