nes-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________

FORM 10-Q

__________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2021

☐ 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: 001-33816

_________________________________

(Exact name of registrant as specified in its charter)


Delaware			26-0287117
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

11111 Katy Freeway, Suite 1006, Houston, TX 77079

(602) 903-7802

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

__________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	NES	NYSE American

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all the documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

The number of shares outstanding of the registrant’s common stock as of October 31, 2021 was 16,209,621.

TABLE OF CONTENTS


PART I —FINANCIAL INFORMATION		7
Item 1.	Financial Statements	7
	Condensed Consolidated Balance Sheets as of Septemb er 30, 2021 and December 31, 2020	7
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020	8
	Condensed Consolidated Statements of Changes in Shareholders’ Equity as of Se ptember 30, 2021 and 2020	9
	Condensed Consolidated Statements of Cash Flows for the N ine Months Ended September 30, 2021 and 2020	10
	Notes to the Condensed Consolidated Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	44

PART II – OTHER INFORMATION		45
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46

Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the “Securities Act,” Section 21E of the United States Securities Exchange Act of 1934, as amended, or the “Exchange Act,” and the Private Securities Litigation Reform Act of 1995, as amended, or the “Reform Act.” These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:

•the impact of the coronavirus disease 2019 (“COVID-19”) pandemic and commodity market disruptions;

•future financial performance and growth targets or expectations;

•our limited liquidity to meet debt obligations and operating needs;

•market and industry trends and developments, and

•the potential benefits of any financing transactions and any potential benefits from future merger, acquisition, disposition, and restructuring transactions.

You can identify these and other forward-looking statements by the use of words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “might,” “will,” “should,” “would,” “could,” “potential,” “future,” “continue,” “ongoing,” “forecast,” “project,” “target” or similar expressions, and variations or negatives of these words.

These forward-looking statements are based on information available to us as of the date of this Quarterly Report and our current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. Future performance cannot be ensured, and actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include, among others:

•the severity, magnitude and duration of the COVID-19 pandemic and commodity market disruptions;

•failure to successfully implement planned initiatives to improve our liquidity by generating sufficient operating cash flow or accessing additional capital in order to meet operating needs and address our future debt service obligations;

•changes in commodity prices;

•fluctuations in consumer trends, pricing pressures, transportation costs, changes in raw material or labor prices or rates related to our business and changing regulations or political developments in the markets in which we operate;

•risks associated with our indebtedness, including changes to interest rates, decreases in our borrowing availability, our ability to manage our liquidity needs and to comply with covenants under our credit facilities, which are discussed further in Segment Operating Results;

•the loss of one or more of our larger customers;

•delays in customer payment of outstanding receivables and customer bankruptcies;

•natural disasters, such as hurricanes, earthquakes and floods, pandemics (including COVID-19), acts of terrorism, or extreme weather conditions, that may impact our business locations, assets, including wells or pipelines, or distribution channels, or which otherwise may disrupt our customers’ operations or the markets we serve;

•disruptions impacting crude oil and natural gas transportation, processing, refining, and export systems, including vacated easements, environmental impact studies, forced shutdown by governmental agencies and litigation affecting the Dakota Access Pipeline;

•bans on drilling and fracking leases and permits on federal land;

•our ability to attract and retain key executives and qualified employees in strategic areas of our business;

•our ability to attract and retain a sufficient number of qualified truck drivers;

•the unfavorable change to credit and payment terms due to changes in industry condition or our financial condition, which could constrain our liquidity and reduce availability under our operating line of credit;

•higher than forecasted capital expenditures to maintain and repair our fleet of trucks, tanks, pipeline, equipment and disposal wells;

•our ability to control costs and expenses;

•changes in customer drilling, completion and production activities, operating methods and capital expenditure plans, including impacts due to low oil and/or natural gas prices, shut-in production, decline in operating drilling rigs, closures or pending closures of third-party pipelines or the economic or regulatory environment;

•risks associated with the limited trading volume of our common stock on the NYSE American Stock Exchange, including potential fluctuation in the trading prices of our common stock;

•risks associated with the reliance on third-party analyst and expert market projections and data for the markets in which we operate that is utilized in our business strategy;

•present and possible future claims, litigation or enforcement actions or investigations;

•risks associated with changes in industry practices and operational technologies;

•risks associated with the operation, construction, development and closure of salt water disposal wells, solids and liquids transportation assets, landfills and pipelines, including access to additional locations and rights-of-way, permitting and licensing, environmental remediation obligations, unscheduled delays or inefficiencies and reductions in volume due to micro- and macro-economic factors or the availability of less expensive alternatives;

•the effects of competition in the markets in which we operate, including the adverse impact of competitive product announcements or new entrants into our markets and transfers of resources by competitors into our markets;

•changes in economic conditions in the markets in which we operate or in the world generally, including as a result of political uncertainty;

•reduced demand for our services due to regulatory or other influences related to extraction methods such as hydraulic fracturing, shifts in production among shale areas in which we operate or into shale areas in which we do not currently have operations, and shifts to reuse of water and water sharing in completion activities;

•the unknown future impact of changes in laws and regulation on waste management and disposal activities, including those impacting the delivery, storage, collection, transportation, and disposal of waste products, as well as the use or reuse of recycled or treated products or byproducts;

•risks involving developments in environmental or other governmental laws and regulations in the markets in which we operate and our ability to effectively respond to those developments including laws and regulations relating to oil and natural gas extraction businesses, particularly relating to water usage, and the disposal and transportation of liquid and solid wastes; and

•other risks identified in this Quarterly Report or referenced from time to time in our filings with the United States Securities and Exchange Commission.

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)


	September 30,		December 31,
	2021		2020
Assets
Cash and cash equivalents	$	3,934	$	12,880
Restricted cash	3,705		2,820
Accounts receivable, net of allowance for doubtful accounts of $1.0 million and $1.0 million at September 30, 2021 and December 31, 2020, respectively	17,188		15,427
Inventories	2,838		2,852
Prepaid expenses and other receivables	3,356		3,119

Assets held for sale	—		778
Total current assets	31,021		37,876
Property, plant and equipment, net of accumulated depreciation of $134.7 million and $114.9 million at September 30, 2021 and December 31, 2020, respectively	136,587		151,164
Operating lease assets	1,443		1,691
Equity investments	—		35
Intangibles, net	155		194

Other assets	100		106

Total assets	$	169,306	$	191,066
Liabilities and Shareholders’ Equity
Accounts payable	$	4,497	$	5,130
Accrued and other current liabilities	13,412		9,550
Current portion of long-term debt	2,201		2,433

Total current liabilities	20,110		17,113
Long-term debt	25,062		31,673
Noncurrent operating lease liabilities	1,213		1,360
Deferred income taxes	120		120
Long-term contingent consideration	500		500
Asset retirement obligations	8,014		8,017

Total liabilities	55,019		58,783
Commitments and contingencies
Shareholder's equity:
Preferred stock $0.01 par value (1,000 shares authorized, no shares issued and outstanding at September 30, 2021 and December 31, 2020)	—		—
Common stock, $0.01 par value (75,000 shares authorized, 16,405 shares issued and 16,210 outstanding at September 30, 2021, and 15,833 shares issued and 15,772 outstanding at December 31, 2020)	164		158
Additional paid-in capital	340,627		339,663
Treasury stock (195 shares and 60 shares at September 30, 2021 and December 31, 2020, respectively)	(813)		(477)
Accumulated deficit	(225,691)		(207,061)
Total shareholders' equity	114,287		132,283
Total liabilities and equity	$	169,306	$	191,066

The accompanying notes are an integral part of these statements.

NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Revenue:
Service revenue	$	22,603	$	22,666	$	68,042	$	80,093
Rental revenue	2,183		1,130		5,183		6,111
Total revenue	24,786		23,796		73,225		86,204
Costs and expenses:
Direct operating expenses	20,647		19,022		63,065		69,049
General and administrative expenses	4,894		4,084		13,265		13,453
Depreciation and amortization	5,602		6,821		17,406		21,966
Impairment of long-lived assets	—		—		—		15,579


Total costs and expenses	31,143		29,927		93,736		120,047
Operating loss	(6,357)		(6,131)		(20,511)		(33,843)
Interest expense, net	(645)		(1,014)		(1,964)		(3,290)
Other income	28		20		4,051		200

Reorganization items, net	(196)		—		(206)		—
Loss before income taxes	(7,170)		(7,125)		(18,630)		(36,933)
Income tax expense	—		—		—		(15)


Net loss	$	(7,170)	$	(7,125)	$	(18,630)	$	(36,948)

Loss per common share:


Net loss per basic common share	$	(0.45)	$	(0.45)	$	(1.17)	$	(2.34)



Net loss per diluted common share	$	(0.45)	$	(0.45)	$	(1.17)	$	(2.34)

Weighted average shares outstanding:
Basic	16,069		15,771		15,981		15,762
Diluted	16,069		15,771		15,981		15,762

The accompanying notes are an integral part of these statements.

NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands) (Unaudited)


	Common Stock			Additional Paid-In Capital		Treasury Stock			Accumulated Deficit		Total
	Shares	Amount				Shares	Amount
Balance at January 1, 2021	15,833	$	158	$	339,663	(60)	$	(477)	$	(207,061)	$	132,283
Issuance of common stock to employees and Board of Directors	271	3		(3)		—	—		—		—
Treasury stock acquired through surrender of shares for tax withholding	—	—		—		(88)	(217)		—		(217)
Stock-based compensation	—	—		133		—	—		—		133
Net loss	—	—		—		—	—		(7,603)		(7,603)
Balance at March 31, 2021	16,104	161		339,793		(148)	(694)		(214,664)		124,596
Issuance of common stock to employees	91	—		—		—	—		—		—
Treasury stock acquired through surrender of shares for tax withholding	—	—		—		(47)	(119)		—		(119)
Stock-based compensation	—	—		392		—	—		—		392
Net loss	—	—		—		—	—		(3,857)		(3,857)
Balance at June 30, 2021	16,195	161		340,185		(195)	(813)		(218,521)		121,012
Issuance of common stock to employees and directors	210	3		(3)		—	—		—		—

Stock-based compensation	—	—		445		—	—		—		445
Net loss	—	—		—		—	—		(7,170)		(7,170)
Balance at September 30, 2021	16,405	$	164	$	340,627	(195)	$	(813)	$	(225,691)	$	114,287


Balance at January 1, 2020	15,781	$	158	$	337,628	(46)	$	(436)	$	(162,918)	$	174,432


Issuance of common stock to employees	40	—		—		—	—		—		—
Treasury stock acquired through surrender of shares for tax withholding	—	—		—		(14)	(41)		—		(41)
Stock-based compensation	—	—		290		—	—		—		290
Net loss	—	—		—		—	—		(23,044)		(23,044)
Balance at March 31, 2020	15,821	158		337,918		(60)	(477)		(185,962)		151,637


Stock-based compensation	—	—		322		—	—		—		322
Net loss	—	—		—		—	—		(6,779)		(6,779)
Balance at June 30, 2020	15,821	158		338,240		(60)	(477)		(192,741)		145,180
Issuance of common stock to employees	12	—		—		—	—		—		—

Stock-based compensation	—	—		324		—	—		—		324
Net loss	—	—		—		—	—		(7,125)		(7,125)
Balance at September 30, 2020	15,833	158		338,564		(60)	(477)		(199,866)		138,379

The accompanying notes are an integral part of these statements.

NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(18,630)	$	(36,948)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
PPP Loan Forgiveness	(4,000)		—

Depreciation and amortization	17,406		21,966
Amortization of debt issuance costs, net	189		95

Stock-based compensation	970		936
Impairment of long-lived assets	—		15,579

Gain on disposal of property, plant and equipment	(1,681)		(384)
Bad debt expense (recoveries)	27		(129)


Deferred income taxes	—		40
Other, net	573		567

Changes in operating assets and liabilities:
Accounts receivable	(1,788)		10,667
Prepaid expenses and other receivables	(242)		(141)
Accounts payable and accrued liabilities	2,420		(892)
Other assets and liabilities, net	(344)		568


Net cash (used in) provided by operating activities	(5,100)		11,924
Cash flows from investing activities:

Proceeds from the sale of property, plant and equipment	2,513		1,596
Purchases of property, plant and equipment	(2,106)		(2,802)



Net cash provided by (used in) investing activities	407		(1,206)
Cash flows from financing activities:

Payments on Equipment loan	(1,216)		—

Payments on Commercial real estate loan	(417)		—

Payments on First and Second Lien Term Loans	—		(5,496)
Proceeds from Revolving Facility	—		101,182
Payments on Revolving Facility	—		(101,182)
Proceeds from PPP Loan	—		4,000


Purchases of treasury stock	(336)		—
Payments on finance leases and other financing activities	(1,399)		(1,463)


Net cash used in financing activities	(3,368)		(2,959)
Change in cash, cash equivalents and restricted cash	(8,061)		7,759
Cash and cash equivalents, beginning of period	12,880		4,788
Restricted cash, beginning of period	2,820		922
Cash, cash equivalents and restricted cash, beginning of period	15,700		5,710
Cash and cash equivalents, end of period	3,934		13,469
Restricted cash, end of period	3,705		—
Cash, cash equivalents and restricted cash, end of period	$	7,639	$	13,469


	Nine Months Ended
	September 30,
	2021		2020
Supplemental disclosure of cash flow information:
Cash paid for interest	$	874	$	2,603
Cash paid for taxes, net	—		249
Property, plant and equipment purchases in accounts payable	911		403
Gain on Paycheck Protection Program Loan Forgiveness	(4,000)		—

The accompanying notes are an integral part of these statements.

NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

The accompanying condensed consolidated financial statements of Nuverra Environmental Solutions, Inc. and its subsidiaries (collectively, “Nuverra,” the “Company,” “we,” “us,” or “our”) are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Our condensed consolidated balance sheet as of December 31, 2020, included herein, has been derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (or “GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 16, 2021 (the “2020 Annual Report on Form 10-K”).

All dollar and share amounts in the footnote tabular presentations are in thousands, except per share amounts and unless otherwise noted.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates.

There have been no other material changes or developments in our significant accounting policies or evaluation of accounting estimates and underlying assumptions or methodologies from those disclosed in our 2020 Annual Report on Form 10-K.

Restricted Cash

On November 16, 2020, we entered into a Loan Agreement (the “Master Loan Agreement”) with First International Bank & Trust, a North Dakota banking corporation (the “Lender”), for: (i) a $13.0 million equipment term loan (the “Equipment Loan”); (ii) a $10.0 million real estate term loan (the “CRE Loan”); (iii) a $5.0 million operating line of credit (the “Operating LOC Loan”); and (iv) a $4.839 million letter of credit facility (the “Letter of Credit Facility”), which collectively may be referred to as the “Loans”. The Letter of Credit Facility was amended on January 25, 2021 and August 19, 2021, in order to increase the maximum availability thereunder to $5.880 million. The Master Loan Agreement also required the Company deposit into a reserve account held by the Lender (the “Reserve Account”) the sum of $2.5 million and make additional monthly deposits of $100,000 into the Reserve Account. In connection with the closing of the Loans, the Company repaid all outstanding obligations in full under (a) our First Lien Credit Agreement (the “First Lien Credit Agreement”), by and among the lenders party thereto, ACF FinCo I, LP, as administrative agent, and the Company and (b) our Second Lien Term Loan Agreement (the “Second Lien Term Loan Agreement”) by and among the lenders party thereto, Wilmington Savings Fund Society, FSB, as administrative agent, and the Company, totaling $12.6 million and $8.3 million, respectively. Funds held in the Reserve Account are not accessible by the Company and are pledged as additional security for the CRE Loan, the Operating LOC Loan and the Letter of Credit Facility. We had a restricted cash balance of $3.7 million and $2.8 million as of September 30, 2021 and December 31, 2020, respectively.

Fair Value Measurements

Fair value represents an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

• Level 1 — Observable inputs such as quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

• Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

• Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Liquidity and Going Concern

The Company continues to incur operating losses, and we anticipate losses to continue into the near future. There has been a significant decline in oil and natural gas production activities, which has negatively impacted our customers’ demand for our services, as well as rising costs which has resulted in uncertainty surrounding the potential impact on our cash flows, results of operations and financial condition.

Due to high costs and uncertainty of our customers increasing their production activities there is substantial doubt as to the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued. In order to mitigate these conditions, the Company has undertaken various initiatives that include reducing our costs, increasing of our “pricing and services,” and leaving areas that are not profitable.

Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The standard removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard will be effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We adopted this Topic 740 on January 1, 2021. The adoption of the new tax standard did not have a material effect on our consolidated financial statements.

Note 2 - Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). Due to the issuance of ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), and the fact that we are a smaller reporting company, the new standard is effective for reporting periods beginning after December 15, 2022. The standard replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We plan to adopt the new credit loss standard effective January 1, 2023. We do not expect the new credit loss standard to have a material effect on our consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform, if certain criteria are met. ASU No. 2020-04 only applies to contracts and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The new standard is effective for all entities as of March 12, 2020 through December

31, 2022. We are currently evaluating the impact of the new reference rate reform practical expedient will have on our consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815–40). ASU No. 2020-06 simplifies the accounting for certain convertible instruments, amends the guidance for the derivatives scope exception for contracts in an entity’s own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. The standard may be adopted using either a retrospective or modified retrospective method. The new standard will be effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We do not expect the adoption of the new standard to have a material effect on our consolidated financial statements.

Note 3 - Revenues

Revenues are generated upon the performance of contracted services under formal and informal contracts with customers. Revenues are recognized when the contracted services for our customers are completed in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Sales and usage-based taxes are excluded from revenues. Payment is due when the contracted services are completed in accordance with the payment terms established with each customer prior to providing any services. As such, there is no significant financing component for any of our revenues.

Some of our contracts with customers involve multiple performance obligations as we are providing more than one service under the same contract, such as water transport services and disposal services. However, our core service offerings are capable of being distinct and also are distinct within the context of contracts with our customers. As such, these services represent separate performance obligations when included in a single contract. We have standalone pricing for all of our services which is negotiated with each of our customers in advance of providing the service. The contract consideration is allocated to the individual performance obligations based upon the standalone selling price of each service, and no discount is offered for a bundled services offering.

Contract Assets

There was no contract asset recorded on the consolidated balance sheets as of September 30, 2021 and December 31, 2020.

Disaggregated Revenues

The following tables present our revenues disaggregated by revenue source for each reportable segment for the three and nine months ended September 30, 2021 and September 30, 2020:


	Three months ended September 30, 2021
	Rocky Mountain		Northeast		Southern		Corporate/Other		Total
Water Transport Services	$	9,244	$	4,715	$	2,748	$	—	$	16,707
Disposal Services	1,813		1,473		1,815		—		5,101
Other Revenue	691		57		47		—		795
Total Service Revenue	11,748		6,245		4,610		—		22,603

Rental Revenue	2,175		8		—		—		2,183

Total Revenue	$	13,923	$	6,253	$	4,610	$	—	$	24,786


	Three months ended September 30, 2020
	Rocky Mountain		Northeast		Southern		Corporate/Other		Total
Water Transport Services	$	8,165	$	5,613	$	2,299	$	—	$	16,077
Disposal Services	1,380		2,634		1,624		—		5,638
Other Revenue	660		266		25		—		951
Total Service Revenue	10,205		8,513		3,948		—		22,666

Rental Revenue	1,103		27		—		—		1,130

Total Revenue	$	11,308	$	8,540	$	3,948	$	—	$	23,796


	Nine months ended September 30, 2021
	Rocky Mountain		Northeast		Southern		Corporate/Other		Total
Water Transport Services	$	27,814	$	15,847	$	7,376	$	—	$	51,037
Disposal Services	4,840		5,163		4,811		—		14,814
Other Revenue	1,733		378		80		—		2,191
Total Service Revenue	34,387		21,388		12,267		—		68,042

Rental Revenue	5,140		43		—		—		5,183

Total Revenue	$	39,527	$	21,431	$	12,267	$	—	$	73,225


	Nine months ended September 30, 2020
	Rocky Mountain		Northeast		Southern		Corporate/Other		Total
Water Transport Services	$	31,128	$	18,746	$	6,680	$	—	$	56,554
Disposal Services	6,769		6,648		5,922		—		19,339
Other Revenue	3,091		1,007		102		—		4,200
Total Service Revenue	40,988		26,401		12,704		—		80,093

Rental Revenue	6,010		95		6		—		6,111

Total Revenue	$	46,998	$	26,496	$	12,710	$	—	$	86,204

Water Transport Services

The majority of our revenues are from the removal and disposal of produced water and flowback water originating from oil and natural gas wells or the transportation of fresh water and produced water to customer sites for use in drilling and hydraulic fracturing activities by trucks or through temporary or permanent water transfer pipelines. Water transport rates for trucking are based upon either a fixed fee per barrel or upon an hourly rate. Revenue is recognized once the water has been transported, or over time, based upon the number of barrels transported or disposed of, or at the agreed upon hourly rate, depending upon the customer contract. Contracts for the use of our water disposal pipeline are priced at a fixed fee per disposal barrel transported, with revenues recognized over time from when the water is injected into our pipeline until the transport is complete. Water transport services are all generally completed within 24 hours with no remaining performance obligation outstanding at the end of each month.

Disposal Services

Revenues for disposal services are generated through fees charged for disposal of fluids near disposal wells and disposal of oilfield wastes in our landfill. Disposal rates are generally based on a fixed fee per barrel of produced water, or on a per ton basis for landfill disposal, with revenues recognized once the disposal has occurred. The performance obligation for disposal services is considered complete once the disposal occurs. Therefore, disposal services revenues are recognized at a point in time.

Other Revenue

Other revenue includes revenues from the sale of “junk” or “slop” oil obtained through the skimming of disposal water. Revenue is recognized for “junk” or “slop” oil sales at a point in time once the goods are transferred.

Rental Revenue

We generate rental revenue from the rental of equipment used in wellsite services. Rental rates are based upon negotiated rates with our customers and revenue is recognized over the rental service period. Revenues from rental equipment are not within the scope of the new revenue standard, but rather are recognized under ASC 842, Leases. As the rental service period for our equipment is very short term in nature and does not include any sales-type or direct financing leases, nor any variable rental components, the adoption of ASC 842 in 2019 did not have a material impact upon our consolidated statement of operations.

Note 4 - Leases

We lease vehicles, transportation equipment, real estate and certain office equipment. We determine if an arrangement is a lease at inception. Operating and finance lease assets represent our right to use an underlying asset for the lease term, and operating and finance lease liabilities represent our obligation to make lease payments arising from the lease. Operating and finance lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. Absent a documented borrowing rate from the lessor, we use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments.

Most of our leases have remaining lease terms of one year to 12 years, with one lease having a term of 99 years. Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with an initial term of twelve months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis. Some of our vehicle leases include residual value guarantees. It is probable that we will owe approximately $2.5 million under the residual value guarantees, therefore this amount has been included in the measurement of the lease liability and leased asset.

The components of lease expense were as follows:


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Lease Cost	Classification	2021		2020		2021		2020
Operating lease cost (a)	General and administrative expenses	$	233	$	464	$	720	$	1,813
Finance lease cost:
Amortization of leased assets	Depreciation and amortization	525		526		1,587		1,689
Interest on lease liabilities	Interest expense, net	117		137		367		426
Variable lease cost	General and administrative expenses	636		626		1,779		2,222
Sublease income	Other income, net	(76)		(38)		(123)		(70)
Total net lease cost		$	1,435	$	1,715	$	4,330	$	6,080

(a) Includes short-term leases, which represented $0.1 million and $0.1 million of the balance for the three months ended September 30, 2021 and September 30, 2020, respectively, and $0.3 million and $0.3 million of the balance for the nine months ended September 30, 2021 and September 30, 2020, respectively.

Supplemental balance sheet, cash flow and other information related to leases was as follows (in thousands, except lease term and discount rate):


Leases	Classification	September 30, 2021		December 31, 2020
Assets:
Operating lease assets	Operating lease assets	$	1,443	$	1,691
Finance lease assets	Property, plant and equipment, net of accumulated depreciation (a)	4,568		6,185
Total leased assets		$	6,011	$	7,876

Liabilities:
Current
Operating lease liabilities	Accrued and other current liabilities	$	229	$	331
Finance lease liabilities	Current portion of long-term debt	1,441		1,420
Noncurrent
Operating lease liabilities	Noncurrent operating lease liabilities	1,213		1,360
Finance lease liabilities	Long-term debt	5,075		6,161
Total lease liabilities		$	7,958	$	9,272

(a) Finance lease assets are recorded net of accumulated amortization of $5.4 million and $3.9 million as of September 30, 2021 and December 31, 2020, respectively.


Lease Term and Discount Rate	September 30, 2021		December 31, 2020
Weighted-average remaining lease term (in years):
Operating leases	44.1		39.9
Finance leases	2.2		3.2

Weighted-average discount rate:
Operating leases	10.00	%	10.08	%
Finance leases	6.77	%	6.77	%


	Nine Months Ended
	September 30,
Supplemental Disclosure of Cash Flow Information and Other Information	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	720	$	1,813
Operating cash flows from finance leases	367		426
Financing cash flows from finance leases	1,065		1,082


Leased assets obtained in exchange for new finance lease liabilities	—		349

Maturities of lease liabilities are as follows:


	September 30, 2021
	Operating Leases (a)		Finance Leases (b)
Remainder of 2021	$	241	$	466
2022	347		1,832
2023	200		3,447
2024	190		383
2025	188		423
Thereafter	6,522		1,062


Total lease payments	7,688		7,613
Less amount representing interest	(6,246)		(1,097)
Present value of total lease liabilities	1,442		6,516
Less current lease liabilities	(229)		(1,441)
Long-term lease liabilities	$	1,213	$	5,075

(a) Operating lease payments do not include any options to extend lease terms that are reasonably certain of being exercised.

(b) Finance lease payments include $1.4 million related to options to extend lease terms that are reasonably certain of being exercised.

Note 5 - Equity

Preferred Stock

The Board is authorized to issue up to 1.0 million shares of preferred stock, par value $0.01, and to determine the powers, preferences, privileges, rights, including voting rights, qualifications, limitations and restrictions of those shares without further vote or act by the common stockholders. There was no preferred stock outstanding as of September 30, 2021 and December 31, 2020.

Series A Preferred Stock

On December 21, 2020, the Board declared a dividend of one right (a “Right”) for each of the Company’s issued and outstanding shares of common stock, par value $0.01 per share (“Common Stock”). The dividend was paid to the stockholders of record at the close of business on January 4, 2021 (the “Record Date”). Each Right entitles the registered holder, subject to the terms of the Rights Agreement (as defined below), to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”), at a price of $7.02, subject to certain adjustments. The description and terms of the Rights are set forth in the Rights Agreement, dated as of December 21, 2020 (the “Rights Agreement”), between the Company and American Stock Transfer & Trust Company, LLC.

The Rights, which are not exercisable until the Distribution Date (as defined in the Rights Agreement), will expire prior to the earliest of (i) the close of business on December 21, 2021, unless extended prior to expiration (provided any such extension will be submitted to the stockholders of the Company for ratification at the next annual meeting following such extension); (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement; (iii) the time at which the Rights are exchanged pursuant to the Rights Agreement and (iv) the time at which the Rights are terminated upon the occurrence of certain transactions.

Each share of Preferred Stock will be entitled, when, as and if declared, to a preferential per share quarterly dividend payment equal to the greater of (i) $1.00 per share or (ii) 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, in each case, paid to holders of Common Stock during such period. Each share of Preferred Stock will entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Company. In the event of any merger, consolidation or other transaction in which shares of Common Stock are converted or exchanged, each share of Preferred Stock will be entitled to receive 1,000 times the amount received per one share of Common Stock.

Other Equity Issuances

During the nine months ended September 30, 2021, we issued common stock for our stock-based compensation program, which is discussed further in Note 13.

Note 6 - Earnings Per Common Share

Net loss per basic and diluted common share have been computed using the weighted average number of shares of common stock outstanding during the period. For the three and nine months ended September 30, 2021 and September 30, 2020, no shares of common stock underlying restricted stock or warrants were included in the computation of diluted earnings per common share because the inclusion of such shares would be anti-dilutive based on the net losses reported for those periods.

The following table presents the calculation of basic and diluted net loss per common share, as well as the anti-dilutive stock-based awards that were excluded from the calculation of diluted net loss per share for the periods presented (in thousands except per share amounts):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020


Numerator: Net loss	$	(7,170)	$	(7,125)	$	(18,630)	$	(36,948)

Denominator:
Weighted average shares—basic	16,069		15,771		15,981		15,762
Common stock equivalents	—		—		—		—
Weighted average shares—diluted	16,069		15,771		15,981		15,762

Loss per common share:


Net loss per basic common share	$	(0.45)	$	(0.45)	$	(1.17)	$	(2.34)



Net loss per diluted common share	$	(0.45)	$	(0.45)	$	(1.17)	$	(2.34)







Anti-dilutive stock-based awards excluded:	241		422		300		409

Note 7 - Intangible Assets

Intangible assets consist of the following:


	September 30, 2021
	Gross Carrying Amount		Accumulated Amortization		Net		Remaining Useful Life (Years)
Disposal permits	$	540	$	(385)	$	155	4.2

Total intangible assets	540		(385)		155		4.2


	December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Net		Remaining Useful Life (Years)
Disposal permits	$	540	$	(346)	$	194	4.8
Trade name	799		(799)		—		0.0
Total intangible assets	$	1,339	$	(1,145)	$	194	4.8

The disposal permits are related to the Rocky Mountain, Northeast and Southern divisions. The remaining weighted average useful lives shown are calculated based on the net book value and remaining amortization period of each respective intangible asset.

Amortization expense was $14.0 thousand and $0.1 million for the three months ended September 30, 2021 and September 30, 2020, respectively, and $40.0 thousand and $0.2 million for the nine months ended September 30, 2021 and September 30, 2020, respectively.

Note 8 - Assets Held for Sale and Impairment

Impairment Charges

We had no impairment charges during the nine months ended September 30, 2021. Impairment charges of $15.6 million were recorded during the nine months ended September 30, 2020.

Assets Held for Sale

During the nine months ended September 30, 2020, certain property classified as “Assets held for sale” on the condensed consolidated balance sheet located in the Rocky Mountain division was re-evaluated for impairment based on an accepted offer from a buyer that indicated fair value of the real property was lower than its net book value, and impairment charges of $0.6 million were recorded during the nine months ended September 30, 2020, which is included in “Impairment of long-lived assets” on our consolidated statements of operations. During the nine months ended September 30, 2021, management approved the sale of this property and recognized an additional loss of $0.3 million.

Impairment of Long-Lived Assets

Long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. During 2020, there was a significant decline in oil prices due to the impacts of the outbreak of COVID-19 and the oil supply conflict between two major oil producing countries, which resulted in a decrease in activities by our customers. As a result of these events, we determined that there were indicators that the carrying value of our assets may not be recoverable.

Our impairment review during the nine months ended September 30, 2020 concluded that the carrying values of the assets associated with the landfill in the Rocky Mountain division and trucking equipment in the Southern division were not recoverable as the carrying value exceeded our estimate of future undiscounted cash flows for these asset groups. As a result, we recorded an impairment charge of $15.0 million during the nine months ended September 30, 2020 as the carrying value exceeded fair value, which is included in “Impairment of long-lived assets” on our condensed consolidated statements of operations. The fair value of the assets associated with the landfill and trucking equipment asset groups was determined using discounted estimated future cash flows (Level 3 in the fair value hierarchy).

Note 9 - Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following at September 30, 2021 and December 31, 2020:


	September 30, 2021		December 31, 2020
Accrued payroll and employee benefits	$	3,100	$	2,353
Accrued insurance	2,647		2,263
Accrued legal	89		294
Accrued taxes	1,227		1,282
Accrued interest	404		56

Accrued operating costs	4,070		2,683
Accrued other	1,646		288

Current operating lease liabilities	229		331

Total accrued and other current liabilities	$	13,412	$	9,550

Note 10 - Debt

Debt consisted of the following at September 30, 2021 and December 31, 2020:


				September 30, 2021			December 31, 2020
	Interest Rate	Maturity Date		Carrying Value of Debt (k)			Carrying Value of Debt (k)
Operating LOC Loan (a)	7.00%	Nov. 2021		$	—		$	—
Equipment Loan (b)	3.14%	Nov. 2025		11,785			13,000
CRE Loan (c)	8.00%	Nov. 2032		9,516			9,932
Letter of Credit Facility (d)	7.00%	Nov. 2021		—			—


PPP Loan (e)	1.00%	May 2022		—			4,000
Vehicle Term Loan (f)	5.27%	Dec. 2021		91			363
Equipment Finance Loan (g)	6.50%	Nov. 2022		96			158
Finance leases (h)	6.77%	Various		6,514			7,581
Total debt				28,002			35,034
Debt issuance costs presented with debt (i)				(739)			(928)
Total debt, net				27,263			34,106
Less: current portion of long-term debt (j)			(2,201)			(2,433)
Long-term debt				$	25,062		$	31,673

_____________________

(a) Interest on the Operating LOC Loan accrues at an annual rate equal to the Prime Rate of plus 3.75%, with an interest floor of 7.00%.

(b) Interest on the Equipment Loan accrues at an annual rate equal to the LIBOR Rate plus 3.00%.

(c) Interest on the CRE Loan accrues at an annual rate equal to the Federal Home Loan Bank Rate of Des Moines three-year advance rate plus 4.50%, with an interest rate floor of 8.00%.

(d) The interest rate presented represented the interest rate on the $5.880 million Letter of Credit Facility.

(e) Interest on the PPP Loan (as defined below) accrued at an annual rate of 1.00%. The PPP Loan forgiveness was granted in June 2021.

(f) Interest on the Vehicle Term Loan (as defined below) accrues at an annual rate of 5.27%.

(g) Interest on the Equipment Finance Loan (as defined below) accrues at an annual rate of 6.50%.

(h) Our finance leases include finance lease arrangements related to fleet purchases and real property with a weighted-average annual interest rate of approximately 6.77%, which mature in varying installments between 2021 and 2029.

(i) The debt issuance costs as of September 30, 2021 and December 31, 2020 resulted from refinancing the debt with First International Bank.

(j) The principal payments due within one year for the CRE Loan, Vehicle Term Loan, Equipment Finance Loan and finance leases are included in current portion of long-term debt as of September 30, 2021 and December 31, 2020.

(k) Our Operating LOC Loan, Equipment Loan, CRE Loan, Vehicle Term Loan, Equipment Finance Loan and finance leases bear interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value.

See below for a discussion of material changes and developments in our debt and its principal terms from those described in Note 12 to the consolidated financial statements in our 2020 Annual Report on Form 10-K.

Indebtedness

As of September 30, 2021, we had $28.0 million of indebtedness outstanding, consisting of $11.8 million under the Equipment Loan, $9.5 million under the CRE Loan, $0.1 million under the Vehicle Term Loan, $0.1 million under the Equipment Finance Loan and $6.5 million of finance leases for vehicle financings and real property leases. The PPP Loan forgiveness was granted in June 2021.

As further described below, our Operating LOC Loan, CRE Loan, and Equipment Loan contain certain affirmative and negative covenants, including a minimum debt service coverage ratio (“DSCR”), beginning December 31, 2022, as well as other terms and conditions that are customary for loans of this type. As of September 30, 2021, we were in compliance with all covenants.

Master Loan Agreement

On November 16, 2020, the Company entered into the Master Loan Agreement with Lender. Pursuant to the Master Loan Agreement, Lender agreed to extend to the Company: (i) the Equipment Loan that is subject to the Main Street Priority Loan Facility (the “MSPLF”) as established by the Board of Governors of the Federal Reserve System under Section 13(3) of the Federal Reserve Act; (ii) the CRE Loan; (iii) the Operating LOC Loan; and (iv) the Letter of Credit Facility. On November 18, 2020, the Company was advised by Lender that the Equipment Loan had been approved as a MSPLF, and the Loans were funded and closed on November 20, 2020. In connection with the closing of the Loans, the Company repaid all outstanding obligations in full under the First Lien Credit Agreement and Second Lien Term Loan Agreement totaling $12.6 million and $8.3 million, respectively.

The terms of the Master Loan Agreement provide for customary events of default, including, among others, those relating to a failure to make payment, bankruptcy, breaches of representations and covenants, and the occurrence of certain events. Pursuant to the Master Loan Agreement, the Company must maintain a minimum DSCR of 1.35 to 1.00 beginning December 31, 2022 and annually on December 31 of each year thereafter. The DSCR means the ratio of (i) Adjusted EBITDA to (ii) the annual debt service obligations (less subordinated debt annual debt service) of the Company, calculated based on the actual four quarters ended on the applicable December 31 measurement date. If the DSCR falls below 1.35 to 1.00, then in addition to all other rights and remedies available to Lender, the interest rates on the CRE Loan, the Operating LOC Loan and the Letter of Credit Facility will increase by 1.5% until the minimum DSCR is maintained. The Company may cure a failure to comply with the DSCR by issuing equity interests in the Company for cash and applying the proceeds to the applicable Adjusted EBITDA measurement.

In addition, the Master Loan Agreement limits capital expenditures to $7.5 million annually and requires the Company to maintain a positive working capital position of at least $7.0 million at all times. The Master Loan Agreement also requires the Company deposit into the Reserve Account the sum of $2.5 million and make additional monthly deposits of $100 thousand into the Reserve Account. Funds held in the Reserve Account are not accessible by the Company and are pledged as additional security for the CRE Loan, the Operating LOC Loan and the Letter of Credit Facility.

Amendment to Master Loan Agreement

On August 19, 2021, the Company entered into a Second Amendment to the Master Loan Agreement (the “Second Amendment”) with “the Lender”, pursuant to which the Company and the Lender agreed to amend the Master Loan Agreement in order to increase by $531,166 the maximum availability under the Letter of Credit Facility and make certain other modifications to the terms of the Master Loan Agreement, including (i) modifying the DSCR covenant, contained in section 5(N) of the Master Loan Agreement, so that it would first be tested for the fiscal year ending December 31, 2022, (ii) permitting the sale or other disposition of certain assets and other equipment, and (iii) temporarily increasing the interest rate on the CRE Loan by 1.5% per annum. The Second Amendment also provides for the addition of certain real property located in Mackenzie County, North Dakota to a mortgage previously granted by the Company in favor of the Lender. As amended, the Letter of Credit Facility provides for the issuance of letters of credit of up to $5.880 million in aggregate face amount, and all other terms of the Letter of Credit Facility remain unchanged.

Equipment Loan

The Equipment Loan is evidenced by that certain Promissory Note (Equipment Loan) executed by the Company in the original principal amount of $13.0 million. The Equipment Loan bears interest at a rate of one-month US dollar LIBOR plus 3.00%. Interest payments during the first year will be deferred and added to the loan balance and principal payments during the first two years will be deferred. Monthly amortization of principal will commence on December 1, 2022, with principal amortization payments due in annual installments of 15% on November 16, 2023, 15% on November 16, 2024, and the remaining 70% on the maturity date of November 16, 2025. The Equipment Loan, plus accrued and unpaid interest, may be prepaid at any time at par. The entire outstanding principal balance of the Equipment Loan together with all accrued and unpaid interest is due and payable in full on November 16, 2025. In connection with the Equipment Loan, the Company paid a $130 thousand origination fee to Lender and a $130 thousand origination fee to MSPLF.

The Equipment Loan includes all covenants and certifications required by the MSPLF, including, without limitation, the MSPLF Borrower Certifications and Covenants Instructions and Guidance. In connection with the same, the Company delivered a Borrower Certifications and Covenants (the “MS Certifications and Covenants”) to MS Facilities LLC, a Delaware limited liability company, a special purpose vehicle of the Federal Reserve. Under the MS Certifications and Covenants, the Company is subject to certain restrictive covenants during the period that the Equipment Loan is outstanding and, with respect to certain of those restrictive covenants, for an additional one year period after the Equipment Loan is repaid, including restrictions on the Company’s ability to repurchase stock, pay dividends or make other distributions and limitations on executive compensation and severance arrangements. The Equipment Loan is secured by a first lien security interest in all equipment and titled vehicles of the Company and its subsidiaries.

CRE Loan

The CRE Loan is evidenced by that certain Promissory Note (Real Estate) executed by the Company in the original principal amount of $10.0 million. The CRE Loan bears interest at the Federal Home Loan Bank Rate of Des Moines three-year advance rate plus 4.50% with an interest rate floor of 8.00%. The CRE Loan has a twelve-year maturity. The Company is required to make monthly principal and interest payments, and monthly escrow deposits for real estate taxes and insurance. The entire outstanding principal balance of the CRE Loan together with all accrued and unpaid interest is due and payable in full on November 13, 2032. In connection with the CRE Loan, the Company paid a $150 thousand origination fee to Lender.

The CRE Loan is secured by a first lien real estate mortgage on certain real estate owned by the Company and its subsidiaries and by the Reserve Account. The Company will incur a declining prepayment premium of 6%, 5%, 4%, 3%, 2%, and 1% of the outstanding principal balance of the CRE Loan over the first six years of the loan, respectively. The Company is not permitted to prepay the principal of the CRE Loan more than 5% per year without Lender’s prior written approval.

Operating LOC Loan

The Operating LOC Loan is evidenced by that certain Revolving Promissory Note (Operating Line of Credit Loan) executed by the Company in the original maximum principal amount of $5.0 million. The Operating LOC Loan bears interest at a variable rate, adjusting daily, equal to the Prime Rate plus 3.75%, with an interest rate floor of 7.00%. In connection with the Operating LOC Loan, the Company paid a $50 thousand origination fee to Lender. The Operating LOC Loan is currently undrawn and fully available to the Company.

The Operating LOC Loan is secured by a first lien security interest in all business assets of the Company and its subsidiaries, including without limitation all accounts receivable, inventory, trademarks and intellectual property licenses to which it is a party and by the Reserve Account. The entire outstanding principal balance of the Operating LOC Loan together with all accrued and unpaid interest is due and payable in full on November 14, 2021.

Letter of Credit Facility

The Letter of Credit Facility provides for the issuance of letters of credit of up to $4.839 million in aggregate face amount and is evidenced by that certain Promissory Note (Letter of Credit Loan) executed by the Company. Amounts drawn on letters of credit issued under the Letter of Credit Facility bear interest at a variable rate, adjusting daily, equal to the Prime Rate plus 3.75%, with an interest rate floor of 7.00%. The Letter of Credit Facility has a one-year final maturity on November 19, 2021.

On January 25, 2021, the Letter of Credit Facility was amended in order to increase by $510,000 the maximum availability thereunder. As amended, the Letter of Credit Facility provides for the issuance of letters of credit of up to $5.349 million in aggregate face amount and is evidenced by that certain Amended and Restated Promissory Note (Letter of Credit Loan), dated January 25, 2021, executed by the Company.

On August 19, 2021, the Letter of Credit Facility was amended in order to increase by $531,166 the maximum availability thereunder. As amended, the Letter of Credit Facility provides for the issuance of letters of credit of up to $5.880 million in aggregate face amount. The increase of $531,166 is evidenced by that certain Promissory Note (Letter of Credit Loan-Insurance), dated August 19, 2021, executed by the Company.

In connection with the Letter of Credit Facility, the Company is required to pay an annual fee equal to 3.00% of the maximum undrawn face amount of each letter of credit issued thereunder. The Letter of Credit Facility is secured by a first lien security interest in all business assets of the Company and its subsidiaries and by the Reserve Account.

Paycheck Protection Program Loan

On May 8, 2020, pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020, an indirect wholly-owned subsidiary of the Company (the “PPP Borrower”) received proceeds of a loan (the “PPP Loan”) from First International Bank & Trust (the “PPP Lender”) in the principal amount of $4.0 million. The PPP Loan was evidenced by a promissory note (the “Promissory Note”), dated May 8, 2020. The Promissory Note was unsecured, expected to mature on May 8, 2022, bore interest at a rate of 1.00% per annum, and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration (the “SBA”) under the CARES Act.

Under the terms of the PPP, up to the entire principal amount of the PPP Loan, and accrued interest, may be forgiven if the proceeds are used for certain qualifying expenses over the covered period as described in the CARES Act and applicable implementing guidance issued by the SBA, subject to potential reduction based on the level of full-time employees maintained by the organization during the covered period as compared to a baseline period.

The PPP Borrower used the PPP Loan proceeds for designated qualifying expenses over the covered period and applied for forgiveness of the PPP Loan during September 2020 in accordance with the terms of the PPP. On June 11, 2021, the Company received notification from the PPP Lender that the SBA had approved the PPP Borrower’s application for forgiveness of the entire PPP Loan balance effective June 10, 2021 and that the SBA had remitted to the PPP Lender payment in full of all outstanding principal and interest under the PPP Loan. The Company recognized a gain on the forgiveness that is included on the statement of operations in other income (expense), net.

Vehicle Term Loan

On December 27, 2019, we entered into a Direct Loan Security Agreement (the “Vehicle Term Loan”) with PACCAR Financial Corp as the Secured Party. The Vehicle Term Loan was used to refinance 38 trucks that were previously recorded as finance leases with balloon payments that would have been due in January of 2020. The Vehicle Term Loan matures on December 27, 2021, when the entire unpaid principal balance and interest, plus any other accrued charges, shall become due and payable. The Vehicle Term Loan shall be repaid in installments of $31,879 beginning on January 27, 2020 and on the same day of each month thereafter, with interest accruing at an annual rate of 5.27%.

Equipment Finance Loan

On November 20, 2019, we entered into a Retail Installment Contract (the “Equipment Finance Loan”) with a secured party to finance $0.2 million of equipment. The Equipment Finance Loan matures on November 15, 2022, and shall be repaid in monthly installments of approximately $7 thousand beginning December 2019 and then each month thereafter, with interest accruing at an annual rate of 6.50%.

Note 11 - Derivative Warrants

Upon emergence from chapter 11 on August 7, 2017 (the “Effective Date”), pursuant to the prepackaged plans of reorganization (together, and as amended, the “Plan”), we issued to the holders of the pre-Effective Date 9.875% Senior Notes due 2018 (the “2018 Notes”) and holders of certain claims relating to the rejection of executory contracts and unexpired leases warrants to purchase an aggregate of 118,137 shares of common stock, par value $0.01, at an exercise price of $39.82 per share and a term expiring seven years from the Effective Date. The effective value of the outstanding warrant was zero at September 30, 2021 and December 31, 2020.

Note 12 - Income Taxes

The effective income tax rate for the three and nine months ended September 30, 2021 was 0.0%, which differed from the federal statutory rate of 21.0%. The difference is primarily due to the increase in the valuation allowance on deferred tax assets resulting from current year losses.

The effective income tax rate for the three and nine months ended September 30, 2020 was 0.0% and 0.0%, respectively, which differed from the federal statutory rate of 21.0% primarily due to the increase in the valuation allowance on deferred tax assets resulting from current year losses.

We have significant deferred tax assets, consisting primarily of net operating losses, some of which have a limited life, generally expiring between the years 2032 and 2037, and capital losses, which began to expire in 2020. We regularly assess the evidence available to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred in recent years. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future taxable income.

In light of our continued ordinary losses, at September 30, 2021 we determined that our deferred tax liabilities were not sufficient to fully realize our deferred tax assets. Accordingly, a valuation allowance continues to be required against the portion of our deferred tax assets that is not offset by deferred tax liabilities. We expect our effective income tax rate to be near 0.0% for the remainder of 2021.

Note 13 - Stock-Based Compensation

Award Plans

2017 Long Term Incentive Plan

Pursuant to the requirements of the Plan, on February 22, 2018, the Board approved the Nuverra Environmental Solutions, Inc. 2017 Long Term Incentive Plan (the “Incentive Plan”). The Incentive Plan is intended to provide for the grant of equity-based awards to designated members of the Company’s management and employees. Pursuant to the terms of the Plan, the Incentive Plan became effective on the Effective Date. The maximum number of shares of the Company’s common stock that is available for the issuance of awards under the Incentive Plan is 1,772,058. As of September 30, 2021, approximately 324,086 shares were available for issuance under the Incentive Plan.

2018 Restricted Stock Plan for Directors

Further, the Compensation Committee on February 22, 2018 adopted the 2018 Restricted Stock Plan for Directors (the “Director Plan”), which was ratified by the Company’s stockholders at the Company’s 2018 Annual Meeting. The Director Plan provides for the grant of restricted stock to the non-employee directors of the Company. On December 18, 2020, our stockholders approved at our annual stockholder meeting an amendment to increase the number of shares that may be issued under the Director Plan to 250,000 shares of common stock from 100,000 shares of common stock. As of September 30, 2021, 97,939 shares were available for issuance under the Director Plan.

There were 105,263 and 217,005 grants awarded under the Incentive Plan and the Director Plan, respectively, during the three and nine months ended September 30, 2021.

The total grants awarded under both the Incentive Plan and the Director Plan during the three and nine months ended September 30, 2021 and September 30, 2020 are presented in the table below:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2021	2020	2021	2020

Restricted stock grants (1)	105	—	217	75
Total grants in the period	105	—	217	75

(1) Includes expense related to restricted stock awards, performance-based restricted stock units, and time-based restricted stock units granted under the Incentive Plan and the Director Plan.

The total stock-based compensation expense, net of estimated forfeitures, included in “General and administrative expenses” in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and September 30, 2020 was as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020

Restricted stock (1)	$	445	$	324	$	970	$	936
Total expense	$	445	$	324	$	970	$	936

(1) Includes expense related to restricted stock awards, performance-based restricted stock units, and time-based restricted stock units granted under the Incentive Plan and the Director Plan.

At September 30, 2021, the total unrecognized share-based compensation expense, net of estimated forfeitures, was $0.2 million and is expected to be recognized over a weighted average period of 1.1 years.

Note 14 - Commitments and Contingencies

Environmental Liabilities

We are subject to the environmental protection and health and safety laws and related rules and regulations of the United States and of the individual states, municipalities and other local jurisdictions where we operate. Our operations are subject to rules and regulations promulgated by the Texas Railroad Commission, the Texas Commission on Environmental Quality, the Louisiana Department of Natural Resources, the Louisiana Department of Environmental Quality, the Ohio Department of Natural Resources, the Pennsylvania Department of Environmental Protection, the North Dakota Department of Health, the North Dakota Industrial Commission, Oil and Gas Division, the North Dakota State Water Commission, the Montana Department of Environmental Quality and the Montana Board of Oil and Gas, among others. These laws, rules and regulations address environmental, health and safety and related concerns, including water quality and employee safety. We have installed safety, monitoring and environmental protection equipment such as pressure sensors, containment walls, supervisory control and data acquisition systems and relief valves, and have established reporting and responsibility protocols for environmental protection and reporting to such relevant local environmental protection departments as required by law.

We believe we are in material compliance with all applicable environmental protection laws and regulations in the United States and the states in which we operate. We believe that there are no unrecorded liabilities as of the periods reported herein in connection with our compliance with applicable environmental laws and regulations. The condensed consolidated balance sheets at September 30, 2021 and December 31, 2020 did not include any accruals for environmental matters.

Contingent Consideration for Ideal Settlement

On July 25, 2017, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan. On June 28, 2017, the Company and certain of its material subsidiaries (collectively with the Company, the “Nuverra Parties”) filed a motion with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking authorization to resolve unsecured claims related to the $8.5 million contingent consideration from the Ideal Oilfield Disposal LLC acquisition (the “Ideal Settlement”). On July 11, 2017, the Bankruptcy Court entered an order authorizing the Ideal Settlement. Pursuant to the approved settlement terms, the $8.5 million contingent claim was replaced with an obligation on the part of the applicable Nuverra Party to transfer $0.5 million to the counterparties to the Ideal Settlement upon emergence from chapter 11, and $0.5 million when the Ideal Settlement counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit. The $0.5 million due upon emergence from chapter 11 was paid during the five months ended December 31, 2017. The remaining $0.5 million, due when the counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit, has been classified as noncurrent and is reported in “Long-term contingent consideration” on the condensed consolidated balance sheets, as these permits and certificates are not expected to be received within one year.

State Sales and Use Tax Liabilities

During the year ended December 31, 2017, the Pennsylvania Department of Revenue (or “DOR”) completed an audit of our sales and use tax compliance for the period January 1, 2012 through May 31, 2017. As a result of the audit, we were assessed by the DOR for additional state and local sales and use tax plus penalties and interest. During the years ended December 31, 2017 and 2018, we disputed various claims in the assessment made by the DOR through the appropriate boards of appeal and were able to obtain relief for many of the contested claims. However, in January of 2019, the final appeals board upheld an assessment of sales tax and interest that relates to one material position. We have appealed this decision to the Commonwealth of Pennsylvania as we continue to believe that the transactions involved are exempt from sales tax in Pennsylvania, and therefore we have not recorded an accrual as of September 30, 2021. If we lose this appeal, which could take several years to settle, we estimate that we would be required to pay between $1.0 million and $1.5 million to the DOR.

Surety Bonds and Letters of Credit

At September 30, 2021, and December 31, 2020, we had surety bonds outstanding of approximately $4.1 million and $4.2 million respectively, primarily to support financial assurance obligations related to our landfill and disposal wells. Additionally, at September 30, 2021 and December 31, 2020, we had outstanding irrevocable letters of credit each totaling $5.4 million, to support various agreements, leases and insurance policies.

Note 15 - Legal Matters

Litigation

There are various lawsuits, claims, investigations and proceedings that have been brought or asserted against us, which arise in the ordinary course of business, including actions with respect to securities and shareholder class actions, personal injury, vehicular and industrial accidents, commercial contracts, legal and regulatory compliance, securities disclosure, labor and employment, and employee benefits and environmental matters, the more significant of which are summarized below. We record a provision for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter.

We believe that we have valid defenses with respect to legal matters pending against us. Based on our experience, we also believe that the damage amounts claimed in pending lawsuits are not necessarily a meaningful indicator of our potential liability. Litigation is inherently unpredictable, and it is possible that our financial condition, results of operations or cash flow could be materially affected in any particular period by the resolution of one or more of the legal matters pending against us. Based on information currently known to our management, we do not expect the outcome in any of these known legal proceedings, individually or collectively, to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Confirmation Order Appeal

On July 26, 2017, David Hargreaves, an individual holder of 2018 Notes, appealed the Confirmation Order to the District Court of the District of Delaware (the “District Court”) and filed a motion for a stay pending appeal from the District Court. Although the motion for a stay pending appeal was denied, the appeal remained pending and the District Court heard oral arguments in May 2018, and in August 2018, the District Court issued an order dismissing the appeal. Hargreaves subsequently appealed the District Court’s decision to the United States Court of Appeals for the Third Circuit (the “Appellate Court”). The parties filed appellate briefs in December 2018 and January 2019, and presented oral arguments to a three-judge panel of the Appellate Court in November 2020. On January 6, 2021, the Appellate Court issued a decision in favor of Nuverra, affirming the dismissal of the appeal. Hargreaves subsequently filed a petition for rehearing, either by the three-judge panel or en banc by the full Appellate Court, and on February 4, 2021 the Appellate Court issued an order denying the petition for rehearing. On July 6, 2021, Hargreaves filed a petition for a writ of certiorari (the “Petition”) with the Supreme Court of the United States (the “Supreme Court”). On July 21, 2021, Nuverra filed a waiver indicating that it does not intend to file a response to the Petition unless one is requested by the Supreme Court. On October 12, 2021, the Supreme Court issued an order denying the Petition, leaving the previous decision in favor of the Company intact.

Note 16 - Related Party and Affiliated Company Transactions

There have been no significant changes to the other related party transactions as described in Note 23 to the consolidated financial statements in our 2020 Annual Report on Form 10-K.

Note 17 - Segments

We evaluate business segment performance based on income (loss) before income taxes exclusive of corporate general and administrative costs and interest expense, which are not allocated to the segments. Our business is comprised of three operating divisions, which we consider to be operating and reportable segments of our operations: (1) the Rocky Mountain division comprising the Bakken Shale area, (2) the Northeast division comprising the Marcellus and Utica Shale areas and (3) the Southern division comprising the Haynesville Shale area. Corporate/Other includes certain corporate costs and certain other corporate assets.

Financial information for our reportable segments related to operations is presented below.


	Rocky Mountain		Northeast		Southern		Corporate/ Other		Total
Three months ended September 30, 2021
Revenue	$	13,923	$	6,253	$	4,610	$	—	$	24,786
Direct operating expenses	10,518		6,457		3,647		25		20,647
General and administrative expenses	849		387		250		3,408		4,894
Depreciation and amortization	2,257		2,233		1,101		11		5,602
Operating income (loss)	299		(2,824)		(388)		(3,444)		(6,357)
Income (loss) before income taxes	183		(2,907)		(450)		(3,996)		(7,170)

Nine months ended September 30, 2021
Revenue	$	39,527	$	21,431	$	12,267	$	—	$	73,225
Direct operating expenses	33,057		20,308		9,700		—		63,065
General and administrative expenses	2,511		1,072		593		9,089		13,265
Depreciation and amortization	6,862		6,870		3,641		33		17,406
Operating loss	(2,903)		(6,819)		(1,667)		(9,122)		(20,511)
Income (loss) before income taxes	708		(7,105)		(1,831)		(10,402)		(18,630)

As of September 30, 2021
Total assets (a)	$	213,286	$	46,083	$	60,432	$	(150,495)	$	169,306


Three months ended September 30, 2020
Revenue	$	11,308	$	8,540	$	3,948	$	—	$	23,796
Direct operating expenses	9,700		6,405		2,917		—		19,022
General and administrative expenses	836		460		194		2,594		4,084
Depreciation and amortization	2,810		2,514		1,486		11		6,821

Operating loss	(2,038)		(839)		(649)		(2,605)		(6,131)
Loss before income taxes	(2,203)		(945)		(698)		(3,279)		(7,125)

Nine months ended September 30, 2020
Revenue	$	46,998	$	26,496	$	12,710	$	—	$	86,204
Direct operating expenses	39,709		20,369		8,971		—		69,049
General and administrative expenses	3,849		1,528		704		7,372		13,453
Depreciation and amortization	9,149		7,597		5,201		19		21,966
Operating loss	(17,892)		(2,998)		(5,562)		(7,391)		(33,843)
Loss before income taxes	(18,244)		(3,324)		(5,718)		(9,647)		(36,933)

As of September 30, 2020
Total assets (a)	$	60,730	$	57,218	$	63,279	$	14,709	$	195,936
Total assets held for sale	—		—		—		778		778

_____________________

(a) Total assets exclude intercompany receivables eliminated in consolidation.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note about Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related notes thereto. See “Forward-Looking Statements” on page 4 of this Quarterly Report on Form 10-Q (“Quarterly Report”) and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 16, 2021 (the “2020 Annual Report on Form 10-K”), as well as the updated risk factor below in “Part II - Other Information Item 1A. Risk Factors”, and in our other filings with the United States Securities and Exchange Commission (“SEC”) for a description of important factors that could cause actual results to differ from expected results.

Company Overview

Nuverra Environmental Solutions, Inc. and its subsidiaries (collectively, “Nuverra,” the “Company,” “we,” “us,” or “our”) are providers of water logistics and oilfield services to customers focused on the development and ongoing production of oil and natural gas from shale formations in the United States. Our business operations are organized into three geographically distinct divisions: the Rocky Mountain division, the Northeast division, and the Southern division. Within each division, we provide water transport services, disposal services, environmental remediation services and rental and other services associated with the drilling, completion, and ongoing production of shale oil and natural gas. These services and the related revenues are further described in Note 3 in the Notes to the Condensed Consolidated Financial Statements herein.

Rocky Mountain Division

The Rocky Mountain division is our Bakken Shale area business. The Bakken and underlying Three Forks shale formations are the two primary oil producing reservoirs currently being developed in this geographic region, which covers western North Dakota, eastern Montana, northwestern South Dakota and southern Saskatchewan. We have operations in various locations throughout North Dakota and Montana, including yards in Dickinson, Williston, Watford City, Tioga, Stanley, and Beach, North Dakota, as well as Sidney, Montana. Additionally, we operate a financial support office in Minot, North Dakota. As of September 30, 2021, we had 188 employees in the Rocky Mountain division.

Water Transport Services

We manage a fleet of 137 trucks in the Rocky Mountain division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities and for work over activity.

Disposal Services

We manage a network of 20 owned and leased salt water disposal wells with current capacity of approximately 78 thousand barrels of water per day, and permitted capacity of 107 thousand barrels of water per day. Our salt water disposal wells in the Rocky Mountain division are operated under the Landtech brand. Additionally, we operate a landfill facility near Watford City, North Dakota that handles the disposal of drill cuttings and other oilfield waste generated from drilling and completion activities in the region.

Rental and Other Services

We maintain and lease rental equipment to oil and gas operators and others within the Rocky Mountain division. These assets include tanks, loaders, manlifts, light towers, winch trucks, and other miscellaneous equipment used in drilling and completion activities. In the Rocky Mountain division, we also provide oilfield labor services, also called “roustabout work,” where our employees move, set-up and maintain the rental equipment for customers, in addition to providing other oilfield labor services.

Northeast Division

The Northeast division is comprised of the Marcellus and Utica Shale areas, both of which are predominantly natural gas producing basins. The Marcellus and Utica Shale areas are located in the northeastern United States, primarily in Pennsylvania, West Virginia, New York and Ohio. We have operations in various locations throughout Pennsylvania, West Virginia, and Ohio, including yards in Masontown and Wheeling, West Virginia, Williamsport, Pennsylvania, and Cambridge and Cadiz, Ohio. As of September 30, 2021, we had 142 employees in the Northeast division.

Water Transport Services

We manage a fleet of 148 trucks in the Northeast division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region, or to other customer locations for reuse in completing other wells. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities.

Disposal Services

We manage a network of 13 owned and leased salt water disposal wells with current capacity of approximately 19 thousand barrels of water per day, and permitted capacity of approximately 19 thousand barrels of water per day in the Northeast division. Our salt water disposal wells in the Northeast division are operated under the Nuverra, Heckmann, and Clearwater brands.

Rental and Other Services

We maintain and lease rental equipment to oil and gas operators and others within the Northeast division. These assets include tanks and winch trucks used in drilling and completion activities.

Southern Division

The Southern division is comprised of the Haynesville Shale area, a predominantly natural gas producing basin, which is located across northwestern Louisiana and eastern Texas, and extends into southwestern Arkansas. We have operations in various locations throughout eastern Texas and northwestern Louisiana, including a yard in Frierson, Louisiana. Additionally, we operate a corporate support office in Houston, Texas. As of September 30, 2021, we had 62 employees in the Southern division.

Water Transport Services

We manage a fleet of 31 trucks in the Southern division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water to operator locations for use in well completion activities.

In the Southern division, we also own and operate a 60-mile underground twin pipeline network for the collection of produced water for transport to interconnected disposal wells and the delivery of fresh water from water sources to operator locations for use in well completion activities. The pipeline network can currently handle disposal volumes up to approximately 50 thousand barrels per day with 6 disposal wells attached to the pipeline and is scalable up to approximately 106 thousand barrels per day.

Disposal Services

We manage a network of 7 owned and leased salt water disposal wells that are not connected to our pipeline with current capacity of approximately 83 thousand barrels of water per day, and permitted capacity of approximately 206 thousand barrels of water per day, in the Southern division.

Rental and Other Services

We maintain and lease rental equipment to oil and gas operators and others within the Southern division. These assets include tanks and winch trucks used in drilling and completion activities.

Trends Affecting Our Operating Results

COVID-19 Pandemic and Oil Price Fluctuations

The outbreak of the novel coronavirus (“COVID-19” or the “pandemic”) in the first quarter of 2020 and its continued spread across the globe throughout 2020 and 2021 has continued to cause significant economic disruptions, including reduction in energy demand and commodity price volatility. During 2020, federal, state and local governments implemented significant actions to mitigate the public health crisis, including shelter-in-place orders, business closures and capacity limits, quarantines, travel restrictions, executive orders and similar restrictions intended to control the spread of COVID-19. At the end of 2020 and into 2021 most of these restrictions have been adjusted based on the severity of the COVID-19 outbreak in particular communities, sometimes resulting in an easing of restrictions while other times resulting in a reinstatement or tightening of restrictions. The distribution and administration of COVID-19 vaccines has led to the reopening of meaningful elements of the domestic economy throughout most of the country. The economy has started to recover back to pre-pandemic levels and continues to show improvement. The opening of the domestic economy and return to travel has resulted in a generally improved demand for refined products, such as gasoline and jet fuel, and consequently an increase in the demand for crude oil. Overall there has been strong post-pandemic economic activity throughout 2021, this has translated into higher fuel costs which are a significant operating cost for the trucking business. The pandemic created insurmountable financial challenges for many businesses that ultimately closed, however there are still many participants in each of our business who are as active with aggressive pricing services as they have been. Despite businesses closing the competition across the industry has remained strong.

Other Trends Affecting Operating Results

Our results are affected by capital expenditures made by the exploration and production operators in the shale basins in which we operate. These capital expenditures determine the level of drilling and completion activity which in turn impact the amount of produced water, water for fracking, flowback water, drill cuttings and rental equipment requirements that create demand for our services. The primary drivers of these expenditures are current or anticipated prices of crude oil and natural gas. Prices trended lower during the third quarter of 2020 and increased during the third quarter of 2021. The average price per barrel of West Texas Intermediate (“WTI”) crude oil was $70.58 for the three months ended September 30, 2021 as compared to $40.89 for the three months ended September 30, 2020. The average price per million Btu of natural gas as measured by the Henry Hub Natural Gas Index was $4.07 for the three months ended September 30, 2021 compared to $2.00 for the three months ended September 30, 2020. See “COVID-19 Pandemic and Oil Price Declines” above for further discussion.

The rapid drop in crude prices occurred primarily in March and April 2020. Since June 2020, crude oil prices have ranged between $35 and $70 per barrel. The drop in crude oil prices had minimal impact on the first quarter of 2020 operating results as our customers had little time to adjust activity levels. However, our customers’ drilling and completion activity fell substantially beginning in the second quarter of 2020, with many customers also shutting in or lowering production as a result of spot crude prices falling below the cash costs of production in many basins and wells. While crude oil prices have recovered, the increase in activity has been largely in the Permian Basin, but the Bakken is improving as the rig count has more than doubled from the 2020 low. One driver preventing an activity increase is a recent trend by our customers, at the insistence of investors, to limit capital expenditures to cash flow and to return any excess cash to shareholders in the form of dividends or stock repurchases and or to repay debt. While it is unclear if our customers will maintain this stance permanently, to date they have maintained capital discipline despite significant increases in crude oil pricing from the lows experienced in 2020. This has limited additional activity and capital expenditures versus what has been seen historically when commodity prices were at current levels.

As a result of increased operational costs, and values in commodities our customers experienced higher cash flows during this period. Along with many of our competitors, we began reaching out to our customers requesting price increases. While it is unclear to what degree our efforts will be successful, any increase in pricing for our services will help to offset some of these cost pressures. In addition to price increases, we have continued to focus on reducing costs where possible and other savings initiatives instituted during 2020.

A lack of confidence in our industry on the part of the financial markets may result in a lack of access to capital, which could lead to reduced liquidity, an event of default, or an inability to access amounts available under our Operating LOC (as defined below) of $5.0 million, and our Letter of Credit Facility (as defined below) of $5.880 million.

During 2020 and 2021, we have seen continued reuse and water sharing in the Northeast. Some of our customers are using produced and flowback water for fracking as they have determined it is more economical to transport produced water to sites than it is to dispose of the water. Operators are also sharing water with other operators to avoid disposal. Transporting shared or reused water still requires trucking services, but it is generally shorter haul work done at an hourly rate which negatively impacts our revenues.

Other Factors Affecting Our Operating Results

Our results are also driven by a number of other factors, including (i) availability of our equipment, which we have built through acquisitions and capital expenditures, (ii) transportation costs, which are affected by fuel costs, (iii) utilization rates for our equipment, which are also affected by the level of our customers’ drilling and production activities, competition, and our ability to relocate our equipment to areas in which oil and natural gas exploration and production activities are growing, (iv) the availability of qualified employees (or alternatively, subcontractors) in the areas in which we operate, (v) labor costs, (vi) changes in governmental laws and regulations at the federal, state and local levels, (vii) seasonality and weather events, (viii) pricing and (ix) our health, safety and environmental performance record.

While we have agreements in place with some of our customers to establish pricing for our services and various other terms and conditions, these agreements typically do not contain minimum volume commitments or otherwise require the customer to use us. Accordingly, our customer agreements generally provide the customer the ability to change the relationship by either in-sourcing some or all services we have historically provided or by contracting with other service providers. As a result, even with respect to customers with which we have an agreement to establish pricing, the revenue we ultimately receive from that customer, and the mix of revenue among lines of services provided, is unpredictable and subject to variation over time.

According to the U.S. Bureau of Labor Statistics, 4 million Americans quit their jobs in July 2021; ( “The Great Resignation” ) with a record breaking 10.9 million open jobs at the end of July. We are experiencing increased pressure on wages as other parts of the economy have remained strong or improved with in our industry. This phenomenon has required us to evaluate and in some cases adjust hourly rates and salaries for drivers and mechanics. We are facing challenges to recruit and retain drivers who historically migrated to competitors within energy industry in search of a higher compensation structure. Our intent is to retain the current talent and hire new employees for driving and non-driving jobs, focusing on growth, values, and transparency to keep good employees.

The results reported in the accompanying condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our 2020 Annual Report on Form 10-K.

Results of Operations:

Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020

The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):


	Three Months Ended
	September 30,				Increase (Decrease)
	2021		2020		2021 versus 2020
Revenue:
Service revenue	$	22,603	$	22,666	$	(63)	(0.3)	%
Rental revenue	2,183		1,130		1,053		93.2	%
Total revenue	24,786		23,796		990		4.2	%
Costs and expenses:
Direct operating expenses	20,647		19,022		1,625		8.5	%
General and administrative expenses	4,894		4,084		810		19.8	%
Depreciation and amortization	5,602		6,821		(1,219)		(17.9)	%



Total costs and expenses	31,143		29,927		1,216		4.1	%
Operating loss	(6,357)		(6,131)		226		(3.7)	%
Interest expense, net	(645)		(1,014)		(369)		(36.4)	%
Other income	28		20		8		40.0	%

Reorganization items, net	(196)		—		(196)		N/A
Loss before income taxes	(7,170)		(7,125)		45		(0.6)	%



Net loss	$	(7,170)	$	(7,125)	$	45	(0.6)	%

Service Revenue

Service revenue consists of fees charged to customers for water transport services, disposal services and other services associated with the drilling, completion, and ongoing production of shale oil and natural gas.

On a consolidated basis, service revenue for the three months ended September 30, 2021 was $22.6 million, down $0.1 million, or 0.3%, from $22.7 million in the prior year period. The decrease in service revenue is primarily due to increases in water transport services in the Rocky Mountain and Southern divisions, offset by a decrease in water transport services in the Northeast division and a decrease in disposal services in the Southern division. As the primary causes of the fluctuations in water transport services and decreases in disposal services are different for all three divisions, see “Segment Operating Results” below for further discussion.

Rental Revenue

Rental revenue consists of fees charged to customers for use of equipment owned by us, as well as other fees charged to customers for items such as delivery and pickup of equipment. Our rental business is primarily located in the Rocky Mountain division, however, we do have some rental equipment available in both the Northeast and Southern divisions.

Rental revenue for the three months ended September 30, 2021 was $2.2 million, up $1.1 million, or 93.2%, from $1.1 million in the prior year period due to an increase in drilling and completion activity, which resulted in higher utilization and pricing of rental equipment in the Rocky Mountain division.

Direct Operating Expenses

The primary components of direct operating expenses are compensation, third-party hauling, fuel and repairs and maintenance costs.

Direct operating expenses for the three months ended September 30, 2021 increased $1.6 million to $20.6 million from $19.0 million in the prior year period. The increase is primarily attributable to higher costs in water transport services and disposal services, coupled with an increase in third-party hauling costs and fleet-related expenses, including fuel and maintenance and repair costs. See “Segment Operating Results” below for further details on each division.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2021 were $4.9 million, up $0.8 million, or 19.8%, from $4.1 million in the three months ended September 30, 2020 due primarily to an increase in compensation costs resulting from an increase in stock based compensation. There were partial wage increases that took effect in March 2021 for employees whose wages had been reduced in prior periods. Included in these expenses for the three months ended September 30, 2021 is approximately $0.8 million of transition costs, which included but were not limited to severance and stock based compensation for executives.

Depreciation and Amortization

Depreciation and amortization for the three months ended September 30, 2021 was $5.6 million, down 17.9% as compared to $6.8 million in the prior year period. The decrease is primarily attributable to a lower depreciable asset base due to the sale of under-utilized or non-core assets as well as an aging asset base that is becoming fully depreciated which is partially offset by asset additions.

Impairment of Long-lived Asset

There were no impairment charges recorded during the three months ended September 30, 2021 and September 30, 2020.

Interest Expense, net

Interest expense, net during the three months ended September 30, 2021 was $0.6 million compared to $1.0 million in the prior year period. The decrease is primarily due to the retirement of the First Lien Credit Agreement and Second Lien Term Loan Agreement (as defined below) and the lower overall effective interest rates on our outstanding debt.

Other Income, net

During the three months ended September 30, 2021, we had other income, net of $28.0 thousand compared to $20.0 thousand in the prior year period. There was no change in fair value of the derivative warrant liability during the three months ended September 30, 2021 and September 30, 2020.

Income Taxes

No income tax expense or benefit was recorded for the three months ended September 30, 2021 or September 30, 2020. The primary item impacting income taxes for the three months ended September 30, 2021 and September 30, 2020 was the valuation allowance against our deferred tax assets. See Note 12 in the Notes to the Condensed Consolidated Financial Statements herein for additional information on income taxes.

Segment Operating Results: Three Months Ended September 30, 2021 and 2020

The following table shows operating results for each of our segments for the three months ended September 30, 2021 and 2020:


	Rocky Mountain		Northeast		Southern		Corporate/Other		Total
Three months ended September 30, 2021
Revenue	$	13,923	$	6,253	$	4,610	$	—	$	24,786
Direct operating expenses	10,518		6,457		3,647		25		20,647

Operating income (loss)	299		(2,824)		(388)		(3,444)		(6,357)

Three months ended September 30, 2020
Revenue	$	11,308	$	8,540	$	3,948	$	—	$	23,796
Direct operating expenses	9,700		6,405		2,917		—		19,022

Operating loss	(2,038)		(839)		(649)		(2,605)		(6,131)

Change
Revenue	$	2,615	$	(2,287)	$	662	$	—	$	990
Direct operating expenses	818		52		730		25		1,625

Operating income (loss)	2,337		(1,985)		261		(839)		(226)

Rocky Mountain

The Rocky Mountain division has experienced a recovery in the third quarter of 2021 compared to the third quarter of 2020. The rig count increased to 23 at the end of September 2021 compared to 10 at the end of the same period of 2020. WTI crude oil price per barrel barrel has improved to an average of $70.58 in this period compared to $40.89 in the third quarter of 2020. The Bakken basin is seeing an overall increased level of activity since the depths of the pandemic, which were still driving the business in the third quarter of 2020. As a result, our revenues increased 23%, quarter over quarter to $13.9 million for the period ending September 30, 2021. The trucking business enjoyed slightly in excess of a 10% increase in revenue in the third quarter of 2021. While the average fluid driver count declined almost 37%, our adjusted rates increased enough to offset the decline in driver count. The rental services increased their activity since rental is highly dependent upon drilling activity. We saw both rental equipment and winch truck hauling increase compared to the third quarter in 2020. On the other hand, our Salt Water Disposal business saw an increase in average daily volumes of approximately 20% and pricing improved approximately 10% during this period. Quarter over quarter there were no material changes in the landfill business as both quarters were affected by capacity limitations while we develop the new cell that should be fully operational during the fourth quarter of 2021.

For the Rocky Mountain division, direct operating costs increased by $0.8 million during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to higher disposal costs, higher third party hauling costs, and higher fuel, maintenance and repair costs.

Northeast

Revenues for the Northeast division decreased by $2.3 million, or 27%, during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The rig count in the Marcellus/Utica basin increased to 38 during the three months ended September 30, 2021 compared to 32 for the three months ended September 30, 2020, with all of the increase associated with the Utica Basin. Natural gas prices per million Btu, as measured by the Henry Hub Natural Gas Index, increased 103.5% to an average of $4.07 for the three months ended September 30, 2021 from an average of $2.00 for the three months ended September 30, 2020. The trucking business contributed to approximately $1 million of the decline in revenue. This reduction was caused by a decline in the average number of drivers to 94 in 2021 from 123 in 2020, primarily due to the closure of the Wellsboro trucking operation in the northern part of the basin and the challenge in keeping drivers given the alternative opportunities they have available. We experienced a very slight increase in pricing for the period. The remainder of the $2.3 million decline is a function of lower volumes and lower prices for the disposal business. Volumes declined approximately 30% during the period as a result of reuse and some downtime at one of the wells and pricing was down slightly in excess of 10% as a result of ongoing competitive pressures.

For the Northeast division, direct operating costs increased by $0.1 million, or 9%, during the three months ended September 30, 2021, as compared to the three months ended September 30, 2020 due to a combination of higher fleet-related expenses, including fuel costs. Operating loss increased by $2.0 million over the prior year period due primarily to $2.3 million in lower revenue, coupled with facility closures.

Southern

Revenues for the Southern division increased 17%, to $0.6 million, during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Rig count increased 31% in the area, to 47 at September 30, 2021, from 36 at September 30, 2020. Natural gas prices per million Btu, as measured by the Henry Hub Natural Gas Index, increased 103.5% to an average of $4.07 for the three months ended September 30, 2021 from an average of $2.00 for the three months ended September 30, 2020. The pipeline volumes and pricing were both marginally lower and revenue for the quarter from the pipeline declined approximately $0.1 million,. The non-pipeline disposal business saw a 35% increase in average daily volumes and pricing for that business increased slightly in excess of 20%, both as a result of the increase in activity. Similarly the trucking revenue increased 20% with an equivalent number of drivers.

For the Southern division, direct operating costs increased by $0.7 million during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 due to an increase in fleet-related expenses, including fuel and maintenance and repair costs and compensation costs. Operating loss decreased by $0.3 million as compared to the prior year as the increase in direct operating expenses was offset by a decrease of $0.4 million in depreciation and amortization expense during the current year.

Corporate/Other

The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general and administrative costs for the three months ended September 30, 2021 were $0.8 million higher than those reported for the three months ended September 30, 2020 due to approximately $0.8 million of transition costs, which included but were not limited to severance and stock based compensation for executives.

Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020

The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):


	Nine Months Ended
	September 30,				Increase (Decrease)
	2021		2020		2021 versus 2020
Revenue:
Service revenue	$	68,042	$	80,093	$	(12,051)	(15.0)	%
Rental revenue	5,183		6,111		(928)		(15.2)	%
Total revenue	73,225		86,204		(12,979)		(15.1)	%
Costs and expenses:
Direct operating expenses	63,065		69,049		(5,984)		(8.7)	%
General and administrative expenses	13,265		13,453		(188)		(1.4)	%
Depreciation and amortization	17,406		21,966		(4,560)		(20.8)	%
Impairment of long-lived assets	—		15,579		(15,579)		(100.0)	%


Total costs and expenses	93,736		120,047		(26,311)		(21.9)	%
Operating loss	(20,511)		(33,843)		(13,332)		(39.4)	%
Interest expense, net	(1,964)		(3,290)		(1,326)		(40.3)	%
Other income, net	4,051		200		3,851		1,926	%

Reorganization items, net	(206)		—		206		NA
Loss before income taxes	(18,630)		(36,933)		(18,303)		(49.6)	%
Income tax expense	—		(15)		(15)		(100.0)	%


Net loss	$	(18,630)	$	(36,948)	$	(18,318)	NM

Service Revenue

On a consolidated basis, service revenue for the nine months ended September 30, 2021 was $68.0 million, down $12.1 million, or 15.0%, from $80.1 million in the prior year period. The decline in service revenue is primarily due to decreases in water transport services in the Rocky Mountain and Southern divisions, coupled with a decrease of disposal services in all three divisions that primarily occurred in the three months ended March 31, 2020 as compared to the three months ended March 31, 2021 while the activity in the three months ended September 30, 2021 was relatively flat compared to the three months ended September 30, 2020. As the primary causes of the changes in service revenue are different for all three divisions, see “Segment Operating Results” below for further discussion.

Rental Revenue

Rental revenue for the nine months ended September 30, 2021 was $5.2 million, down $0.9 million as compared to the prior year period due primarily to a decline in drilling and completion activity, which resulted in lower utilization and the return of rental equipment by our customers in all three divisions.

Direct Operating Expenses

Direct operating expenses for the nine months ended September 30, 2021 were $63.1 million, down $6.0 million from $69.0 million in the prior year period. The decrease is primarily attributable to lower activity levels in water transport services and disposal services and company-enacted cost cutting measures resulting in a decline in third-party hauling costs, compensation costs, and fleet-related expenses, including fuel and maintenance and repair costs. See “Segment Operating Results” below for further details on each division.

General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2021 amounted to $13.3 million, down $0.2 million from $13.5 million in the prior year period. The decrease was primarily due to a decrease in compensation costs resulting from broad employee wage reductions and layoffs and a $0.1 million decrease in stock-based compensation expense partially offset by $0.8 million of transaction fees during 2020 associated with the credit agreements. Included in these expenses for the nine months ended September 30, 2021 is approximately $2.1 million of transition costs, which included but were not limited to severance and stock based compensation for executives.

Depreciation and Amortization

Depreciation and amortization for the nine months ended September 30, 2021 was $17.4 million, down $4.6 million from $22.0 million in the prior year period. The decrease is primarily attributable to a lower depreciable asset base due to impairment of long-lived assets during 2020, the sale of under-utilized or non-core assets and an aging asset base that is becoming fully depreciated partially offset by asset additions.

Impairment of long-lived assets

There was no impairment charges recorded for the nine months ended September 30, 2021.

Long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Due to the impacts of the outbreak of COVID-19 and the oil supply conflict between two major oil producing countries, there was a significant decline in oil prices during the first quarter of 2020, which resulted in a decrease in activities by our customers. As a result of these events, during the nine months ended September 30, 2020, there were indicators that the carrying values of the assets associated with the landfill in the Rocky Mountain division and trucking equipment in the Southern division were not recoverable and as a result we recorded long-lived asset impairment charges of $15.0 million.

Additionally, during 2020, certain property classified as held for sale in the Rocky Mountain division was evaluated for impairment based on an accepted offer received by the Company for the sale of the property. As a result of that offer, an impairment charge of $0.6 million was recorded during the nine months ended September 30, 2020 to adjust the book value to match the fair value.

Interest Expense, net

Interest expense, net during the nine months ended September 30, 2021 was $2.0 million, or $1.3 million lower than the $3.3 million in the prior year period. The decrease is primarily due to continued principal payments on the First and Second Lien Term Loans (as defined below) and lower overall effective interest rates on our outstanding debt.

Other Income, net

Other income, net for the nine months ended September 30, 2021 was $4.1 million compared to $0.2 million in the prior year period. The increase is primarily due to a gain due to the PPP Loan forgiveness granted to the Company in June 2021, and less debt.

Income Taxes

No income tax expense or benefit was recorded for the nine months ended September 30, 2021, as compared to $15.0 thousand income tax expense for the nine months ended September 30, 2020. The primary item impacting income taxes for the nine months ended September 30, 2021 and September 30, 2020 was the valuation allowance against our deferred tax assets. See Note 12 in the Notes to the Condensed Consolidated Financial Statements herein for additional information on income taxes.

Segment Operating Results: Nine Months Ended September 30, 2021 and 2020

The following table shows operating results for each of our segments for the nine months ended September 30, 2021 and 2020:


	Rocky Mountain		Northeast		Southern		Corporate/Other		Total
Nine months ended September 30, 2021
Revenue	$	39,527	$	21,431	$	12,267	$	—	$	73,225
Direct operating expenses	33,057		20,308		9,700		—		63,065
Impairment of long-lived assets	—		—		—		—		—
Operating loss	(2,903)		(6,819)		(1,667)		(9,122)		(20,511)

Nine months ended September 30, 2020
Revenue	$	46,998	$	26,496	$	12,710	$	—	$	86,204
Direct operating expenses	39,709		20,369		8,971		—		69,049
Impairment of long-lived assets	12,183		—		3,396		—		15,579
Operating loss	(17,892)		(2,998)		(5,562)		(7,391)		(33,843)

Change
Revenue	$	(7,471)	$	(5,065)	$	(443)	$	—	$	(12,979)
Direct operating expenses	(6,652)		(61)		729		—		(5,984)
Impairment of long-lived assets	(12,183)		—		(3,396)		—		(15,579)
Operating (loss) income	14,989		(3,821)		3,895		(1,731)		13,332

Rocky Mountain

Revenues for the Rocky Mountain division for the nine months ended September 30, 2021, declined 16%, to $39.5 million, compared to the same period in 2020. The region recognize revenue of $23.4 million in the first three months of 2020, and the first quarter of 2020 was the last pre-pandemic reporting period. For reference, the division generated $12.8 million of revenue in the first quarter of 2021, a time when the pandemic was still dramatically effecting the division. This $10.6 million decline from the first quarter of 2020 to the first quarter of 2021 was larger than the decline when comparing the full nine month periods. The second two quarters of 2020 were most significantly impacted by the pandemic and business started to stabilize late in the third quarter of 2020. Crude oil prices fell to below $20 per barrel in March of 2020, and recovered to a monthly average high of $47 per barrel in December of 2020. The regional rig count dropped to 10 by the end of the second quarter of 2020 and recovered to 23 by the end of the third quarter of 2021. These commodity price and rig count numbers established the foundation for regional activity over the two nine month periods. The same trends affected each of the businesses in the region; a strong first quarter of 2020 followed by the pandemic. Trucking revenue over the nine month period of 2021 declined slightly less than 10%. The significant decline in company drivers was offset by a $2.6 million increase in revenue associated with third party drivers. Pricing over the comparable periods, on average, was almost flat. The division’s rental business revenue for the nine month period of 2021 declined 17% from the same period in 2020. Almost 45% of the rental revenue for the nine month period of 2020 was generated before the pandemic in the first quarter. Comparing the second and third quarters of 2020 and 2021 shows a 14% increase in revenue for the two quarters of 2021, reflecting the slight recovery from the pandemic. Revenue from the saltwater disposal well business was relatively flat over the two periods, with little change to average pricing and volumes for the two periods. The landfill saw a significant decline in revenue between the two comparable periods. The landfill was fully operational in the first four months of 2020 at which time volumes were restricted reflecting the need to build the new cell that has recently been completed.

For the Rocky Mountain division, direct operating costs decreased by $6.7 million during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 due primarily to lower activity levels for water transport services and disposal services resulting in a decline in third-party hauling costs, compensation costs that are also impacted by company cost cutting initiatives, and fleet-related expenses, including fuel and maintenance and repair costs. The average number of drivers during the first nine of 2021 decreased 37% from the prior year period. The Rocky Mountain division had a $2.9 million operating loss during the current year period, as opposed to $17.9 million in operating loss in the prior year period, due primarily to a $12.2 million long-lived asset impairment charge (as previously discussed above in the consolidated results) and lower activity levels for water transport services and disposal services partially offset by a decrease of $6.6 million in direct operating expenses, $1.3 million in general and administrative expenses and $2.3 million in depreciation and amortization expense.

Northeast

Revenues for the Northeast division decreased by $5.1 million, or 19%, during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Natural gas prices per million Btu, as measured by the Henry Hub Natural Gas Index, increased 93.0%, from an average of $1.87 for the nine months ended September 30, 2020 to an average of $3.61 for the nine months ended September 30, 2021, and the rig count increased 19% from 32 at September 30, 2020 to 38 at September 30, 2021. Despite these positive macroeconomic trends, we continued to face challenges with drivers, leading to trucking contributing to $3.3 million of the decline in revenue. Average driver count decreased from 132 in the nine-month period ending September 30, 2020 to 109 for the same period in 2021. Disposal revenue decreased $1.5 million, driven primarily by average barrel volumes which were lower by 13%, or approximately 1,700 barrels per day versus the prior period. Our customers have continued the industry trend of water reuse and water sharing in 2021. Water reuse inherently reduces trucking activity due to shorter hauling distances as water is being transported between well sites rather than to disposal wells. This also contributed to the decline in the business versus prior periods.

For the Northeast division, direct operating costs decreased by $0.1 million during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 due to a combination of lower activity levels for water transport services and disposal services as well as company cost cutting initiatives resulting in a decline in compensation costs and fleet-related expenses, including fuel costs. Operating loss increased by $3.8 million over the prior year period primarily due to a $5.1 million decrease in revenues, partially offset by a $0.4 million decrease in general and administrative expenses due to headcount and compensation reductions and $0.7 million in lower depreciation and amortization expense.

Southern

Revenues for the Southern division remained relatively flat, decreasing by $0.4 million, or 3%, during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The decrease was due primarily to lower disposal well volumes both on the pipeline and for saltwater disposal assets not connected to our pipeline due in part to the winter storm in the first quarter of 2021 resulting in lost revenue days due to power outages and dangerous road conditions.

These revenue declines were partially offset by an increase in trucking revenue and higher prices received in our non-pipeline disposal wells. Volumes received in our disposal wells not connected to our pipeline decreased by an average of 4,600, barrels per day (or 23%) during the current year and volumes received in the disposal wells connected to the pipeline decreased by an average of 12,990, barrels per day (or 36%) during the current year.

In the Southern division, direct operating costs remained flat during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 due to lower activity levels for disposal services and water transport services. The Southern division had $1.7 million in operating loss during the current year period, as opposed to a $5.6 million loss in the prior year period due primarily to a $3.4 million long-lived asset impairment charge in 2020 (as previously discussed above in the consolidated results).

Corporate/Other

The Corporate general and administrative costs for the nine months ended September 30, 2021 were $1.7 million higher than the nine months ended September 30, 2020 due primarily to approximately $2.1 million of transition costs, which included but were not limited to severance and stock based compensation for executives.

Liquidity and Capital Resources

Cash Flows and Liquidity

Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. Our sources of cash during the nine months ended September 30, 2021 included cash generated by our operations and asset sales. During the nine months ended September 30, 2021 and September 30, 2020, net cash used in operating activities was $5.1 million and net cash provided by operating activity was $11.9 million, respectively, and net loss was $18.6 million and $36.9 million, respectively. As of September 30, 2021, our total indebtedness was $28.0 million and total liquidity was $8.9 million, consisting of $3.9 million of cash and $5.0 million available under the Operating LOC Loan (as defined below).

On November 16, 2020, the Company entered into a Loan Agreement (the “Master Loan Agreement”) with First International Bank & Trust, a North Dakota banking corporation (“Lender”). Pursuant to the Master Loan Agreement, Lender agreed to extend to the Company: (i) a $13.0 million equipment term loan (the “Equipment Loan”); (ii) a $10.0 million real estate term loan (the “CRE Loan”); (iii) a $5.0 million operating line of credit (the “Operating LOC Loan”); and (iv) a $4.839 million letter of credit facility (the “Letter of Credit Facility”) (the CRE Loan, the Equipment Loan, the Operating LOC Loan and the Letter of Credit Facility, collectively may be referred to as the “Loans”). The Loans were funded and closed on November 20, 2020. The Letter of Credit Facility was amended on January 25, 2021 and August 19, 2021 in order to increase the maximum availability thereunder, to $5.880 million. In connection with the closing of the Loans, the Company repaid all outstanding obligations in full under (a) our First Lien Credit Agreement (the “First Lien Credit Agreement”), by and among the lenders party thereto, ACF FinCo I, LP, as administrative agent, and the Company and (b) our Second Lien Term Loan Agreement (the “Second Lien Term Loan Agreement”) by and among the lenders party thereto, Wilmington Savings Fund Society, FSB, as administrative agent, and the Company, totaling $12.6 million and $8.3 million, respectively.

The Company continues to incur operating losses, and we anticipate losses to continue into the near future. Due to high operating costs and lack of significant additional production by our customers, there is uncertainty around our future cash flows, results of operations and financial condition. In order to mitigate these conditions, the Company implemented various initiatives during 2020 and continuing into 2021 that management believes positively impacted our operations, including personnel and salary reductions, other changes to our operating structure to achieve additional cost reductions, and the sale of certain assets. The Company remains exposed to significant uncertainty regarding its future liquidity position and the availability of alternative sources of liquidity.

The following table summarizes our sources and uses of cash for the nine months ended September 30, 2021 and September 30, 2020 (in thousands):


	Nine Months Ended
	September 30,
Net cash provided by (used in):	2021		2020
Operating activities	$	(5,100)	$	11,924
Investing activities	407		(1,206)
Financing activities	(3,368)		(2,959)
Net change in cash, cash equivalents and restricted cash	$	(8,061)	$	7,759

Operating Activities

Net cash used in operating activities was $5.1 million for the nine months ended September 30, 2021. The net loss, after adjustments for non-cash items, used cash of $5.1 million, compared to $1.7 million provided in the corresponding 2020 period. The non-cash items and other adjustments included $17.4 million of depreciation and amortization, and stock-based compensation expense of $1.0 million, partially offset by a gain on PPP Loan forgiveness of $4.0 million and a $1.7 million gain on the sale of assets.

Net cash provided by operating activities was $11.9 million for the nine months ended September 30, 2020. The net loss, after adjustments for non-cash items, provided cash of $1.7 million. Changes in operating assets and liabilities used $10.2 million in cash primarily due to decreases in accounts receivable partially offset by decreases in accounts payable and accrued liabilities. The non-cash items and other adjustments included long-lived asset impairment charges of $15.6 million, $22.0 million of

depreciation and amortization, and stock-based compensation expense of $0.9 million, partially offset by a $0.4 million gain on the sale of assets.

Investing Activities

Net cash provided by investing activities was $0.4 million for the nine months ended September 30, 2021 and primarily consisted of $2.1 million of purchases of property, plant and equipment partially offset by $2.5 million of proceeds from the sale of property, plant and equipment. Asset sales were primarily comprised of the disposition of motor vehicles and under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our fleet upgrades for water transport and disposal services.

Net cash used by investing activities was $1.2 million for the nine months ended September 30, 2020 and primarily consisted of $2.8 million of purchases of property, plant and equipment partially offset by $1.6 million of proceeds from the sale of property, plant and equipment. Asset sales were primarily comprised of the disposition of two properties and under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our truck fleet for water transport services.

Financing Activities

Net cash used in financing activities was $3.4 million for the nine months ended September 30, 2021 and was primarily comprised of $0.4 million of payments on the CRE Loan and $1.4 million of payments on vehicle finance leases and other financing activities.

Net cash used in financing activities was $3.0 million for the nine months ended September 30, 2020 and was primarily comprised of proceeds from the PPP Loan of $4.0 million partially offset by $5.5 million of payments on the First Lien Credit Agreement and Second Lien Term Loan Agreement and $1.5 million of payments on finance leases and other financing activities.

Capital Expenditures

Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. Cash required for capital expenditures for the nine months ended September 30, 2021 totaled $2.1 million compared to $2.8 million for the nine months ended September 30, 2020. These capital expenditures were partially offset by proceeds received from the sale of under-utilized or non-core assets of $2.5 million and $1.6 million in the nine months ended September 30, 2021 and 2020, respectively.

A portion of our transportation-related capital requirements are financed through finance leases (see Note 4 in the Notes to the Condensed Consolidated Financial Statements herein for further discussion of finance leases). We had $0 and $0.3 million of equipment additions under finance leases during the nine months ended September 30, 2021 and September 30, 2020, respectively.

We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale basins in which we operate. Due to the COVID-19 outbreak, we implemented a significant reduction in our capital expenditures budget for fiscal 2021, as discussed above in “Trends Affecting Our Operating Results.” Our planned capital expenditures for 2021 are expected to be financed through cash flow from operations, finance leases, borrowings under our Operating LOC Loan, or a combination of the foregoing.

Indebtedness

As of September 30, 2021, we had $28.0 million of indebtedness outstanding, consisting of $11.8 million under the Equipment Loan, $9.5 million under the CRE Loan, $0.1 million under our vehicle term loan, $0.1 million under our equipment finance loan and $6.5 million of finance leases for vehicle financings and real property leases.

The PPP Borrower used the PPP Loan proceeds for designated qualifying expenses over the covered period and applied for forgiveness of the PPP Loan during September 2020 in accordance with the terms of the PPP, which was granted in full in June 2021. See Note 10 in the Notes to the Condensed Consolidated Financial Statements herein for a discussion about our debt arrangements and related terms.

The Loans contain certain affirmative and negative covenants, including a minimum debt service coverage ratio, beginning December 31, 2022, as well as other terms and conditions that are customary for loans of this type. As of September 30, 2021, we were in compliance with all covenants.

Off Balance Sheet Arrangements

As of September 30, 2021, we did not have any material off-balance-sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies

There have been no significant changes to our Critical Accounting Policies during the nine months ended September 30, 2021 from those disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our quantitative and qualitative disclosures about market risk from those disclosed in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2020 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report, we performed an evaluation, under the supervision and with the participation of our Chief Executive Officer (Principal Executive Officer) and Interim Chief Financial Officer (Principal Financial Officer), of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective at that time to provide reasonable assurance that the information required to be disclosed in our reports filed with the SEC under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and are accumulated and communicated to our management, including the Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2021 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

See “Legal Matters” in Note 15 of the Notes to the Condensed Consolidated Financial Statements for a description of our material legal proceedings.

Item 1A. Risk Factors

In addition to the information set forth in this Quarterly Report, you should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors of our 2020 Annual Report on Form 10-K in addition to the liquidity risk factor below

We may not be able to generate sufficient liquidity to fund our future operating needs and debt service obligations, and we may not be successful in implementing measures to improve our liquidity position

We continue to incur operating losses, and although management has undertaken various initiatives to generate additional liquidity, including reducing operating and administrative costs through employee headcount reductions, closing operating locations that are not profitable, deferring capital expenditures in our continuing business operations, and increasing our prices, we anticipate continuing to incur operating losses into the near future. There can be no assurance that these steps, or any others we might implement, will be sufficient to mitigate the adverse trends we are experiencing in our businesses and the resulting negative impact on our liquidity position.

If we do not generate enough cash flow from operations to satisfy our operating needs and debt service obligations, we may be required to undertake alternative financing plans, such as raising additional capital, incurring additional debt or restructuring our existing debt, or divesting all or a portion of our business or assets. We also may consider other forms of strategic transactions, such as mergers, combinations, joint ventures, asset sales or other forms of strategic transactions involving some or all of our business operations, that have the potential to enhance our prospects and liquidity position. There can be no assurance, however, that we would be able to implement any such alternative financing plans or other strategic transactions on commercially reasonable terms or at all, or that undertaking alternative financing plans or other strategic transactions would provide sufficient liquidity to allow us to meet our debt service obligations and capital expenditure needs or that any such contemplated actions would be permitted under the terms of our existing debt instruments. Any incurrence of additional debt or restructuring of our existing debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business and operations. If we raise additional funds through the issuance of equity or debt securities, our shareholders could experience significant dilution of their ownership interest, and these securities could have rights, preferences, and privileges that are superior to those of our existing common stock. Any divestitures of all or a portion of our business or assets may be on unattractive terms and prices. We also may incur substantial costs in pursuing these alternatives, which could include investment banking and advisory fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses, and other costs. We also may be required to recognize non-cash charges in connection with certain securities we may issue, which may adversely impact our financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed on the “Exhibit Index” set forth below are filed or furnished with this Quarterly Report on Form 10-Q or incorporated by reference as set forth therein.


Exhibit Number		Description


10.1	*	Second Amendment to Loan Agreement, dated August 19, 2021, between Nuverra Environmental Solutions, Inc. and First International Bank & Trust (incorporated by reference to Exhibit 10.1 to Nuverra’s Current Report on Form 8-K filed with the SEC on August 19, 2021).

10.2	*	Promissory Note (Letter of Credit Loan-Insurance), dated August 19, 2021, by Nuverra Environmental Solutions, Inc. in favor of First International Bank & Trust (incorporated by reference to Exhibit 10.2 to Nuverra’s Current Report on Form 8-K filed with the SEC on August 19, 2021).

31.1	*	Rule 13-a-14(a)/15d-14(a) Certification of Principal Executive Officer.

31.2	*	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.

32.1	*	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


101.INS	*	XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

101.SCH	*	XBRL Taxonomy Extension Schema Document.

101.CAL	*	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	*	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	*	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	*	XBRL Taxonomy Extension Presentation Linkbase Document.
104.1	*	Cover Page Interactive Data File - The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

	*	Filed herewith

SIGNATURES

Pursuant to the requirements 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.


NUVERRA ENVIRONMENTAL SOLUTIONS, INC.
(Registrant)

Date:			November 15, 2021

			/s/ Charles K. Thompson
Name:			Charles K. Thompson
Title:			Chief Executive Officer
			(Principal Executive Officer)


			/s/ Eric Bauer
Name:			Eric Bauer
Title:			Executive Vice President and Interim Chief Financial Officer
			(Principal Financial Officer)