UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from [ ] to [ ]
Commission file number 001-38025
U.S. WELL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
organization)
1360 Post Oak Boulevard, Suite 1800, Houston, TX
(Address of principal executive offices)
81-1847117
(I.R.S. Employer incorporation or
Identification No.)
77056
(Zip Code)
Registrant’s telephone number, including area code (832) 562-3730
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
CLASS A COMMON SHARES $0.0001, par value
WARRANTS
Trading Symbol(s)
USWS
USWSW
Name of each exchange on which registered
NASDAQ Capital Market
NASDAQ Capital Market
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [✓] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [✓] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [✓]Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [✓]Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
[ ]
[ ]
[✓]
Accelerated filer
Smaller reporting company
[✓]
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ]Yes [✓]No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant computed as of June 28, 2019 (the last business day of the registrant’s
most recent completed second fiscal quarter) based on the closing price of the Class A common stock on the Nasdaq Capital Market was $92,974,894.
As of March 2, 2020, the registrant had 62,857,624 shares of Class A Common Stock and 5,500,692 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required to be disclosed in Part III of this report is incorporated by reference from the registrant’s definitive proxy statement or an amendment to this report, which
will be filed with the SEC not later than 120 days after the end of the fiscal year covered by this report.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10–K Summary
SIGNATURES
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Cautionary Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (“Annual 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.
All statements, other than statements of historical information, should be deemed to be forward-looking statements. Forward-looking statements are often
identified by the 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 are based on
our current expectation, belief 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. Known material factors that could cause
actual results to differ materially from those contemplated in the forward-looking statements include those set forth in “Item 1A. Risk Factors” and
elsewhere in this Annual Report. We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof.
We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new
information, future events, or otherwise, except to the extent required by law.
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Item 1. Business.
Overview
PART I
We are a growth-oriented and technology-focused oilfield service company focused exclusively on hydraulic fracturing for oil and natural gas exploration
and production (“E&P”) companies in the United States. We are one of the first companies to develop and commercially deploy electric-powered hydraulic
fracturing technology, which we believe is an industry-changing technology. Currently, we provide our services in the Appalachian Basin, the Eagle Ford,
and the Permian Basin. We have demonstrated the capability to expeditiously deploy our fleets to new oil and gas basins when requested by customers.
Our customers include Apache, Diamondback, Equinor, Marathon, Range Resources, Shell, and other leading E&P companies.
Company Formation
On February 21, 2012, U.S. Well Services, LLC (“USWS LLC”) was formed as a Delaware limited liability company. We are a Houston, Texas-based
oilfield service provider that grew organically from one diesel powered hydraulic fracturing fleet (“Conventional Fleets”) in April 2012 to 13 available
fleets representing 684,545 hydraulic horsepower (“HHP”); five of which utilize our patented electric-powered hydraulic fracturing technology (the “Clean
Fleets”).
As part of a corporate restructuring (the “Restructuring”) in February 2017, all of the outstanding equity interest of USWS LLC (“Predecessor”) was
acquired by a newly-formed entity, USWS Holdings, LLC (“Successor” or “USWS Holdings”), a Delaware limited liability company that was formed for
the purposes of effecting the Restructuring and that had no operations of its own. The Restructuring was accounted for as a business combination under the
acquisition method of accounting. USWS Holdings was acquired by U.S. Well Services, Inc. (f/k/a Matlin & Partners Acquisition Corporation) on
November 9, 2018, as discussed further under Business Combination herein.
Business Combination
On March 10, 2016, Matlin & Partners Acquisition Corporation was incorporated in Delaware as a special purpose acquisition company (SPAC) for the
purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or
more target businesses. On March 15, 2017, Matlin & Partners Acquisition Corporation consummated its initial public offering (the “IPO”), following
which its shares began trading on the Nasdaq Capital Market (“Nasdaq”).
On November 9, 2018 (the “Closing Date”), Matlin & Partners Acquisition Corporation acquired USWS Holdings (the “Transaction”) pursuant to a
Merger and Contribution Agreement, dated as of July 13, 2018 (as amended, the “Merger and Contribution Agreement”). The Transaction was accounted
for as a reverse recapitalization. Under this method of accounting, USWS Holdings is treated as the acquirer and Matlin & Partners Acquisition
Corporation is treated as the acquired party.
In connection with the closing of the Transaction, Matlin & Partners Acquisition Corporation changed its name to U.S. Well Services, Inc. (“USWS Inc.”)
and its trading symbols on Nasdaq from “MPAC,” and “MPACW,” to “USWS” and “USWSW”. Unless the context otherwise requires, “we,” “us,” “our,”
“Company” and the “Registrant” refer, for periods prior to the completion of the Transaction, to USWS Holdings and its subsidiaries and, for periods upon
or after the completion of the Transaction, to USWS Inc. and its subsidiaries, including USWS Holdings and its subsidiaries.
Pursuant to the Merger and Contribution Agreement, on the Closing Date, USWS Inc. issued Class A common stock to certain members of USWS
Holdings in exchange for their interests in USWS Holdings and Class B common stock to certain members of USWS Holdings who retained their interests
in USWS Holdings.
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Following the completion of the Transaction, the Company was organized as an “Up-C” structure, meaning that substantially all of the Company’s assets
and operations are held and conducted by USWS LLC. The Company’s only assets are equity interests representing 92% ownership of USWS Holdings as
of December 31, 2019. The Transaction did not include a tax receivable agreement.
Organizational Structure
The following diagram illustrates the ownership structure of the Company as of December 31, 2019:
Each share of Class B common stock has no economic rights in USWS Inc., but entitles its holder to one vote on all matters to be voted on by shareholders
generally. Holders of Class A common stock and Class B common stock will vote together as a single class on all matters presented to our shareholders for
their vote or approval, except as otherwise required by applicable law. We do not intend to list the Class B common stock on any exchange.
Under the Amended and Restated Limited Liability Company Agreement of USWS Holdings, each share of Class B common stock of USWS Inc.,
together with one unit of USWS Holdings and subject to certain limitations, is exchangeable (the "Exchange Right") for one share of Class A common
stock of USWS Inc. or, at the Company's election, the cash equivalent to the market value of one share of Class A common stock of USWS Inc. The
exchange is subject to conversion rate adjustments for stock splits, stock dividends, reclassifications and other similar transactions. In addition, upon a
change in control of USWS Inc., USWS Inc. has the right to require each holder of USWS Holdings units (other than USWS Inc.) to exercise its Exchange
Right with respect to some or all of such holder's USWS Holdings units. An exchange of Class B common stock of USWS Inc., together with the
corresponding one unit of USWS Holdings, will result in both being cancelled.
Operations
Our operations are organized into a single business segment, which consists of hydraulic fracturing services, and we have one reportable geographical
business segment, the United States.
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Services
We provide hydraulic fracturing services to E&P companies. Hydraulic fracturing services are performed to enhance the production of oil and natural gas
from formations with low permeability and restricted flow of hydrocarbons. Our customers benefit from our expertise in fracturing of horizontal and
vertical oil and natural gas-producing wells in shale and other unconventional geological formations.
The process of hydraulic fracturing involves pumping a pressurized stream of fracturing fluid — typically a mixture of water, chemicals and proppant —
into a well casing or tubing in order to cause the underground mineral formation to fracture or crack. Fractures release trapped hydrocarbon particles and
provide a conductive channel for the oil or natural gas to flow freely to the wellbore for collection. The propping agent, or proppant, becomes lodged in the
cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons from the reservoir to the well.
Our fleets consist of mobile hydraulic fracturing units and other auxiliary heavy equipment to perform fracturing services. We have two designs for our
hydraulic fracturing units: (1) our Conventional Fleets, which are powered by diesel fuel and utilize traditional internal combustion engines, transmissions,
and radiators and (2) our Clean Fleets, which replace the traditional engines, transmissions, and radiators with electric motors powered by electricity
generated by natural gas-fueled turbine generators. Both designs utilize high-pressure hydraulic fracturing pumps mounted on trailers. We refer to the
group of pump trailers and other equipment necessary to perform a typical fracturing job as a “fleet,” and the personnel assigned to each fleet as a “crew.”
Clean Fleet® Technology
Our Clean Fleets combine natural gas turbine generators with electric motors and existing industry equipment to provide fracturing services with numerous
advantages over conventional fleets. Our Clean Fleet® technology is a proven technology that has been in commercial operations since July 2014, making
us a leading provider of electric-powered hydraulic fracturing services. Our Clean Fleet® technology is supported by a robust intellectual property portfolio.
We have been granted, or have received notice of allowance, for 30 patents and have an additional 104 patents pending.
We believe Clean Fleet® technology provides the Company with a distinct competitive advantage over our competitors because of the following
characteristics:
• Environmental benefits. Clean Fleet® technology can substantially reduce emissions of air pollutants as compared to conventional fleets, reducing
the environmental impact of hydraulic fracturing operations.
• Fuel cost savings. The use of natural gas directly from the field allows our Clean Fleets to eliminate diesel fuel costs including cost of delivery to
wellsite, providing significant fuel cost savings versus a conventional diesel-powered fleet.
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Improved operational efficiency. The elimination of diesel delivery results in simpler logistics, reduced truck traffic and congestion on location and
in the community. The reduction of routine maintenance services (e.g., oil changes) along with the inherent stability of the electric system maximizes
productive time at the wellsite, allowing our Clean Fleets to pump more hours per day versus a conventional diesel-powered fleet, resulting in fewer
days on location. In addition to the cost of the completion crew, our customers incur significant costs for ancillary equipment and service providers
each day on site. The reduction in days on site creates additional economic benefit to our customers by reducing these costs.
• Reduced repair and maintenance cost. Clean Fleet® technology eliminates the use of diesel engines and transmissions, which require on-going
maintenance in the form of routine oil and filter changes, component replacements and eventual rebuilds. In addition to having a materially longer
rebuild cycle, the cost to rebuild an electric motor is significantly less than the cost to rebuild a conventional engine, transmission and radiator.
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• Longer equipment useful life. Natural gas-powered generators are proven, long-lived assets that have operated in harsh environments for decades. In
conjunction with the turbine generators, Clean Fleet® technology uses electric motors that have fewer mechanical parts relative to the conventional
diesel-powered engines and transmissions. Similar to the generators, these electric motors have been in-use in other heavy-duty industrial
applications for decades with a demonstrated useful life of at least 15 years.
• Reduced noise pollution. Clean Fleet® technology offers a dramatic reduction in sound pressure and low frequency noise as compared to
conventional fracturing fleets, which benefits the surrounding communities and improves worksite conditions for our employees and customers.
• Enhanced safety features. Clean Fleet® technology reduces heat and noise emissions, making the wellsite safer for our employees and all personnel at
the wellsite. Additionally, by eliminating diesel truck deliveries, Clean Fleet® technology decreases the danger from refueling operations, reduces
traffic in the communities in which we operate and limits wellsite crowding.
Competitive Strengths
We believe that the following strengths will position us to provide high-quality service to our customers and create value for our stockholders:
• Proprietary Clean Fleet® technology. We are a market leader in electric fracturing technology, with five all-electric hydraulic fracturing fleets. Our
Clean Fleets provide substantial cost savings by replacing diesel fuel with natural gas and offer considerable operational, safety and environmental
advantages. Clean Fleet® technology offers superior operational efficiency resulting from reduced non-productive time due to repairs, maintenance
and failures associated with diesel-powered engines and transmissions. Additionally, Clean Fleet® technology can substantially reduce emissions of
air pollutants and noise from the wellsite. We believe that adoption of this technology in the near term will materially increase and allow us to
continue to significantly expand our market share over the next several years.
• Strong customer relationships supported by contracts and dedications. We have cultivated strong relationships with a diverse group of customers as
a result of the quality of our service, safety performance and ability to work with customers to establish mutually beneficial service agreements. Our
contracts and dedications provide customers with certainty of service pricing, allowing them to efficiently budget and plan the development of their
wells. Additionally, our contracts and dedications allow us to maintain higher utilization of our fleet and generate revenue and cash flow through
industry cycles. We believe our relationships and the structure of our contracts and dedications position us to continue to build long-term partnerships
with customers and support stable financial performance.
• Modern, high-quality equipment and rigorous maintenance program. Our hydraulic fracturing fleets consist of modern, well-maintained equipment.
We invest in high-quality equipment from leading original equipment manufacturers. Moreover, we take proactive measures to maintain the quality
of our equipment, using specialized equipment to monitor frac pump integrity and our proprietary FRAC MD® data analytics platform to support
preventative maintenance efforts. We believe the quality of our equipment is critical to our ability to provide high quality service to our customers.
• Strong, employee-centered culture. Our employees are critical to our success and are a key source of our competitive advantage. We continuously
invest in training and development for our employees, and as a result, we are able to provide consistent, high-quality service and safe working
conditions for both employees and customers. During the last industry downturn, we maintained higher levels of utilization and were able to operate
without making significant reductions in force. The continuity of our workforce has ensured a consistent culture and the high quality of service for
which we are known.
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• Track record for safety. Safety is a critical element of our operations. We focus on providing customers with the highest quality of service by
employing a trained and motivated workforce that is rigorously focused on safety. We continuously review safety data and work to develop and
implement policies and procedures that ensure the safety and wellbeing of our employees, customers and the communities in which we operate. Our
field operators are empowered to stop work and question the safety of a situation or task performed. We use specialized technology to improve safety
for our truck drivers, and employ measures to mitigate the risk of respirable silica dust exposure on the wellsite. We believe our record of safe
operations makes us an attractive partner for both our customers and our employees.
• Proven, cycle-tested management team. Our management team has a proven track record for building and operating oilfield service companies. As a
result of our strategy, we have grown the business organically. Our operating and commercial teams have significant industry experience and
longstanding relationships with our clients. We believe our management team’s experience and relationships position us to generate business and
create value for stockholders.
Customer Concentration
Our customers include a broad range of leading E&P companies. For the year ended December 31, 2019, Apache Corporation, Hawkwood Energy, and
Sable Permian Resources each comprised greater than 10% of our consolidated revenues.
Suppliers
We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We currently rely on a limited
number of suppliers from which we procure major equipment components used to maintain, build or upgrade our custom Clean Fleet® hydraulic fracturing
equipment. In addition, some of these components have few suppliers and long lead times to acquire. Historically, we have generally been able to obtain
the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe that we will be able to make satisfactory
alternative arrangements in the event of any interruption in the supply of these materials and/or equipment by one of our suppliers, we may not always be
able to do so. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant
price increases in the future. As a result, we may be unable to mitigate any future supply shortages and our results of operations, prospects and financial
condition could be adversely affected.
Competition
The markets in which we operate are very competitive. We provide services in various geographic regions across the United States, and our competitors
include many large and small oilfield service providers, including some of the largest integrated service companies. Our hydraulic fracturing services
compete with large, integrated companies such as Halliburton Company and Schlumberger Limited as well as other companies including BJ Services
Company, Calfrac Well Services Ltd., FTS International Inc., Liberty Oilfield Services Inc., NexTier Oilfield Solutions Inc., Patterson-UTI Energy Inc.,
ProPetro Services Inc., and RPC Inc. In addition, our industry is highly fragmented and we compete regionally with a significant number of smaller service
providers.
We believe that the principal competitive factors in the markets we serve are technical expertise, equipment capacity, workforce competency, efficiency,
safety record, reputation, experience and price. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive
environment.
Cyclical Nature of Industry
We operate in a cyclical industry. The key factor driving demand for our services is the level of well completions by E&P companies, which in turn
depends largely on the current and anticipated economics of new well completions. Global supply and demand for oil and the domestic supply and demand
for natural gas are critical in assessing industry outlook. Demand for oil and natural gas is cyclical and subject to large, rapid fluctuations. E&P companies
tend to increase capital expenditures in response to increases in oil and natural gas prices, which generally results in greater revenues and profits for oilfield
service companies like us. Increased E&P capital expenditures ultimately lead to greater production, which historically has resulted in increased supplies
and reduced prices which in turn tend to reduce demand for oilfield services. For these reasons, the results of our operations may fluctuate from quarter to
quarter and from year to year, and these fluctuations may distort comparisons of results across periods.
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Seasonality
Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to holiday seasons, inclement weather, and the
conclusion of our customers’ annual drilling and completion capital expenditure budgets, during which we may experience declines in our operating results.
Insurance
Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks,
either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been
subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for
which we are not insured, or which exceed the policy limits of their applicable insurance, could have a material adverse effect on our business and financial
condition.
Environmental and Occupational Health and Safety Regulations
Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to
environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require
difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in permit revocations or
modifications, operational disruptions, or injunctive obligations for noncompliance. These laws and regulations may, for example, restrict the types,
quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain
lands lying within wilderness, wetlands, ecologically or seismically-sensitive areas and other protected areas, or require action to prevent or remediate
pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes
in environmental, health and safety laws and regulations occur frequently, and any changes in the laws or regulations or the interpretation thereof that result
in more stringent and costly requirements could materially adversely affect our operations and financial position. We have not experienced any material
adverse effect from compliance with these requirements. This trend, however, may not continue in the future.
Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’
operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial
position may also have an indirect material adverse effect on our operations and financial position.
Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act (“RCRA”) and comparable state
laws and regulations, which impose requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and nonhazardous
wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with our own, more stringent
requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid
wastes” that are subject to the less stringent requirements of nonhazardous waste provisions.
Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the Environmental
Protection Agency (“EPA”) or state or local governments may adopt more stringent requirements for the handling of nonhazardous wastes or re-categorize
some nonhazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain
oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA
to modify existing regulations to re-categorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes
in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the
current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas
exploration and production wastes could increase our costs to manage and dispose of such wastes.
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Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) and
analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be
responsible for the release of a hazardous substance into the environment or, under some state CERCLA-analogous laws, the release of solid waste. These
persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, those
persons that disposed or arranged for the disposal of the substance at the facility, and transporters who selected the disposal site. Liability for the costs of
removing or remediating previously disposed wastes or contamination, damages to natural resources, and the costs of conducting certain health studies,
amongst other things, is strict and joint and several. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use
materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us
responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such substances have been released.
NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials (“NORM”) associated with
oil and gas deposits and accordingly may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of naturally
occurring radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and
work area affected by NORM may be subject to remediation or restoration requirements.
Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and
strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The
discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA, the U.S. Army Corps of
Engineers (the “Corps”), or the applicable state. The Clean Water Act has been interpreted by these agencies to apply broadly. The EPA and the Corps
released a rule to revise the definition of “waters of the United States,” or WOTUS, for all Clean Water Act programs, which went into effect in August
2015. Litigation and political maneuverings surrounding the revised WOTUS definition have been ongoing since that time. More recently, on October 22,
2019, the EPA and the Corps issued a final rule to repeal the 2015 Clean Water Rule and re-codify the regulatory text that existed prior to 2015 (the “Step
One Rule”). The Step One Rule became effective on December 23, 2019. On January 23, 2020, the EPA and the Corps announced the final Navigable
Waters Protection Rule, which would revise and narrow the WOTUS definition. The Navigable Waters Protection Rule will become effective 60 days after
its publication in the Federal Register, at which time it will replace the Step One Rule. We expect litigation regarding the WOTUS definition to continue,
creating uncertainty as to what constitutes a protected “water of the United States.” In addition, spill prevention, control and countermeasure plan
requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters.
Air Emissions. The Clean Air Act (“CAA”) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of
permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing
emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be
required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs
of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas
projects.
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Climate Change. The EPA has determined that greenhouse gasses (“GHGs”) present an endangerment to public health and the environment because such
gases contribute to warming of the Earth’s atmosphere and other climatic changes. Based on these findings, the EPA has adopted and implemented, and
continues to adopt and implement, regulations that restrict emissions of GHGs under existing provisions of the CAA. The EPA also requires the annual
reporting of GHG emissions from certain large sources of GHG emissions in the United States, including certain oil and gas production facilities. The U.S.
Congress has from time to time considered adopting legislation to reduce emissions of GHGs and almost one-half of the states have already taken legal
measures to reduce emissions of GHGs primarily through the development of GHG emission inventories and/or regional GHG cap and trade programs and
through the establishment of emissions reduction targets. In December 2015, the United States joined the international community at the 21st Conference of
the Parties of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to
undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of greenhouse gases. The Paris
Agreement entered into force in November 2016. On June 1, 2017, the United States President announced that the U.S. planned to withdraw from the Paris
Agreement and to seek negotiations either to reenter the Paris Agreement on different terms or establish a new framework agreement. The United States
formally began the process of withdrawing from the Paris Agreement on November 4, 2019 by submitting a notification to the United Nations. Per the
U.S. Department of State, the withdrawal will take effect one year from delivery of this notification, on or about November 4, 2020.
Moreover, climate change may cause more extreme weather conditions and increased volatility in seasonal temperatures. Extreme weather conditions can
interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured.
Endangered and Threatened Species. Environmental laws such as the Endangered Species Act (“ESA”) and analogous state laws may impact exploration,
development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed
as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish
and Wildlife Service may identify previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that
it believes are necessary for survival of a threatened or endangered species, which could cause us or our customers to incur additional costs or become
subject to operating restrictions or operating bans in the affected areas.
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Regulation of Hydraulic Fracturing and Related Activities. Hydraulic fracturing is an important and common practice that is used to stimulate production of
hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under
pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However,
federal agencies have asserted regulatory authority over certain aspects of the process. For example, beginning in August 2012, the EPA issued a series of rules
under the CAA that establish new emission control requirements for certain oil and natural gas production and natural gas processing operations and
associated equipment. However, in June 2017, the EPA proposed a two year stay of the fugitive emissions monitoring requirements, pneumatic pump
standards, and closed vent system certification requirements in the 2016 New Source Performance Standards rule for the oil and gas industry while it
reconsiders these aspects of the rule. On September 11, 2018, the EPA proposed targeted improvements to the rule, including amendments to the rule’s
fugitive emissions monitoring requirements, and expects to “significantly reduce” the regulatory burden of the rule in doing so. On September 24, 2019,
the EPA proposed additional amendments to the 2016 New Source Performance Standards that would rescind certain methane control requirements and
may remove the transmission and storage segment from the oil and natural gas source category. To date, none of these proposed amendments to the 2016
New Source Performance Standards has been finalized. The U.S. Department of Interior’s Bureau of Land Management (“BLM”) finalized similar rules in
November 2016 that limit methane emissions from new and existing oil and natural gas operations on federal lands through limitations on the venting and
flaring of gas, as well as enhanced leak detection and repair requirements. The BLM adopted final rules in January 2017. Operators generally had one year
from the January 2017 effective date to come into compliance with the rule’s requirements. In December 2017, the BLM temporarily suspended or delayed
certain of these requirements set forth in its Venting and Flaring Rule until January 2019, and in September 2018, the BLM published a final rule which
scaled back the waste-prevention requirements of the 2016 rule. Environmental groups sued in federal district court a day later to challenge the legality of
aspects of the revised rule, and the outcome of this litigation is currently uncertain. Moreover, in March 2015, the BLM issued a final rule that imposes
requirements on hydraulic fracturing activities on federal and Indian lands, including new requirements relating to public disclosure, wellbore integrity and
handling of flowback water. However, the BLM rescinded this rule in December 2017. In January 2018, California and a coalition of environmental groups
filed suit in the Northern District of California to challenge the BLM’s rescission of the 2015 rule. This litigation is ongoing and future implementation of
the rule is uncertain at this time.
Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition
of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing have been proposed in recent sessions of Congress.
Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could require
disclosure of the chemical constituents of the fluids used in the fracturing process, restrict or prohibit hydraulic fracturing in certain circumstances, impose more
stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids.
More recently, federal and state governments have begun investigating whether the disposal of produced water into underground injection wells has caused
increased seismic activity in certain areas. For example, in December 2016, the EPA released its final report regarding the potential impacts of hydraulic
fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources
under certain circumstances such as water withdrawals for fracturing in times or areas of low water availability, surface spills during the management of
fracturing fluids, chemicals or produced water, injection of fracturing fluids into wells with inadequate mechanical integrity, injection of fracturing fluids
directly into groundwater resources, discharge of inadequately treated fracturing wastewater to surface waters, and disposal or storage of fracturing
wastewater in unlined pits. The results of these studies could lead the federal government and has led some state governments to develop and implement
additional regulations, including stricter regulatory requirements relating to the location and operation of underground injection wells or requirements
regarding the permitting of produced water disposal wells or otherwise.
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Increased regulation of hydraulic fracturing and related activities (whether as a result of the EPA study results or resulting from other factors) could subject
us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring,
reporting and recordkeeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us
and our customers and reduce the demand for our services.
OSHA Matters. The Occupational Safety and Health Act (“OSHA”) and comparable state statutes regulate the protection of the health and safety of
workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in
operations and that this information be provided to employees, state and local government authorities, and the public.
Employees
As of December 31, 2019, we had 871 full-time employees and no part-time employees. We are not a party to any collective bargaining agreements and
have not experienced any strikes or work stoppages. We believe our relationships with our employees are excellent. From time to time, we will utilize the
services of independent contractors to perform various field and/or other services.
Intellectual Property
We have been granted or have received notice of allowance for 30 patents, which begin to expire in late 2033, and have an additional 104 patents pending.
Our patents protect our Clean Fleet® technology from being duplicated by competitors. These patents help provide unique competitive advantages in
operating areas where noise and emissions are key concerns. We also use proprietary FRAC MD® technology to support our preventative maintenance
program and prolong equipment useful life. This technology utilizes specialized equipment to capture and analyze vibrations in order to identify
component stress so maintenance can be performed prior to catastrophic failures.
Availability of Information
We file or furnish annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (the “SEC”)
under the Exchange Act. The SEC maintains an internet website at www.sec.gov that contains reports, proxy and information statements and other
information regarding issuers, including us, that file electronically with the SEC.
We also make available free of charge through our website, www.uswellservices.com, electronic copies of certain documents that we file with the SEC,
including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. Information on our website or any other website is not incorporated by reference into, and does not constitute a part of, this Annual
Report.
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Item 1A. Risk Factors.
The following risk factors apply to our business and operations and the industry in which we operate. These risk factors are not exhaustive, and investors
are encouraged to perform their own investigation with respect to our business, financial condition and prospects. You should carefully consider the
following risk factors in addition to the other information included in this Annual Report, including matters addressed in the section entitled “Cautionary
Note Regarding Forward-Looking Statements.” We may face additional risks and uncertainties that are not presently known to us, or that we currently
deem immaterial, which may also impair our business, financial condition or prospects. The following discussion should be read in conjunction with our
consolidated financial statements and notes to the consolidated financial statements included in this Annual Report.
Risks Related to Our Business and Industry
Our business depends on the level of capital spending and exploration and production activity by the onshore oil and natural gas industry in the United
States, and the level of such activity is affected by industry conditions that are beyond our control.
Our business is directly affected by the willingness of our customers to make expenditures to explore for, develop and produce oil and natural gas from
onshore resources in the United States. The willingness of our customers to undertake these activities depends largely upon prevailing industry conditions
that are influenced by numerous factors over which we have no control, including:
• prices, and expectations about future prices, for oil and natural gas;
• domestic and foreign supply of, and demand for, oil and natural gas and related products;
•
•
•
the level of global and domestic oil and natural gas inventories;
the supply of and demand for hydraulic fracturing and other oilfield services and equipment in the United States;
the cost of exploring for, developing, producing and delivering oil and natural gas;
• available pipeline, storage and other transportation capacity;
•
•
•
•
lead times associated with acquiring equipment and products and availability of qualified personnel;
the discovery rates of new oil and natural gas reserves;
federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as exploration and production activities,
including public pressure on governmental bodies and regulatory agencies to regulate our industry;
the availability of water resources, suitable proppant and chemicals in sufficient quantities for use in hydraulic fracturing fluids;
• geopolitical developments and political instability in oil and natural gas producing countries;
• actions of the Organization of the Petroleum Exporting Countries (“OPEC”), its members and other state-controlled oil companies relating to oil
price and production controls;
• advances in exploration, development and production technologies or in technologies affecting energy consumption;
•
the price and availability of alternative fuels and energy sources;
• weather conditions, natural disasters and other catastrophic events such as an epidemic or pandemic disease outbreak;
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• uncertainty in capital and commodities markets and the ability of oil and natural gas producers to raise equity capital and debt financing; and
• U.S. federal, state and local and non-U.S. governmental regulations and taxes.
The oil and natural gas industry is volatile. A prolonged economic slowdown or recession in the United States, adverse events relating to the energy
industry or regional, national and global economic conditions and factors, could negatively impact exploration and production activity and the level of
drilling and completion activity by some of our customers. This volatility may result in a decline in the demand for, or adversely affect the price of, our
services. In addition, material declines in oil and natural gas prices, the development of oil and natural gas reserves in our market areas or drilling or
completion activity in the U.S. oil and natural gas shale regions, could have a material adverse effect on our business, financial condition, prospects, results
of operations and cash flows.
The volatility of oil and natural gas prices may adversely affect the demand for our services and negatively impact our results of operations.
The demand for our services is substantially influenced by current and anticipated crude oil and natural gas commodity prices and the related levels of
capital spending and drilling activity in the areas in which we have operations. Volatility or weakness in crude oil and natural gas commodity prices (or the
perception that crude oil and natural gas commodity prices will decrease) affects the spending patterns of our customers, and the products and services we
provide are, to a substantial extent, deferrable in the event oil and natural gas companies reduce capital expenditures. As a result, we may experience lower
utilization of, and may be forced to lower our rates for, our equipment and services.
Historical prices for crude oil and natural gas have been extremely volatile and are expected to continue to be volatile. The market prices for crude oil and
natural gas depend on factors beyond our control, including worldwide and domestic supplies of crude oil and natural gas and actions taken by foreign oil
and gas producing nations. Crude oil and natural gas prices and, therefore, the level of exploration, development and production activity, experienced a
sustained decline from the highs in the latter half of 2014 to the lows in 2016. Although commodity prices improved in late 2016 through the first part of
2018, prices significantly decreased during the third and fourth quarter of 2018 and throughout 2019, and continue to remain volatile.
As a result of declines and volatility in commodity prices, exploration and production companies moved to significantly cut costs, both by decreasing drilling
and completion activity and by demanding price concessions from their service providers, including providers of hydraulic fracturing services. In turn, service
providers, including hydraulic fracturing service providers, were forced to lower their operating costs and capital expenditures, while continuing to operate their
businesses in an extremely competitive environment. Prolonged periods of price instability in the oil and natural gas industry will adversely affect the demand
for our products and services, our financial condition, prospects and results of operations and our ability to service our debt or fund capital expenditures.
Additionally, fuel conservation measures, alternative fuel requirements and increasing consumer demand for alternatives to oil and natural gas could
reduce the demand for oil and natural gas products, creating downward pressure on commodity prices and the prices we are able to charge for our services.
15
Our level of current and future indebtedness could adversely affect our financial condition.
As of December 31, 2019, we had $40.1 million of borrowings outstanding, with available capacity of $11.0 million, under our ABL credit facility, and
$250.0 million of borrowings outstanding under our senior secured term loan. We are required to make quarterly principal payments of 2.0% per annum of
the initial principal balance of our senior secured term loan, commencing on January 15, 2020, with final payment due at maturity on May 7, 2024. Our
ABL credit facility is scheduled to mature on February 6, 2024. Upon maturity of our ABL credit facility and senior secured term loan, we will be required
to repay, extend or refinance our indebtedness. We may not be able to extend, replace or refinance either one or both of our existing debt financing
agreements on terms reasonably acceptable to us, or at all. Our obligations under both our ABL credit facility and senior secured term loan are secured by
substantially all of our assets. In addition, we have entered into several security agreements with financial institutions for the purchase of certain fracturing
equipment. As of December 31, 2019, the aggregate outstanding balance under our equipment financing arrangements was $16.1 million, of which $5.6
million is due within one year. Our equipment financing arrangements are secured by certain of our fracturing equipment. If we are unable to meet our debt
service obligations, our lenders under our ABL credit facility, senior secured term loan, or equipment financing arrangements can seek to foreclose on our
assets. For more information about our debt financing agreements and equipment financing arrangements, please see “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Our ability to meet our debt service obligations will be dependent upon future performance, which in turn will be subject to general economic conditions,
industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. Our business may not continue to
generate sufficient cash flow from operations to pay our debt service obligations when due. Moreover, we may incur additional indebtedness, which would
increase the amount of cash flow we need to service debt obligations. If we are unable to generate sufficient cash flow from operations, we may be
required to sell assets, to restructure or refinance all or a portion of such indebtedness or to obtain additional financing. We cannot assure you, however,
that we would be able to sell assets, restructure or refinance all or a portion of our indebtedness or obtain additional financing on commercially reasonable
terms or at all. Moreover, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a
reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms. To the extent inadequate liquidity or other
considerations require us to seek to restructure or refinance our indebtedness, our ability to do so will depend on numerous factors, including many beyond
our control, such as the condition of the capital markets and our financial condition at such time. Any refinancing or restructuring of our indebtedness
could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
Our debt financing agreements subject us to financial and other restrictive covenants. These restrictions may limit our operational or financial
flexibility and could subject us to potential defaults under our credit facilities.
Our debt financing agreements subject us to restrictive covenants, including, among other things, limitations (each of which is subject to certain
exceptions) on our ability to incur debt, grant liens, enter into transactions resulting in fundamental changes (such as mergers or sales of all or substantially
all of our assets) and asset sales or other types of dispositions, restrict subsidiary dividends or other subsidiary distributions, enter into transactions with
affiliates and swap counterparties, make investments and restricted payments, permit subsidiaries to provide guarantees to other material debt, and enter
into leases and sale and lease back arrangements.
Additionally, our ABL credit facility is subject to a springing fixed charge coverage covenant. For a description of the covenants under our ABL credit
facility, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
If we are unable to remain in compliance with the covenants of our ABL credit facility, then amounts outstanding thereunder may be accelerated and
become due immediately. We might not have, or be able to obtain, sufficient funds to make these accelerated payments, and any such acceleration could
have a material adverse effect on our financial condition and results of operations.
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Moreover, subject to the limits contained in our debt financing agreements, we may incur substantial additional debt from time to time. Any borrowings
we may incur in the future would have several important consequences for our future operations, including that:
• covenants contained in the documents governing such indebtedness may require us to meet or maintain certain financial tests, which may affect our
flexibility in planning for, and reacting to, changes in our industry, such as being able to take advantage of acquisition opportunities when they arise;
• our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited;
• we may be competitively disadvantaged to our competitors that are less leveraged or have greater access to capital resources; and
• we may be more vulnerable to adverse economic and industry conditions.
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect our ability to
refinance our indebtedness.
Financial regulators are working to transition away from the London Interbank Offered Rate (“LIBOR”) as a reference rate for financial contracts. On July
27, 2017, the Financial Conduct Authority announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new
methods of calculating LIBOR will be established such that it continues to exist after 2021. While our ABL credit facility and senior secured term loan are
scheduled to mature in February 2024 and May 2024, respectively, potential changes, or uncertainty related to such potential changes in interest rate
benchmarks may adversely affect our ability to refinance our indebtedness. There is no guarantee that a transition from LIBOR to an alternative will not
result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could have an adverse effect
on our business, financial condition and results of operations.
Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately
insured.
Our operations are exposed to the risks inherent to our industry, such as equipment defects, vehicle accidents, fires, explosions, blowouts, surface cratering,
uncontrollable flows of gas or well fluids, pipe or pipeline failures, abnormally pressured formations and various environmental hazards, such as oil spills
and releases of, and exposure to, hazardous substances. For example, our operations are subject to risks associated with hydraulic fracturing, including any
mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. In addition, our operations are exposed
to potential natural disasters, including blizzards, tornadoes, storms, floods, other adverse weather conditions and earthquakes. The occurrence of any of
these events could result in substantial losses to our business due to personal injury or loss of life, severe damage to or destruction of property, natural
resources and equipment, pollution or other environmental damage or other damage resulting in curtailment or suspension of our operations. Litigation
arising from operations where our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including
claims for exemplary damages. The cost of managing such risks may be significant, and the frequency and severity of such incidents may affect operating
costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they
view our environmental or safety record as unacceptable, which could cause us to lose customers and substantial revenues.
Our insurance may not be adequate to cover all losses or liabilities we may suffer, and the insurance coverage may not be adequate to cover claims that
may arise. We are not fully insured against all risks, either because insurance is not available or coverage is excluded from our policy, or because of the
high premium costs relative to perceived risk. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at
reasonable rates. Insurance rates in the past have been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost
or higher deductibles and retentions or the imposition of sub-limits for certain risks. In addition, we may not be able to secure additional insurance or
bonding that might be required by new governmental regulations. If we were to incur a significant liability for which we are not fully insured, it could have
a material adverse effect on our business, results of operations and financial condition.
17
Our long-term contracts are subject to certain risks, including counterparty payment risks, inability to renew or replace at favorable economic terms,
and changing market conditions that result in higher costs without offsetting revenue escalations.
We generally have long-term written contractual arrangements with our customers on the majority of our equipment. The counterparties to our contractual
arrangements are subject to various market risks that impact their businesses and, as a result, they may be unable to make payments to us pursuant to the
payment terms set forth in such contractual arrangements. Additionally, as contracts with our customers come up for replacement or renewal, changing
market conditions may prevent us from replacing or renewing the contracts on comparable terms. Our ability to achieve favorable terms under these
expiring contracts could be affected by many factors, including prolonged reduced commodity prices, decrease in demand for our services or increased
competition in the markets we serve. If we are unable to replace or renew the expiring agreements on comparable terms, it could materially adversely
affect our business, financial condition, results of operations and cash flows, including our ability to make cash distributions to our shareholders.
With no long-term contract in place, such customers could cease buying our services at any time, for any reason, with little or no recourse. If multiple
customers or a material customer with whom we did not have a long-term contract in place elected not to purchase our services, our business prospects,
financial condition and results of operations could be adversely affected.
Competition within the oilfield services industry may adversely affect our ability to market our services.
The oilfield services industry is highly competitive and includes several large companies that compete in many of the markets we serve, as well as
numerous small companies that compete with us on a local basis. Our larger competitors’ greater resources allow them to better withstand industry
downturns and compete more effectively on the basis of technology, geographic scope and retained skilled personnel. Several of our competitors provide a
broader array of services and have a stronger presence in more geographic markets.
We believe the principal competitive factors in the market areas we serve are price, equipment quality, supply chains, balance sheet strength and financial
condition, product and service quality, safety record, availability of crews and equipment and technical proficiency. Our operations may be adversely
affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other
characteristics than our products and services or expand into service areas where we operate. Competitive pressures or other factors may also result in
significant price competition, particularly during industry downturns. During such downturns, we experience reductions in the prices we can charge for our
services based on reduced demand and resulting overcapacity, including an intensified competitive environment as a result of an industry downturn and
oversupply of oilfield services. Any inability to compete effectively with our competitors or overcapacity in the markets which we serve could adversely affect
our business and results of operations.
We are dependent on a few customers in a single industry. The loss of one or more significant customers could adversely affect our financial condition,
prospects and results of operations.
Our customers are engaged in the oil and natural gas E&P business in the United States. Historically, we have been dependent upon a few customers for a
significant portion of our revenue. For the year ended December 31, 2019, Apache Corporation, Hawkwood Energy, and Sable Permian Resources, each
accounted for greater than 10% of total consolidated revenues. For the year ended December 31, 2018, Antero Resources, Southwestern Energy, Hawkwood
Energy, Wildhorse Resources, and CNX Resources, each accounted for greater than 10% of total consolidated revenues. It is likely that we will continue to derive
a significant portion of our revenue from a relatively small number of customers in the future. Additionally, the oil and natural gas industry is characterized by
frequent consolidation activity and, recently by frequent financial distress and bankruptcy filings. Changes in ownership of our customers or bankruptcy filings by
our customers may result in the loss of, or reduction in, business from those customers. If we were to lose any material customer, or if a major customer fails to pay
or delays in paying for our services, we may not be able to redeploy our equipment at similar utilization or pricing levels or within a short period of time and such
loss could have a material adverse effect on our business, financial condition, prospects and results of operations.
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We currently rely on a limited number of suppliers for major equipment to build new and upgrade existing electric fleets to our current custom Clean
Fleet® design, and our reliance on these vendors exposes us to risks including price and timing of delivery.
We currently rely on a limited number of suppliers for major equipment to build our new fleets and upgrade any existing electric fleets as needed to our
current custom Clean Fleet® design. During periods in which fracturing services are in high demand, we have experienced delays in obtaining certain parts
that are used in fabricating and assembling our fleets. If demand for hydraulic fracturing fleets or the components necessary to build such fleets increases
or these vendors face financial distress or bankruptcy, these vendors may not be able to provide the new or upgraded fleets on schedule or at the current
price. If this were to occur, we could be required to seek other suppliers for major equipment to build or upgrade our fleets, which may adversely affect our
revenues or increase our costs.
Our assets require significant amounts of capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for
new equipment.
Our fleets and other completion service-related equipment require significant capital investment in maintenance, upgrades and refurbishment to maintain
their competitiveness. The costs of components and labor may increase in the future which will require us to incur additional costs to maintain, upgrade
and/or refurbish our fleets. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, upgrades or
refurbishment. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other
opportunities. Furthermore, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such
projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service or our
equipment may not be attractive to potential or current customers. Additionally, competition or advances in technology within our industry may require us
to update or replace existing fleets or build or acquire new fleets. Such demands on our capital or reductions in demand for our fleets and the increase in
cost of labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position,
financial condition, prospects and results of operations and may increase our costs.
We are subject to federal, state and local laws and regulations regarding issues of health, safety and protection of the environment, including with
respect to our hydraulic fracturing operations. Under these laws and regulations, we may become liable for penalties, damages or costs of remediation
or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business.
Our operations are subject to stringent federal, state, and local laws and regulations relating to, among other things, protection of natural resources, clean
air and drinking water, endangered species, GHGs, nonattainment areas, the environment, health and safety, chemical use and storage, waste management,
waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability,
including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater.
Some environmental laws and regulations may impose strict liability, joint and several liability, or both. In some situations, we could be exposed to liability
as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we
caused or contributed to the conditions. Additionally, environmental concerns, including clean air, drinking water contamination and seismic activity, have
prompted investigations that could lead to the enactment of regulations, limitations, restrictions or moratoria that could potentially result in the shutdown
of our operations, fines and penalties (administrative, civil or criminal), revocations of permits to conduct business, expenditures for remediation or other
corrective measures and/or claims for liability for property damage, exposure to hazardous materials, exposure to hazardous waste, nuisance or personal
injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or
criminal penalties, revocation of permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action
orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our
business, financial condition, prospects and results of operations. Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria
on oil and natural gas exploration and completion activities at a federal, state or local level or changes in the way these requirements are interpreted or
enforced could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the
cost of our services, thereby possibly having a material adverse impact on our financial condition. For more information about regulations and laws
regarding issues of health, safety and protection of the environment in our industry, please see “Item 1. Business - Environmental and Occupational Health
and Safety Regulations.”
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In December 2016, the EPA issued a study of the potential impacts of hydraulic fracturing on drinking water and groundwater. The EPA report states that
there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances and identifies certain conditions in
which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further
initiatives to regulate hydraulic fracturing. Additionally, state legislatures, state regulatory agencies and local municipalities may consider legislation,
regulations or ordinances, respectively that could affect all aspects of the oil and natural gas industry and occasionally take action to restrict or further
regulate hydraulic fracturing operations. Some states, counties and municipalities have enacted or are considering moratoria on hydraulic fracturing or
zoning ordinances, which could impose a de facto ban on drilling and hydraulic fracturing operations. At this time, it is not possible to estimate the
potential impact on our business of these state and municipal actions or the enactment of additional federal or state legislation or regulations affecting
hydraulic fracturing. Compliance, stricter regulations or the consequences of any failure to comply by us could have a material adverse effect on our
business, financial condition, prospects and results of operations. For more information about regulations relating to hydraulic fracturing, please see “Item
1. Business - Environmental and Occupational Health and Safety Regulations.”
Furthermore, many states in which we operate require the disclosure of some or all of the chemicals used in our hydraulic fracturing operations. Certain aspects
of one or more of these chemicals may be considered proprietary by us or our chemical suppliers. Disclosure of our proprietary chemical information to third
parties or to the public, even if inadvertent, could diminish the value of our trade secrets or those of our chemical suppliers and could result in competitive harm to
us, which could have an adverse impact on our business, financial condition, prospects and results of operations. Additionally, our business could be affected
by a moratorium or increased regulation of companies in our supply chain, such as sand mining by our proppant suppliers, which could limit our access to
supplies and increase the costs of our raw materials. At this time, it is not possible to estimate how these various restrictions could affect our ongoing
operations.
Many regulatory and legislative bodies routinely evaluate the adequacy and effectiveness of laws and regulations affecting the oil and gas industry. The oil
and gas industry is one of the sectors designated for increased enforcement by the EPA, which will continue to regulate our industry in the years to come.
Laws and regulations protecting the environment, especially those related to GHGs and climate change, generally have become more stringent over time,
and we expect them to continue to do so. This could lead to material increases in our costs and liability exposure for future environmental compliance and
remediation and may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of
environmental requirements, including land use policies responsive to environmental concerns. Additionally, if we expand the size or scope of our
operations, we could be subject to regulations that are more stringent than the requirements under which we are currently allowed to operate or require
additional authorizations to continue operations. Compliance with this additional regulatory burden could increase our operating or other costs.
Additionally, failure to comply with government, industry or our own health and safety laws and regulations, or failure to comply with our compliance or
reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position. In addition,
customers maintain their own compliance and reporting requirements, and if we do not perform in accordance with their requirements, we could lose
business from our customers, many of whom have an increased focus on environmental and safety issues.
Climate change legislation, regulations restricting emissions of greenhouse gases or other action taken by public or private entities related to climate change
could result in increased operating costs and reduced demand for the crude oil and natural gas produced by our customers.
In response to findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to public health and the environment, the EPA has
issued regulations to restrict emissions of GHGs under existing provisions of the Clean Air Act. From time to time, the Congress has considered legislation to
reduce emissions of GHGs but no such legislation has yet been adopted by Congress. Some states have individually or in regional cooperation, imposed
restrictions on GHG emissions under various policies and approaches, including establishing a cap on emissions, requiring efficiency measures, or providing
incentives for pollution reduction, use of renewable energy sources, or use of replacement fuels with lower carbon content. In the future, the United
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States may also choose to adhere to international agreements targeting GHGs reductions. The adoption of legislation or regulatory programs to reduce emissions of
GHGs could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or to
comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce
demand for, the oil and natural gas our customers produce. Consequently, legislation and regulatory programs to reduce emissions of GHGs could have an adverse
effect on our business, financial condition and results of operations. For more information about climate change legislation, please see “Item 1. Business -
Environmental and Occupational Health and Safety Regulations.”
Furthermore, increasing attention to the risks of climate change has resulted in an increased possibility of lawsuits or investigations brought by public and private
entities against oil and natural gas companies in connection with their GHGs emissions. Should we be targeted by any such litigation or investigations, we may
incur liability, which, to the extent that societal pressures or political or other factors are involved, could be imposed without regard to the causation of or
contribution to the asserted damage, or to other mitigating factors. The ultimate impact of GHGs emissions-related agreements, legislation and measures on our
Company’s financial performance is highly uncertain because we are unable to predict with certainty, for a multitude of individual jurisdictions, the outcome of
political decision-making processes and the variables and tradeoffs that inevitably occur in connection with such processes.
If we are unable to fully protect our intellectual property rights, we may suffer a loss in our competitive advantage or market share.
We have been granted or have received notice of allowance for 30 patents, and have an additional 104 patents pending. If we are not able to maintain the
confidentiality of our trade secrets or fail to adequately protect our intellectual property rights we have now or acquire in the future, our competitive
advantage would be diminished. Additionally, competitors may be able to replicate our technology or services protected by our intellectual property rights.
We cannot assure you that any patents we may obtain in the future would provide us with any significant commercial benefit or would allow us to prevent
our competitors from employing comparable technologies or processes.
We may be adversely affected by disputes regarding intellectual property rights of third parties.
Third parties from time to time may initiate litigation against us by asserting that the conduct of our business infringes, misappropriates or otherwise violates
intellectual property rights. If any third parties bring a claim of intellectual property infringement against us, we may be subject to costly and time-
consuming litigation, diverting the attention of management and our employees. We may not prevail in any such legal proceedings related to such claims, and
our products and services may be found to infringe, impair, misappropriate, dilute or otherwise violate the intellectual property rights of others. If we are
unsuccessful in defending such claims, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or
technology. Any legal proceeding concerning intellectual property could be protracted and costly regardless of the merits of any claim and is inherently
unpredictable and could have a material adverse effect on our financial condition, regardless of its outcome.
If we were to discover that our technologies or products infringe valid intellectual property rights of third parties, we may need to obtain licenses from
these parties or substantially re-engineer our products in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable
terms, or at all, or be able to re-engineer our products successfully. If our inability to obtain required licenses for our technologies or products prevents us
from selling our products, it could adversely impact our financial condition and results of operations.
We may be subject to interruptions or failures in our information technology systems.
We rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. Any of these
systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses,
cyberattacks or other security breaches, or similar events. The failure of any of our information technology systems may cause disruptions in our operations,
which could adversely affect our sales and profitability.
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We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or
financial loss.
The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we
depend on digital technologies to perform many of our services and to process and record financial and operating data. At the same time, cyber incidents,
including deliberate attacks, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of
cyber security threats. Our technologies, systems and networks, and those of our vendors, suppliers and other business partners, may become the target of
cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary
and other information, or other disruption of business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an
extended period. In the past, we have experienced data security breaches resulting from unauthorized access to our systems, which to date have not had a
material impact on our operations; however, there is no assurance that such impacts will not be material in the future. Our systems and insurance coverage
for protecting against cyber security risks may not be sufficient. As cyber incidents continue to evolve, we will likely be required to expend additional
resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. Our insurance
coverage for cyberattacks may not be sufficient to cover all the losses we may experience as a result of such cyberattacks.
Changes in transportation regulations may increase our costs and negatively impact our results of operations.
We are subject to various transportation regulations, including as a motor carrier by the U.S. Department of Transportation and by various federal and state
agencies, whose regulations include certain permit requirements of highway and safety authorities. These regulatory authorities exercise broad powers over
our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver
requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact
our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any
specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality,
engine efficiency and GHG emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment
productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck
traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight
restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain routes
or times on specific roadways. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any
such increase would increase our operating costs. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal
ordinances applicable to our logistics operations will be enacted and to what extent any such legislation or regulations could increase our costs or
otherwise adversely affect our business or operations.
We may be unable to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers. In addition, the absence
or loss of certain key employees could adversely affect our business.
The delivery of our services requires personnel with specialized skills and experience who can perform physically demanding work. Additionally, our
ability to successfully operate our business is dependent upon the efforts of certain key personnel, including our senior management. The demand for
skilled workers in our areas of operations can be high, the supply may be limited, and we may be unable to relocate our employees from areas of lower
utilization to areas of higher demand. If we are unable to retain or meet growing demand for skilled technical personnel, our operating results and our
ability to execute our growth strategies may be adversely affected. A significant increase in the wages paid by competing employers could result in a
reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Further, a significant decrease in the wages paid by us or our
competitors as a result of reduced industry demand could result in a reduction of the available skilled labor force, and there is no assurance that the
availability of skilled labor will improve following a subsequent increase in demand for our services or an increase in wage rates.
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We are subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions, and require full
compliance with the Immigration Reform and Control Act of 1986 and other laws concerning immigration and the hiring of legally documented workers.
In some cases, it may be necessary to obtain a required work authorization from the U.S. Department of Homeland Security or similar government agency prior to
a foreign national working as an employee for us. There may be costs that arise in the course of our efforts to comply with various current or future labor
and employment related regulations.
In addition, many key responsibilities within our business have been assigned to a small number of employees. The unexpected loss or unavailability of
key members of management or technical personnel, in particular one or more members of our executive team, including our chief executive officer, chief
financial officer, chief administrative officer and chief operating officer, may have a material adverse effect on our business, financial condition, prospects
or results of operations. We do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any
losses resulting from the death of our key employees.
Anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us.
We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for
losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or
other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a
party against the consequences of its own negligence. Furthermore, certain states, including Texas, have enacted statutes generally referred to as “oilfield
anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such anti-indemnity acts
may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results
of operations.
A terrorist attack or armed conflict could harm our business.
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States could adversely affect the U.S. and global economies and
could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or
disruptions of fuel supplies and markets if wells, operations sites or other related facilities are direct targets or indirect casualties of an act of terror or war.
Such activities could reduce the overall demand for oil and gas, which, in turn, could also reduce the demand for our products and services. Terrorist
activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our
ability to raise capital or otherwise adversely impact our ability to realize certain business strategies.
We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our
financial results.
We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the
domestic E&P industry which, as described above, is subject to volatility and, therefore, credit risk. Our credit procedures and policies may not be
adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated
deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use
our equipment could have a material adverse effect on our business, financial condition, prospects or results of operations.
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We rely on a limited number of third parties for sand, proppant and chemicals, and delays in deliveries of such materials, increases in the cost of such
materials or our contractual obligations to pay for materials that we ultimately do not require could harm our business, results of operations and
financial condition.
We have established relationships with a limited number of suppliers of our raw materials (such as sand, proppant and chemicals). Should any of our
current suppliers be unable to provide the necessary materials or otherwise fail to deliver the materials in a timely manner and in the quantities required,
any resulting delays in the provision of services could have a material adverse effect on our business, results of operations and financial condition.
Additionally, increasing and volatile costs of such materials may negatively impact demand for our services or the profitability of our business operations.
In the past, our industry faced sporadic proppant shortages associated with hydraulic fracturing operations requiring work stoppages, which adversely
impacted the operating results of several competitors. We may not be able to mitigate any future shortages of materials, including proppant. Additionally,
we have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are “take or
pay” agreements with minimum purchase obligations. If demand for our services decreases, demand for the raw materials we supply as part of these
services will also decrease. Additionally, some of our customers have bought, and in the future may buy, proppant directly from vendors, reducing our need
for proppant. If demand decreases enough, or our customers buy proppant directly from vendors, we could have contractual minimum commitments that
exceed the required amount of goods we need to supply to our customers. To the extent our contracts require us to purchase more materials, including
proppant, than we ultimately require, we may be forced to pay for the excess amount under “take or pay” contract provisions.
Delays or restrictions in obtaining permits by us for our operations or by our customers for their operations could impair our business.
Our operations and the operations of our oil and natural gas producing customers require permits from one or more governmental agencies in order to
perform drilling and completion activities, secure water rights, or engage in other regulated activities. Such permits are typically issued by state agencies,
but federal and local governmental permits may also be required. The requirements for such permits vary depending on the location where such regulated
activities will be conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time
it will take for a permit to be issued, and the conditions that may be imposed in connection with the granting of the permit. Therefore, our customers’
operations in certain areas of the United States may be interrupted or suspended for varying lengths of time, causing a loss of revenue to us and adversely
affecting our results of operations in support of those customers.
Oil and natural gas companies’ operations using hydraulic fracturing are substantially dependent on the availability of water. Restrictions on the
ability to obtain water for exploration and production activities and the disposal of flowback and produced water may impact their operations and have
a corresponding adverse effect on our business, results of operations and financial condition.
Water is an essential component of shale oil and natural gas production during both the drilling and hydraulic fracturing processes. Our oil and natural gas
producing customers’ access to water to be used in these processes may be adversely affected due to reasons such as periods of extended drought, private,
third-party competition for water in localized areas or the implementation of local or state governmental programs to monitor or restrict the beneficial use
of water subject to their jurisdiction for hydraulic fracturing to assure adequate local water supplies. The occurrence of these or similar developments may
result in limitations being placed on allocations of water due to needs by third-party businesses with more senior contractual or permitting rights to the
water. Our customers’ inability to locate or contractually acquire and sustain the receipt of sufficient amounts of water could adversely impact their
exploration and production operations and have a corresponding adverse effect on our business, results of operations and financial condition.
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Moreover, the imposition of new environmental regulations and other regulatory initiatives could include increased restrictions on our producing
customers’ ability to dispose of flowback and produced water generated in hydraulic fracturing or other fluids resulting from exploration and production
activities. For more information about water-related regulations, please see “Item 1. Business - Environmental and Occupational Health and Safety
Regulations.” Compliance with current and future environmental regulations and permit requirements governing the withdrawal, storage and use of surface
water or groundwater necessary for hydraulic fracturing of wells and any inability to secure transportation and access to disposal wells with sufficient
capacity to accept all of our flowback and produced water on economic terms may increase our customers’ operating costs and cause delays, interruptions
or termination of our customers’ operations, the extent of which cannot be predicted. In addition, the legal requirements related to the disposal of produced
water into a non-producing geologic formation by means of underground injection wells are subject to change based on concerns of the public or governmental
authorities regarding such disposal activities. One such concern arises from recent seismic events near underground disposal wells that are used for the disposal
by injection of produced water resulting from oil, natural gas and natural gas liquids activities. In response to concerns regarding induced seismicity, regulators
in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells to assess any relationship
between seismicity and the use of such wells. Among other things, these rules require companies seeking permits for disposal wells to provide seismic activity
data in permit applications, provide for more frequent monitoring and reporting for certain wells and allow the state to modify, suspend or terminate permits on
grounds that a disposal well is likely to be, or determined to be, causing seismic activity. States may issue orders to temporarily shut down or to curtail the
injection depth of existing wells in the vicinity of seismic events.
Another consequence of seismic events may be lawsuits alleging that disposal well operations have caused damage to neighboring properties or otherwise
violated state and federal rules regulating waste disposal. These developments could result in additional regulation and restrictions on the use of injection wells
by us. Increased regulation and attention given to induced seismicity could also lead to greater opposition, including litigation to limit or prohibit oil, natural gas
and natural gas liquids activities utilizing injection wells for produced water disposal.
Any one or more of these developments may result in us or our vendors having to limit disposal well volumes, disposal rates and pressures or locations, or
require us or our vendors to shut down or curtail the injection into disposal wells, which events could have a material adverse effect on our business, financial
condition and results of operations.
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Our ability to expand our operations relies in part on our ability to market our Clean Fleet® technology, and advancements in well service technologies,
including those involving hydraulic fracturing, could have a material adverse effect on our business, financial condition and results of operations.
The hydraulic fracturing industry is characterized by rapid and significant technological advancements and introductions of new products and services
using new technologies, some of which may be subject to patent or other intellectual property protections. For example, we use our patented Clean Fleet®
technology as a competitive advantage in the markets we serve. As competitors and others use or develop new or comparable technologies in the future,
we may lose market share or be placed at a competitive disadvantage. Further, we may face competitive pressure to develop, implement or acquire certain
new technologies at a substantial cost. Some of our competitors may have greater financial, technical and personnel resources than we do, which may
allow them to gain technological advantages or implement new technologies before we can. Additionally, we may be unable to implement new
technologies or services at all, on a timely basis or at an acceptable cost. New technology could also make it easier for our customers to vertically integrate
their operations, thereby reducing or eliminating the need for our services. Limits on our ability to effectively use or implement new technologies may
have a material adverse effect on our business, financial condition and results of operations.
We may record losses or impairment charges related to idle assets or assets that we sell.
Prolonged periods of low utilization, changes in technology or the sale of assets below their carrying value may cause us to experience losses. These
events could result in the recognition of impairment charges that negatively impact our financial results. Significant impairment charges as a result of a
decline in market conditions or otherwise could have a material adverse effect on our results of operations in future periods.
Risks Related to Our Securities
Our only significant assets are the ownership of a majority interest in USWS Holdings, and such ownership may not be sufficient to generate the funds
necessary to meet our financial obligations.
We have no direct operations or significant assets other than the ownership of a majority (92%) interest in USWS Holdings. We depend on USWS
Holdings and its subsidiaries, including U.S. Well Services, LLC, for distributions, loans and other payments to generate the funds necessary to meet our
financial obligations. Subject to certain restrictions, USWS Holdings generally will be required to (i) make pro rata distributions to its members, including
us, in an amount at least sufficient to enable us to pay our taxes and (ii) reimburse us for certain corporate and other overhead expenses. However, legal
and contractual restrictions in agreements governing indebtedness of USWS Holdings and its subsidiaries, as well as the financial condition and operating
requirements of USWS Holdings and its subsidiaries may limit our ability to obtain cash from USWS Holdings. The earnings from, or other available
assets of, USWS Holdings and its subsidiaries, may not be sufficient to enable us to satisfy our financial obligations. USWS Holdings is classified as a
partnership for U.S. federal income tax purposes and, as such, will not be subject to any entity-level U.S. federal income tax. Instead, taxable income will
be allocated to holders of USWS Units, including us. As a result, we generally will incur taxes on our allocable share of any net taxable income generated
by USWS Holdings. Under the terms of the Amended and Restated Limited Liability Company Agreement of USWS Holdings, dated November 9, 2018
(the “A&R USWS Holdings LLC Agreement”), among MPAC and certain owners of common units in USWS Holdings, USWS Holdings is obligated to
make tax distributions to holders of the USWS Units, including us, except to the extent such distributions would render USWS Holdings insolvent or are
otherwise prohibited by law or the terms of any future financing agreement of USWS Holdings or its subsidiaries. In addition to our tax obligations, we
also incur expenses related to our operations and our interests in USWS Holdings, including costs and expenses of being a publicly-traded company, all of
which could be significant. To the extent that we require funds and USWS Holdings or its subsidiaries are restricted from making distributions under
applicable law or regulation or under the terms of their financing arrangements, or are otherwise unable to provide such funds, it could materially
adversely affect our liquidity and financial condition, including our ability to pay our income taxes when due.
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There can be no assurance that we will be able to comply with the continued listing standards of Nasdaq.
Our Class A common stock and warrants are currently listed on Nasdaq. There can be no assurance that we will be able to meet Nasdaq’s listing
requirements with respect to our Class A common stock and warrants. If our Class A common stock or warrants are delisted, there could be limited
availability of market quotations for the Class A common stock and warrants and reduced liquidity in trading for these securities. Although we anticipate
that these securities would be eligible for quotation and trading on the over-the-counter market, there can be no assurance that trading would be
commenced or maintained on the over-the-counter market.
In addition, if we fail to meet Nasdaq’s listing requirements with respect to our Class A common stock, in addition to reduced liquidity, we and our
stockholders could face significant material adverse consequences including:
• a determination that our Class A common stock is a “penny stock” which will require brokers trading in our stock to adhere to more stringent rules
and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
•
•
a limited amount of news and analyst coverage; and
a decreased ability to issue additional securities or obtain additional financing in the future.
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain
securities, which are referred to as “covered securities.” Because our Class A common stock is listed on Nasdaq, it is a covered security. Although the
states are preempted from regulating the sale of our Class A common stock, if we were no longer listed on Nasdaq, our Class A common stock would not
be a covered security and we would be subject to regulation in each state in which we offer our Class A common stock.
The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act, and the requirements of the
Sarbanes-Oxley Act, increases costs and distracts management, and we may be unable to comply with these requirements in a timely or cost-effective
manner.
As a public company, we are subject to laws, regulations and requirements, certain corporate governance provisions, related regulations of the SEC and the
requirements of Nasdaq, including the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act and other applicable securities rules and regulations.
Compliance with these rules and regulations require us to incur significant additional legal, accounting and other expenses that we would not incur if we
were not a public company.
The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The
Sarbanes-Oxley Act and the rules subsequently implemented by the SEC and the national securities exchanges, establish certain requirements for the
corporate governance practices of public companies. For example, as a result of becoming a public company, we have additional board committees and are
required to maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required,
improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management
oversight are required.
We rely on a small number of key personnel to manage compliance with these regulations, and compliance with such regulations causes additional costs to
our operations and diverts management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of
operations and financial condition. We have made, and will continue to make, changes to our internal control over financial reporting, accounting systems
disclosure controls and procedures, auditing functions and other procedures related to public reporting in order to meet our reporting obligations as a
public company.
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We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will
result in significant savings.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). For as long as we remain an “emerging
growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are
not “emerging growth companies.” We will remain an “emerging growth company” for up to five years or until such earlier time that we have more than
$1.07 billion in annual revenues, have more than $700 million in market value of our common shares held by non-affiliates, or issue more than $1.0 billion
of non-convertible debt over a three-year period. Further, there is no guarantee that the exemptions available to us under the JOBS Act will result in
significant savings. To the extent we choose not to use exemptions from various reporting requirements under the JOBS Act, we may incur additional
compliance costs, which may impact earnings and result in further diversion of management time and attention from revenue-generating activities.
An active, liquid and orderly trading market for our securities may not be maintained, which could adversely affect the liquidity and price of our
securities.
An active, liquid and orderly trading market for our securities may not be maintained. Active, liquid and orderly trading markets usually result in less price
volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of our securities could vary significantly as a result of a
number of factors, some of which are beyond our control. In the event of a drop in the market price of our securities, you could lose a substantial part or all
of your investment in our securities.
The following factors could affect the price of our securities:
• quarterly variations in our financial and operating results;
•
•
•
the public reaction to our press releases, our other public announcements and our filings with the SEC;
strategic actions by our competitors;
the failure of securities or industry analysts to cover our securities or publish research or reports about us, our business, or our market;
• changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;
•
•
•
speculation in the press or investment community;
sales of our securities by us or our stockholders, or the perception that such sales may occur;
the volume of our securities available for public sale;
• changes in accounting principles, policies, guidance, interpretations or standards;
• additions or departures of key management personnel;
• actions by our stockholders;
• general market conditions, including fluctuations in commodity prices;
• domestic and international economic, legal and regulatory factors unrelated to our performance; and
•
the realization of any risks described under this “Risk Factors” section.
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The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the trading price of our securities. Securities class action litigation has often been instituted against
companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us,
could result in very substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.
Future sales or the availability for sale of substantial amounts of our Class A common stock, or the perception that these sales may occur, could adversely
affect the trading price of our Class A common stock and could impair our ability to raise capital through future sales of equity securities.
Our Second Amended and Restated Certificate of Incorporation (as amended, the “Second Amended and Restated Charter”) authorizes us to issue
400,000,000 shares of Class A common stock, of which 62,857,624 shares were outstanding as of March 2, 2020, and 10,000,000 shares of preferred
stock, of which 55,000 shares of Series A convertible redeemable preferred stock (“Series A preferred stock”) were outstanding as of March 2, 2020. The
holders of the Series A preferred stock will have the right to convert all or any portion of their shares of Series A preferred stock into shares of Class A
common stock beginning in May 2020. In addition, as of March 2, 2020, warrants to purchase up to 15,680,651 shares of our Class A common stock were
outstanding and immediately exercisable.
A large percentage of our shares of common stock are held by a relatively small number of investors. We entered into registration rights agreements (the
“Registration Rights Agreements”) with certain of those investors in connection with the Transaction and in connection with their subsequent purchase of
Series A preferred stock and warrants pursuant to which we have filed registration statements with the SEC to facilitate potential future sales of such
shares by them.
We may issue shares of our Class A common stock or other securities from time to time as consideration for future acquisitions and investments. If any
such acquisition or investment is significant, the number of shares of our Class A common stock, or the number or aggregate principal amount, as the case
may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our Class A
common stock or other securities in connection with any such acquisitions and investments.
We cannot predict the effect that future sales of our Class A common stock will have on the price at which our Class A common stock trades or the size of
future issuances of our Class A common stock or the effect, if any, that future issuances will have on the market price of our Class A common stock. Sales
of substantial amounts of our Class A common stock, or the perception that such sales could occur, may adversely affect the trading price of our Class A
common stock and could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities.
Certain of our principal stockholders have significant influence over us.
A large percentage of our shares of Class A common stock are held by a relatively small number of investors whose interests may conflict with that of our
other common stockholders. Consequently, these holders (each of whom we refer to as a “principal stockholder”) may have significant influence over all
matters that require approval by our stockholders, including the election and removal of directors and the size of our Board, any amendment to our
certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our
assets. This concentration of ownership and the rights of our principal stockholders will limit the ability of our other common stockholders to influence
corporate matters and, as a result, actions may be taken that they may not view as beneficial.
Furthermore, conflicts of interest could arise in the future between us, on the one hand, and our principal stockholders and their respective affiliates,
including portfolio companies, on the other hand, concerning among other things, potential competitive business activities or business opportunities.
Several of our principal stockholders are private equity firms or investment funds in the business of making investments in entities in a variety of
industries. As a result, our principal stockholders’ existing and future portfolio companies may compete with us for investment or business opportunities.
Our Second and Amended and Restated Charter provides that our directors and officers, including any of the foregoing who were designated by our
principal stockholders, do not have any obligation to offer to us any corporate opportunity of which he or she may become aware prior to offering such
opportunities to other entities with which they may be affiliated, subject to certain limited exceptions.
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We may amend the terms of our Public Warrants and Private Placement Warrants in a manner that may be adverse to holders with the approval by the
holders of at least 65% of the then outstanding Public Warrants. As a result, the exercise price of these warrants could be increased, the exercise
period could be shortened and the number of shares of our Class A common stock purchasable upon exercise of a warrant could be decreased, without
approval by all of the warrant holders.
We issued 32,500,000 warrants to purchase shares of our Class A common stock (the “Public Warrants”) as part of our IPO and 15,500,000 warrants to
purchase shares of our Class A common stock in a private placement that closed simultaneously with the closing of our IPO (the “Private Placement
Warrants”). Our Public Warrants and Private Placement Warrants were issued in registered form under a warrant agreement between Continental Stock
Transfer & Trust Company, as warrant agent, and us. The warrant agreement provides that the terms of the warrants may be amended without the consent
of any holder to cure any ambiguity or correct any defective provision but requires the approval by the holders of at least 65% of the then outstanding
Public Warrants to make any change that adversely affects the interests of the registered holders. Accordingly, we may amend the terms of the Public
Warrants in a manner adverse to a holder if holders of at least 65% of the then outstanding Public Warrants approve of such amendment. Although our
ability to amend the terms of the Public Warrants with the consent of at least 65% of the then outstanding Public Warrants is unlimited, examples of such
amendments could be amendments to, among other things, increase the exercise price of the warrants, shorten the exercise period or decrease the number
of shares of our Class A common stock purchasable upon exercise of a warrant.
We may redeem unexpired Public Warrants prior to their exercise at a time that is disadvantageous to warrant holders, thereby making their Public
Warrants worthless.
We have the ability to redeem outstanding Public Warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per
warrant upon a minimum of 30 days’ prior written notice of redemption, provided that the last reported sales price of our Class A common stock equals or
exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date we send the notice of
redemption to the warrant holders. If, and when, the Public Warrants become redeemable by us, we may exercise our redemption right even if we are
unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding Public Warrants
could force the warrant holders (i) to exercise their Public Warrants and pay the exercise price therefore at a time when it may be disadvantageous for them
to do so, (ii) to sell their warrants at the then-current market price when they might otherwise wish to hold their Public Warrants or (iii) to accept the
nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of
their Public Warrants. None of the Private Placement Warrants will be redeemable by us so long as they are held by Matlin & Partners Acquisition
Sponsor, LLC (“M&P LLC”) or its permitted transferees.
The exercise of our outstanding warrants could increase the number of shares eligible for future resale in the public market and result in dilution to
our stockholders.
As of December 31, 2019, we had 9,994,635 Public Warrants and 15,500,000 Private Placement Warrants outstanding that were issued concurrently with
our IPO. Each warrant is exercisable to purchase one-half of one share of Class A common stock for $5.75 per half share, or $11.50 per whole share,
commencing on December 9, 2018. In addition, 2,933,333 warrants were issued to certain institutional investors in connection with the issuance of our
Series A preferred stock in May 2019, which are exercisable to purchase one share of our Class A common stock for $7.66 per share. Additionally, subject
to there being shares of Series A preferred stock outstanding, we will issue an aggregate of 488,888 additional warrants in quarterly installments beginning
nine months after the closing date of our issuance of Series A preferred stock in May 2019. To the extent such warrants are exercised, additional shares of
our Class A common stock will be issued, which will result in dilution to the then existing holders of our Class A common stock and increase the number
of shares eligible for resale in the public market.
The Private Placement Warrants are identical to the Public Warrants, except that, so long as they are held by M&P LLC or its permitted transferees, (i) they
will not be redeemable by us, (ii) they (including the Class A common stock issuable upon exercise of these warrants) could not, subject to certain limited
exceptions, be transferred, assigned or sold by M&P LLC until December 9, 2018 and (iii) they may be exercised by M&P LLC or its permitted
transferees for cash or on a cashless basis.
30
Additionally, the Company has engaged, and in the future may engage, in transactions to exchange outstanding warrants for shares of Class A common
stock. Any transactions to exchange warrants for shares of Class A common stock will result in dilution to the then existing holders of our Class A
common stock and increase the number of shares eligible for resale in the public market. Sales in the public market of substantial numbers of shares issued
in connection with the exercise or exchange of warrants could adversely affect the market price of our Class A common stock.
Our charter and bylaws contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of
the Class A common stock.
Our Second Amended and Restated Charter authorizes our board of directors to issue preferred stock without stockholder approval. If our board of
directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of the Second Amended and
Restated Charter and our bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to
and desirable by our stockholders, including:
• a classified board of directors, so that only approximately one-third of our directors are elected each year;
•
•
•
•
•
removal of directors by our stockholders only for cause and only by the affirmative vote of at least 66 2⁄3% of the voting power of all outstanding
shares of our capital stock entitled to vote generally in the election of directors, voting together as a single class;
adoption, amendment or repeal of our bylaws by our stockholders only by the affirmative vote of at least 66 2⁄3% of the voting power of all
outstanding shares of our capital stock entitled to vote generally in the election of directors, voting together as a single class;
amendment or repeal of the supermajority voting provisions of the Second Amended and Restated Charter described above only by the affirmative
vote of at least 66 2⁄3% of the voting power of all outstanding shares of our capital stock entitled to vote on such amendment or repeal, in addition to
any other vote of stockholders required by the Second Amended and Restated Charter or applicable law;
inability of our stockholders to call special meetings or act by written consent; and
advance notice provisions for stockholder proposals and nominations for elections to our board of directors to be acted upon at meetings of
stockholders.
The Second Amended and Restated Charter designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain
types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us or our directors, officers or employees.
The Second Amended and Restated Charter provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of
the State of Delaware (“Court of Chancery”) will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative
action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other
employees to us or our stockholders, (iii) any action asserting a claim against us or any of our directors, officers or employees of ours arising pursuant to
any provision of the Delaware General Corporation Law, the Second Amended and Restated Charter or our bylaws or (iv) any action asserting a claim
against us or any of our directors, officers or other employees that is governed by the internal affairs doctrine, in each case except for such claims as to
which (a) the Court of Chancery determines that it does not have personal jurisdiction over an indispensable party, (b) exclusive jurisdiction is vested in a
court or forum other than the Court of Chancery or (c) the Court of Chancery does not have subject matter jurisdiction. Section 27 of the Exchange Act
creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations
thereunder. As a result, the exclusive forum provision will not apply to actions arising under the Exchange Act or the rules and regulations thereunder. The
Court of Chancery of the State of Delaware has recently held that a Delaware corporation can only use its constitutive documents to bind a plaintiff to a
particular forum where the claim involves rights or relationships that were established by or under Delaware’s corporate law. As such, these exclusive
forum provisions are also not meant to apply to actions arising under the Securities Act. In any case, our stockholders will not be deemed to have waived
our compliance with the federal securities laws and the rules and regulations thereunder.
31
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the
provisions of our Second Amended and Restated Charter described in the preceding paragraph. This exclusive forum provision may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage
such lawsuits against us and such persons. Additionally, a court could determine that the exclusive forum provision is unenforceable. If a court were to find
these provisions of our Second Amended and Restated Charter inapplicable to, or unenforceable in respect of, one or more of the specified types of actions
or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business,
financial condition or results of operations.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect
our financial condition and results of operations.
We will be subject to income taxes in the United States, and our domestic tax liabilities will be subject to the allocation of expenses in differing
jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
• changes in the valuation of our deferred tax assets and liabilities;
• expected timing and amount of the release of any tax valuation allowances;
•
tax effects of stock-based compensation;
• costs related to intercompany restructurings;
• changes in tax laws, regulations or interpretations thereof; and
•
lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings in
jurisdictions where we have higher statutory tax rates.
In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal and state authorities. Outcomes from these audits
could have an adverse effect on our financial condition and results of our operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive offices are located at 1360 Post Oak Boulevard, Suite 1800, Houston, Texas 77056. We lease our general office space at our
corporate headquarters. We have additional corporate space at 770 South Post Oak Lane, Houston, Texas 77056. This lease expires in 2023 with the option to exit
the lease in 2021. We lease various other facilities, which are located across multiple basins strategically to maximize efficiency of operations and
exposure to customers.
We believe that our existing facilities are adequate for our operations and our locations allow us to efficiently serve our customers. We do not believe that
any single facility is material to our operations and, if necessary, we could readily obtain a replacement facility.
Item 3. Legal Proceedings.
We are involved in various pending or potential legal actions in the ordinary course of our business. Management is unable to predict the ultimate outcome
of these actions because of the inherent uncertainty of litigation. However, management believes that the most probable, ultimate resolution of these
matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
32
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Class A common stock and warrants are currently quoted on Nasdaq under the symbols “USWS” and “USWSW,” respectively. Through November 9,
2018, our common stock and warrants were quoted under the symbols “MPAC” and “MPACW,” respectively.
Additionally, the Company is authorized to issue 20,000,000 shares of Class B common stock with a par value of $0.0001 per share. At December 31, 2019
there were 5,500,692 shares of Class B common stock issued and outstanding. The shares of Class B common stock are non-economic; however, holders are
entitled to one vote per share. Each share of Class B common stock, together with one unit of USWS Holdings, is exchangeable for one share of Class A
common stock or, at the Company’s election, the cash equivalent to the market value of one share of Class A common stock. There is no market for our Class
B common stock.
Holders of our Common Stock
As of March 2, 2020, there were 107 stockholders of record of our Class A common stock and 8 stockholders of record of our Class B common stock. The
number of record holders is based upon the actual number of holders registered on the books of the Company at such date and does not include holders of
shares in “street name” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depositories.
Dividend Policy
We have not paid any dividends since our inception and we do not intend to pay regular cash dividends in the foreseeable future. We are not required to pay
dividends, and our stockholders will not be guaranteed, or have contractual or other rights to receive, dividends. The declaration and payment of any future
dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions to the extent there are any with respect to the payment of dividends, and other considerations that
our board of directors deems relevant.
Recent Sales of Unregistered Equity Securities
We had no sales of unregistered equity securities during the period covered by this Annual Report that were not previously reported in a Current Report on
Form 8-K.
Equity Compensation Plan Information
The following table summarizes our issuance of stock option awards under our 2018 Stock Incentive Plan as of December 31, 2019:
Plan Category
Equity compensation plans approved
by security holders
(a)
(b)
Number of securities
to be issued upon exercise of
outstanding options, warrants and
rights (1)
Weighted-average exercise price
of outstanding options, warrants
and rights
(c)
Number of securities remaining
available for future issuance under
equity compensation plan
(excluding securities reflected in
column (a))
1,068,162
$8.91 per share
4,321,826
33
Item 6. Selected Financial Data.
The following table shows selected historical financial information of the Company for the periods and as of the dates indicated. The selected historical
consolidated financial information of the Company was derived from the audited historical consolidated financial statements of the Company included
elsewhere in this Annual Report.
Our historical results are not necessarily indicative of future operating results. The selected consolidated financial information should be read in conjunction
with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the historical consolidated financial
statements of the Company and accompanying notes included in “Item 8. Financial Statements and Supplementary Data” in this Annual Report.
(in thousands, except per share amounts)
Statement of Operations Data:
Revenue
Costs and expenses:
Cost of services (excluding depreciation
and amortization)
Depreciation and amortization
Selling, general and administrative
expenses
Impairment loss on intangible assets
Loss on disposal of assets
Loss from operations
Interest expense, net
Loss on extinguishment of debt
Other income (expense)
Loss before income taxes
Income tax expense (benefit)
Net loss
Loss per share
Balance Sheet Data:
Cash and cash equivalents
Property and equipment, net
Total assets
Total debt including capital leases
Total liabilities
Total mezzanine equity
Total members' equity
Cash Flow Statement Data:
Net cash provided (used) by operating
activities
Net cash used in investing activities
Net cash provided by financing activities
Other Financial Data
Adjusted EBITDA (a)
Capital expenditures
Successor
Successor
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Predecessor
Year Ended December 31, 2017
Successor
February 2,
2017
(inception) to
December 31,
2017
January 1,
2017 to
February 1,
2017
Predecessor
Year Ended
December 31,
2016
$
514,757
$
648,847 $
466,487
$
32,867 $
294,755
383,957
154,149
31,856
-
20,065
(75,270)
(30,099)
(12,558)
1,768
(116,159)
(77)
(116,082) $
(2.11) $
$
33,794
441,610
612,782
315,248
426,114
38,928
147,740
$
74,844
(208,294)
144,818
117,996
209,101
$
533,031
108,440
34,497
-
10,848
(37,969)
(32,636)
(190)
333
(70,462)
352
(70,814) $
(1.33) $
29,529 $
331,387
480,230
133,477
239,881
-
240,349
83,469 $
(139,573)
79,714
117,445 $
147,606
394,125
92,430
17,601
20,247
11,958
(69,874)
(22,961)
-
(787)
(93,622)
-
(93,622)
(1.89)
5,923
251,288
407,596
264,594
363,333
-
44,263
$
$
28,053
4,920
1,281
-
201
(1,588)
(4,067)
-
1
(5,654)
-
(5,654) $
(0.11) $
$
(b)
(b)
(b)
(b)
(b)
(b)
(b)
$
47,287
(71,565)
26,316
67,729
(71,584)
$
(2,777) $
-
1,473
4,628 $
-
262,311
66,084
9,837
-
6,560
(50,037)
(45,376)
-
9
(95,404)
-
(95,404)
(1.93)
5,192
197,512
246,895
300,633
369,847
159,431
(282,383)
22,719
(18,792)
1,765
24,692
19,045
$
$
$
$
$
(a)
(b)
Adjusted EBITDA is a non-GAAP financial measure. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss, see “Non-GAAP Financial Measures”
below.
Balance sheet data only provided as of each calendar year end.
34
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are non-GAAP financial measures and should not be considered as a substitute for net income (loss), operating income (loss)
or any other performance measure derived in accordance with GAAP or as an alternative to net cash provided by operating activities as a measure of our
profitability or liquidity. Our management believes EBITDA and Adjusted EBITDA are useful because they allow external users of our consolidated financial
statements, such as industry analysts, investors, lenders and rating agencies, to more effectively evaluate our operating performance, compare the results of
our operations from period to period and against our peers without regard to our financing methods or capital structure and because it highlights trends in our
business that may not otherwise be apparent when relying solely on GAAP measures. We present EBITDA and Adjusted EBITDA because we believe
EBITDA and Adjusted EBITDA are important supplemental measures of our performance that are frequently used by others in evaluating companies in our
industry. Because EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income (loss) and may vary among companies, the
EBITDA and Adjusted EBITDA we present may not be comparable to similarly titled measures of other companies. We define EBITDA as earnings before
interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA excluding the following: loss on disposal of assets; share-
based compensation; impairments, and other items that management believes to be nonrecurring in nature.
The following table presents a reconciliation of EBITDA and Adjusted EBITDA from net loss, our most directly comparable financial measure calculated and
presented in accordance with GAAP:
(in thousands)
Successor
Successor
Net loss
Interest expense, net
Income tax expense (benefit)
Depreciation and amortization
EBITDA
Loss on disposal of assets (a)
Share based compensation (b)
Impairment loss (c)
Certain non-productive time (d)
Fleet start-up and relocation costs (e)
Restructuring and transaction related costs (f)
Fleet 6 fire (g)
Loss on extinguishment of debt (h)
Terminated vendor contract (i)
Adjusted EBITDA
Year Ended
December 31,
2019
Year Ended
December 31,
2018
$
$
(116,082) $
30,099
(77)
154,149
68,089
20,065
7,755
-
-
9,085
1,738
(1,294)
12,558
-
117,996
$
(70,814) $
32,636
352
108,440
70,614
10,848
20,633
-
1,200
5,056
4,391
1,294
190
3,219
117,445 $
Year Ended
December 31, 2017
Successor
February 2,
2017
(inception) to
December 31,
2017
Predecessor
Predecessor
January 1,
2017 to
February 1,
2017
Year Ended
December 31,
2016
(93,622)
22,961
-
92,430
21,769
11,958
4,546
20,247
-
4,190
5,019
-
-
-
67,729
$
$
(5,654) $
4,067
-
4,920
3,333
201
-
-
-
-
1,094
-
-
-
4,628 $
(95,404)
45,376
-
66,084
16,056
6,560
-
-
-
-
2,076
-
-
-
24,692
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Represents net losses on the disposal of property and equipment.
Represents non-cash share-based compensation.
Represents a non-cash impairment loss with respect to intangible assets.
Represents revenue shortfall associated with non-productive time due to sand mine issues with a customer. The delays were caused by excessive wait times at the customer’s chosen sand
mine as sand mine operations were starting up and have since been addressed. Additionally, the Company has come to an agreement with the customer to better define how non-productive
time caused by sand mine delays are to be split between the two parties. As such, the Company does not anticipate, nor has experienced, additional material revenue shortfalls related to
delays at the customer’s sand mine moving forward.
Represents non-recurring costs related to the start-up and relocation of hydraulic fracturing fleets.
Represents non-recurring third-party professional fees and other costs including costs related to the capital restructuring and the potential sale of U.S. Well Services, LLC.
Represents non-recurring costs related to a fleet fire (2018) and subsequent reimbursement via insurance proceeds (2019).
Represents non-recurring costs related to debt extinguishment.
Represents non-recurring accrued costs related to disputed charges under a vendor contract that was subsequently terminated.
35
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and
related notes included within “Item 8. Financial Statements and Supplementary Data.” In addition to historical consolidated financial information, the
following discussion contains forward-looking statements that reflect the Company’s plans, estimates, or beliefs. Actual results could differ materially from
those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere
in this Annual Report, including, without limitation, those described in the sections titled “Cautionary Note Regarding Forward Looking Statements” and
Part I, Item 1A “Risk Factors” of this Annual Report.
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
in the industry. We operate in many of the active shale and unconventional oil and natural gas basins of the 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 the
high utilization rates that result in more efficient operations. Our senior management team has extensive industry experience providing pressure pumping
services to exploration and production companies across North America.
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 have written contractual arrangements with our customers. Under these contracts, we charge our customers base monthly rates, adjusted for
activity and provision of materials such as proppant and chemicals or we charge a per stage amount based on the nature of the stage including well
pressure, pumping time, sand and chemical volumes and transportation.
Our Costs of Conducting Business
The principal costs involved in conducting our hydraulic fracturing services are materials, transportation, labor and maintenance 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.
A majority 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.
36
The following table presents our cost of services for the years ended December 31, 2019, 2018 and 2017:
Cost of Services
(in thousands)
Materials
Transportation
Labor
Maintenance
Other (1)
Cost of services
Successor
Successor
Successor
Predecessor
February 2, 2017 January 1, 2017
Year Ended
Year Ended
(inception) to
to
Year Ended
December 31, 2017
December 31, 2019 December 31, 2018 December 31, 2017 February 1, 2017
10,113
$
5,231
5,083
2,469
5,157
28,053
144,492 $
62,060
76,436
45,235
65,902
394,125 $
71,530 $
45,681
124,204
65,201
77,341
383,957 $
175,610 $
86,611
107,014
64,467
99,329
533,031 $
$
(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.
How We Evaluate Our Operations
We use a variety of financial and operating metrics to evaluate and analyze the performance of our business, including EBITDA and Adjusted EBITDA.
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as earnings before interest, income taxes,
depreciation and amortization. We define Adjusted EBITDA as EBITDA excluding the following: loss on disposal of assets; share-based compensation;
impairments; and other items that management believes to be nonrecurring in nature. For a reconciliation of EBITDA and Adjusted EBITDA to net
income (loss), the most directly comparable GAAP measure, see section entitled “Item 6. Selected Financial Data – Non – GAAP Financial Measures.”
37
Results of Operations
Year 2019 Compared to Year 2018
(in thousands, except percentages)
Year Ended December 31,
$
Revenues
Costs and expenses:
Cost of services (excluding depreciation and amortization)
Depreciation and amortization
Selling, general and administrative expenses
Loss on disposal of assets
Loss from operations
Interest expense, net
Loss on extinguishment of debt
Other income
Income tax expense (benefit)
Net loss
$
2019
% (1)
514,757 100.0% $
383,957 74.6%
154,149 29.9%
31,856 6.2%
20,065 3.9%
(75,270) (14.6)%
(30,099) (5.8)%
(12,558) (2.4)%
1,768 0.3%
(77) (0.0)%
(116,082) (22.6)% $
%
2018
Variance
648,847 100.0% $ (134,090) (20.7)%
Variance
% (1)
533,031 82.2% (149,074) (28.0)%
45,709 42.2%
108,440 16.7%
(2,641) (7.7)%
34,497 5.3%
10,848 1.7%
9,217 85.0%
(37,969) (5.9)%
(32,636) (5.0)%
(190) (0.0)%
333 0.1%
352 0.1%
1,435 430.9%
(429)
(70,814) (10.9)% $ (45,268)
2,537 (7.8)%
* (2)
* (2)
(12,368)
(37,301)
* (2)
* (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.
Revenues. The decrease in revenues was primarily attributable to more customers self-sourcing lower-margin consumables such as sand, chemicals, and
sand transportation, which was partially offset by an increase in higher-margin service and equipment revenue due to increased activity levels. We expect
the industry trend of E&P companies self-sourcing consumables to continue resulting in decreased lower-margin revenues for us as compared to years in
which we provided these consumables to our customers.
Cost of services, excluding depreciation and amortization. The decrease in cost of services, excluding depreciation and amortization both in dollars and as
a percentage of revenues, was primarily attributable to the change in revenue mix discussed above.
Depreciation and amortization. The increase in depreciation and amortization was primarily due to depreciation related to four hydraulic fracturing fleets
that were added after the third quarter of 2018.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased due to a decrease in share-based compensation
expense of $9.4 million in 2019, resulting from a share-based bonus granted to our CEO and immediate vesting of Class G Units in connection with the
completion of the Transaction in 2018. This decrease was partially offset by higher costs due to us becoming an SEC reporting company, with $4.3 million
of higher professional fees and public reporting expenses, $2.2 million of headcount and salary increases and an increase in travel related costs, as well as
costs related to the addition of a new office lease to support our growth and increased activity.
Loss on disposal of assets. The increase in loss on disposal of assets was partly due to a gain on disposal recorded in the prior corresponding period
amounting to $4.1 million resulting from the excess of insurance proceeds over net book value of equipment lost in a fire on one of our hydraulic
fracturing fleets. For the remainder of the increase, 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.
38
Interest expense, net. The decrease in interest expense, net was primarily attributable to the write-off of deferred financing costs in the fourth quarter of
2018 associated with the termination of certain of our debt agreements in connection with the Transaction, and the resulting lower average debt balance in
the first quarter of 2019 compared to the prior corresponding period. This decrease was partially offset by an increase in our average debt balance
beginning in the second quarter of 2019 compared to the previous corresponding periods due to the new senior term loan obtained in May 2019.
Other income. The increase in other income was primarily due to an insurance reimbursement received in 2019 of certain expenses incurred in 2018 in
relation to a fire on one of our hydraulic fracturing fleets.
Information related to the comparison of our operating results between the years 2018 and 2017 is included in “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K filed with the SEC.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows generated from operating activities, issuance of Series A preferred stock, borrowings under our ABL credit
facility and senior secured term loan and availability under our ABL credit facility.
We believe that our current cash position, cash generated from operations, and borrowing capacity from our ABL facility (see “Debt Agreements - ABL
Credit Facility” below for more information) will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at
least the next twelve months.
Cash Flows
(in thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Year Ended December 31,
2018
2019
$
74,844 $
(208,294)
144,818
83,469
(139,573)
79,714
Net Cash Provided by Operating Activities. Net cash provided by operating activities primarily represents the results of operations exclusive of non-cash
expenses, including depreciation, amortization, interest, impairment losses, gains and losses on disposal of assets, and share-based compensation, and the
impact of changes in operating assets and liabilities. Net cash provided by operating activities decreased $8.7 million in 2019 compared to 2018 due
primarily to an increase in working capital requirements driven by new fleet deployments over the course of 2019 and diversification of our customer base
with the addition of several new customers with longer payment terms than the customers they replaced.
Net Cash Used in Investing Activities. Net cash used in investing activities primarily relates to the purchase of property and equipment. Net cash used in
investing activities was $208.3 million in 2019, primarily due to purchases of property and equipment amounting to $209.1 million, $65.5 million of which
related to maintaining and supporting our existing hydraulic fracturing equipment, $119.3 million of which related to investment spending on additional
fleets and $24.3 million of which related to fleet enhancements. The investment spend in 2019 relates to the addition of three hydraulic fracturing fleets
that we placed into service in the first half of 2019, deposit payments for an expansion fleet which we deployed in January 2020, maintaining and
supporting our hydraulic fracturing equipment, and fleet enhancements to our existing hydraulic fracturing equipment. We expect similar spending on
maintenance going forward and significantly less spending on growth initiatives unless supported by new customer contracts.
Net Cash Provided by Financing Activities. Net cash provided by financing activities primarily relates to proceeds from our Series A preferred stock
offering, revolving credit facility, long-term debt, and notes payable, offset by repayments of amounts under equipment financing arrangements, notes
payable, revolver, long-term debt, and principal payments under our finance lease obligations. Net cash provided by financing activities was $144.8
million in 2019. During this period, we received proceeds of $54.5 million from our Series A preferred stock offering, which was net of issue costs, $50.0
million from our revolving credit facility, $9.9 million from issuance
39
of notes payable, and $285.0 million from long-term debt. We also repaid $6.4 million of debt under notes payable, $0.8 million of debt under the new
revolving credit facility, $70.6 million of debt under equipment financing arrangements, $16.7 million of principal under finance lease obligations, $6.6
million of fees related to debt extinguishment, and $13.5 million of deferred financing costs. We also repaid $65.0 million and $75.0 million of debt under
our first lien credit facility and second lien term loan, respectively, and terminated both facilities. Our financing activities largely went to funding our
growth capital expenditures, specifically the building of four new electric fleets.
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 a number of factors, including expected industry
activity levels and company initiatives. We intend to fund the majority 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 (defined below) and other financing sources such as
proceeds from the equity capital markets, sales of equity to current shareholders or equipment financing agreements.
Debt Agreements
Senior Secured Term Loan
We have a $250.0 million Senior Secured Term Loan that matures in May 2024. We are required to make quarterly principal payments of $1.25 million
commencing on January 15, 2020, with final payment due at maturity on May 7, 2024. The Senior Secured Term Loan bears interest at a variable rate per
annum equal to the applicable LIBOR rate, subject to a 2.0% floor, plus 8.25%.
The Senior Secured Term Loan requires mandatory prepayments upon certain dispositions of property or certain issuances of other indebtedness, as
defined, and quarterly a percentage of excess cash flow, if any, equal to 25% to 100% (depending on total debt outstanding) commencing in September
2019. Certain mandatory prepayments (excluding excess cash flows sweep) and optional prepayments are subject to a yield maintenance fee for the first
two years and prepayment premium of 2% in year three and 1% in year four. Upon the final payment and termination of the Senior Secured Term Loan,
we are subject to an exit fee equal to 2.00% of the principal amount of loans then outstanding and the aggregate principal amount of loans repaid during
the 120 days that occurred prior to such final payment.
The 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,
dispositions of assets, paying dividends, transactions with affiliates, mergers and consolidations.
40
ABL Credit Facility
We have a $75.0 million ABL Credit Agreement (the “ABL Credit Facility”) which matures on February 6, 2024. The ABL Credit Facility is subject to a
borrowing base which is calculated based on a formula referencing our eligible accounts receivables. Borrowings under the ABL Credit Facility bear
interest at LIBOR, plus an applicable LIBOR rate margin of 1.5% to 2.0% or base rate margin of 0.5% to 1.0% as defined in the ABL Credit Facility. The
unused portion of the ABL Credit Facility is subject to an unused commitment fee of 0.250% to 0.375%.
All borrowings under the ABL Credit Facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of
representations and warranties and certifications regarding sales of certain inventory, and to a borrowing base (described above). Borrowings under the
ABL Credit Facility are fully and unconditionally guaranteed jointly and severally by each of our subsidiaries, other than future unrestricted subsidiaries.
The ABL Credit Facility is subject to a springing financial covenant that requires us to maintain a certain consolidated fixed charge coverage ratio of at
least 1.00 to 1.00 if our availability under the ABL Credit Facility falls below certain levels.
Series A Convertible Redeemable Preferred Stock
On May 23, 2019, we entered into a Purchase Agreement with certain institutional investors (collectively, the “Purchasers”) to issue and sell in a private
placement 55,000 shares of a newly designated series of convertible redeemable preferred stock of the Company (“Series A preferred stock”), for an
aggregate purchase price of $1,000 per share, for total gross proceeds of $55.0 million. Included in the offering was 2,933,333 warrants exercisable for
shares of Class A common stock, and an additional 4,399,992 warrants to be issued to the Purchasers subject to certain conditions as described in the
Purchase Agreement. At the initial closing on May 24, 2019 (“Closing Date”), the Purchasers purchased all of the Series A preferred stock.
For more information related to the Series A preferred stock, see “Note 10 – Mezzanine Equity” in the Notes to the Consolidated Financial Statements.
Contractual Obligations
We enter into certain contractual obligations in the normal course of our business. The following table summarizes our known contractual commitments as
of December 31, 2019 (in thousands):
Less than
1 year
1 - 3
Years
3 - 5
Years
Thereafter
Total
Senior Secured Term Loan
ABL Credit Facility
Equipment financing
Notes payable
Capital lease obligations (1)
Estimated interest payments (2)
Operating lease obligations (3)
Purchase commitments (4)
Sand purchase agreements (5)
Total
$
$
6,250 $
-
5,564
8,068
10,474
45,913
1,743
9,467
16,108
103,587 $
15,000 $
-
10,501
-
-
83,143
2,185
-
960
111,789 $
228,750 $
40,090
-
-
-
11,076
325
-
-
280,241 $
- $
-
-
-
-
-
-
-
-
- $
250,000
40,090
16,065
8,068
10,474
140,132
4,253
9,467
17,068
495,617
Capital lease obligations consist of our obligations on capital leases of fracturing equipment.
Estimated interest payments are based on outstanding debt balances as of December 31, 2019.
(1)
(2)
(3) Operating lease obligations are related to our facilities and office space(s).
(4)
Purchase commitments relate to purchase agreements with a vendor to purchase certain components for use by our fleets.
41
(5)
Sand purchase agreements relate to supply agreements with vendors for sand purchases. The purchase commitments disclosed represent the
aggregate amounts that the Company would be obligated to pay in the event that the Company procured no additional proppant under the
contracts subsequent to December 31, 2019.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements include the operating leases and unconditional purchase commitments disclosed in the “Liquidity and Capital
Resources” section in the contractual obligations table above.
We do not have any interest in entities referred to as variable interest entities.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. We regularly evaluate estimates and judgments based on historical experience and other
relevant facts and circumstances.
We discuss our significant estimates used in the preparation of the financial statements in the notes accompanying the financial statements. Listed below
are the accounting policies we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions
involved.
Revenue Recognition
We adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” on January 1, 2019 using the modified
retrospective approach. As a result of adoption of ASC 606, we recorded a $0.1 million increase in retained earnings due to the timing of expense
recognition related to certain sales commissions considered to be costs of acquiring customer contracts.
Under the new standard, revenue recognition is based on the customer’s ability to benefit from the services rendered in an amount that reflects the
consideration expected to be received in exchange for those services. Taxes collected from customers and remitted to governmental authorities are
accounted for on a net basis and therefore excluded from revenues in our financial statements.
Our revenues consist of providing hydraulic fracturing services for either a pre-determined term or number of stages/wells to E&P companies operating in
the onshore oil and natural gas basins of the United States. In the performance of these services, and at the request of our customers, we may also provide
consumables such as chemicals and sand. Revenues are earned as services are rendered, which is generally on a per stage or monthly rate basis. Customers
are invoiced according to contract terms either upon the completion of a stage, the completion of a well or monthly with payment due typically 30 days
from invoice date.
Hydraulic fracturing is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of wellbores. The process
involves the injection of water, sand and chemicals under high pressure into shale formations. Our performance obligations are satisfied over time,
typically measured in the number of stages completed or the number of pumping days a fleet is available to pump for a customer in a month. A field ticket
is created for each stage completed that records all services performed, including any chemicals and proppant we provided and consumed in completing
the stage. The field ticket is signed by a customer representative and evidences the amounts to which we have a right to invoice and thus to recognize as
revenue. All revenue is recognized when a contract with a customer exists, collectability of amounts subject to invoice is probable, the performance
obligations under the contract have been satisfied over time, and the amount to which the Company has the right to invoice has been determined. Contract
fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the
consolidated statements of operations since their related performance obligations are typically satisfied within a month or less. Our contracts contain
variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is
complete, at which time the variability is resolved.
We have elected to use the “as invoiced” practical expedient to recognize revenue based upon the amount we have a right to invoice upon the completion
of each performance obligation per the terms of the contract. The practical expedient permits an entity to recognize revenue in the amount to which it has a
right to invoice the customer if that amount corresponds directly with the value to the customer of the entity’s performance completed to date. We
42
believe that this is an accurate reflection of the value transferred to the customer as each incremental obligation is performed.
We have elected to expense sales commissions paid upon the successful signing of a new customer contract as incurred if the related contract will be fully
satisfied within one year. For contracts that will not be fully satisfied within one year, these incremental costs of obtaining a contract with a customer will
be recognized as a contract asset and amortized on a straight-line basis over the life of the contract.
Accounts Receivable
We analyze the need for an allowance for doubtful accounts for estimated losses related to potentially uncollectible accounts receivable on a case-by-case
basis throughout the year. We reserve amounts based on specific identification after considering each customer’s situation, including payment patterns,
current financial condition as well as general economic conditions. It is reasonably possible that our estimates of the allowance for doubtful accounts will
change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance.
Property and Equipment
We calculate depreciation based on the estimated useful lives of our assets. When assets are placed into service, we make estimates with respect to their
useful lives that we believe are reasonable. However, the cyclical nature of our business, which results in fluctuations in the use of our equipment and the
environments in which we operate, could cause us to change our estimates, thus affecting the future calculation of depreciation.
We continuously perform repair and maintenance expenditures on our service equipment. Expenditures for renewals and betterments that extend the lives
of our service equipment, which may include the replacement of significant components of service equipment, are capitalized and depreciated. Other
repairs and maintenance costs are expensed as incurred. The determination of whether an expenditure should be capitalized or expensed requires
management judgment with regard to the effect of the expenditure on the useful life of the equipment.
We separately identify and account for certain significant components of our hydraulic fracturing units including the engine, transmission, and pump,
which requires us to separately estimate the useful lives of these components. For our other service equipment, we do not separately identify and track
depreciation of specific original components. When we replace components of these assets, we typically have to estimate the net book values of the
components that are retired, which are based primarily upon their replacement costs, their ages and their original estimated useful lives.
Definite-lived Intangible Assets
At December 31, 2019, our net book value of definite-lived intangible assets was $21.8 million and the related amortization reflected in our consolidated
statement of operations was $6.1 million for the year ended December 31, 2019. These intangible assets are primarily related to patents and trademarks
acquired in a business acquisition. We calculate amortization for these assets based on their estimated useful lives. When these assets are recorded, we
make estimates with respect to their useful lives that we believe are reasonable. However, these estimates contain judgments regarding the future utility of
these assets and a change in our assessment of the useful lives of these assets could materially change the future calculation of amortization.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and amortizable identifiable intangible assets, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. When impairment is indicated, we determine the amount by which
the assets carrying value exceeds its fair value. We consider a number of factors such as estimated future cash flows, appraisals and current market value
analysis in determining fair value. Assets are written down to fair value if the concluded current fair value is below the net carrying value. If actual results
or performance are not consistent with our estimates and assumptions, we may be subject to additional impairment charges, which could be material to our
results of operations. For example, if our results of operations significantly decline as a result of an extended decline in the price of oil, there could be a
material increase in the impairment of long-lived assets in future periods.
43
Fair Value of the Series A Preferred Stock and Warrants Issued
The fair values of the Series A preferred stock and associated warrants issued in May 2019 were calculated using a discounted cash flow model and Black-
Scholes option-pricing model, respectively, which involve significant judgments and estimates.
Share-based Compensation
We sponsor a share-based compensation program for employees and nonemployees. We account for the employee share-based awards based on the fair
value of the award, and recognize the expense over the requisite service period, or upon the occurrence of certain vesting events.
Share-based awards to nonemployees are expensed over the period in which the related services are rendered. The grant-date fair value of the awards is
estimated using the Black-Scholes option-pricing model, or probability-weighted discounted cash flow model and market valuation approaches. Each of
these valuation approaches involves significant judgments and estimates, including estimates regarding our future operations or the determination of a
comparable public company peer group.
Income Taxes
Prior to the completion of the Transaction, the Company was a limited liability company and was treated as a partnership for federal and certain state
income tax purposes. As such, the results of operations were allocated to the members for inclusion in their income tax returns and therefore no provision
or benefit for federal or certain state income taxes was included in our financial statements prior to the completion of the Transaction.
Post-Transaction, the Company uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are
recognized for the future tax consequences of (i) temporary differences between the financial statement carrying amounts and the tax bases of existing
assets and liabilities and (ii) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable
to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period the rate change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely
than not the deferred tax assets will not be realized. Our deferred tax calculation and valuation allowance requires us to make certain estimates about future
operations. Changes in state or federal tax laws, as well as changes in our financial condition or the carrying value of existing assets and liabilities, could
affect those estimates. The effect of a change in tax rates is recognized as income or expense in the period that the rate is enacted.
Recent Accounting Pronouncements
See Note 3 – Accounting Standards to our audited consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data”
for further discussion regarding recently issued accounting standards.
Related Party Transactions
See Note 17 – Related Party Transactions to our audited consolidated financial statements included in “Item 8. Financial Statements and Supplementary
Data” for further discussion regarding related party transactions.
44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks from interest rate and commodity price fluctuations. We have not entered into any derivative financial instrument
transactions to manage or reduce market risk for speculative purposes. Our operations are conducted entirely in the United States; therefore, we have no
significant exposure to foreign currency exchange rate risk. The consolidated financial statements are subject to concentrations of credit risk consisting
primarily of accounts receivable.
We are subject to interest rate risk on our Senior Secured Term Loan and ABL Credit Facility. These agreements are subject to an annual interest rate that
is indexed to the London Interbank Offered Rate (“LIBOR”). Refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations—Debt Agreements.” The impact of a 1% increase in interest rates on our outstanding debt would have resulted in an increase in interest
expense of approximately $2.9 million for the year ended December 31, 2019.
Our material and fuel purchases expose us to commodity price risk. Our material costs primarily consist of proppants and chemicals that are consumed
while providing hydraulic fracturing services. Our fuel costs primarily consist of diesel fuel used by our trucks and other equipment. Our material and fuel
costs are variable and are impacted by changes in supply and demand. We generally pass along price increases to our customers; however, we may be
unable to do so in the future. We do not engage in commodity price hedging activities. However, we have commitments in place with certain vendors to
purchase sand. Some of these agreements have minimum purchase requirements. We could be required to purchase sand and pay prices in excess of market
prices at the time of purchase. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual
Obligations” for the contractual commitments and obligations table as of December 31, 2019.
The concentration of our customers in the oil and gas industry may impact our overall exposure to credit risk in that customers may be similarly affected
by changes in economic and industry conditions. We extend credit to customers and other parties in the normal course of our business. We manage our
credit exposure by performing credit evaluations of our customers and maintaining an allowance for doubtful accounts.
45
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
U.S. Well Services, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of U.S. Well Services, Inc. and subsidiaries (the Company) as of December 31, 2019 and
2018, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2019 and 2018 (Successor),
for the period February 2, 2017 to December 31, 2017 (Successor), and for the period January 1, 2017 to February 1, 2017 (Predecessor), and the related
notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years ended December 31,
2019 and 2018 (Successor), for the period February 2, 2017 to December 31, 2017 (Successor), and for the period January 1, 2017 to February 1, 2017
(Predecessor), in conformity with U.S. generally accepted accounting principles.
New Basis for Presentation
As discussed in note 1 to the consolidated financial statements, on February 2, 2017, the Company completed a transaction to restructure its capital
structure and applied acquisition method accounting in conformity with Accounting Standards Codification Topic 805, Business Combinations.
Accordingly, the accompanying consolidated financial statements for the Successor periods includes assets acquired and liabilities assumed that were
recorded at fair value having carrying amounts not comparable with prior periods, as discussed in note 2 to the consolidated financial statements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2012.
Houston, Texas
March 5, 2020
46
U.S. WELL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
2019
December 31,
2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Restricted cash
Accounts receivable (net of allowance for doubtful accounts of
$22 and $189 in 2019 and 2018, respectively)
Inventory, net
Prepaids and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Deferred financing costs, net
TOTAL ASSETS
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued expenses and other current liabilities
Notes payable
Current portion of long-term equipment financing
Current portion of long-term capital lease obligation
Current portion of long-term debt
Total current liabilities
Long-term equipment financing
Long-term debt
Deferred rent
TOTAL LIABILITIES
Commitments and contingencies (NOTE 16)
MEZZANINE EQUITY
Series A Convertible Redeemable Preferred Stock, par value $0.0001 per share;
55,000 shares authorized, issued and outstanding as of December 31, 2019;
aggregate liquidation preference of $59,050 as of December 31, 2019
STOCKHOLDERS' EQUITY
Class A Common Stock, par value of $0.0001 per share; 400,000,000 shares
authorized; 62,857,624 shares and 49,254,760 shares issued and outstanding
as of December 31, 2019 and 2018, respectively
Class B Common Stock, par value of $0.0001 per share; 20,000,000 shares
authorized; 5,500,692 shares and 13,937,332 shares issued and outstanding
as of December 31, 2019 and 2018, respectively
Additional paid in capital
Accumulated deficit
Total stockholders' equity attributable to U.S. Well Services, Inc.
Noncontrolling interest
Total Stockholders' Equity
TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS'
EQUITY
$
$
$
33,794 $
7,610
79,542
9,052
13,332
143,330
441,610
21,826
4,971
1,045
612,782 $
70,170 $
40,481
8,068
5,564
10,474
6,250
141,007
10,501
274,391
215
426,114
38,928
5
1
248,302
(111,201)
137,107
10,633
147,740
29,529
507
58,026
9,413
16,437
113,912
331,387
27,890
4,971
2,070
480,230
89,360
17,044
4,560
3,263
25,338
900
140,465
8,304
91,112
-
239,881
-
5
1
204,928
(17,383)
187,551
52,798
240,349
$
612,782 $
480,230
The accompanying notes are an integral part of these consolidated financial statements.
47
U.S. WELL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Successor
Successor
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Successor
February 2,
2017
(inception) to
December 31,
2017
Predecessor
January 1,
2017 to
February 1,
2017
$
514,757 $
648,847 $
466,487 $
32,867
383,957
154,149
31,856
-
20,065
(75,270)
(30,099)
(12,558)
1,768
(116,159)
(77)
(116,082)
(22,169)
(93,913)
(4,050)
(11,206)
533,031
108,440
34,497
-
10,848
(37,969)
(32,636)
(190)
333
(70,462)
352
(70,814)
(4,918)
(65,896)
-
-
394,125
92,430
17,601
20,247
11,958
(69,874)
(22,961)
-
(787)
(93,622)
-
(93,622)
-
(93,622)
-
-
28,053
4,920
1,281
-
201
(1,588)
(4,067)
-
1
(5,654)
-
(5,654)
-
(5,654)
-
-
$
(109,169) $
(65,896) $
(93,622) $
(5,654)
$
(2.11) $
(1.33) $
(1.89) $
(0.11)
50,244
47,899
47,940
47,940
48
Revenue
Costs and expenses:
Cost of services (excluding depreciation and
amortization)
Depreciation and amortization
Selling, general and administrative expenses
Impairment loss on intangible assets
Loss on disposal of assets
Loss from operations
Interest expense, net
Loss on extinguishment of debt
Other income (expense)
Loss before income taxes
Income tax expense (benefit)
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to U.S. Well Services, Inc.
Dividends accrued on Series A preferred
stock
Deemed and imputed dividends on Series A
preferred stock
Net loss attributable to U.S. Well Services, Inc.
Common stockholders
Loss per common share (See Note 12):
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
U.S. WELL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Successor
Successor
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Successor
February 2,
2017 (inception)
to December 31,
2017
Predecessor
January 1,
2017 to
February 1,
2017
$
(116,082) $
(70,814) $
(93,622)
$
(5,654)
154,149
-
434
359
-
-
20,065
1,581
1,410
12,558
7,755
(21,950)
2
3,226
-
(12,316)
5,463
18,190
74,844
(209,101)
807
(208,294)
49,960
(65,844)
285,000
-
(75,000)
(6,560)
9,928
(6,421)
(70,619)
-
(16,699)
54,524
-
-
-
(13,451)
144,818
11,368
108,440
-
644
153
9,553
-
10,848
50
8,534
190
20,633
15,765
3,591
(6,460)
-
(22,543)
4,887
(2)
83,469
(147,606)
8,033
(139,573)
55,975
(49,825)
40,000
(163,860)
-
-
7,278
(4,163)
(22,997)
-
(9,551)
-
(10)
243,865
(11,475)
(5,523)
79,714
23,610
$
30,036
41,404
$
6,426
30,036
$
92,430
20,247
438
450
17,456
-
11,958
-
1,775
-
4,546
(35,716)
(7,646)
(5,879)
-
38,913
1,937
-
47,287
(71,584)
19
(71,565)
49,825
(15,475)
-
4,112
(2,723)
(4,607)
(29)
(2,587)
-
-
-
(2,200)
26,316
2,038
4,388
6,426
$
4,920
-
-
-
3,155
117
201
54
112
-
-
(10,175)
(137)
(414)
113
2,446
1,922
563
(2,777)
-
-
-
2,500
-
-
-
(276)
(428)
-
(5)
-
-
-
(318)
1,473
(1,304)
5,692
4,388
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation and amortization
Impairment loss on intangible assets
Provision for losses on accounts receivable
Provision for losses on inventory obsolescence
Non-cash interest
SMRF Interests present value adjustment
Loss on disposal of assets
Amortization of discount on debt
Deferred financing costs amortization
Loss on extinguishment of debt
Share-based compensation expense
Changes in assets and liabilities:
Accounts receivable
Inventory
Prepaids and other current assets
Other non-current assets
Accounts payable
Accrued liabilities
Accrued interest
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Insurance proceeds from damaged property and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of revolving credit facility
Repayments of revolving credit facility
Proceeds from issuance of long-term debt
Repayments of long-term debt to related party
Repayments of long-term debt
Payment of fees related to debt extinguishment
Proceeds from issuance of note payable
Repayments of note payable
Repayments of amounts under equipment financing
Payment to re-acquire JMRF Interest
Principal payments under finance lease obligation
Proceeds from issuance of preferred stock and warrants, net
Cash distribution to partners
Proceeds from issuance of common stock, net
Repurchase of common stock
Deferred financing costs
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents and
restricted cash
Cash and cash equivalents and restricted cash, beginning of
period
Cash and cash equivalents and restricted cash, end of period
The accompanying notes are an integral part of these consolidated financial statements.
49
U.S. WELL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Supplemental cash flow disclosure:
Interest paid
Income tax paid
Non-cash investing and financing activities:
Beneficial conversion feature of Series A preferred stock
Issuance of warrants to purchase common stock
associated with preferred stock offering
Deemed and imputed dividends on Series A preferred
stock
Accrued Series A preferred stock dividends
Changes in accrued and unpaid capital expenditures
Assets under finance lease obligations
Financed equipment purchases
Partial settlement of debt through issuance of common
stock
Deferred finance cost related to issuance of Class B units
by USWS Holdings
Successor
Predecessor
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Successor
February 2,
2017
(inception) to
December 31,
2017
Predecessor
January 1,
2017 to
February 1,
2017
$
8,838 $
116
20,132
10,720
11,206
4,050
6,874
10,513
66,342
-
-
41,537 $
-
-
-
-
-
27,283
15,849
7,482
13,150
3,745 $
-
-
-
-
-
2,298
21,330
30,385
66
-
-
-
-
-
2,251
-
-
-
8,271
-
The accompanying notes are an integral part of these consolidated financial statements.
50
U.S. WELL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(PREDECESSOR)
(In thousands, except share amounts)
Class A Common Stock Class B Common Stock
Shares
Amount
- $
-
Shares
Amount
- $
- $
- $
4,816 $
(287,199) $
Additional
Paid in
Capital
Member's
Interest
Member's
Accumulated
Deficit
Retained
Earnings
Noncontrolling
Interests
Total
Equity
-
-
-
-
-
-
(217)
- $
-
-
-
-
-
-
-
(1,550)
-
- $
-
- $
- $
- $
4,816 $
(5,654)
(294,620) $
-
- $
-
-
-
- $
-
- $
51
-
- $
(4,816)
- $
294,620
- $
- $
-
- $
- $ (282,383)
-
(217)
-
(1,550)
-
(5,654)
- $ (289,804)
-
- $
289,804
-
Balance, December 31, 2016
Accrued preferred return on Series E
Units
Accrued dividends on Junior
Mandatorily Redeemable
Financial Interests
Partner distributions
Net loss
Balance, February 1, 2017
Elimination of deficit in connection
with
Acquisition
Balance, February 2, 2017
U.S. WELL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(SUCCESSOR)
(In thousands, except share amounts)
Class A Common Stock
Class B Common Stock
Shares
Amount
Shares
Amount
Additional
Paid in
Capital
Member's
Interest
Member's
Accumulated
Deficit
Retained
Earnings
Noncontrolling
Interest
Total
Equity
-
$
-
$
-
$
133,339
$
-
$
-
$
-
$
133,339
Balance, February 2, 2017
Deemed contribution related to
unit-based compensation
Net loss
Balance, December 31, 2017
Deemed contribution related to
unit-based compensation
Partner distributions
Net loss prior to Transaction
Effects of the Transaction:
Restricted stock granted to employees
Share-based Transaction bonus
Partial settlement of debt through
issuance of common stock
Recapitalization
Share-based compensation subsequent
to Transaction
Repurchase of common stock
Net loss subsequent to Transaction
Balance, December 31, 2018
Adoption of ASC 606 as of
January 1, 2019 (Note 2)
Exercise of warrants
Conversion of Class B common stock to
Class A common stock
Change in noncontrolling interest
Restricted stock granted to employees
Class A Common stock granted
to board members
Share-based compensation
Restricted stock forfeitures
Issuance of warrants to purchase
common stock associated with
preferred stock offering
Beneficial conversion feature of Series
A preferred stock
Deemed and imputed dividends on
Series A preferred stock
Accrued Series A preferred stock dividends
Net loss
Balance, December 31, 2019
-
$
$
-
-
-
-
-
-
530,000
650,000
1,314,999
47,584,677
-
(824,916 )
-
49,254,760
-
2,925,712
8,436,640
-
2,218,183
46,875
-
(24,546 )
-
-
-
-
-
62,857,624
$
-
-
-
-
-
-
-
-
-
-
5
-
-
-
5
-
-
-
-
-
-
-
-
-
-
-
-
-
5
$
-
-
-
-
-
-
-
-
-
14,546,755
-
(609,423 )
-
13,937,332
-
-
(8,436,640 )
-
-
-
-
-
-
-
-
-
-
5,500,692
$
-
-
-
-
-
-
-
-
-
1
-
-
-
1
-
-
-
-
-
-
-
-
-
-
-
-
-
1
$
-
-
-
-
-
-
-
6,500
13,150
192,719
316
(7,757 )
-
204,928
-
-
-
21,515
-
331
5,932
-
10,720
20,132
(11,206 )
(4,050 )
-
248,302
$
$
4,546
-
137,885
$
-
(93,622 )
(93,622 ) $
$
13,724
(10 )
-
-
-
(48,513 )
-
-
-
(151,599 )
-
-
-
142,135
$
-
-
-
-
-
-
-
-
-
-
-
-
(17,383 )
(17,383 )
95
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
61,409
92
(3,785 )
(4,918 )
52,798
27
-
-
(21,515 )
-
87
1,405
-
-
-
-
-
4,546
(93,622 )
44,263
13,724
(10 )
(48,513 )
-
6,500
13,150
244,670
408
(11,542 )
(22,301 )
240,349
122
-
-
-
418
7,337
-
10,720
20,132
(11,206 )
(4,050 )
(116,082 )
147,740
(93,913 )
(111,201 ) $
(22,169 )
10,633
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
The accompanying notes are an integral part of these consolidated financial statements.
52
U.S. WELL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE 1 – DESCRIPTION OF BUSINESS
U.S. Well Services, Inc. (the “Company”), f/k/a Matlin & Partners Acquisition Corp (“MPAC”), is a Houston, Texas-based oilfield service provider of well
stimulation services to the upstream oil and natural gas industry. The Company engages in high-pressure hydraulic fracturing in oil and natural gas basins
in the United States. The fracturing process consists of pumping a specially formulated fluid into perforated well casing, tubing or open holes under high
pressure, causing the underground formation to crack or fracture, allowing nearby hydrocarbons to flow more freely up the wellbore.
The Company’s fleets consist of mobile hydraulic fracturing units and other auxiliary heavy equipment to perform fracturing services. The Company has
two designs for hydraulic fracturing units: (1) Conventional Fleets, which are powered by diesel fuel and utilize traditional internal combustion engines,
transmissions, and radiators and (2) Clean Fleets, which replace the traditional engines, transmissions, and radiators with electric motors powered by
electricity generated by natural gas-fueled turbine generators. Both designs utilize high-pressure hydraulic fracturing pumps mounted on trailers. The
Company refers to the group of pump trailers and other equipment necessary to perform a typical fracturing job as a “fleet” and the personnel assigned to
each fleet as a “crew”.
The Company was incorporated in Delaware in March 2016 as a special purpose acquisition company, formed for the purpose of effecting a merger,
capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses.
On November 9, 2018 (the “Closing Date”), MPAC acquired USWS Holdings LLC, a Delaware limited liability company (“USWS Holdings”), pursuant
to the Merger and Contribution Agreement, dated as of July 13, 2018, and subsequently amended (as amended, the “Merger and Contribution
Agreement”). The acquisition, together with the other transactions contemplated by the Merger and Contribution Agreement are referred to herein as the
“Transaction”. In connection with the closing of the Transaction, MPAC changed its name to U.S. Well Services, Inc.
Following the completion of the Transaction, substantially all of the Company’s assets and operations are held and conducted by U.S. Well Services, LLC
(“USWS LLC”), a wholly owned subsidiary of USWS Holdings, and the Company’s only assets are equity interests representing 92% ownership of USWS
Holdings as of December 31, 2019.
Unless the context otherwise requires, “the Company”, “we,” “us,” and “our” refer, for periods prior to the completion of the Transaction, to USWS
Holdings and its subsidiaries and, for periods upon or after the completion of the Transaction, to US Well Services, Inc. and its subsidiaries, including
USWS Holdings and its subsidiaries.
On February 2, 2017, USWS Holdings acquired (the “Acquisition”) all of the outstanding equity interests of USWS LLC. USWS Holdings, a Delaware
limited liability company, was formed for the purpose of effecting the Acquisition and had no operations of its own. USWS Holdings accounted for the
Acquisition as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded
at fair value with the remaining purchase price recorded as goodwill (see Note 4 to our audited consolidated financial statements included in “Item 8.
Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018). USWS LLC elected to
push down the effects of the Acquisition to its consolidated financial statements.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The acquisition of USWS Holdings by the Company has been accounted for as a reverse recapitalization. Under this method of accounting, USWS Holdings
is treated as the acquirer, and the Company is treated as the acquired party. Therefore, the consolidated financial statements presented are those of USWS
LLC prior to the Closing Date as the Company’s predecessor entity and of the Company subsequent to the Closing date. The financial statements reflect the
Transaction as the equivalent of the issuance of stock by USWS LLC for the net monetary assets of the Company. The accounting for the Transaction did not
affect the carrying values of the assets and liabilities of USWS LLC.
53
The consolidated financial statements for the years ended December 31, 2019 (the “2019 Successor Period”) and 2018 (the “2018 Successor Period”) and for
the period from February 2, 2017 to December 31, 2017 (the “2017 Successor Period”) represent the financial information of the Company and its
subsidiaries subsequent to the Acquisition. The consolidated financial statements for the period from January 1, 2017 to February 1, 2017 (the “2017
Predecessor”) represents the financial information of the Company and its subsidiaries prior to the Acquisition. Due to the change in the basis of accounting
resulting from the Acquisition, the consolidated financial statements of the Company for these reporting periods are not comparable.
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America
(“GAAP”).
Our operations are organized into a single business segment, which consists of hydraulic fracturing services, and we have one reportable geographical
business segment, the United States.
Principles of Consolidation
The consolidated financial statements comprise the financial statements of the Company, its wholly owned subsidiaries, and subsidiaries that it controls due to
ownership of a majority voting interest. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control,
and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting
period as the Company. All significant intercompany balances and transactions are eliminated upon consolidation.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. Under this method, acquired assets, including separately
identifiable intangible assets, and any assumed liabilities are recorded at their acquisition date estimated fair value. The excess of purchase price over the fair
value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. Determining the fair
value of assets acquired and liabilities assumed involves the use of significant estimates and assumptions.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. We regularly evaluate estimates and judgments based on historical experience and other relevant facts
and circumstances. Significant estimates included in these financial statements primarily relate to allowance for doubtful accounts, allowance for inventory
obsolescence, estimated useful lives and valuation of property and equipment and intangibles, impairment assessments of goodwill and other intangibles,
Level 2 inputs used in fair value estimation of term loans, accounting for business combination, and the assumptions used in our Black-Scholes and Monte
Carlo option pricing models associated with the valuation of share-based compensation and certain equity instruments. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity at the date of acquisition of three months or less. Cash and cash equivalents consist
of cash on deposit with domestic banks and, at times, may exceed federally insured limits.
Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements, or are reserved for a specific purpose,
that are not readily available for immediate or general use are recorded in restricted cash in our consolidated balance sheets. The restricted cash in our
consolidated balance sheet represents cash transferred into a trust account to support our workers’ compensation obligations and cash held for use in capital
expenditures related to approved fleet expansion amounting to $513 and $7,097, respectively, as of December 31, 2019, and $507 and $0, respectively, as of
December 31, 2018.
54
The following table provides a reconciliation of the amount of cash and cash equivalents reported on the consolidated balance sheets to the total of cash and
cash equivalents and restricted cash shown on the consolidated statements of cash flows:
Cash and cash equivalents
Restricted cash
Cash and cash equivalents and restricted cash
Inventory
December 31,
2019
December 31,
2018
$
$
33,794 $
7,610
41,404 $
29,529
507
30,036
Inventory consists of proppant, chemicals, and other consumable materials and supplies used in our high-pressure hydraulic fracturing operations. Inventories
are stated at the lower of cost or net realizable value. Cost is determined principally on a first-in-first-out cost basis. All inventories are purchased and used by
the Company in the delivery of its services with no inventory being sold separately to outside parties. Inventory quantities on hand are reviewed regularly and
write-downs for obsolete inventory are recorded based on our forecast of the inventory item demand in the near future. As of December 31, 2019 and 2018,
the Company had established inventory reserves of $579 and $572, respectively, for obsolete and slow-moving inventory. The following table shows the
change in the inventory reserves:
Balance at beginning of period
Charges to costs and expenses
Recoveries and write-offs
Balance at end of period
December 31,
2019
December 31,
2018
$
$
572 $
359
(352)
579 $
450
153
(31)
572
On certain contracts with our proppant vendors, we take ownership of proppant as it leaves the sand mines. These in transit inventories are recognized as part
of Inventory in our balance sheets. As of December 31, 2019 and 2018, in transit inventories amounted to $0 and $265, respectively.
Property and Equipment
Property and equipment are carried at cost, with depreciation provided on a straight-line basis over their estimated useful lives. Expenditures for renewals and
betterments that extend the lives of the assets are capitalized. Amounts spent for maintenance and repairs, which do not improve or extend the life of the
related asset, are charged to expense as incurred.
Long-lived Assets
Long-lived assets, such as property and equipment and amortizable identifiable intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. When making this assessment, the following factors are considered:
current operating results, trends and prospects, as well as the effects of obsolescence, demand, competition and other economic factors. We determine
recoverability by evaluating whether the undiscounted estimated future net cash flows of the asset or asset group are less than its carrying value. When
impairment is indicated, we proceed to Step 2 of the impairment test and measure the impairment as the amount by which the assets carrying value exceeds its
fair value. Management considers a number of factors such as estimated future cash flows, appraisals and current market value analysis in determining fair
value. Assets are written down to fair value if the concluded current fair value is below the net carrying value.
55
For the 2017 Successor Period, we identified a triggering event in our impairment analysis relating to an intangible asset based on changes in a specific
customer contract, which resulted in recognition of an impairment loss amounting to $20,247, which was presented as impairment loss on intangible assets in
the consolidated statements of operations. The triggering event was caused by our negotiation of the release of two fleets under contract with one customer for
redeployment to other customers. The fair value of the order backlog as of the date of impairment was determined using the income approach, which reflected
management’s cash flow projections.
Goodwill
Goodwill is not amortized, but is reviewed for impairment annually, or more frequently when events or changes in circumstances indicate that the carrying
value may not be recoverable. Judgements regarding indicators of potential impairment are based on market conditions and operational performance of the
business.
As of December 31, or as required, the Company performs an impairment analysis of goodwill. The Company may assess its goodwill for impairment
initially using a qualitative approach (“step zero”) to determine whether conditions exist that indicate it is more likely than not that a reporting unit’s carrying
value is greater than its fair value, and if such conditions are identified, then a quantitative analysis will be performed to determine if there is any impairment.
The Company may also elect to initially perform a quantitative analysis instead of starting with step zero. The quantitative assessment for goodwill is a two-
step assessment. “Step one” requires comparing the carrying value of a reporting unit, including goodwill, to its fair value, which the Company estimates
using the income approach. The income approach uses a discounted cash flow model, which involves significant estimates and assumptions, including
preparation of revenue and profitability growth forecasts, selection of a discount rate, and selection of a terminal year multiple. If the fair value of the
respective reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and no further testing is required. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the goodwill impairment test is to measure the amount of impairment loss, if any. “Step two” compares
the implied fair value of goodwill to the carrying amount of goodwill. The implied fair value of goodwill is determined by a hypothetical purchase price
allocation using the reporting unit’s fair value as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge
is recorded to write down goodwill to its implied fair value.
Deferred Financing Costs
Costs incurred to obtain financing are capitalized and amortized to interest expense using the effective interest method over the contractual term of the debt.
At the balance sheet date, deferred financing costs related to the senior term loans are presented as a direct deduction from the debt liability, while deferred
financing costs related to the revolver facility are presented as deferred financing costs, net, on the consolidated balance sheets.
Fair Value of Financial Instruments
Fair value is defined under Accounting Standards Codification (ASC) 820, Fair Value Measurement, as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level hierarchy,
which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels
are defined as follows:
Level 1–inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2–inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3–inputs are unobservable for the asset or liability.
The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of December 31, 2019 and 2018:
56
Senior Secured Term Loan and Second Lien Term Loan. The carrying value of the Senior Secured Term Loan and Second Lien Term Loan approximates fair
value as its terms are consistent with and comparable to current market rates as of December 31, 2019 and 2018, respectively.
Equipment financing. The carrying value of the equipment financing approximates fair value as its terms are consistent with and comparable to current market
rates as of December 31, 2019 and 2018, respectively.
Revenue Recognition
Effective January 1, 2019, the Company adopted a comprehensive new revenue recognition standard, ASC 606, Revenue from Contracts with Customers. The
details of the significant changes to accounting policies resulting from the adoption of the new standard are set out below. The Company adopted the standard
using a modified retrospective method, allowing the Company to apply the cumulative effect of the standard in the most current period presented as an
adjustment to retained earnings. As a result of the change in accounting principle, the Company recorded an increase of $122 in retained earnings due to the
timing of expense recognition related to certain sales commissions considered to be costs of acquiring customer contracts.
Under the new standard, revenue recognition is based on the customer’s ability to benefit from the services rendered in an amount that reflects the
consideration expected to be received in exchange for those services. Taxes collected from customers and remitted to governmental authorities are accounted
for on a net basis and therefore excluded from revenues in the Company’s financial statements.
The Company’s revenues consist of providing hydraulic fracturing services for either a pre-determined term or number of stages/wells to exploration and
production companies operating in the onshore oil and natural gas basins of the United States. In the performance of these services, and at the request of our
customers, we may also provide consumables such as chemicals and sand. Revenues are earned as services are rendered, which is generally on a per stage or
monthly rate basis. Customers are invoiced according to contract terms either upon the completion of a stage, the completion of a well or monthly with
payment due typically 30 days from invoice date.
Hydraulic fracturing is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of wellbores. The process
involves the injection of water, sand and chemicals under high pressure into shale formations. The Company’s performance obligations are satisfied over
time, typically measured in number of stages completed or the number of pumping days a fleet is available to pump for a customer in a month. A field ticket
is created for each stage completed that records all services performed, including any chemicals and proppant we provided and consumed in completing the
stage. The field ticket is signed by a customer representative and evidences the amounts to which the Company has a right to invoice and thus to recognize as
revenue. All revenue is recognized when a contract with a customer exists, collectability of amounts subject to invoice is probable, the performance
obligations under the contract have been satisfied over time, and the amount to which the Company has the right to invoice has been determined. Contract
fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the consolidated
statements of operations since their related performance obligations are typically satisfied within a month or less. The Company’s contracts contain variable
consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which
time the variability is resolved.
The Company has elected to use the “as invoiced” practical expedient to recognize revenue based upon the amount it has a right to invoice upon the
completion of each performance obligation per the terms of the contract. The practical expedient permits an entity to recognize revenue in the amount to
which it has a right to invoice the customer if that amount corresponds directly with the value to the customer of the entity’s performance completed to date.
The Company believes that this is an accurate reflection of the value transferred to the customer as each incremental obligation is performed.
The Company has elected to expense sales commissions paid upon the successful signing of a new customer contract as incurred if the related contract will be
fully satisfied within one year. For contracts that will not be fully satisfied within one year, these incremental costs of obtaining a contract with a customer
will be recognized as a contract asset and amortized on a straight-line basis over the life of the contract.
57
Accounts Receivable
Accounts receivable are recorded at their outstanding balances adjusted for an allowance for doubtful accounts. The allowance for doubtful accounts is
determined by analyzing the payment history and credit worthiness of each debtor. Receivable balances are charged off when they are considered
uncollectible by management. Recoveries of receivables previously charged off are recorded as income when received. The Company recorded an allowance
for doubtful accounts amounting to $22 and $189 as of December 31, 2019 and 2018, respectively. The following table shows the change in allowance for
doubtful accounts:
Balance at beginning of period
Charges to costs and expenses
Recoveries and write-offs
Balance at end of period
Major Customer and Concentration of Credit Risk
December 31,
2019
December 31,
2018
$
$
189 $
434
(601)
22 $
438
644
(893)
189
The concentration of our customers in the oil and natural gas industry may impact our overall exposure to credit risk, either positively or negatively, in that
customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not
generally require collateral in support of our trade receivables.
The following table shows the percentage of revenues from our significant customers for the 2019 Successor Period, 2018 Successor Period, 2017 Successor
Period, and the 2017 Predecessor Period:
Customer A
Customer B
Customer C
Customer D
Customer E
Customer F
Customer G
An asterisk indicates that revenue is less than ten percent.
Successor
Successor
Year
Ended
December 31,
2019
*
*
*
18.3%
*
18.4%
15.7%
Year
Ended
December 31,
2018
27.3%
20.3%
12.0%
15.4%
11.2%
*
*
Successor
February 2,
2017
(inception)
to
December 31,
2017
36.5%
26.6%
*
*
*
*
*
Predecessor
January 1,
2017 to
February 1,
2017
53.5%
42.8%
*
*
*
*
*
58
The following table shows the percentage of trade receivables from our significant customers:
Customer A
Customer B
Customer C
Customer D
Customer E
Customer F
Customer G
Customer H
An asterisk indicates that trade receivable is less than ten percent.
Share-Based Compensation
December 31,
2019
*
*
*
12.1%
10.3%
12.0%
34.5%
15.9%
December 31,
2018
18.4%
17.7%
10.8%
26.1%
13.0%
*
*
*
The Company measures share-based compensation costs at the award’s fair value on the grant date. Employee share-based compensation is recognized as an
expense over the requisite service period which is typically the period over which the award vests, or upon the occurrence of certain vesting events.
Forfeitures are recognized as they occur. Non-employee share-based compensation is recognized over the period in which the related services are rendered.
Fair Value of Preferred Stock
The fair value of preferred stock at the date of issuance was estimated by calculating the present value of its one-year redemption cost to the Company and
then discounted for lack of marketability.
Embedded Conversion Features
The Company evaluates embedded conversion features within a convertible instrument under ASC 815, Derivatives and Hedging, to determine whether the
embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value
recorded in earnings. If the conversion feature does not require treatment under ASC 815, the instrument is evaluated under ASC 470-20, Debt with
Conversion and Other Options, for consideration of any beneficial conversion features.
The Company records a beneficial conversion feature (“BCF”) when the convertible instrument is issued with conversion features at fixed or adjustable rates
that are below market value when issued. The BCF for convertible instruments is recognized and measured by allocating a portion of the proceeds equal to
the intrinsic value of that feature to additional paid-in capital. The intrinsic value is generally calculated at the commitment date as the difference between the
conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into
which the security is convertible. If certain other securities are issued with the convertible security, the proceeds are allocated among the different
components. The portion of the proceeds allocated to the convertible security is divided by the contractual number of the conversion shares to determine the
effective conversion price, which is used to measure the BCF. The effective conversion price is used to compute the intrinsic value. The value of the BCF is
limited to the basis that is initially allocated to the convertible security.
The BCF for the convertible instrument is recorded as a reduction, or discount, to the carrying amount of the convertible instrument equal to the fair value of
the conversion feature. The discount is then amortized as deemed dividends over the period from the date of the convertible instrument’s issuance to the
earliest redemption date, provided that the convertible instrument is not currently redeemable but probable of becoming redeemable in the future.
59
Warrants Issued with Convertible Instruments
The Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method. The Company allocates
the value of the proceeds received from a convertible instrument transaction between the conversion feature and any other detachable instruments (such as
warrants) on a relative fair value basis. The allocated fair value is recorded as discount or premium.
Income Taxes
Prior to the completion of the Transaction, the Company was a limited liability company and was treated as a partnership for federal and certain state income
tax purposes. As such, the results of operations were allocated to the members for inclusion in their income tax returns and therefore no provision or benefit
for federal of certain state income taxes was included in our consolidated financial statements prior to the completion of the Transaction.
The Company, under ASC 740, uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are
recognized for the future tax consequences of (i) temporary differences between the financial statement carrying amounts and the tax bases of existing assets
and liabilities and (ii) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the
future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities
is recognized in income in the period the rate change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely than not the
deferred tax assets will not be realized.
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by
taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were
accrued for the payment of interest and penalties at December 31, 2019. The Company is currently not aware of any issues under review that could result in
significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since
inception.
NOTE 3 – ACCOUNTING STANDARDS
Recently Adopted Accounting Pronouncements
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”), as modified
by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to
comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive
compensation and shareholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting
standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of
securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a
company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any
such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is
issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new
or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements
with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended
transition period difficult or impossible because of the potential differences in accounting standards used.
60
In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, which is intended to reduce the diversity in practice around how certain transactions are classified within the
statement of cash flows. The new guidance will be effective for emerging growth companies for fiscal years beginning after December 15, 2018, and
interim periods within fiscal years beginning after December 15, 2019; however, early adoption is permitted. The Company adopted this new guidance as
of April 1, 2019 which resulted in the presentation of the cash portion of the loss on extinguishment of debt amounting to $6,560 as cash used in financing
activities rather than operating activities in the consolidated statement of cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers and subsequent amendments thereto. This pronouncement
requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the
consideration which the entity expects to be entitled to in exchange for those goods and services. The new guidance will be effective for emerging growth
companies for fiscal years beginning after December 15, 2018, and interim periods beginning after December 15, 2019; however, early adoption is
permitted. The Company adopted the guidance on January 1, 2019 which did not have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition
of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new
guidance will be effective for emerging growth companies for fiscal years beginning after December 15, 2018, and interim periods within fiscal years
beginning after December 15, 2019. The Company adopted the guidance as of January 1, 2019 which did not have an impact on the consolidated financial
statements.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10,
ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). Topic 842 requires companies to generally recognize on the balance sheet
operating and financing lease liabilities and corresponding right-of-use assets. We expect to adopt Topic 842 using the effective date of January 1, 2021 as
the date of our initial application of the standard. We are currently evaluating the impact of our adoption of Topic 842 on our consolidated financial
statements. We expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and
right-of-use assets upon our adoption of Topic 842, which will increase our total assets and total liabilities that we report relative to such amounts prior to
adoption. The Company will use the modified retrospective with applied transition method upon adoption of the standard. Under this adoption method, all
leases that are in effect and in existence as of, and subsequent to transition date will be applied as of the transition date, with a cumulative impact to
retained earnings in that period. Prior period financial statements would be stated under the old guidance ASC 840 with no change to prior periods or
disclosures associated with prior period.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which changes the impairment model for most financial
assets and certain other instruments. Specifically, this new guidance requires using a forward-looking, expected loss model for trade and other receivables,
held-to-maturity debt securities, loans and other instruments. This will replace the currently used model and may result in an earlier recognition of
allowance for losses. In addition, in November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments –
Credit Losses, which clarifies guidance around how to report expected recoveries. The new guidance will be effective for emerging growth companies for
fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of
adopting the new guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which
eliminates the second step of the previous two-step quantitative test of goodwill impairment. Under the new guidance, the quantitative test consists of a
single step in which the carrying amount of the reporting unit is compared to its fair value. An impairment charge would be recognized for the amount by
which the carrying amount exceeds the reporting unit’s fair value; however, the amount of the impairment would be limited to the total amount of goodwill
allocated to the reporting unit. The guidance does not affect the existing option to perform the qualitative assessment for a reporting unit to determine
whether the quantitative impairment test is necessary. The new guidance will be effective for emerging growth companies for fiscal years beginning after
December 15, 2021; however, early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the
consolidated financial statements.
61
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes specific
exceptions to the general principles in Topic 740 in GAAP. The new guidance also improves the issuer’s application of income tax-related guidance and
simplifies GAAP for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill,
separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The new guidance will be
effective for emerging growth companies for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after
December 15, 2022; however, early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the
consolidated financial statements.
NOTE 4 – PREPAIDS AND OTHER CURRENT ASSETS
Prepaids and other current assets include the following:
Prepaid insurance
Recoverable costs from insurance
Sales tax receivable
Other receivables
Income tax receivable
Other current assets
Total prepaid expenses and other current assets
December 31,
2019
December 31,
2018
$
$
11,127 $
-
-
-
810
1,395
13,332 $
6,011
3,540
1,987
895
810
3,194
16,437
In March 2017, some of our turbine equipment that we use to operate our Clean Fleets was damaged in an accident. As a result, we incurred costs
primarily to rent replacement equipment in order to continue our operations. Recoverable costs from insurance as of December 31, 2018 included costs of
$2,871, which was recovered from the insurance company in January 2019.
In June 2018, we experienced a fire on one of our hydraulic fracturing fleets operating in Pennsylvania, damaging a portion of the hydraulic fracturing
equipment. We received insurance proceeds during the year ended December 31, 2019 amounting to $2,354 as final settlement to cover the cost of
replacing damaged equipment and reimbursement of certain operating expenses incurred due to the fire. Of this amount, reimbursement of certain
expenses incurred in the prior year amounting to $1,648 was recorded as other income in the consolidated statement of operations for the year ended
December 31, 2019.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consisted of the following:
As of December 31, 2019
Order backlog
Trademarks
Patents
As of December 31, 2018
Order backlog
Trademarks
Patents
Estimated
Useful
Life (in
years)
Gross
Carrying
Value
Accumulated
Amortization
Net Book
Value
$
$
$
$
15,345 $
3,132
22,955
41,432 $
15,345 $
3,132
22,955
41,432 $
15,345 $
913
3,348
19,606 $
10,742 $
600
2,200
13,542 $
-
2,219
19,607
21,826
4,603
2,532
20,755
27,890
3
10
20
3
10
20
62
The intangible assets are amortized over the period the Company expects to receive the related economic benefit. Amortization expense related to
amortizable intangible assets was $6,064, $8,405, and $8,937 for the 2019 Successor Period, 2018 Successor Period and the 2017 Successor Period,
respectively, and $0 for the 2017 Predecessor Period. These amounts were included as part of depreciation and amortization in the consolidated statements
of operations.
The estimated amortization expense for future periods is as follows:
Fiscal Year
2020
2021
2022
2023
2024
Thereafter
Total
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
Fracturing equipment
Light duty vehicles
Furniture and fixtures
IT equipment
Auxiliary equipment
Leasehold improvements
Less: Accumulated depreciation
and amortization
Property and equipment, net
Estimated
Amortization
Expense
$
$
1,461
1,461
1,461
1,461
1,461
14,521
21,826
$
Estimated Useful
Life (in years)
1.5 to 25
5
5
3
2 to 20
Term of lease
December 31,
2019
December 31,
2018
651,162 $
8,188
277
6,724
38,502
725
705,578
449,685
6,455
231
5,339
24,118
335
486,163
$
(263,968)
441,610 $
(154,776)
331,387
Depreciation and amortization expense was $154,149, $108,440, $92,430, and $4,920 for the 2019 Successor Period, 2018 Successor Period, 2017 Successor
Period, and 2017 Predecessor Period, respectively. The depreciation and amortization expense in the 2019 Successor Period, 2018 Successor Period, and 2017
Successor Period included the amortization expense on intangibles of $6,064, $8,405, and $8,937, respectively. There was no amortization expense on
intangibles recorded in the 2017 Predecessor period.
Capital leases. We entered into a capital lease in November 2018 and in January 2019. The equipment under the capital lease in November 2018 was received
at the end of December 2018 and placed into service in 2019. The total amount capitalized under these capital leases was $29,857, presented as part of
fracturing equipment in property and equipment, and the related accumulated depreciation was $21,642 and $0 as of December 31, 2019 and 2018
respectively.
63
In January 2019, through equipment financing, we purchased certain equipment that were previously under capital leases entered into in August and
September 2017. As a result, a difference of $97 between the purchase price and the carrying amount of the capital lease obligation was recorded as
adjustment to the carrying amount of the equipment. The total amount capitalized under this equipment financing was $7,647, presented as part of fracturing
equipment in property and equipment.
The future minimum lease payments related to the Company’s capital leases as of December 31, 2019 amounts to $11,102, which are due in 2020. Included in
the total amount is imputed interest totaling $627.
NOTE 7 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
Accrued payroll and benefits
Accrued taxes
Accrued interest
Other current liabilities
Accrued expenses and other current liabilities
NOTE 8 – NOTE PAYABLE
December 31,
2019
December 31,
2018
$
$
9,356 $
9,817
18,190
3,118
40,481 $
7,087
8,119
-
1,838
17,044
In 2019 and 2018, the Company entered into various premium finance agreements with a credit finance institution to pay the premiums on insurance
policies for its directors and officers liability, general liability, workers’ compensation, umbrella, auto and pollution coverage needs. For the years ended
December 31, 2019 and 2018, the aggregate amount of the premiums financed was $9,928 and $6,974, respectively, payable in equal monthly installments
at a weighted average interest rate of 4.8% and 5.3%, respectively. These premium finance agreements had a total balance of $8,068 and $4,560 as of
December 31, 2019 and 2018, respectively.
NOTE 9 – DEBT
Long-term debt consisted of the following:
Senior Secured Term Loan
ABL Credit Facility
First Lien Credit Facility
Second Lien Term Loan
Equipment financing
Capital leases
Total debt
Unamortized discount on debt and debt issuance costs
Current maturities
Net Long-term debt
Senior Secured Term Loan
December 31,
2019
December 31,
2018
$
$
250,000 $
40,090
-
-
16,065
10,474
316,629
(9,449)
(22,288)
284,892 $
-
-
55,975
40,000
11,567
25,338
132,880
(3,963)
(29,501)
99,416
On May 7, 2019, our subsidiary, USWS LLC (the “Borrower”), we, as guarantor, and all of our subsidiaries entered into a $250,000 Senior Secured Term
Loan Credit Agreement (as amended, the “Senior Secured Term Loan”). The Company is required to make quarterly principal payments of 2.0% per
annum of the initial principal balance, commencing on January 15, 2020, with final payment due at maturity on May 7, 2024.
64
The Senior Secured Term Loan bears interest at a variable rate per annum equal to the applicable LIBOR rate, subject to a 2.0% floor, plus 8.25%.
The Senior Secured Term Loan is not subject to financial covenants but is subject to certain non-financial covenants, including but not limited to,
reporting, insurance, notice and collateral maintenance covenants as well as limitations on the incurrence of indebtedness, permitted investments, liens on
assets, dispositions of assets, paying dividends, transactions with affiliates, mergers and consolidations.
The Senior Secured Term Loan requires mandatory prepayments upon certain dispositions of property or issuance of other indebtedness, as defined, and
quarterly a percentage of excess cash flow, if any, equal to 25% to 100% (depending on total debt outstanding) commencing in September 2019. Certain
mandatory prepayments (excluding excess cash flows sweep) and optional prepayments are subject to a yield maintenance fee for the first two years and
prepayment premium of 2% in year three and 1% in year four. Upon the final payment and termination of the Senior Secured Term Loan, we are subject to
an exit fee equal to 2.0% of the principal amount of loans then outstanding and the aggregate optional prepayment of principal amounts repaid during the
120 days that occurred prior to such final payment.
Proceeds from the Senior Secured Term Loan were used to repay the outstanding balances of the First Lien Credit Facility, Second Lien Term Loan, and
certain equipment financings, fund a cash account reserved solely for future expansion capital expenditures, and pay associated fees and expenses. The
First Lien Credit Facility and Second Lien Term Loan were both terminated and accounted for as debt extinguishments which resulted in a $6,560 loss on
early repayment of debt, write off of $1,672 of unamortized debt issue costs related to the First Lien Credit Facility and write off of $4,326 of unamortized
original issue discount and debt issuance costs related to the Second Lien Term Loan, all of which were presented as part of loss on extinguishment of debt
in the consolidated statement of operations.
The Senior Secured Term Loan was issued at a $5,000 discount and the Company incurred $5,758 in debt issuance costs with both amounts recorded as a
direct deduction to the face amount of the Senior Secured Term Loan. The debt issuance costs and debt discount related to the Senior Secured Term Loan
are being amortized to interest expense based on the effective interest rate method over the term of the Senior Secured Term Loan.
As of December 31, 2019, the outstanding principal balance of the Senior Secured Term Loan was $250,000, of which $6,250 was due within one year
from the balance sheet date.
ABL Credit Facility
On May 7, 2019, the Company entered into a $75,000 ABL Credit Agreement (the “ABL Credit Facility”) which matures on February 6, 2024. The ABL
Credit Facility is subject to a borrowing base which is calculated based on a formula referencing the eligible accounts receivables of the Borrower.
Borrowings under the ABL Credit Facility bear interest at LIBOR, plus an applicable LIBOR rate margin of 1.5% to 2.0% or base rate margin of 0.5% to
1.0% as defined in the ABL Credit Facility. The unused portion of the ABL Credit Facility is subject to an unused commitment fee of 0.250% to 0.375%.
All borrowings under the ABL Credit Facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of
representations and warranties and certifications regarding sales of certain inventory, and to a borrowing base (described above). In addition, the ABL
Credit Facility includes a springing consolidated fixed charge coverage ratio of 1.00 to 1.00 but only when a financial covenant trigger period is in effect
as defined in the ABL Credit Facility. Borrowings under the ABL Credit Facility are fully and unconditionally guaranteed jointly and severally by the
Company and its subsidiaries, other than future unrestricted subsidiaries.
In connection with the ABL Credit Facility, the Company incurred $1,205 in debt issuance costs, recorded as deferred financing costs, net in the
consolidated balance sheet. Debt issuance costs related to the ABL Credit Facility are being amortized to interest expense ratably over the term of the ABL
Credit Facility.
As of December 31, 2019, the borrowing base was $51,146 and the outstanding revolver loan balance was $40,090, classified as long-term debt in the
consolidated balance sheets.
65
First Lien Credit Facility
On December 14, 2018, the Company entered into a Third Amendment (the “Amendment) to that certain Amended and Restated Senior Secured Credit
Agreement dated February 2, 2017 with a syndicate of lenders and U.S. Bank National Association, as administrative and collateral agent (as amended, the
“First Lien Credit Facility”). The Amendment, among other things, extended the maturity date from February 2, 2020 to May 31, 2020 and permitted the
borrower to incur the debt under the Second Lien Term Loan (as defined below). The Amendment was accounted for as a debt modification, resulting in a
debt issue costs write-off of $411 recorded as part of interest expense in the consolidated statements of operations for the year ended December 31, 2018.
Borrowings under the First Lien Credit Facility bore interest at a per annum rate equal to LIBOR plus 6%.
In connection with the entrance into the Amendment, the Company repurchased from one of the lenders 824,916 shares of Class A common stock of the
Company, 609,423 shares of Class B common stock of the Company and 609,423 common units of USWS Holdings for $11,475. The Company retired
these shares resulting in a decrease in additional paid in capital in the consolidated balance sheets by $11,475for the year ended December 31, 2018.
As of December 31, 2018, the outstanding principal balance under the First Lien Credit Facility amounted to $55,975, classified as long-term debt in the
consolidated balance sheet.
Second Lien Term Loan
On December 14, 2018 (“second lien closing date”), our subsidiary, USWS LLC, as borrower, entered into a Second Lien Credit Agreement (the “Second
Lien Term Loan”) with USWS Holdings and the Company, as guarantors, the lenders party thereto, and Piper Jaffray Finance, LLC, as administrative
agent. The Second Lien Term Loan consists of a second lien term loan in the principal amount of $40,000, all of which was borrowed on December14,
2018, and delayed draw term loans in the principal amounts of up to $20,000, which may be drawn prior to April 1, 2019, and up to $15,000, which may
be drawn on any business day prior to June 30, 2019. Loans made under the term loan facility bore interest on the outstanding principal amount at a per
annum rate equal to LIBOR plus (x) 7.75% from the second lien closing date through the first anniversary of the second lien closing date and (y) 11.50%
from the day immediately succeeding the first anniversary of the second lien closing date to the maturity date plus, in each case, subject to certain
qualifications, an additional interest amount equal to (a) 0.75% per annum for the period beginning April 1, 2019 through June 30, 2019, (b) 1.75% per
annum for the period beginning July 1, 2019 through September 30, 2019 and (c) 3.00% on or after October 1, 2019. However, the additional interest
amount will be zero on or after the date on which the Company has replaced the First Lien Credit Facility with an asset-based first lien credit facility. The
Company was required to make quarterly principal payments beginning in the second fiscal quarter in 2019.
All of the loans made under the Second Lien Credit Agreement had a maturity of May 31, 2020.
As of December 31, 2018, the outstanding principal balance under the Second Lien Term Loan amounted to $40,000, of which $900 was due within one
year from the balance sheet date.
Equipment Financing
From 2016 to 2019, the Company entered into security agreements with financing institutions for the purchase of certain fracturing equipment. As of
December 31, 2019 and 2018, these financing agreements with maturities through 2023, had a total balance of $16,065 and $11,567, respectively, of which
$5,564 and $3,263, respectively, was due within one year from the balance sheet date.
The weighted average interest rate for these agreements was 6.4% and 6.3% per annum as of December 31, 2019 and 2018, respectively.
66
Payments of Debt Obligations due by Period
Presented below is a schedule of the repayment requirements of long-term debt as of December 31, 2019:
Principal
Amount
of Long-term
Debt
$
$
22,288
10,594
9,157
5,750
268,840
316,629
2020
2021
2022
2023
2024
Total
NOTE 10 – MEZZANINE EQUITY
Series A Convertible Redeemable Preferred Stock
The following table summarizes the Company’s Series A Convertible Redeemable Preferred Stock activities for the year ended December 31, 2019:
Total mezzanine equity as of December 31, 2018
Proceeds from issuance of Series A preferred stock and warrants
Fair value of common stock warrants issued with Series A preferred
stock, net
Issuance cost associated with the Series A preferred stock
Beneficial conversion feature of Series A preferred stock
Deemed and imputed dividends on Series A preferred stock
Accrued Series A preferred stock dividends
Total mezzanine equity as of December 31, 2019
Shares
Amount
- $
55,000
-
-
-
-
55,000 $
-
55,000
(10,720)
(476)
(20,132)
11,206
4,050
38,928
The Company is authorized to issue up to 10,000,000 shares of preferred stock, par value $0.0001 per share. On May 23, 2019, the Company entered into a
Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (collectively, the “Purchasers”) to issue and sell in a private
placement 55,000 shares of a newly created series of convertible redeemable preferred stock of the Company (“Series A preferred stock”), for an aggregate
purchase price of $1,000 per share, for total gross proceeds of $55,000.
At the initial closing on May 24, 2019 (“Closing Date”), the Purchasers purchased all of the Series A preferred stock and 2,933,333 initial warrants
exercisable for shares of Class A common stock. Subject to there being Series A preferred stock outstanding, the Company will issue an additional
4,399,992 warrants to the Purchasers in quarterly installments of 488,888 warrants beginning nine months after the Closing Date. Crestview III USWS,
L.P. and Crestview III USWS TE, LLC, two of the Purchasers, are part of an affiliate group which, prior to the Closing Date, held an aggregate 29.80%
ownership interest in the Company and is entitled to designate for nomination by the Company for election two directors to serve on the Company’s board
of directors.
Holders of shares of Series A preferred stock are entitled to receive cumulative dividends, compounding and accruing quarterly in arrears, from the
Closing Date until the second anniversary of the Closing Date, at an annual rate of 12.0%, and thereafter, 16% of the stated value of $1,000 per share,
subject to increase in connection with the payment of dividends in kind. Dividends are payable, at the Company’s option, in cash from legally available
funds or in kind by increasing the stated value of the outstanding Series A preferred stock by the amount per share of the dividend on February 24, May
24, August 24, and November 24 of each year. On August 24 and November 24, 2019, the Company’s board of directors did not declare a dividend on the
Series A preferred stock resulting in the dividends for these periods being paid-in-kind in accordance with the Series A preferred stock’s Certificate of
Designations.
67
The Series A preferred stock is redeemable by the Company at any time for cash equal to the stated value per share on the date of redemption, except for a
redemption occurring prior to the nine-month anniversary of the Closing Date, in which case the redemption price shall be $1,092.73 per share. If the
Company notifies the holders that it has elected to redeem the Series A preferred stock, the holder may instead elect to convert such shares into Class A
common stock. If the Company funds the redemption with proceeds of an equity offering within one year of the Closing Date, then any converting shares
will convert at a ratio that is based on the higher of the price to the public in the offering or the ordinary conversion price of $6.67. Otherwise, such
converting shares will convert by reference to the ordinary conversion price. In any event, the Series A preferred stock converting in response to a
redemption notice will net settle for a combination of cash and Class A common stock.
Following the first anniversary of the Closing Date, each holder of Series A preferred stock may convert all or any portion of its shares of Series A
preferred stock into Class A common stock based on the then-applicable liquidation preference at a conversion price of $6.67, subject to anti-dilution
adjustments, at any time, but not more than once per quarter, so long as any conversion is for at least $1.0 million.
The Company has the option to force a conversion of any then outstanding shares of Series A preferred stock following the third anniversary of the
Closing Date, and contingent upon (i) the closing price of the Company’s Class A common stock being greater than 130% of the Conversion Price for 20
trading days during any 30-day consecutive trading day period, (ii) the average daily trading volume of the Class A common stock exceeding 250,000 for
20 trading days and (iii) the Company having an effective registration statement on file with the Securities and Exchange Commission (“SEC”) covering
resales of the underlying Class A common stock to be received upon such conversion.
In connection with the Series A preferred stock offering, there were 55,000 shares of Series A preferred stock and 2,933,333 warrants outstanding as of
December 31, 2019. The Series A preferred stock was recorded as Mezzanine Equity, net of issuance cost, on the condensed consolidated balance sheets
because it has redemption features upon certain triggering events that are outside the Company’s control, such as change in control.
The Company has determined that the warrants should be accounted as a component of stockholders’ equity. On the Closing Date, the Company estimated
the fair value of the warrants at $12,786 using the Black-Scholes option pricing model using the following primary assumptions: contractual term of 6.5
years, volatility rate of 53.0%, risk-free interest rate of 2.2% and expected dividend rate of 0%. Based on the warrant’s relative fair value to the fair value
of the Series A preferred stock, $10,720, net of issuance costs, of the $12,786 aggregate value was allocated to the warrants, creating a corresponding
preferred stock discount in the same amount.
Due to the reduction of allocated proceeds to Series A preferred stock, the effective conversion price was approximately $5.40 per share creating a
beneficial conversion feature of $20,132 which further reduced the carrying value of the Series A preferred stock. Since the holders’ conversion option of
the Series A preferred stock could only be exercisable after the first anniversary of the Closing Date, the discount resulting from the beneficial conversion
feature will be accreted over one year as deemed preferred dividends using the effective yield method, resulting in a corresponding increase in the carrying
value of the Series A preferred stock over the same time period.
The Series A preferred stock had similar characteristics of an “Increasing Rate Security” as described by SEC Staff Accounting Bulletin Topic 5Q,
Increasing Rate Preferred Stock. As a result, the discount on Series A preferred stock is considered an unstated dividend cost that is amortized over the
period preceding commencement of the perpetual dividend using the effective interest method, by charging imputed dividend cost against retained
earnings, or additional paid in capital in the absence of retained earnings, and increasing the carrying amount of the Series A preferred stock by a
corresponding amount. The discount is therefore being amortized over two years using the effective yield method. The amortization in each period is the
amount which, together with the stated dividend in the period, results in a constant rate of effective cost with regard to the carrying amount of the Series A
preferred stock.
68
NOTE 11 – STOCKHOLDERS’ EQUITY
Shares Authorized and Outstanding
Preferred Stock
At the Closing Date and pursuant to the Purchase Agreement, as defined in “Note 10 – Mezzanine Equity”, the Company adopted and filed with the
Secretary of State of the State of Delaware the Certificate of Designations as an amendment to the Company’s Second Amended and Restated Certificate
of Incorporation (as amended, the “Charter”) to authorize and establish the rights, preferences and privileges of the Series A preferred stock. The Series A
preferred stock are a new class of equity interests that rank senior to the Class A common stock and Class B common stock in the Company with respect to
distributions. The Series A preferred stock will have only specified voting rights, including with respect to the issuance or creation of senior securities,
amendments to the Charter that negatively impact the rights of the preferred stock and the payment of dividends on, repurchase or redemption of Class A
common stock.
The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001 per share with such designation, rights and
preferences as may be determined from time to time by the Company’s board of directors. At December 31, 2019 and 2018, there were 55,000 and no
shares, respectively, of Series A preferred stock issued and outstanding.
Class A Common Stock
The Company is authorized to issue 400,000,000 shares of Class A common stock with a par value of $0.0001 per share. At December 31, 2019 and
December 31, 2018, there were 62,857,624 and 49,254,760 shares of Class A common stock issued and outstanding, respectively. At December 31, 2019,
1,000,000 outstanding shares of Class A common stock were subject to cancellation on November 9, 2024, unless the closing price per share of the Class
A common stock has equaled or exceeded $12.00 for any 20 trading days within any 30-trading day period, and 609,677 outstanding shares of Class A
common stock were subject to the same cancellation provision, but at a closing price per share of $13.50.
Class B Common Stock
The Company is authorized to issue 20,000,000 shares of Class B common stock with a par value of $0.0001 per share. The shares of Class B common
stock are non-economic; however, holders are entitled to one vote per share. Each share of Class B common stock, together with one unit of USWS
Holdings, is exchangeable for one share of Class A common stock or, at the Company’s election, the cash equivalent to the market value of one share of
Class A common stock.
During 2019, 8,436,640 shares of Class B common stock were converted to an equivalent number of shares of Class A common stock. As of December 31,
2019 and December 31, 2018, there were 5,500,692 and 13,937,332 shares, respectively, of Class B common stock issued and outstanding.
Class F Common Stock
Prior to the Transaction, the Company was authorized to issue 10,000,000 shares of Class F common stock with a par value of $0.0001 per share. The
Class F common stock was identical to the Class A common stock, except that Class F common stock automatically converted into shares of Class A
common stock upon consummation of the Transaction. At December 31, 2017, there were 8,125,000 shares of Class F common stock issued and
outstanding. In connection with the Transaction, 2,975,000 shares of Class F common stock were cancelled, and the remaining 5,150,000 shares converted
into shares of Class A common stock.
69
Warrants
Prior to the Transaction, 32,500,000 warrants (the “public warrants”) were issued pursuant to our initial public offering and 15,500,000 warrants (the
“private placement warrants”) were sold simultaneously to Matlin & Partners Acquisition Sponsor, LLC (the “Sponsor”) and Cantor Fitzgerald (the
“Underwriter”). Each warrant entitles its holder to purchase one half of one share of Class A common stock at an exercise price of $5.75 per half share, to
be exercised only for a whole number of shares of our Class A common stock. The warrants became exercisable 30 days after the completion of the
Transaction and expire five years after that date or earlier upon redemption or liquidation. Once the warrants became exercisable, the Company may
redeem the outstanding warrants at a price of $0.01 per warrant upon a minimum of 30 days’ prior written notice of redemption, if the last sale price of the
Company’s common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third business day
before the Company sends the notice of redemption to the warrant holders. The private placement warrants, however, are nonredeemable so long as they
are held by the Sponsor, the Underwriter or their permitted transferees.
In March 2019, the Company entered into privately negotiated warrant exchange agreements with certain warrant holders to exchange 10,864,391 public
warrants for Class A common stock at a ratio of 0.13 Class A common shares per warrant. In April 2019, pursuant to a previously announced public
warrant exchange offer on March 14, 2019, the Company exchanged an additional 11,640,974 public warrants for Class A common stock at a ratio of 0.13
Class A common shares per warrant. As a result of the private and public warrant exchanges, our issued and outstanding Class A common stock increased
by 2,925,712 shares. In May 2019, in connection with the Purchase Agreement, as defined in “Note 10 – Mezzanine Equity”, the Company issued
2,933,333 initial warrants to certain institutional investors and will issue the remaining 4,399,992 warrants to them in quarterly installments beginning nine
months after the initial closing date of the transactions contemplated by the Purchase Agreement.
As of December 31, 2019, there remained 9,994,635 public warrants and 15,500,000 private placement warrants outstanding, the total of both are
exercisable for 12,747,318 shares of Class A common stock, and 2,933,333 initial warrants issued and outstanding pursuant to the Series A preferred stock
Purchase Agreement as disclosed in “Note 10 – Mezzanine Equity”, which are exercisable for 2,933,333 shares of Class A common stock.
Noncontrolling Interest
The Company’s noncontrolling ownership interest in consolidated subsidiaries is presented in the consolidated balance sheet and within stockholders’
equity as a separate component and represents approximately 8% ownership of USWS Holdings as of December 31, 2019.
Long-Term Incentive Plan
In connection with the Transaction, the Company’s Board of Directors adopted the U.S. Well Services, Inc. 2018 Stock Incentive Plan (the “LTIP”). An
aggregate 8,160,500 shares of Class A common stock were initially available for issuance under the LTIP. Shares issued under the LTIP are further
discussed in “Note 13 - Share-Based Compensation”. The aggregate amount of shares available for issuance as of December 31, 2019 was 4,321,826.
NOTE 12 – EARNINGS (LOSS) PER SHARE
The Transaction was accounted for as a reverse recapitalization by which the Company issued stock for the net assets of USWS Holdings accompanied by
a recapitalization. Earnings (loss) per share has been recast for all historical periods to reflect the Company’s capital structure for all comparative periods.
Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share is computed in the same manner as basic earnings per share except that the
denominator is increased to include the number of additional common shares that could have been outstanding assuming the exercise of stock options,
exercise of warrants, conversion of Series A preferred shares, conversion of Class B shares and vesting of restricted shares.
70
Basic and diluted net income (loss) per share excludes the income (loss) attributable to and shares associated with the 1,609,677 Class A shares that are
subject to cancellation on November 9, 2024 if certain market conditions have not been met. The Company included in the calculation deemed dividends
resulting from amortization of discounts related to the Series A preferred stock.
The following table sets forth the calculation of basic and diluted earnings (loss) per share for the periods indicated based on the weighted average number
of common shares outstanding for the period subsequent to the corporate reorganization that occurred in connection with the Transaction:
Basic Net Loss Per Share
Numerator:
Net loss attributable to U.S. Well
Services, Inc.
Net loss attributable to cancellable
Class A shares
Basic net loss attributable to U.S. Well
Services, Inc. shareholders
Dividends accrued on Series A
preferred stock
Deemed and imputed dividends on
Series A preferred stock
Basic net loss attributable to U.S. Well
Services, Inc. common shareholders
Denominator:
Weighted average shares outstanding
Cancellable Class A shares
Basic weighted average shares
outstanding
Basic and diluted net loss per share
attributable to Class A shareholders
Successor
Successor
Successor
February 2,
2017
Year Ended
December 31,
2019
Year Ended
December 31,
2018
(inception) to
December 31,
2017
Predecessor
January 1,
2017
to
February 1,
2017
$
(93,913) $
(65,896) $
(93,622) $
(5,654)
2,915
2,142
3,041
184
(90,998)
(63,754)
(90,581)
(5,470)
(4,050)
(11,206)
-
-
-
-
-
-
$
(106,254) $
(63,754) $
(90,581) $
(5,470)
51,853,183
(1,609,677)
49,508,995
(1,609,677)
49,549,676
(1,609,677)
49,549,676
(1,609,677)
50,243,506
47,899,318
47,939,999
47,939,999
$
(2.11) $
(1.33) $
(1.89) $
(0.11)
71
A summary of securities excluded from the computation of diluted earnings per share is presented below for the applicable periods:
Diluted earnings per share:
Anti-dilutive stock options
Anti-dilutive warrants
Anti-dilutive restricted stock
Anti-dilutive Class B shares
convertible into Class A
common stock
Anti-dilutive Series A Preferred
stock convertible into Class A
common stock
Potentially dilutive securities excluded
as anti-dilutive
NOTE 13 – SHARE-BASED COMPENSATION
Share-based compensation consisted of the following:
Restricted stock
Unrestricted stock
Stock options
Transaction bonus
Class G Units
Total
Successor
Successor
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Successor
February 2,
2017
(inception) to
December 31,
2017
Predecessor
January 1,
2017 to
February 1,
2017
1,068,162
15,680,651
2,723,637
-
24,000,000
530,000
5,500,692
13,937,332
8,853,028
-
33,826,170
38,467,332
-
-
-
-
-
-
Successor
Successor
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Successor
February 2,
2017 (inception)
to December 31,
2017
Predecessor
January 1,
2017 to
February 1,
2017
6,496
418
841
-
-
7,755 (1)
408
-
-
6,500
13,725
20,633 (2)
-
-
-
4,546
4,546 (3)
-
-
-
-
-
-
-
-
-
-
-
(1) $2,513 was presented as part of cost of services and $5,242 was presented as part of selling, general and administrative expenses in the
consolidated statement of operations.
(2) $6,450 was presented as part of cost of services and $14,183 was presented as part of selling, general and administrative expenses in the
consolidated statement of operations.
(3) $1,578 was presented as part of cost of services and $2,968 was presented as part of selling, general and administrative expenses in the
consolidated statement of operations.
72
Restricted Stock
The following table summarizes the restricted stock activity for the year ended December 31, 2019:
Non-vested restricted stock as of December
31, 2018
Granted
Vested
Forfeited
Non-vested restricted stock as of December
31, 2019
Weighted-
average
grant-date
fair value
(per share data)
8.72
8.91
-
8.91
8.87
Number of
shares
530,000
2,218,183
-
(24,546)
2,723,637 $
During the year ended December 31, 2019 and 2018, the Company granted shares of restricted Class A common stock (“restricted stock”) totaling
2,218,183 and 530,000, respectively, to certain employees of the Company pursuant to the LTIP. Restricted stock is subject to restrictions on transfer and is
generally subject to a risk of forfeiture if the award recipient is no longer an employee of the Company prior to the lapse of the restriction. The restricted
stock granted in 2019 is time-based and vests over four years in equal installments each year on the anniversary of the grant date. The restricted stock
granted in 2018 is time-based and vests over three years in equal installments each year on the anniversary of the grant date, and is subject to a market
condition that requires the closing price of the Class A common stock to be $12.00 or greater for 20 trading days in any period of 30 consecutive trading
days before any vesting of awards may occur. The total compensation cost, net of forfeitures, associated with restricted stock granted in 2019 and 2018
amounts to $19,545 and $4,622, respectively, and will be recognized over the vesting period of four years and three years, respectively.
The fair value of the restricted stock granted in 2019 was determined using the closing price of the Company’s Class A common stock on the grant date.
The fair value of the restricted stock granted in 2018 was determined using a Monte Carlo simulation analysis, which used Geometric Brownian Motion to
estimate future equity prices for the Company. The following key input assumptions were used to calculate fair value:
USWS Starting Share Price
Vesting Term
Expected Volatility
Dividend Yield
Risk-free Rate
Unrestricted stock
$
10.0
3.0
61.4%
0.0%
3.0%
During the year ending December 31, 2019, the Company granted 46,875 shares of fully vested and unrestricted Class A common stock (“unrestricted
stock”) under the LTIP to certain board members in exchange for their services as a director of the Company, in accordance with the existing compensation
plan of the Board of Directors. The fair value of the unrestricted stock was $8.91 per share, which was determined using the closing price of the
Company’s Class A common stock on the grant date.
73
Stock options
During the year ending December 31, 2019, the Company granted a total of 1,068,162 stock options under the LTIP to certain employees of the Company.
The fair value of stock options on the date of grant was $3.95 per option, which was calculated using the Black-Scholes valuation model. These stock
options were granted with seven-year terms and vest over four years in equal installments each year on the anniversary of the grant date. The expected
term of the options granted was based on the safe harbor rule of the SEC Staff Accounting Bulletin No. 107 “Share-Based Payment” as the Company lacks
historical exercise data to estimate the expected term of these options. The expected stock price volatility is calculated based on the Company’s peer group
because the Company does not have sufficient historical data and will continue to use peer group volatility information until historical volatility of the
Company is available to measure expected volatility for future grants. The exercise price for stock options granted equals the closing market price of the
underlying stock on the date of grant. These options are time-based and are not based upon attainment of performance goals. Stock based compensation
costs totaling $4.2 million associated with this award will be recognized over the four-year vesting period.
The following table sets forth the assumptions used in the Black-Scholes valuation model:
Expected option term
Expected price volatility
Expected dividend yield
Risk-free Rate
Grant date fair value per share
Grant date exercise price per share
4.75 years
49.0%
0.0%
2.63%
3.95
8.91
$
$
As of December 31, 2019, the total unrecognized compensation cost related to stock-based compensation grants under the LTIP was $20,641. We expect to
recognize these costs over a weighted average period of 3.1 years.
Transaction Bonus
In connection with the closing of the Transaction, a grant of 650,000 shares of Class A common stock was awarded to the chief executive officer with a
fair value of $10.00 per share. The shares immediately vested on the grant date.
Class G Units
During the 2017 Successor Period, USWS Holdings entered into various Class G Unit Agreements pursuant to which 85,800 Class G Units were granted
to directors, officers, and key employees of the Company as performance incentives and are generally subject to a four-year vesting period. Each Class G
Unit issued is intended to be a “profits interest” within the meaning of Revenue Procedures 93-27 and 2001-43. These Class G Unit grants are classified as
equity awards and are subject to vesting and forfeiture under circumstances set forth in the agreements between USWS Holdings and each such directors,
officers, and key employees. The fair value of each award is determined using an option pricing model, which is then adjusted for a discount due to lack of
marketability. Of the total number of Class G Unit grants, there were 15,000 Class G Units granted to an officer that vested immediately on grant date, and
a total of 20,000 Class G Units granted to two officers, for which units will be fully vested upon satisfaction of a performance condition, which is the sale
of the Company, and satisfaction of a market condition. The market condition requires the Enterprise Value, as defined in the grant agreements, to be
greater than $450,000 and $500,000, respectively, for the two officers at the effective date of sale of the Company. As of the Transaction closing date, both
the performance and market conditions were met. The Company recognizes the compensation expense related to these grants from USWS Holdings to its
employees in its consolidated statement of operations with a corresponding credit to equity, representing a deemed capital contribution from USWS
Holdings. As a result of the Transaction, the vesting of the remaining Class G Units was accelerated pursuant to the Class G Unit agreements.
74
NOTE 14 – EMPLOYEE BENEFIT PLAN
On March 1, 2013, the Company established the U.S. Well Services 401(k) Plan. We match 100% of employee contributions up to 6% of the employee’s
salary, subject to cliff vesting after two years of service. Our matching contributions were $3,843, $3,610, $2,360, and $125 for the 2019 Successor Period,
2018 Successor Period, 2017 Successor Period, and 2017 Predecessor Period, respectively, included in cost of services and selling, general and
administrative expenses in the statements of operations.
NOTE 15 – INCOME TAXES
The Company’s net deferred tax assets are as follows:
Deferred Tax Assets
Net Operating Loss Carryforward
Startup/Organization Expenses
Investment in Partnership
Interest Expense
Attributes/Other
Total Deferred Tax Assets
Less Valuation Allowance
Total Deferred Tax Assets, net
Deferred Tax Liabilities
Net Deferred Tax Assets
The income tax provision consists of the following:
December 31,
2019
2018
30,485 $
163
19,489
911
186
51,234
(51,234)
- $
-
- $
20,686
175
15,318
-
328
36,507
(36,507)
-
-
-
$
$
$
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Total
Successor
Successor
Year ended
December 31,
2019
Year ended
December 31,
2018
Successor
February 2,
2017
(inception) to
December 31,
2017
Predecessor
January 1,
2017 to
February 1,
2017
$
$
- $
(77)
(77)
-
-
-
(77) $
75
- $
352
352
-
-
-
352 $
- $
-
-
-
-
-
- $
-
-
-
-
-
-
-
A reconciliation of the federal income tax rate to the Company’s effective tax rate at December 31, 2019 is as follows:
Pre-tax book loss
$
116,159
Federal Provision (Benefit)
Noncontrolling Interest
Permanent Differences
State Income Taxes, net of Federal Benefit
Return to Provision, Other
Valuation Allowance
Total Provision (Benefit)
(24,394)
10,696
755
(62)
(1,798)
14,726
(77)
21.00%
-9.20%
-0.65%
0.05%
1.55%
-12.68%
0.07%
$
As of December 31, 2019, the Company had total U.S. federal net operating loss ("NOL") carryforwards of $129,060 and $116,989 of state NOLs available to
offset future taxable income. If unused, $28,388 of the federal NOLs would begin to expire in 2036. Federal NOLs generated after December 31, 2017 do not
expire and the state rules vary by state. After consideration of all of the information available, management has established a valuation allowance against the
deferred tax assets of the Company’s tax loss carryforwards to the extent it is more likely than not that the Company will not utilize its net deferred tax assets.
As of December 31, 2019, the valuation allowance totaled $51,234.
In assessing the realization of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible amounts become deductible. Management considers the positive and negative evidence with
respect to sources of taxable income for purposes of determining the realization of deferred tax assets. In accordance with Section 382 of the Internal Revenue
Code, deductibility of the Company’s NOLs may be subject to an annual limitation in the event of a change in control as defined under the regulations.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions and is subject to examination by the taxing
authorities.
We follow guidance issued by the FASB in accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing
the minimum recognition threshold an income tax position is required to meet before being recognized in the consolidated financial statements and applies to
all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not
that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected
to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely
to be realized upon its ultimate settlement.
We have considered our exposure under the standard at both the federal and state tax levels. We did not record any liabilities for uncertain tax positions as of
December 31, 2019 or December 31, 2018. We record income tax-related interest and penalties, if any, as a component of income tax expense. We did not
incur any material interest or penalties on income taxes.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Litigation
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties, and other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as
incurred.
76
Sand Purchase Agreements
The Company entered into agreements for the supply of proppant for use in its hydraulic fracturing operations. Under the terms of these agreements, the
Company is subject to minimum purchase quantities on a monthly, quarterly, or annual basis at fixed prices or may pay penalties in the event of any
shortfall. As of December 31, 2019, we estimated and accrued for a shortfall in quantities. This accrual is presented as part of accrued liabilities on the
consolidated balance sheets.
The following is a schedule of the contracted volumes in dollars and minimum commitments under the proppant supply purchase agreements as of
December 31, 2019:
2020
2021
Total
Minimum
Contracted Commitments
16,108
$
960
17,068
54,952 $
11,340
66,292 $
$
The minimum commitments represent the aggregate amounts that we would be obligated to pay in the event that we procured no additional proppant under
the contracts subsequent to December 31, 2019.
During the first quarter of 2019, we became involved in a contract dispute with a proppant vendor resulting in the cancellation of the contract.
Accordingly, as of December 31, 2019, we have excluded $47,093 and $48,000 of contracted and minimum commitments, respectively, related to this
contract. The litigation involving the contract in dispute is in the discovery stage, as such no prediction can be made as to the outcome of the case at this
time nor can we reasonably estimate the potential losses or range of losses resulting from this litigation, if any.
Operating Lease Agreements
The Company has various operating leases for facilities with terms ranging from 24 to 76 months.
Rent expense for the 2019 Successor Period, 2018 Successor Period, 2017 Successor Period, and 2017 Predecessor Period was $2,646, 2,140, $1,304, and
$84, respectively, of which $2,130, $1,915, $1,062, and $64 are recorded as part of cost of services and $516, $225, $242, and $20 are recorded as part of
selling, general and administrative expenses in the consolidated statements of operations.
The following is a schedule of future minimum payments on non-cancellable operating leases as of December 31, 2019:
2020
2021
2022
2023
2024
Thereafter
Total future minimum rentals
1,743
1,071
826
288
258
67
4,253
$
$
77
Lease Revenue
In November 2019, we entered into a short-term lease agreement to lease six of our Turbine generators to a third party, for total fixed monthly rental of
$693 over a minimum period of 18 months with a cancellation provision after 12 months. For the year ended December 31, 2019, we recognized $1,386 in
income from rentals, presented as Revenue in the consolidated statements of operations.
Self-insurance
Beginning June 2014, the Company established a self-insured plan for employees’ healthcare benefits except for losses in excess of varying threshold
amounts. The Company charges to expense all actual claims made during each reporting period, as well as an estimate of claims incurred, but not yet
reported. The amount of estimated claims incurred, but not reported as of December 31, 2019 and 2018 was $588 and $278, respectively, and was reported
as accrued expenses in the balance sheets. We believe that the liabilities we have recorded are appropriate based on the known facts and circumstances and
do not expect further losses materially in excess of the amounts already accrued for existing claims.
NOTE 17 – RELATED PARTY TRANSACTIONS
For the year ended December 31, 2019, the Company purchased $11,060 in chemicals used for our hydraulic fracturing operations from Rockwater Energy
Solutions (“Rockwater”), a subsidiary of Select Energy Services (“Select Energy”). Rockwater is considered a related party since Select Energy and the
Company share two board members and a common investor, Crestview Partners (“Crestview”). As of December 31, 2019 and 2018, the Company had
$3,241 and $346, respectively, in accounts payable owed to Rockwater.
Crestview purchased 20,000 shares of Series A preferred stock for a total payment of $20,000. Along with the Series A preferred stock, Crestview received
1,066,666 initial warrants and the right to receive up to 1,600,002 additional warrants according to the Purchase Agreement as described in “Note 10 –
Mezzanine Equity”.
In 2017 and early 2018 certain critical components to manufacture hydraulic fracturing pumps were in short supply. Based on our projected sales pipeline,
we had the potential need for growth fleets later in the year. Through long-standing industry relationships, Joel Broussard, our Chief Executive Officer,
was able to secure access to these components, but only if ordered in an amount that significantly exceeded our projected requirements. Mr. Broussard
presented this opportunity to the Board of Directors, who concluded that such a transaction was outside of USWS’ business plan and that the Company
was not in a position to enter into such a transaction. In order to ensure we would have access to these components, if needed, Mr. Broussard proposed to
personally form a joint venture (the “JV”) with Dragon Products, LLC (“Dragon”) whereby Mr. Broussard’s contribution was to provide access to these
critical components using his own personal resources and Dragon’s contribution to the JV was to provide the fracturing pump designs, manufacturing
facility and manufacturing expertise. The JV was both disclosed to members of our Board of Directors and permitted under the terms of Mr. Broussard’s
employment contract.
In April 2018, we entered into a two-year contract with a new customer to provide the customer with a conventional hydraulic fracturing fleet. We
conducted a bid process to acquire the pumps necessary to fulfil the contract; Dragon participated in the bid process. The results of the bid process were
presented to our Board of Directors for review and discussion along with a full disclosure of the details of the JV with Dragon. Mr. Broussard recused
himself from the Board of Directors’ process. Our Board of Directors approved the purchase of the pumps from Dragon (with the pumps to be
manufactured by the JV) based on the equipment quality, price, financing terms and Dragon’s ability to deliver the pumps on schedule. The Company
purchased the pumps from Dragon at a total cost of approximately $39.2 million. In August 2018, in anticipation of the merger with MPAC and due to the
increased industry adoption of electric fleets, Mr. Broussard negotiated the sale of his entire interest in the JV back to Dragon.
78
NOTE 18 – SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following table sets forth certain unaudited financial and operating information for each quarter of the year ended December 31, 2019 and 2018. The
unaudited quarterly information includes all adjustments that, in the opinion of management, are necessary for the fair presentation of information
presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year.
Selected Financial Data:
Revenue
Costs and expenses:
Cost of services (excluding depreciation and
amortization)
Depreciation and amortization
Selling, general and administrative expenses
Loss on disposal of assets
Loss from operations
Interest expense, net
Loss on extinguishment of debt
Other income
Loss before income taxes
Income tax expense (benefit)
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to U.S. Well Services, Inc.
Dividends accrued on Series A preferred stock
Deemed and imputed dividends on Series A
preferred stock
Net loss attributable to U.S. Well Services, Inc.
common stockholders
Selected Financial Data:
Revenue
Costs and expenses:
Cost of services (excluding depreciation and
amortization)
Depreciation and amortization
Selling, general and administrative expenses
Impairment loss on intangible assets
Loss (gain) on disposal of assets
Loss from operations
Interest expense, net
Loss on extinguishment of debt
Other income
Loss before income taxes
Income tax expense
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to U.S. Well Services, Inc.
Year Ended December 31, 2019
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
139,772 $
151,419 $
130,884 $
92,682
109,681
37,844
8,620
6,904
(23,277)
(5,115)
-
27
(28,365)
124
(28,489)
(6,217)
(22,272)
-
107,369
40,322
7,638
4,003
(7,913)
(7,820)
(12,558)
1,686
(26,605)
306
(26,911)
(5,432)
(21,479)
(660)
90,792
39,723
8,216
4,976
(12,823)
(8,449)
-
62
(21,210)
39
(21,249)
(4,280)
(16,969)
(1,670)
76,115
36,260
7,382
4,182
(31,257)
(8,715)
-
(7)
(39,979)
(546)
(39,433)
(6,240)
(33,193)
(1,720)
-
(1,560)
(4,406)
(5,240)
$
(22,272) $
(23,699) $
(23,045) $
(40,153)
Year Ended December 31, 2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
171,606 $
192,632 $
166,173 $
118,436
138,428
25,920
4,337
-
2,929
(8)
(7,401)
-
317
(7,092)
-
(7,092)
-
$
(7,092) $
79
151,363
24,862
5,278
-
5,187
5,942
(6,884)
-
5
(937)
-
(937)
-
(937) $
137,452
26,765
5,248
-
(126)
(3,166)
(7,387)
-
9
(10,544)
-
(10,544)
-
(10,544) $
105,788
30,893
19,634
-
2,858
(40,737)
(10,964)
(190)
2
(51,889)
352
(52,241)
(4,918)
(47,323)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under
the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and
other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes policies and procedures that address:
•
•
•
The maintenance of records that accurately, fairly and in reasonable detail reflect transactions involving, and dispositions of, company assets;
Reasonable assurance that transactions are recorded as needed to permit preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures are made only in accordance with management authorization; and
Reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of company assets.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management concluded that, as of December 31,
2019, the Company’s internal control over financial reporting was effective.
This Annual Report on Form 10-K does not include, and we were not required to include, an attestation report of our independent registered public
accounting firm on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 for as long
as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act.
80
Changes in Internal Control over Financial Reporting
There were no changes made in our internal control over financial reporting during the quarter ended December 31, 2019 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
81
Item 10. Directors, Executive Officers and Corporate Governance
PART III
We have adopted a Code of Business Conduct and Ethics (the “Code”), which is applicable to our principal executive officer and other senior financial
officers, who include our principal financial officer, principal accounting officer or controller, and persons performing similar functions. The Code may be
found on our website at www.uswellservices.com under “Investor Relations – Corporate Governance”. To the extent required by SEC rules, we intend to
disclose any amendments to this Code and any waiver of a provision of the Code for the benefit of our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing similar functions, on our website within four (4) business days following any such
amendment of waiver, or within any other period that may be required under SEC rules from time to time.
The other information required by this item is incorporated in this Annual Report on Form 10-K by reference to our definitive proxy statement or an
amendment to this Annual Report on Form 10-K to be filed with the Securities and Exchange Commission not later than 120 days after the end of the
fiscal year ended December 31, 2019.
Item 11. Executive Compensation
The information required by this item is incorporated in this Annual Report on Form 10-K by reference to our definitive proxy statement or an amendment
to this Annual Report on Form 10-K to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended
December 31, 2019.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated in this Annual Report on Form 10-K by reference to our definitive proxy statement or an amendment
to this Annual Report on Form 10-K to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended
December 31, 2019.
Item 13. Certain Relationships and Related Transaction, and Director Independence
The information required by this item is incorporated in this Annual Report on Form 10-K by reference to our definitive proxy statement or an amendment
to this Annual Report on Form 10-K to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended
December 31, 2019.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated in this Annual Report on Form 10-K by reference to our definitive proxy statement or an amendment
to this Annual Report on Form 10-K to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended
December 31, 2019.
82
Item 15. Exhibits, Financial Statement Schedules.
Financial Statements
PART IV
Our Consolidated Financial Statements and accompanying footnotes are included under “Item 8. Financial Statements and Supplementary Data” of this
Annual Report.
Financial Statements Schedules
All other schedules have been omitted because they are either not applicable, not required or the information called for therein appears in the consolidated
financial statements or notes thereto or will be filed within the required timeframe.
Exhibits
Exhibit No.
2.1
2.2
2.3
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
Description
Merger and Contribution Agreement, dated as of July 13, 2018, by and among Matlin & Partners Acquisition Corporation, MPAC Merger
Sub LLC, USWS Holdings LLC, certain blocker companies named therein and, solely for purposes described therein, the seller
representatives named therein (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K (File No. 001-38025), filed with
the SEC on July 16, 2018).
Amendment No. 1, dated as of August 9, 2018, to Merger and Contribution Agreement, dated as of July 13, 2018, by and among Matlin &
Partners Acquisition Corporation, MPAC Merger Sub LLC, USWS Holdings LLC, certain blocker companies named therein and, solely for
purposes described therein, the seller representatives named therein (incorporated by reference to Exhibit 2.1.1 of the Quarterly Report on
Form 10-Q (File No. 001-38025), filed with the SEC on October 26, 2018).
Amendment No. 2, dated as of November 2, 2018, to Merger and Contribution Agreement, dated as of July 13, 2018, by and among Matlin
& Partners Acquisition Corporation, MPAC Merger Sub LLC, USWS Holdings LLC, certain blocker companies named therein and, solely
for purposes described therein, the seller representatives named therein (incorporated by reference to Exhibit 2.1 of the Current Report on
Form 8-K (File No. 001-38025), filed with the SEC on November 5, 2018).
Second Amended and Restated Certificate of Incorporation of U.S. Well Services, Inc (incorporated by reference to Exhibit 3.1 of the
Current Report on Form 8-K (File No. 001-38025), filed with the SEC on November 16, 2018).
Certificate of Designations (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-38025), filed with the
SEC on May 24, 2019.
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 of the Registration Statement on Form S-1 (File No. 333-216076),
filed with the SEC on February 15, 2017).
Amended and Restated Registration Rights Agreement, dated as of November 9, 2018, by and among U.S. Well Services, Inc., Matlin &
Partners Acquisition Sponsor LLC, the Blocker Stockholders, certain Non-Blocker USWS Members, Crestview, the Lenders, Piper and Joel
Broussard (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on
November 16, 2018).
Warrant Agreement, dated March 9, 2017, by and between Continental Stock Transfer & Trust Company and Matlin & Partners Acquisition
Corporation (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on
March 15, 2017).
Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.2 of the Registration Statement on Form S-1 (File No.
333-216076), filed with the SEC on February 15, 2017).
Registration Rights Agreement, dated May 24, 2019, by and among U.S. Well Services, Inc. and the Purchasers party thereto (incorporated
by reference to Exhibit 10.2 of the Current Report on Form 8-K (File No. 0001-38025), filed with the SEC on May 24, 2019).
Warrant Agreement, dated May 24, 2019, by and between U.S. Well Services, Inc. and Continental Stock Transfer & Trust Company
(incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on May 24, 2019).
4.6*
Description of Registrant’s Securities.
83
10.1
Amended and Restated Limited Liability Company Agreement of USWS Holdings LLC, dated as of
10.2
10.3
10.4
10.5
10.6#
10.7#
10.8#
10.9#
November 9, 2018 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC
on November 16, 2018).
Amendment No. 1 to Amended and Restated Limited Liability Company Agreement of USWS Holdings LLC, dated May 24, 2019
(incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on November 16,
2018).
Sponsor Agreement, dated as of July 13, 2018, by and among Matlin & Partners Acquisition Corporation, USWS Holdings LLC, Matlin &
Partners Acquisition Sponsor LLC and, solely for purposes described therein, Cantor Fitzgerald & Co. (incorporated by reference to Exhibit
10.1 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on July 16, 2018).
Amendment No. 1, dated November 2, 2018, to Sponsor Agreement, dated as of July 13, 2018, by and among Matlin & Partners
Acquisition Corporation, USWS Holdings LLC, Matlin & Partners Acquisition Sponsor LLC and, solely for purposes described therein,
Cantor Fitzgerald & Co. (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-38025), filed with the
SEC on November 5, 2018).
Amendment No. 2, dated November 9, 2018, to Sponsor Agreement, dated as of July 13, 2018, by and among Matlin & Partners
Acquisition Corporation, USWS Holdings LLC, Matlin & Partners Acquisition Sponsor LLC and, solely for purposes described therein,
Cantor Fitzgerald & Co (incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K (File No. 001-38025), filed with the
SEC on November 16, 2018).
Form of Indemnity Agreement (incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K (File No. 001-38025), filed
with the SEC on November 16, 2018).
Employment Agreement, dated as of July 13, 2018, by and between U.S. Well Services, Inc. and Joel Broussard (incorporated by reference
to Exhibit 10.6 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on November 16, 2018).
Employment Agreement, dated as of July 13, 2018, by and between U.S. Well Services, Inc. and Matt Bernard (incorporated by reference to
Exhibit 10.7 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on November 16, 2018).
Employment Agreement, dated as of July 13, 2018, by and between U.S. Well Services, Inc. and Nathan Houston (incorporated by reference
to Exhibit 10.8 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on November 16, 2018).
10.10#
Employment Agreement, dated as of July 13, 2018, by and between U.S. Well Services, Inc. and Kyle O’Neill (incorporated by reference to
Exhibit 10.9 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on November 16, 2018).
10.11#
U.S. Well Services, Inc. Long Term Incentive Plan (incorporated by reference to Exhibit 10.10 of the Current Report on Form 8-K (File No.
001-38025), filed with the SEC on November 16, 2018).
10.12#
Form of Restricted Stock Award Agreement under the U.S. Well Services, Inc. 2018 Long Term Incentive Plan (incorporated by reference
10.13
10.14
10.15
10.16
to Exhibit 10.11 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on November 16, 2018).
Third Amendment to Amended and Restated Senior Secured Credit Agreement, dated as of December 14, 2018, by and among U.S. Well
Services, LLC, as borrower, USWS Holdings, LLC, as guarantor, U.S. Well Services, Inc., as guarantor, the lenders from time to time party
thereto, and U.S. Bank National Association, as administrative agent (incorporated by reference to Exhibit 10.1 of the Current Report on
Form 8-K (File No. 001-38025), filed with the SEC on December 17, 2018).
Second Lien Credit Agreement, dated as of December 14, 2018, by and among U.S. Well Services, LLC, as borrower, USWS Holdings,
LLC, as guarantor, U.S. Well Services, Inc., as guarantor, the lenders from time to time party thereto, and Piper Jaffray Finance, LLC, as
administrative agent (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC
on December 17, 2018).
Senior Secured Term Loan Credit Agreement, dated as of May 7, 2019, among U.S. Well Services, LLC, as borrower, U.S. Well Serviecs,
Inc. and all the other subsidiaries of U.S. Well Services, Inc., as guarantors, CLMG Corp., as administrative and collateral agent, and certain
other financial institutions (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File No. 001-38025), filed
with the SEC on May 9, 2019).
ABL Credit Agreement, dated as of May 7, 2019, among U.S. Well Services, LLC, as borrower, U.S. Well Services, Inc. and all the other
subsidiaries of U.S. Well Services, Inc., as guarantors, the lenders from time to time party thereto, and Bank of America, N.A., as
administrative agent (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File No. 001-38025), filed with the
SEC on May 9, 2019).
84
10.17
10.18
10.19
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
101.INS*
101.SCH*
101.PRE*
101.CAL*
101.DEF*
101.LAB*
Intercreditor Agreement, dated as of May 7, 2019, among the Borrower, CLMG Corp. and Bank of America, N.A. (incorporated by
reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q (File No. 001-38025), filed with the SEC on May 9, 2019.
Purchase Agreement, dated May 23, 2019, by and among U.S. Well Services, Inc. and the Purchasers party thereto (incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-38025), filed with the SEC on May 24, 2019.
First Technical Supplemental Amendment to the Senior Secured Term Loan Credit Agreement, dated June 14, 2019, by and among U.S.
Well Services, LLC, as borrower, U.S. Well Services, Inc. and all the other subsidiaries of U.S. Well Services, Inc. as guarantors, CLMG
Corp., as administrative and collateral agent, and certain other financial institutions (incorporated by reference to Exhibit 10.7 of the
Quarterly Report on Form 10-Q (File No. 001-38025), filed with the SEC on August 7, 2019.
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to Rule 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934.
Certification of Chief Financial Officer pursuant to Rule 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Presentation Linkbase
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
# Management contract or compensatory plan or arrangement.
* Filed herewith.
** Furnished herewith.
Item 16. 10-K Summary
None.
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 5, 2020.
U.S. WELL SERVICES, INC.
By:
/s/ Kyle O’Neill
Name: Kyle O’Neill
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature
Title
/s/ Joel Broussard
Joel Broussard
/s/ Kyle O’Neill
Kyle O’Neill
/s/ Christopher Wirtz
Christopher Wirtz
/s/ David Matlin
David Matlin
/s/ David Treadwell
David Treadwell
/s/ Adam Klein
Adam Klein
/s/ Eddie Watson
Eddie Watson
/s/ Ryan Carroll
Ryan Carroll
/s/ Richard Burnett
Richard Burnett
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer (Principal Financial Officer)
Principal Accounting Officer
Director
Director
Director
Director
Director
Director
86
Date
March 5, 2020
March 5, 2020
March 5, 2020
March 5, 2020
March 5, 2020
March 5, 2020
March 5, 2020
March 5, 2020
March 5, 2020
Exhibit 4.6
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED PURSUANT TO SECTION 12
OF THE SECURITIES EXCHANGE ACT OF 1934
The following description sets forth certain material terms and provisions of the securities of U.S. Well Services, Inc. that are registered under Section
12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which securities include the Class A Common Stock (as defined below) and
the Public and Private Placement Warrants (as defined below). This description also summarizes relevant provisions of the General Corporation Law of the
State of Delaware (the “DGCL”). The following description is a summary and does not purport to be complete. It is subject to, and qualified in its entirety by
reference to, the applicable provisions of the DGCL, our Second Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”), our
Amended and Restated Bylaws (the “Bylaws”), our Certificate of Designations with respect to our Series A Redeemable Convertible Preferred Stock (the
“Certificate of Designations”), the Amended and Restated Limited Liability Company Agreement of USWS Holdings LLC, dated as of November 9, 2018, as
amended by Amendment No. 1 to Amended and Restated Limited Liability Company Agreement of USWS Holdings LLC, dated May 24, 2019 (collectively,
the “A&R USWS Holdings LLC Agreement”), the Warrant Agreement, dated March 9, 2017 (the “2017 Warrant Agreement”), by and between Continental
Stock Transfer & Trust Company and Matlin & Partners Acquisition Corporation, and the Warrant Agreement, dated May 24, 2019 (the “2019 Warrant
Agreement”), by and between Continental Stock Transfer & Trust Company and the Company. The Certificate of Incorporation, Bylaws, Certificate of
Designations, A&R USWS Holdings LLC Agreement, 2017 Warrant Agreement and 2019 Warrant Agreement, which are filed as Exhibit 3.1, Exhibit 3.2,
Exhibit 3.3, Exhibit 10.1, Exhibit 10.2, Exhibit 4.2 and Exhibit 4.5, respectively, to the Annual Report on Form 10-K of which this Exhibit 4.6 is a part, are
incorporated by reference herein. We encourage you to read the Certificate of Incorporation, Bylaws, Certificate of Designations, A&R USWS Holdings LLC
Agreement, 2017 Warrant Agreement, 2019 Warrant Agreement and the applicable provisions of the DGCL for additional information. Unless the context
requires otherwise, all references to “we,” “us,” “our” and the “Company” in this Exhibit 4.6 refer solely to U.S. Well Services, Inc. and not to our
subsidiaries.
Description of Capital Stock
General
The Certificate of Incorporation provides that the total number of shares of all classes of capital stock, each with a par value of $0.0001 per share,
which the Company is authorized to issue is 440,000,000 shares, consisting of (a) 430,000,000 shares of common stock (the “Common Stock”), including
(i) 400,000,000 shares of Class A Common Stock (the “Class A Common Stock”), (ii) 20,000,000 shares of Class B Common Stock (the “Class B Common
Stock”), and (iii) 10,000,000 shares of Class F Common Stock (the “Class F Common Stock”), and (b) 10,000,000 shares of preferred stock (the “Preferred
Stock”), including 55,000 shares of Series A Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”). As of March 2, 2020, 62,857,624
shares of Class A Common Stock, 5,500,692 shares of Class B Common Stock and 55,000 shares of Series A Preferred Stock were issued and outstanding.
All of the shares of the Class F Common Stock that were not forfeited in connection with our November 9, 2018 business combination (the “Business
Combination”) with USWS Holdings LLC, a Delaware limited liability company (“USWS Holdings”), were converted into shares of Class A Common Stock
on a one-for-one basis at the closing of the Business Combination.
Class A Common Stock
Holders of the Class A Common Stock are entitled to one vote for each share held on all matters to be voted on by the Company’s stockholders.
Holders of the Class A Common Stock and holders of the Class B Common Stock will vote together as a single class on all matters submitted to a vote of the
Company’s stockholders, except as required by law. Unless specified in the Certificate of Incorporation (including any certificate of designation of preferred
stock) or the Bylaws, or as required by applicable provisions of the DGCL or applicable stock exchange rules, the affirmative vote of a majority of the
Company’s shares of Common Stock that are voted is required to approve any such matter voted on by the Company’s stockholders. In the case of an election
of directors, where a quorum is present, a plurality of the votes cast will be sufficient to elect each director.
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In the event of a liquidation, dissolution or winding up of the Company, the holders of the Class A Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference
over the Class A Common Stock. The holders of the Class A Common Stock have no preemptive or other subscription rights. There are no sinking fund
provisions applicable to the Class A Common Stock.
Holders of the Class A Common Stock are entitled to receive dividends from the Company when, as and if declared by the board of directors of the
Company (the “Board”), subject to the consent of the holders of shares of Series A Preferred Stock.
Class B Common Stock
In connection with the Business Combination, and pursuant to the Merger and Contribution Agreement, dated as of July 13, 2018, and amended on
August 9, 2018, and further amended on November 2, 2018, with MPAC Merger Sub LLC, a Delaware limited liability company and wholly owned
subsidiary of the Company, USWS Holdings, certain owners of equity interests in USWS Holdings (the “Blocker Companies”) and, solely for purposes
described therein, the seller representative named therein, the Company issued 14,546,755 shares of Class B Common Stock to certain owners of equity
interests in USWS Holdings other than the Blocker Companies (the “Non-Blocker USWS Members”). Non-Blocker USWS Members were issued units of
USWS Holdings (“USWS Units”) and an equal number of shares of Class B Common Stock. The Non-Blocker USWS Members collectively own all of our
outstanding shares of Class B Common Stock. We expect to maintain a one-to-one ratio between the number of outstanding shares of Class B Common Stock
and the number of USWS Units held by persons other than the Company, so holders of USWS Units (other than the Company) will have a voting interest in
the Company that is proportionate to their economic interest in USWS Holdings. Class B Common Stock represents a non-economic interest in the Company.
Shares of Class B Common Stock (i) may be issued only in connection with the issuance by USWS Holdings of a corresponding number of USWS
Units and only to the person or entity to whom such USWS Units are issued and (ii) may be registered only in the name of (1) a person or entity to whom
shares of Class B Common Stock are issued as described above, (2) its successors and assigns, (3) their respective permitted transferees or (4) any subsequent
successors, assigns and permitted transferees. A holder of shares of Class B Common Stock may transfer shares of Class B Common Stock to any transferee
(other than the Company) only if, and only to the extent permitted by the A&R USWS Holdings LLC Agreement, such holder also simultaneously transfers
an equal number of such holder’s USWS Units to the same transferee in compliance with the A&R USWS Holdings LLC Agreement. Shares of Class B
Common Stock (together with the same number of USWS Units) may be exchanged for shares of Class A Common Stock as provided in the A&R USWS
Holdings LLC Agreement.
Holders of shares of the Class B Common Stock will vote together as a single class with holders of shares of the Class A Common Stock on all
matters properly submitted to a vote of the stockholders. In addition, holders of shares of Class B Common Stock, voting as a separate class, will be entitled
to approve any amendment, alteration or repeal of any provision of the Certificate of Incorporation that would alter or change the powers, preferences or
relative, participating, optional or other or special rights of the Class B Common Stock.
Holders of Class B Common Stock will not be entitled to any dividends from the Company and will not be entitled to receive any of our assets in the
event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs. The holders of the Class B Common Stock have no preemptive or
other subscription rights. There are no sinking fund provisions applicable to the Class B Common Stock.
Preferred Stock
The Certificate of Incorporation provides that shares of Preferred Stock may be issued from time to time in one or more series. Our Board is
authorized to fix the voting rights, if any, designations, powers, preferences, the relative, participating, optional or other special rights and any qualifications,
limitations and restrictions thereof, applicable to the shares of each series. Our Board is able to, without stockholder approval, issue Preferred Stock with
voting and other rights that could adversely affect the voting power and other rights of the holders of the Common Stock and could have antitakeover effects.
The ability of our Board to issue Preferred Stock without stockholder approval could have the effect of delaying, deferring or preventing a change of control
of us or the removal of existing management.
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Series A Preferred Stock
The Series A Preferred Stock ranks senior to the Class A Common Stock and Class B Common Stock with respect to distributions and upon a
liquidation, winding-up or dissolution of our affairs. The Series A Preferred Stock have only specified voting rights, including with respect to the issuance or
creation of senior securities, amendments to the Certificate of Incorporation that negatively impact the rights of the holders of Series A Preferred Stock and
the payment of dividends on, repurchase or redemption of Class A Common Stock.
Holders of Series A Preferred Stock will receive distributions of 12.00% per annum on the then-applicable liquidation preference for the first two
years after issuance and 16.00% per annum on the liquidation preference thereafter. Distributions are not required to be paid in cash and, if not paid in cash,
will automatically accrue and be added to the liquidation preference.
We have the option, but no obligation, to redeem the Series A Preferred Stock for cash. If we notify the holders that we have elected to redeem shares
of Series A Preferred Stock, the holder may instead elect to convert such shares into shares of Class A Common Stock. If we fund the redemption with
proceeds of an equity offering within one year of May 24, 2019 (the “Initial Closing Date”), then any converting shares will convert at a ratio that is based on
the higher of the price to the public in the offering and the ordinary conversion price, which initially was $6.67. Otherwise, such converting shares will
convert by reference to the ordinary conversion price. In any event, shares of Series A Preferred Stock converting in response to a redemption notice will net
settle for a combination of cash and Class A Common Stock.
Following the first anniversary of the Initial Closing Date, each holder of Series A Preferred Stock may convert all or any portion of its shares of
Series A Preferred Stock into Class A Common Stock based on the then-applicable liquidation preference, subject to anti-dilution adjustments, at any time,
but not more than once per quarter, so long as any conversion is for at least $1 million based on the liquidation preference on the date of the conversion
notice.
Following the third anniversary of the Initial Closing Date, we may cause the conversion of all or any portion of the Series A Preferred Stock into
Class A Common Stock if (i) the closing price of the Class A Common Stock is greater than 130% of the conversion price for 20 days over any 30-
day trading period; (ii) the average daily trading volume of the Class A Common Stock exceeded 250,000 for 20 days over any 30-day trading period; and
(iii) we have an effective registration statement on file with the U.S. Securities and Exchange Commission covering resales of the underlying Class A
Common Stock to be received upon such conversion.
Holders of shares of Series A Preferred Stock are entitled to receive cumulative dividends, compounding quarterly and payable in arrears, from the
Initial Closing Date until the second anniversary of the Initial Closing Date, at an annual rate of 12.0% on the then-applicable liquidation preference, and
thereafter, 16% of the liquidation preference. Dividends are payable, at our option, in cash from legally available funds or in kind by increasing the liquidation
preference of the outstanding Series A Preferred Stock by the amount per share of the dividend on February 24, May 24, August 24, and November 24 of
each year, commencing on August 24, 2019
Election of Directors
Our Board is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in
each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the
election of directors can elect all of the directors.
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Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws
Certain Anti-Takeover Provisions of Delaware Law
We are subject to the provisions of Section 203 of the DGCL regulating corporate takeovers. This statute prevents certain Delaware corporations,
under certain circumstances, from engaging in a “business combination” with:
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•
•
a stockholder who owns 15% or more of our outstanding voting stock (otherwise known as an “interested stockholder”);
an affiliate of an interested stockholder; or
an associate of an interested stockholder, for three years following the date that the stockholder became an interested stockholder.
A “business combination” includes a merger or sale of more than 10% of our assets. However, the above provisions of Section 203 do not apply if:
•
•
•
our Board approves the transaction that made the stockholder an “interested stockholder,” prior to the date of the transaction;
after the completion of the transaction that resulted in the stockholder becoming an interested stockholder, that stockholder owned at least
85% of our voting stock outstanding at the time the transaction commenced, other than statutorily excluded shares of Common Stock; or
on or subsequent to the date of the transaction, the business combination is approved by our Board and authorized at a meeting of its
stockholders, and not by written consent, by an affirmative vote of at least two-thirds of the outstanding voting stock not owned by the
interested stockholder.
Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws
Staggered Board; Removal of Directors. The Certificate of Incorporation divides our Board into three classes with staggered three-year terms. In
addition, the Certificate of Incorporation provides that directors may be removed only for cause and only by the affirmative vote of the holders of 66 2/3% of
the voting power of all then outstanding shares of capital stock of the Company entitled to vote generally in the election of directors, voting together as a
single class. Under the Certificate of Incorporation, any vacancy on our Board, including a vacancy resulting from an enlargement of our Board, may be filled
only by vote of a majority of our directors then in office. Furthermore, the Certificate of Incorporation provides that the authorized number of directors may
be changed only by the resolution of our Board. The classification of our Board and the limitations on the ability of our stockholders to remove directors,
change the authorized number of directors and fill vacancies could make it more difficult for a third party to acquire, or discourage a third party from seeking
to acquire, control of us.
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Stockholder Action; Special Meeting of Stockholders; Advance Notice Requirements for Stockholder Proposals and Director Nominations. The
Certificate of Incorporation and Bylaws provide that any action required or permitted to be taken by our stockholders must be effected by a duly called annual
or special meeting of such stockholders and may not be effected by written consent of the stockholders other than with respect to the Class B Common Stock
and the Class F Common Stock, with respect to which action may be taken by written consent. The Certificate of Incorporation and Bylaws also provide that,
except as otherwise required by law, special meetings of the stockholders can only be called by the Chairman of the Board, Chief Executive Officer, or the
Board. In addition, the Bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders,
including proposed nominations of candidates for election to our Board. Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the direction of our Board, or by a stockholder of record on the record date for the
meeting who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our secretary of the stockholder’s intention to
bring such business before the meeting. These provisions could have the effect of delaying until the next stockholder meeting stockholder actions that are
favored by the holders of a majority of our outstanding voting securities. These provisions also could discourage a third party from making a tender offer for
our Common Stock because even if the third party acquired a majority of our outstanding voting stock, it would be able to take action as a stockholder, such
as electing new directors or approving a merger, only at a duly called stockholders meeting and not by written consent.
Super-Majority Voting. The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation’s certificate of incorporation or bylaws unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a
greater percentage. The Bylaws may be amended or repealed by a majority vote of our Board or the affirmative vote of the holders of at least 66 2/3% of the
voting power of all then outstanding shares of capital stock of the Company entitled to vote generally in the election of directors, voting together as a single
class. In addition, the affirmative vote of the holders of at least 66 2/3% of the voting power of the then outstanding shares of capital stock entitled to vote is
required to amend or repeal or to adopt any provisions inconsistent certain provisions of the Certificate of Incorporation described above.
Exclusive Forum Selection. The Certificate of Incorporation provides that, unless we consent in writing to the selection of an alternative forum, the
Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the
Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company to us or our
stockholders, (iii) any action asserting a claim against the Company, its directors, officers or employees arising pursuant to any provision of the DGCL or the
Certificate of Incorporation or the Bylaws, or (iv) any action asserting a claim against the Company, its directors, officers or employees governed by the
internal affairs doctrine, except for, as to each of (i) through (iv) above, any claim as to which the Court of Chancery determines that there is an indispensable
party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of
Chancery within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or
for which the Court of Chancery does not have subject matter jurisdiction. Although the Certificate of Incorporation contains the choice of forum provision
described above, we do not expect this choice of forum provision will apply to suits brought to enforce a duty or liability created by the Securities Act of
1933, as amended (the “Securities Act”), the Exchange Act, or any other claim for which federal courts have exclusive jurisdiction.
Authorized but Unissued Capital Stock. Delaware law does not require stockholder approval for any issuance of authorized shares. However, the
listing requirements of Nasdaq, which would apply so long as the Class A Common Stock remains listed on Nasdaq, require stockholder approval of certain
issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of Class A Common Stock. Authorized
shares may be issued for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions.
One of the effects of the existence of unissued and unreserved Class A Common Stock or Preferred Stock may be to enable our Board to issue shares
to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of us by means of a merger,
tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive the stockholders of opportunities to sell
their shares of Class A Common Stock at prices higher than prevailing market prices.
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Description of Warrants
General
As of March 2, 2020, there were outstanding warrants exercisable for 12,747,318 shares of the Class A Common Stock, consisting of (i) Public
Warrants (as defined below) exercisable for an aggregate of 4,997,318 shares of the Class A Common Stock issued pursuant to the 2017 Warrant Agreement
entered into in connection with our initial public offering; (ii) Private Placement Warrants (as defined below) exercisable for an aggregate of 7,750,000 shares
of the Class A Common Stock issued in a private placement that closed simultaneously with the closing of our initial public offering; and (iii) warrants
exercisable for an aggregate of 2,933,333 shares of the Class A Common Stock issued pursuant to the Purchase Agreement dated as of May 23, 2019 (the
“Series A Purchase Agreement”), between the Company and the purchasers of the Series A Preferred Stock. Subject to there being shares of Series A
Preferred Stock outstanding, the Company will issue an aggregate of 488,888 additional warrants in quarterly installments beginning nine months after the
Initial Closing Date pursuant to the Series A Purchase Agreement. As of March 2, 2020, there were 9,994,635 Public Warrants and 15,500,000 Private
Placement Warrants outstanding, which are exercisable for an aggregate of 12,747,318 shares of Class A Common Stock and 2,933,333 warrants issued
pursuant to the Series A Purchase Agreement, which are exercisable for 2,933,333 shares of Class A Common Stock.
Public and Private Placement Warrants
We issued (i) an aggregate of 32,500,000 warrants to purchase shares of the Class A Common Stock pursuant to the 2017 Warrant Agreement entered
into in connection with our initial public offering (the “Public Warrants”) and (ii) an aggregate of 15,500,000 warrants to purchase shares of the Class A
Common Stock issued in a private placement that closed simultaneously with the closing of our initial public offering (the “Private Placement Warrants,” and,
together with the Public Warrants, the “Public and Private Placement Warrants”).
Each outstanding Public or Private Placement Warrant entitles the registered holder to purchase one-half of one share of the Class A Common Stock
at a price of $5.75 per half share, subject to adjustment. The outstanding Public and Private Placement Warrants will expire five years after the Business
Combination, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation. We may call the outstanding Public and Private Placement
Warrants for redemption:
•
•
•
•
in whole and not in part;
at a price of $0.01 per warrant;
upon not less than 30 days’ prior written notice of redemption (the “30-day redemption period”) to each warrant holder; and
if, and only if, the last sale price of the Class A Common Stock equals or exceeds $24.00 per share (as adjusted for stock splits, stock
dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third trading
day prior to the date on which we send the notice of redemption to the warrant holders
If we call the Public and Private Placement Warrants for redemption as described above, we will have the option to require all holders that wish to
exercise Public or Private Placement Warrants to do so on a “cashless basis.” If we take advantage of this option, each holder would pay the exercise price by
surrendering the Public or Private Placement Warrants for that number of shares of the Class A Common Stock equal to the quotient obtained by dividing
(x) the product of the number of shares of the Class A Common Stock underlying such warrants, multiplied by the difference between the exercise price of
such warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price
of the Class A Common Stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders
of warrants. If we take advantage of this option, the notice of redemption will contain the information necessary to calculate the number of shares of Class A
Common Stock to be received upon exercise of the Public and Private Placement Warrants, including the “fair market value” in such case. Requiring a
cashless exercise in this manner will
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reduce the number of shares to be issued and thereby lessen the dilutive effect of a warrant redemption. If we call the Public and Private Placement Warrants
for redemption and we do not take advantage of this option, Matlin & Partners Acquisition Sponsor LLC and its permitted transferees would still be entitled
to exercise their Public or Private Placement Warrants for cash or on a cashless basis using the same formula described above that other warrant holders
would have been required to use had all warrant holders been required to exercise their Public or Private Placement Warrants on a cashless basis. The Private
Placement Warrants will not be redeemable by us so long as they are held by the initial holders or their permitted transferees. If holders of such Private
Placement Warrants elect to exercise them on a cashless basis, they would pay the exercise price using the same formula described above that other warrant
holders would have been required to use had all warrant holders been required to exercise their warrants on a cashless basis.
The exercise price, the redemption price and number of shares of Class A Common Stock issuable on exercise of the outstanding Public and Private
Placement Warrants may be adjusted in certain circumstances including in the event of a stock dividend, stock split, extraordinary dividend, or
recapitalization, reorganization, merger or consolidation. However, the exercise price and number of Class A Common Stock issuable on exercise of the
Public and Private Placement Warrants will not be adjusted for issuances of Class A Common Stock at a price below the warrant exercise price.
The outstanding Public and Private Placement Warrants were issued in registered form under the 2017 Warrant Agreement. The Public and Private
Placement Warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the
exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price (or on a
cashless basis, if applicable), by certified or official bank check payable to us, for the number of Public and Private Placement Warrants being exercised. The
warrant holders do not have the rights or privileges of holders of Class A Common Stock and any voting rights until they exercise their Public or Private
Placement Warrants and receive shares of Class A Common Stock. After the issuance of shares of Class A Common Stock upon exercise of the Public and
Private Placement Warrants, each holder will be entitled to one vote for each share of Class A Common Stock held of record on all matters to be voted on by
our stockholders.
No outstanding Public and Private Placement Warrants will be exercisable unless at the time of exercise a prospectus relating to Class A Common
Stock issuable upon exercise of the Public and Private Placement Warrants is current and available throughout the 30-day redemption period and the Class A
Common Stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants.
Public and Private Placement Warrants may be exercised only for a whole number of shares of Class A Common Stock. No fractional shares of Class
A Common Stock will be issued upon exercise of the outstanding Public and Private Placement Warrants. If, upon exercise of the Public and Private
Placement Warrants, a holder would be entitled to receive a fractional interest in a share of Class A Common Stock, we will, upon exercise, round up to the
nearest whole number the number of shares of Class A Common Stock to be issued to the warrant holder.
Purchase Agreement Warrants
Each warrant issued pursuant to the Series A Purchase Agreement entitles the registered holder to purchase the number of shares of the Class A
Common Stock stated in such warrant at a price of $7.66 per share, subject to adjustment as discussed below, at any time commencing on the date that is six
months and one day after the Initial Closing (the “Exercisable Date”). Warrants must be exercised for a whole share. The warrants will expire on the sixth
anniversary of the Exercisable Date, at 5:00 p.m., New York City time.
No warrant will be exercisable, and we will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance of
the shares of Class A Common Stock upon such exercise is registered or qualified under the securities laws of the state of the exercising holder, or an
exemption is available.
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If the number of outstanding shares of Class A Common Stock is increased by a stock dividend payable in shares of Class A Common Stock, or by
a split-up of shares of Class A Common Stock or other similar event, then, on the effective date of such stock dividend, split-up or similar event, the number
of shares of Class A Common Stock issuable on exercise of each warrant will be increased in proportion to such increase in the outstanding shares of Class A
Common Stock. A rights offering to holders of Class A Common Stock entitling holders to purchase shares of Class A Common Stock at a price less than the
fair market value will be deemed a stock dividend of a number of shares of Class A Common Stock equal to the product of (i) the number of shares of Class
A Common Stock actually sold in such rights offering (or issuable under any other equity securities sold in such rights offering that are convertible into or
exercisable for Class A Common Stock) multiplied by (ii) one minus the quotient of (x) the price per share of Class A Common Stock paid in such rights
offering divided by (y) the fair market value. For these purposes (i) if the rights offering is for securities convertible into or exercisable for Class A Common
Stock, in determining the price payable for Class A Common Stock, there will be taken into account any consideration received for such rights, as well as any
additional amount payable upon exercise or conversion and (ii) fair market value means the volume weighted average price of Class A Common Stock as
reported during the ten trading day period ending on the trading day prior to the first date on which the shares of Class A Common Stock trade on the
applicable exchange or in the applicable market, regular way, without the right to receive such rights.
In addition, if we, at any time while the warrants are outstanding and unexpired, pay a dividend or make a distribution in cash, securities or other
assets to the holders of Class A Common Stock on account of such shares of Class A Common Stock (or other shares of our capital stock into which the
warrants are convertible), other than as described above, then the warrant exercise price will be decreased, effective immediately after the effective date of
such event, by the amount of cash and/or the fair market value of any securities or other assets paid on each share of Class A Common Stock in respect of
such event.
If the number of outstanding shares of the Class A Common Stock is decreased by a consolidation, combination, reverse stock split or reclassification
of shares of Class A Common Stock or other similar event, then, on the effective date of such consolidation, combination, reverse stock split, reclassification
or similar event, the number of shares of Class A Common Stock issuable on exercise of each warrant will be decreased in proportion to such decrease in
outstanding shares of Class A Common Stock.
Whenever the number of shares of Class A Common Stock purchasable upon the exercise of the warrants is adjusted, as described above, the warrant
exercise price will be adjusted by multiplying the warrant exercise price immediately prior to such adjustment by a fraction (x) the numerator of which will be
the number of shares of Class A Common Stock purchasable upon the exercise of the warrants immediately prior to such adjustment, and (y) the denominator
of which will be the number of shares of Class A Common Stock so purchasable immediately thereafter.
In case of any reclassification or reorganization of the outstanding shares of Class A Common Stock (other than those described above or that solely
affects the par value of such shares of Class A Common Stock), or in the case of any merger or consolidation of us with or into another entity (other than a
consolidation or merger in which we are the continuing corporation and that does not result in any reclassification or reorganization of our outstanding shares
of Class A Common Stock), or in the case of any sale or conveyance to another corporation or entity of the assets or other property of us as an entirety or
substantially as an entirety in connection with which we are dissolved, the holders of the warrants will thereafter have the right to purchase and receive, upon
the basis and upon the terms and conditions specified in the warrants and in lieu of the shares of the Class A Common Stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented thereby, the kind and amount of shares of stock or other securities or property
(including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or transfer, that
the holder of the warrants would have received if such holder had held a number of shares of Class A Common Stock equal to the aggregate of the shares of
Class A Common Stock purchasable upon exercise of their warrants immediately prior to such event (the “Alternative Issuance”). However, if such holders
were entitled to exercise a right of election as to the kind or amount of securities, cash or other assets receivable upon such consolidation or merger, then the
kind and amount of securities, cash or other assets for which each warrant will become exercisable will be deemed to be the weighted average of the kind and
amount received per share by such holders in such consolidation or merger, and if a tender, exchange or redemption offer has been made to and accepted by
such holders under circumstances in which, upon completion of such tender or exchange offer, the maker thereof, together with members of any group (within
the meaning of Rule 13d-5(b)(1) under the Exchange Act) of which such maker is a part, and together with any affiliate or associate of such maker (within the
meaning of Rule 12b-2 under the Exchange Act) and any members of any such group of which any such affiliate or associate is a part, own beneficially
(within the meaning of Rule 13d-3 under the Exchange Act) more than 50% of
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the outstanding shares of Class A Common Stock, (i) the holder of a warrant will be entitled to receive the highest amount of cash, securities or other property
to which such holder would actually have been entitled as a stockholder if such warrant holder had held a number of shares of Class A Common Stock equal
to the aggregate of the shares of Class A Common Stock purchasable upon exercise of their warrants prior to the expiration of such tender or exchange offer,
accepted such offer and all of the Class A Common Stock held by such holder had been purchased pursuant to such tender or exchange offer, subject to
adjustments (from and after the consummation of such tender or exchange offer) as nearly equivalent as possible to the adjustments provided for in the 2019
Warrant Agreement and (ii) if we are not the issuer of the securities constituting the Alternative Issuance, then we and such issuer(s) will take such action so
as to ensure the availability of Section 3(a)(9) under the Securities Act for any issuance of such securities upon the exercise of the warrants and the tacking of
the “holding period” under Rule 144 under the Securities Act for the warrants to such securities. Additionally, if less than 70% of the consideration receivable
by the holders of Class A Common Stock in such a transaction is payable in the form of Class A Common Stock in the successor entity that is listed for
trading on a national securities exchange or is quoted in an established over-the-counter market, or is to be so listed for trading or quoted immediately
following such event, and if the registered holder of the warrant properly exercises the warrant within thirty days following public disclosure of such
transaction, the warrant exercise price will be reduced as specified in the 2019 Warrant Agreement based on the per share consideration minus Black-Scholes
Warrant Value (as defined in the 2019 Warrant Agreement) of the warrant.
The warrants were issued in registered form under the 2019 Warrant Agreement. The 2019 Warrant Agreement provides that the terms of the warrants
may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at
least 75% of the then outstanding warrants issued pursuant to the Series A Purchase Agreement to make any change that adversely affects the interests of the
registered holders of warrants.
The warrants may be exercised upon the surrender of the certificate evidencing such warrant on or before the expiration date at the offices of the
warrant agent, with the subscription form, as set forth in the warrants, duly executed, for that number of shares of Class A Common Stock equal to the
quotient obtained by dividing (x) the product of the number of shares of Class A Common Stock underlying the warrants to be exercised, multiplied by the
difference between the exercise price of the warrants per share and the “fair market value” (defined below) by (y) the fair market value. The “fair market
value” means the volume weighted average price of the Class A Common Stock as reported during the ten (10) trading day period ending on the second
trading day prior to the date on which the notice of warrant exercise or redemption is sent.
The warrant holders do not have the rights or privileges of holders of Class A Common Stock and any voting rights until they exercise their warrants
and receive shares of Class A Common Stock. After the issuance of shares of Class A Common Stock upon exercise of the warrants, each holder will be
entitled to one vote for each share held of record on all matters to be voted on by stockholders.
Warrants may be exercised only for a whole number of shares of Class A Common Stock. No fractional shares will be issued upon exercise of the
warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round down to the
nearest whole number the number of shares of Class A Common Stock to be issued to the warrant holder.
9
SUBSIDIARIES OF THE COMPANY
Exhibit 21.1
USWS Holdings, LLC
U.S. Well Services, LLC
USWS Fleet 10, LLC
USWS Fleet 11, LLC
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
U.S. Well Services, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-234583, No. 333-230471, and No. 333-228664) on Form S-3 and (No.
333-230276) on Form S-8 of U.S. Well Services, Inc. of our report dated March 5, 2020 with respect to the consolidated balance sheets of U.S. Well Services,
Inc. and subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years
ended December 31, 2019 and 2018 (Successor), for the period February 2, 2017 to December 31, 2017 (Successor) and for the period January 1, 2017 to
February 1, 2017 (Predecessor), and the related notes (collectively, the “consolidated financial statements”), which report appears in the December 31, 2019
annual report on Form 10-K of U.S. Well Services, Inc.
Our report dated March 5, 2020 refers to a new basis for presentation as the accompanying consolidated financial statements for the Successor periods
include assets acquired and liabilities assumed that were recorded at fair value having carrying amounts not comparable with prior periods, as discussed in
note 2 to the consolidated financial statements.
Houston, Texas
March 5, 2020
/s/ KPMG
CERTIFICATION
Exhibit 31.1
I, Joel Broussard, Chief Executive Officer, of U.S. Well Services, Inc. (the “Registrant”), certify that:
1.
I have reviewed this Annual Report on Form 10-K of the Registrant (this “Report”);
2.
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
Report;
3.
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4.
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
(d) Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most
recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal
control over financial reporting.
Date: March 5, 2020
/s/ Joel Broussard
Joel Broussard
Chief Executive Officer
CERTIFICATION
Exhibit 31.2
I, Kyle O’Neill, Chief Financial Officer, of U.S. Well Services, Inc. (the “Registrant”), certify that:
1.
I have reviewed this Annual Report on Form 10-K of the Registrant (this “Report”);
2.
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
Report;
3.
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4.
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
(d) Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most
recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal
control over financial reporting.
Date: March 5, 2020
/s/ Kyle O’Neill
Kyle O’Neill
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of U.S. Well Services, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Joel Broussard, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 5, 2020
/s/ Joel Broussard
Joel Broussard
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of U.S. Well Services, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Kyle O’Neill, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 5, 2020
/s/ Kyle O’Neil
Kyle O’Neill
Chief Financial Officer