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Nuverra Environmental Solutions, Inc. (NESC) SEC Filing 10-K Annual report for the fiscal year ending Saturday, December 31, 2016

Nuverra Environmental Solutions, Inc.

CIK: 1403853 Ticker: NESC


Exhibit 99.1
 
 
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NUVERRA ANNOUNCES FOURTH-QUARTER AND FULL YEAR 2016 RESULTS
SCOTTSDALE, AZ (April 14, 2017) - Nuverra Environmental Solutions, Inc. (OTCQB: NESC) (“Nuverra” or the “Company”) today announced financial and operating results for the fourth quarter and full year ended December 31, 2016.
SUMMARY OF QUARTERLY RESULTS
Fourth quarter revenue was $35.8 million, an increase of approximately 1.0%, or $0.3 million, when compared with revenue of $35.4 million in the third quarter of 2016.
Total costs and expenses, adjusted for special items, were $48.0 million, or a 0.9% increase when compared with $47.5 million in the third quarter of 2016, and a 38.9% reduction in total costs and expenses, adjusted for special items, when compared with the fourth quarter of 2015.
Loss from continuing operations for the fourth quarter was $61.3 million, or a loss of $0.45 per diluted share, compared with a loss from continuing operations of $38.4 million, or a loss of $0.30 per diluted share, in the third quarter of 2016.
Adjusted EBITDA from continuing operations for the fourth quarter was $2.5 million, a decrease of $0.9 million compared with adjusted EBITDA from continuing operations of $3.4 million in the third quarter of 2016.
Total liquidity as of December 31, 2016 was $12.6 million.

FOURTH QUARTER 2016 RESULTS
Fourth quarter revenue was $35.8 million, an increase of $0.3 million, or 1.0%, from $35.4 million in the third quarter of 2016. Revenue increased sequentially based on a mix of pricing and activity improvement as rig counts continued to rebound, partially offset by poor weather conditions in December. In the fourth quarter of 2015, the Company reported revenue of $68.6 million.
Total costs and expenses, adjusted for special items, were $48.0 million, a 0.9% increase compared with total costs and expenses, adjusted for special items, of $47.5 million in the third quarter of 2016. The Company reported total costs and expenses, adjusted for special items, of $78.5 million in the fourth quarter of 2015.
On a year-over-year comparison with the fourth quarter of 2015, the $30.5 million reduction in total costs and expenses, adjusted for special items, included:
Approximately $12.8 million in lower payroll and related expenses, reflecting a 41.0% year-over-year reduction in headcount;
Approximately $2.3 million in lower fuel expense;
Approximately $2.6 million, or 34.7%, in lower general and administrative expenses;
Approximately $3.4 million in lower depreciation and amortization expenses; with,
The balance of $9.4 million related to reductions in other direct operating expenses.

For the fourth quarter of 2016, the Company reported a net loss from continuing operations of $61.3 million, or a loss of $0.45 per diluted share. Special items in the fourth quarter totaled approximately $35.3 million and included $31.7 million for asset impairment charges, partially offset by a $0.7 million gain on the change in fair value of the derivative warrant liability. Additionally, special items included net losses on sales of underutilized assets, non-recurring legal and professional fees, and stock-based compensation expense. Excluding the impact of these special items, fourth quarter adjusted loss from continuing operations was $26.0 million, or a loss of $0.19 per diluted share. This compares with a loss from continuing operations, adjusted for special items, of $26.3 million, or a loss of $0.20 per diluted share, in the third quarter of 2016. The Company reported a loss from continuing operations, adjusted for special items, of $21.8 million, or a loss of $0.79 per diluted share, in the fourth quarter of 2015.
Adjusted EBITDA from continuing operations for the fourth quarter was $2.5 million, a decrease of $0.9 million compared with $3.4 million in the third quarter of 2016. Fourth quarter adjusted EBITDA margin from continuing operations was 7.1%,

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The following information was filed by Nuverra Environmental Solutions, Inc. (NESC) on Friday, April 14, 2017 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-K
__________________________________ 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2016
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 001-33816
__________________________________

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 (A Delaware Corporation)
 __________________________________
I.R.S. Employer Identification No. 26-0287117
14624 N. Scottsdale Rd., Suite 300, Scottsdale, Arizona 85254
Telephone: (602) 903-7802
 __________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
OTCQB
Securities registered pursuant to Section 12(g) of the Act:
None
__________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
  
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
ý
 
 
 
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 Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $5.4 million based on the closing sale price on such date as reported on the OTCQB. Shares held by executive officers, directors and persons owning directly or indirectly more than 10% of the outstanding common stock have been excluded from the preceding number because such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for any other purposes.
The number of shares outstanding of the registrant’s common stock as of March 31, 2017 was 150,940,973.
__________________________________
Documents Incorporated by Reference
None.


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TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K (“Annual 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,” and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the “Exchange 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 expected timing and benefits of our contemplated restructuring under chapter 11 of the United States Bankruptcy Code to improve our long-term capital structure;
our ability to continue operations without interruption prior to and throughout a chapter 11 proceeding;
our ability to continue to meet the needs of our employees, customers, and vendors;
our ability to successfully commence and consummate the restructuring transactions;
our limited liquidity to meet debt obligations and operating needs;
future financial performance and growth targets or expectations;
market and industry trends and developments, including the prolonged decline in oil and natural gas prices; and
the potential benefits of our completed and any future merger, acquisition, disposition, restructuring, and financing 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 Annual 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:
risks and uncertainties associated with the restructuring process, including our inability to obtain confirmation of a plan under chapter 11 of the United States Bankruptcy Code;

failure to implement the restructuring to improve our liquidity and long-term capital structure, and to address our debt service obligations;

the current default under our asset-based revolving credit facility and related cross-defaults under our term loan and indentures governing our notes;

the potential that the holders of our indebtedness may initiate foreclosure actions;

failure to make the scheduled interest payments under the agreements governing our debt obligations, including the upcoming interest payments on our notes;

failure to timely satisfy certain conditions and milestones under the restructuring support agreement;

our inability to maintain relationships with suppliers, customers, employees and other third parties as a result of our chapter 11 filing;

difficulties encountered in restructuring our debt in the chapter 11 bankruptcy proceeding, including our ability to obtain approval of the bankruptcy court with respect to motions or other requests made to the bankruptcy court, including maintaining strategic control as debtor-in-possession;

the effects of the restructuring on the Company and the interests of various constituents, including the holders of our common stock and notes;


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the length of time that the Company will operate under chapter 11 protection and the availability of financing during the pendency of the proceedings;

the potential adverse effects of the chapter 11 proceedings on our liquidity and results of operations;

increased advisory costs to execute a reorganization;

risks of successfully consummating the restructuring within the time frames or on the terms contemplated;

the ability to successfully consummate the bankruptcy proceeding;

risks associated with our indebtedness, including changes to interest rates, deterioration in the value of our machinery and equipment or accounts receivables, our ability to manage our liquidity needs and to comply with covenants under our credit facilities, including the indentures governing our notes;

financial results that may be volatile and may not reflect historical trends due to, among other things, changes in commodity prices or general market conditions, acquisition and disposition activities, fluctuations in consumer trends, pricing pressures, 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 ability to collect outstanding receivables as a result of liquidity constraints on our customers resulting from low oil and/or natural gas prices;

the availability of less favorable credit and payment terms due to the downturn in our industry and our financial condition, including more stringent or costly payment terms from our vendors and additional requirements from sureties to collateralize our performance bonds with letters of credit, which may further constrain our liquidity and reduce availability under our revolving credit facility;

risks associated with our capital structure, including our ability to restructure our indebtedness to access necessary funding to generate sufficient operating cash flow to meet our debt service obligations;

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 or the economic or regulatory environment;

difficulties in identifying and completing acquisitions and divestitures, and differences in the type and availability of consideration or financing for such acquisitions and divestitures;

difficulties in successfully executing our growth initiatives, including difficulties in permitting, financing and constructing pipelines and waste treatment assets and in structuring economically viable agreements with potential customers, joint venture partners, financing sources and other parties;
our ability to attract, motivate and retain key executives and qualified employees in key areas of our business;
fluctuations in prices, transportation costs and demand for commodities such as oil and natural gas;
risks associated with the operation, construction and development of saltwater disposal wells, solids and liquids treatment and transportation assets, landfills and pipelines, including access to additional locations and rights-of-way, 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;
risks associated with new technologies and the impact on our business;
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 or the loss of key customers;

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the impact of changes in laws and regulation on waste management and disposal activities, including those impacting the delivery, storage, collection, transportation, treatment and disposal of waste products, as well as the use or reuse of recycled or treated products or byproducts;
control of costs and expenses;
present and possible future claims, litigation or enforcement actions or investigations;
natural disasters, such as hurricanes, earthquakes and floods, or acts of terrorism, or extreme weather conditions, that may impact our business locations, assets, including wells or pipelines, distribution channels, or which otherwise disrupt our or our customers’ operations or the markets we serve;
the threat or occurrence of international armed conflict;
the unknown future impact on our business from legislation and governmental rulemaking, including the Affordable Care Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules to be promulgated thereunder;
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, transportation and treatment of liquid and solid wastes; and
other risks identified in this Annual 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 Annual 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.

 

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NUVERRA ENVIRONMENTAL SOLUTIONS, INC.
PART I
Item 1. Business
When used in this Annual Report, the terms “Nuverra,” the “Company,” “we,” “our,” and “us” refer to Nuverra Environmental Solutions, Inc. and its consolidated subsidiaries, unless otherwise specified.
Overview
Nuverra Environmental Solutions, Inc. is a leading provider of comprehensive, full-cycle environmental solutions to customers focused on the development and ongoing production of oil and natural gas from shale formations in the United States. We provide one-stop, total environmental solutions and wellsite logistics management, including delivery, collection, treatment, recycling, and disposal of solid and liquid materials that are used in and generated by the drilling, completion, and ongoing production of shale oil and natural gas. Headquartered in Scottsdale, Arizona, Nuverra Environmental Solutions, Inc. was incorporated in Delaware on May 29, 2007 as “Heckmann Corporation.” On May 16, 2013, we changed our name to Nuverra Environmental Solutions, Inc. Our address is 14624 N. Scottsdale Road, Suite 300, Scottsdale, AZ 85254, and our website is http://www.nuverra.com. The contents of our website are not a part of this Annual Report on Form 10-K and shall not be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent we incorporate any such content into such future filing by specific reference thereto.
We utilize a broad array of assets to meet our customers' logistics and environmental management needs. Our logistics assets include trucks and trailers, temporary and permanent pipelines, temporary and permanent storage facilities, ancillary rental equipment, treatment and processing facilities, and liquid and solid waste disposal sites. We provide a suite of solutions to customers who demand safety, environmental compliance and accountability from their service providers.
The following chart describes our focus on providing comprehensive environmental and logistics management solutions that we currently provide or are in the process of implementing and the assets we utilize to execute on our strategy:
 
 
 
Logistics
 
Disposal
 
Treatment    
 
Water Midstream
Solutions
 
-Delivery of fresh water and (beginning in 2017) proppant to drilling sites
-Delivery of drilling mud
-Water procurement
-Staging and storage of equipment and materials
-Rental of wellsite equipment
 
-Liquid waste from hydraulic fracturing
-Liquid waste from ongoing well production
-Solid drilling waste


-Liquid and solid waste from drilling, completion and ongoing well production
-Separation of hydrocarbons from oily waste water
-Recycling of produced water for reuse in well completion activities
 
-Collection and transportation of produced water from wellsites to disposal network via fixed pipeline system
-Supplying fresh water for drilling and completion via pipeline system
-Gathering systems for collection and transportation of flowback and produced water to disposal wells
 
Assets
 
-More than 760 trucks
-Approximately 5,220 tanks
-60 miles of produced water collection pipeline

 
-Appalachian Water Services, LLC (“AWS”) plant: a wastewater treatment recycling facility designed to treat and recycle water involved in the hydraulic fracturing process in the Marcellus Shale area
-Thermal treatment assets for solid drilling waste
 
-50 liquid waste disposal wells
-Solid waste landfill


Our shale solutions business consists of operations in shale basins where customer exploration and production (“E&P”) activities are predominantly focused on shale oil and natural gas as follows:
Oil shale areas: includes our operations in the Bakken and Eagle Ford Shale areas. During 2016, 61% of our revenues from continuing operations were derived from these shale areas.
Natural gas shale areas: includes our operations in the Marcellus, Utica, and Haynesville Shale areas. During 2016, 39% of our revenues from continuing operations were derived from these shale areas.

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We support our customers’ demand for diverse, comprehensive and regulatory compliant environmental solutions required for the safe and efficient drilling, completion and production of oil and natural gas from shale formations. Current services include: (i) logistics management, including via procurement, delivery, collection, storage, treatment, recycling and disposal of solid and liquid materials and waste products; (ii) temporary and permanent water midstream assets, consisting of temporary and permanent pipeline facilities and other water management infrastructure assets; (iii) equipment rental and staging services; and (iv) other ancillary services for E&P companies focused on the extraction of oil and natural gas resources from shale formations.
As part of our environmental and logistics management solutions for water and water-related services, we serve E&P customers seeking fresh water acquisition, temporary or permanent water transmission and storage, transportation, treatment or disposal of fresh flowback and produced water in connection with shale oil and natural gas hydraulic fracturing operations. We also provide services for water pit excavations, well site preparation and well site remediation. We own a 60-mile underground pipeline network in the Haynesville Shale area for the collection of produced water, a fleet of more than 760 trucks for delivery and collection, and approximately 5,220 storage tanks. We also own or lease 50 operating saltwater disposal wells in the Bakken, Marcellus/Utica, Haynesville, and Eagle Ford Shale areas. Additionally, we own Appalachian Water Services, LLC (“AWS”) which operates a wastewater treatment facility specifically designed to treat and recycle water resulting from the hydraulic fracturing process in the Marcellus Shale area.

As part of our environmental and logistics management solutions for solid materials, we provide collection, transportation, treatment and disposal options for solid waste generated by drilling and completion activities, including an oilfield solids disposal landfill that we own and operate in the Bakken Shale area. The landfill is located on a 50-acre site with current permitted capacity of more than 1.7 million cubic yards of airspace. We believe that permitted capacity at this site could be expanded up to a total of 5.8 million cubic yards in the future. During 2014, we completed construction of an advanced solids processing and recycling facility at the landfill site in North Dakota which is named TerrafficientSM, and enables E&P operators to recycle and re-use drill cuttings, bypassing the need for wellsite cuttings pits or special-purpose landfills. Beginning in early 2017, we expanded our service offering to include delivery and staging of proppant for use in well completion activities. Proppant typically consists of silica sand, treated sand or man-made ceramic materials and is used to prop open fissures created by hydraulic fracturing thereby allowing the release of hydrocarbons from the fractured shale formation.
Our shale solutions business is comprised of three geographically distinct divisions, which are further described in Note 20 of the Notes to Consolidated Financial Statements herein:
Northeast Division: comprising the Marcellus and Utica Shale areas;
Southern Division: comprising the Haynesville and Eagle Ford Shale areas; and
Rocky Mountain Division: comprising the Bakken Shale area.
Competitive Strengths
We believe our business possesses the following competitive strengths, which position us to better serve our customers and grow revenue and cash flow:
Leading Transportation and Logistics Network to Control Delivery, Collection, Treatment, Recycling and Disposal.
The products we move within our logistics network include fresh water, drilling fluids, liquid waste, solid drilling waste, and oily wastewater. Our business practices and standards promote the safe and responsible collection, treatment, recycling and/or disposal of restricted environmental waste on behalf of our customers. As we expand our treatment, recycling, and disposal solutions, we believe controlling the products that are processed by these assets through our transportation and logistics network is a competitive strength when compared to competitors that rely more heavily on third-party providers for transportation and logistics expertise.
Our Customers are Highly Focused on Environmental Responsibility and Regulatory Compliance.
Our customers are committed to conducting their operations with high levels of environmental responsibility and regulatory compliance. They value a national environmental solutions provider that is focused on the safe and responsible delivery, collection, treatment, recycling, and disposal of their restricted products. There is a high level of scrutiny on the environmental impact of shale oil and natural gas drilling and production. As a result, we believe there is significant demand for Nuverra’s focus on surface environmental matters.

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National Operating Footprint Appeals to Customers Operating in Multiple Shale Basins.
We are one of the few companies solely focused on surface environmental solutions with a national operating capability and a strong presence in the majority of North American unconventional shale basins. An increasing number of E&P operators have a presence in multiple basins, including a growing number of super majors, majors, and large independent companies. As a result, we believe we have a competitive advantage relative to many smaller local and regional competitors due to our national customer relationships and the demand for consistent and comprehensive solutions to customers' environmental needs across multiple basins.
Differentiated Value Proposition.
We continue to believe the future, long-term growth of domestic production of oil and natural gas in unconventional shale basins presents a unique growth opportunity for companies such as ours that provide comprehensive environmental solutions in a one-stop business model. Despite the prolonged downturn in oil prices, many industry experts and financial analysts are forecasting continuing advances in drilling and completion techniques in the unconventional shale basins in which we operate. These new techniques require significant environmental solutions to manage restricted waste products, and our customers remain committed to the responsible and safe handling of these products. As such, we believe our strategy to provide comprehensive environmental solutions, from collection through treatment, recycling or disposal, provides us with a strong competitive advantage. Many of our competitors offer only a single component of this value chain, with environmental solutions comprising a component of their overall business services. We believe our focus on the spectrum of surface-related environmental solutions makes it possible for us to provide customers with a consistent, compliant, professional, and highly differentiated value proposition.
Operational, Environmental and Regulatory Expertise.
We believe our management team and employees have significant expertise on the issues surrounding environmental waste products and can efficiently and safely provide services to our customers to manage this aspect of their business. We apply this experience to providing excellent service and identifying innovative, efficient solutions for our customers. We expect increasing regulatory compliance will increase the financial and operational burdens on our customers, which may increase demand for our services.
Strategy
Our strategy is to leverage our full-cycle business model to expand relationships with current and new customers and to provide comprehensive environmental solutions, including delivery, collection, treatment, recycling, and disposal of the environmental waste generated from unconventional shale oil and natural gas development and production. The principal elements of our business strategy are to:
Utilize Our Leading Transportation and Logistics Network to Expand Treatment, Recycling, Disposal, Rental and Water Solutions.
We intend to leverage our advanced transportation and logistics system to expand our treatment, recycling, disposal, rental and water midstream pipeline solutions in order to provide efficient and effective methods for the management of solids and fluids throughout the life cycle of customers' wells. We believe as the market in the unconventional shale basins evolves, customers will increasingly value a one-stop provider for all of their environmental solutions, including treatment, recycling, disposal, rental and water pipeline solutions for liquid and solid waste products. Our current transportation and logistics footprint provides the platform from which we can continue to expand our customer network while retaining our ability to provide safe and comprehensive environmental solutions.
Establish and Maintain Leading Market Positions in Core Operating Areas.
We strive to establish and maintain leading market positions within our core operating areas to realize the benefits and operating efficiencies provided by scale and customer penetration, as well as to maximize our returns on invested capital. As a result, we seek to maintain long-term customer relationships by providing comprehensive solutions in a safe, efficient and environmentally compliant manner. Combined with the increasing number of customers operating in multiple basins, we seek to maintain a continuous dialogue with our customers on a local, regional and national level in order to provide consistent solutions-based approaches to their ongoing environmental needs.

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Provide Solutions in a Reliable and Responsible Manner.
We are focused on providing service efficiency and environmental sustainability through responsible practices that comply with all applicable regulatory requirements for our industry. We are committed to protecting the health and safety of our employees, partners and other stakeholders, reducing potential impact to the environment, supporting our communities, and enhancing the operations of our customers by providing exceptional services. These are key tenets that govern our daily activities and support our strategic vision. Our customers require high levels of regulatory, environmental and safety compliance, which we support through continuous employee training, maintenance of our asset base and our approach to developing environmentally sustainable solutions for customers.
Develop and Implement Best Practices to Drive Efficiency and Economy.
We strive to implement best practices throughout our operating divisions, as we continuously seek ways to further enhance operating efficiencies and drive results. In conjunction with these efforts, for example, we have adopted comprehensive, uniform safety programs and training; consolidated a variety of back-office functions in order to expedite throughput; and implemented technologies to enhance the speed and accuracy of field data collection. We believe these programs have contributed to service excellence and differentiate us from our competitors.
Industry Overview
For many years, E&P companies have focused on utilizing the vast resource potential available across many of North America’s unconventional shale areas through the application of horizontal drilling and completion technologies, including multi-stage hydraulic fracturing. We believe the majority of the capital for the continued development of shale oil and natural gas resources will be provided in part by large, well-capitalized domestic and international oil and natural gas companies. We believe these companies are highly focused on environmental responsibility, compliance, and regulatory matters and prefer to utilize experienced, highly qualified national vendors.
Advances in drilling technology and the development of unconventional North American hydrocarbon plays allow previously inaccessible or non-economical formations in the earth’s crust to be accessed by utilizing high pressure methods from water injection (or the process known as hydraulic fracturing) combined with proppant fluids (containing sand grains or ceramic beads) to create new perforation depths and fissures to extract natural gas, oil, and other hydrocarbon resources. Significant amounts of water are required for hydraulic fracturing operations, and subsequently, complex water flows, in the forms of flowback and produced water, represent a waste stream generated by these methods of hydrocarbon exploration and production. In addition to the liquid product stream involved in the hydraulic fracturing process, there are also significant environmental solid waste streams that are generated during the drilling and completion of a well. During the drilling process, a combination of the cut rock, or “cuttings,” mixed with the liquid used to drill the well, is returned to the surface and must be handled in accordance with environmental and other regulations. Historically, much of this solid waste byproduct was buried at the well site. We believe customers will increasingly focus on the treatment and offsite disposal or recycling of the solid waste byproduct. Produced water volumes, which represent water from the formation produced alongside hydrocarbons over the life of the well, are generally driven by marginal costs of production and frequently create a multi-year demand for our services once the well has been drilled and completed.
We primarily operate in the Bakken, Marcellus, Utica, Haynesville and Eagle Ford Shale areas.
The Bakken and underlying Three Forks formations are the two primary reservoirs currently being developed in the Williston Basin, which covers most of western North Dakota, eastern Montana, northwest South Dakota and southern Saskatchewan. The Bakken formation occupies approximately 200,000 square miles of the subsurface of the Williston Basin in Montana, North Dakota and Saskatchewan. The Three Forks formation lies directly below North Dakota’s portion of the Bakken formation, where oil-producing rock is located between layers of shale approximately two miles underground. According to the Assumptions to the Annual Energy Outlook 2016 report issued in January of 2017 by the United States Energy Information Administration (or the "EIA") with data as of January 1, 2014, the Bakken and Three Forks Shale formations in North Dakota, South Dakota, and Montana contain an estimated 22.7 billion barrels of technically recoverable oil reserves. According to the EIA's Monthly Crude Oil Production data, the Bakken Shale area is one of the most actively drilled unconventional resources in North America, with North Dakota crude oil production averaging 1.0 million barrels per day during 2016.
The Marcellus Shale area is located in the Appalachian Basin in the Northeastern United States, primarily in Pennsylvania, West Virginia, New York and Ohio. The Marcellus Shale is the largest natural gas field in North America with approximately 214.2 trillion cubic feet (or "Tcf") of technically recoverable natural gas, according to the EIA's report issued in January of 2017 with data as of January 1, 2014.

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Adjacent to the Marcellus Shale is the Utica Shale, located primarily in southwestern Pennsylvania and eastern Ohio. Still in the early stages of development, the Utica Shale play has three identified areas: oil, condensate and dry natural gas. According to the EIA's report issued in January of 2017 with data as of January 1, 2014, the Utica Shale is estimated to have approximately 188.6 Tcf of technically recoverable natural gas and 2.0 billion barrels of technically recoverable oil reserves.
The Haynesville Shale area is located across northwest Louisiana and east Texas, and extends into Arkansas. The Haynesville Shale area is the third largest natural gas-producing basin in North America, with an estimated 80.3 Tcf of technically recoverable natural gas according to the EIA's report issued in January of 2017 with data as of January 1, 2014.
The Eagle Ford Shale area is a natural gas and oil play located across southern Texas. The play contains a high liquid component, which has led to the definition of three areas: oil, condensate and dry gas. The Eagle Ford Shale is estimated to have approximately 51.4 Tcf of technically recoverable natural gas and 15.3 billion barrels of technically recoverable oil reserves, according to the EIA's report issued in January of 2017 with data as of January 1, 2014.
Customers
Our customers include major domestic and international oil and natural gas companies, foreign national oil and natural gas companies and independent oil and natural gas production companies. In the year ended December 31, 2016, our three largest customers represented 12%, 9% and 8%, respectively, of our total consolidated revenues.
Competitors
Our competition includes small regional service providers, as well as larger companies with operations throughout the continental United States and internationally. Our major competitors are Key Energy Services, Inc., Basic Energy Services, Inc., Superior Energy Services, Inc., Pioneer Energy Services Corp., Forbes Energy Services, Inc., Select Energy Services, MBI Energy Services, and Pinnergy, Ltd.
We differentiate ourselves from our major competitors by our operating philosophy.  We do not, unlike many of our competitors, conduct hydraulic fracturing and/or workover operations. None of these companies focus exclusively on the surface environmental aspects of unconventional oil and natural gas operations, a key aspect of our strategy as we focus on our fluid and solid waste treatment, recycling, and disposal capabilities.  We believe that offering a comprehensive environmental solution to our customers, which includes certainty of control of products from generation through disposal, recycling or reuse is an important value proposition and will increase in importance over time.  We believe our delivery and collection logistics network is a significant competitive advantage relative to competitors that are focused solely on solids treatment, recycling and disposal operations.
Health, Safety & Environment
We are committed to excellence in health, safety and environment ("HS&E") in our operations, which we believe is a critical characteristic of our business. Our customers in the unconventional shale basins, including many of the large integrated and international oil and natural gas companies, require us to meet high standards on HS&E matters. As a result, we believe that being a leading environmental solutions company with a national presence and a dedicated focus on environmental solutions is a competitive advantage relative to smaller, regional companies, as well as companies that provide certain environmental services as ancillary offerings.
Seasonality
Certain of our business divisions are impacted by seasonal factors. Generally, our business is negatively impacted during the winter months due to inclement weather, fewer daylight hours and holidays. During periods of heavy snow, ice or rain, we may be unable to move our trucks and equipment between locations, thereby reducing our ability to provide services and generate revenue. In addition, these conditions may impact our customers’ operations, and, as our customers’ drilling and/or hydraulic fracturing activities are curtailed, our services may also be reduced.
Intellectual Property
We operate under numerous trade names and own several trademarks, the most important of which are “Nuverra,” “HWR,” “Power Fuels,” and “Heckmann Water Resources.” We also have access, through certain exclusive and business relationships, to various water treatment technologies which, based on our experience, we utilize to create cost-effective and proprietary total water treatment solutions for our customers.

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Operating Risks
Our operations are subject to hazards inherent in our industry, including accidents and fires that could cause personal injury or loss of life, damage to or destruction of property, equipment and the environment, suspension of operations and litigation, as described in Note 17 of the Notes to the Consolidated Financial Statements herein, associated with these hazards. Because our business involves the transportation of environmentally regulated materials, we may also experience traffic accidents or pipeline breaks that may result in spills, property damage and personal injury. We have implemented a comprehensive HS&E program designed to minimize accidents in the workplace, enhance our safety programs, maintain environmental compliance and improve the efficiency of our operations.
Discontinued Operations
Our former industrial solutions business, also known as Thermo Fluids Inc. ("TFI"), was sold during the three months ended June 30, 2015. The industrial solutions business previously offered route-based environmental services and waste recycling solutions, providing customers a reliable, high-quality and environmentally responsible solution through a “one-stop shop” of collection and recycling services for waste products including used motor oil (“UMO”), oily water, spent antifreeze, used oil filters and parts washers.
Following an assessment of various alternatives regarding our industrial solutions business in the third quarter of 2013 and a decision to focus exclusively on our shale solutions business, our board of directors approved and committed to a plan to divest TFI in the fourth quarter of 2013. On February 4, 2015, we entered into a definitive agreement with Safety-Kleen, Inc. ("Safety-Kleen"), a subsidiary of Clean Harbors, Inc., whereby Safety-Kleen would acquire TFI for $85.0 million in an all-cash transaction, subject to working capital adjustments. On April 11, 2015, we completed the TFI disposition with Safety-Kleen as contemplated by the purchase agreement. The post-closing working capital reconciliation was completed in 2016, with $3.0 million released from escrow to us, and $1.3 million paid to Safety-Kleen for the post-closing adjustment and certain indemnification claims. (See Note 21 in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion.)
We classified TFI as discontinued operations in our consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014.
Governmental Regulation, Including Environmental Regulation and Climate Change
Our operations are subject to stringent United States federal, state and local laws and regulations concerning the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Additional laws and regulations, or changes in the interpretations of existing laws and regulations, that affect our business and operations may be adopted, which may in turn impact our financial condition. The following is a summary of the more significant existing health, safety and environmental laws and regulations to which our operations are subject.
Hazardous Substances and Waste
The United States Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as “CERCLA” or the “Superfund” law, and comparable state laws impose liability without regard to fault or the legality of the original conduct on certain defined persons, including current and prior owners or operators of a site where a release of hazardous substances occurred and entities that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these “responsible persons” may be liable for the costs of cleaning up the hazardous substances, for damages to natural resources and for the costs of certain health studies.
In the course of our operations, we occasionally generate materials that are considered “hazardous substances” and, as a result, may incur CERCLA liability for cleanup costs. Also, claims may be filed for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants. We also generate solid wastes that are subject to the requirements of the United States Resource Conservation and Recovery Act, as amended, or “RCRA,” and comparable state statutes.
Although we use operating and disposal practices that are standard in the industry, hydrocarbons or other wastes may have been released at properties owned or leased by us now or in the past, or at other locations where these hydrocarbons and wastes were taken for treatment or disposal. Under CERCLA, RCRA and analogous state laws, we could be required to clean up contaminated property (including contaminated groundwater), or to perform remedial activities to prevent future contamination.

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Air Emissions
The Clean Air Act, as amended, or “CAA,” and similar state laws and regulations restrict the emission of air pollutants and also impose various monitoring and reporting requirements. These laws and regulations may require us to obtain approvals or permits for construction, modification or operation of certain projects or facilities and may require use of emission controls.
Global Warming and Climate Change
While we do not believe our operations raise climate change issues different from those generally raised by the commercial use of fossil fuels, legislation or regulatory programs that restrict greenhouse gas emissions in areas where we conduct business or that would require reducing emissions from our truck fleet could increase our costs.
Water Discharges
We operate facilities that are subject to requirements of the United States Clean Water Act, as amended, or “CWA,” and analogous state laws for regulating discharges of pollutants into the waters of the United States and regulating quality standards for surface waters. Among other things, these laws impose restrictions and controls on the discharge of pollutants, including into navigable waters as well as the protection of drinking water sources. Spill prevention, control and counter-measure requirements under the CWA require implementation of measures to help prevent the contamination of navigable waters in the event of a hydrocarbon spill. Other requirements for the prevention of spills are established under the United States Oil Pollution Act of 1990, as amended, or “OPA”, which amended the CWA and applies to owners and operators of vessels, including barges, offshore platforms and certain onshore facilities. Under OPA, regulated parties are strictly liable for oil spills and must establish and maintain evidence of financial responsibility sufficient to cover liabilities related to an oil spill for which such parties could be statutorily responsible.
State Environmental Regulations
Our operations involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants and other regulated substances. Various environmental laws and regulations require prevention, and where necessary, cleanup of spills and leaks of such materials and some of our operations must obtain permits that limit the discharge of materials. Failure to comply with such environmental requirements or permits may result in fines and penalties, remediation orders and revocation of permits. In Texas, we are subject to rules and regulations promulgated by the Texas Railroad Commission and the Texas Commission on Environmental Quality, including those designed to protect the environment and monitor compliance with water quality. In Louisiana, we are subject to rules and regulations promulgated by the Louisiana Department of Environmental Quality and the Louisiana Department of Natural Resources as to environmental and water quality issues, and the Louisiana Public Service Commission as to allocation of intrastate routes and territories for waste water transportation. In Pennsylvania, we are subject to the rules and regulations of the Pennsylvania Department of Environmental Protection and the Pennsylvania Public Service Commission. In Ohio, we are subject to the rules and regulations of the Ohio Department of Natural Resources and the Ohio Environmental Protection Agency. In North Dakota, we are subject to the rules and regulations of the North Dakota Department of Health, the North Dakota Industrial Commission, Oil and Gas Division, and the North Dakota State Water Commission. In Montana, we are subject to the rules and regulations of the Montana Department of Environmental Quality and the Montana Board of Oil and Gas.
Occupational Safety and Health Act
We are subject to the requirements of the United States Occupational Safety and Health Act, as amended, or “OSHA,” and comparable state laws that regulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used or produced in our operations be maintained and provided to employees, state and local government authorities and citizens.
Saltwater Disposal Wells
We operate saltwater disposal wells that are subject to the CWA, the Safe Drinking Water Act, or “SDWA,” and state and local laws and regulations, including those established by the Underground Injection Control Program of the United States Environmental Protection Agency, or “EPA,” which establishes minimum requirements for permitting, testing, monitoring, record keeping and reporting of injection well activities. Our saltwater disposal wells are located in Louisiana, Montana, North Dakota, Ohio and Texas. Regulations in many states require us to obtain a permit to operate each of our saltwater disposal wells in those states. These regulatory agencies have the general authority to suspend or modify one or more of these permits if continued operation of one of our saltwater wells is likely to result in pollution of freshwater, tremors or earthquakes, substantial violation of permit conditions or applicable rules, or leaks to the environment. Any leakage from the subsurface portions of the saltwater wells could cause degradation of fresh groundwater resources, potentially resulting in cancellation of

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operations of a well, issuance of fines and penalties from governmental agencies, incurrence of expenditures for remediation of the affected resource and claims by third parties for property damages and personal injuries.
Transportation Regulations
We conduct interstate motor carrier (trucking) operations that are subject to federal regulation by the Federal Motor Carrier Safety Administration, or “FMCSA,” a unit within the United States Department of Transportation, or “USDOT.” The FMCSA publishes and enforces comprehensive trucking safety regulations, including rules on commercial driver licensing, controlled substance testing, medical and other qualifications for drivers, equipment maintenance, and drivers’ hours of service, referred to as “HOS.” The agency also performs certain functions relating to such matters as motor carrier registration (licensing), insurance, and extension of credit to motor carriers’ customers. Another unit within USDOT publishes and enforces regulations regarding the transportation of hazardous materials, or “hazmat." The waste water and other water flows we transport by truck are generally not regulated as hazmat at this time.
In December 2010, the FMCSA launched a program called Compliance, Safety, Accountability, or “CSA,” in an effort to improve commercial truck and bus safety. CSA uses seven Behavior Analysis and Safety Improvement Categories, or “BASICs,” to determine a motor carrier’s safety performance and compliance relative to other carriers. Five BASICs, including unsafe driving, HOS compliance, vehicle maintenance, controlled substances/alcohol and driver fitness, are publicly available online in the Safety Measurement System (or “SMS”). Crash indicator and hazardous materials (or “HM”) compliance are only available to motor carriers that log into their own safety profile, or enforcement personnel. The BASICs organize data from roadside inspections, including driver and vehicle violations, crash reports from the last two years, and investigation results. Violations adversely affect a company’s SMS results for two years and may prioritize a company for an FMCSA intervention, ranging from warning letters to full on-site investigations that could result in an Out-of-Service Order (or “OOSO”) or a change to a company’s safety rating. Our trucking operations currently hold a “Satisfactory” safety rating from FMCSA (the best rating available) and we are continually monitoring our performance to drive improvement in each of the BASICs.
In January 2016, FMCSA published in the Federal Register a notice of a proposed rule designed to enhance the FMCSA's ability to identify non-compliant motor carriers. The proposed rule would update FMCSA’s safety fitness rating methodology by integrating on-road safety data from inspections, along with the results of carrier investigations and crash reports, to determine a motor carrier’s overall safety fitness on a monthly basis. The proposed rule would also replace the current three-tier federal rating system of “satisfactory,” “conditional,” and “unsatisfactory” for federally regulated commercial motor carriers with a single determination of “unfit,” which would require the carrier to either improve its operations or cease operations. Carriers would be assessed monthly, using fixed failure measures that are identified in the proposed rule. Additionally, stricter standards would be used for those BASICs with a higher correlation to crash risk such as unsafe driving and HOS compliance. Further, violations of a revised list of “critical” and “acute” safety regulations would result in failing a BASIC, and all investigation results would be used, not just those from comprehensive on-site reviews. As a result, a carrier could be proposed unfit by failing two or more BASICs through inspections, investigation results and/or a combination of both.
Our intrastate trucking operations are also subject to various state environmental and waste water transportation regulations discussed under “Environmental Regulations” above. Federal law also allows states to impose insurance and safety requirements on motor carriers conducting intrastate business within their borders, and to collect a variety of taxes and fees on an apportioned basis reflecting miles actually operated within each state.

HOS regulations establish the maximum number of hours that a commercial truck driver may work and are intended to reduce the risk of fatigue and fatigue-related crashes and harm to driver health. Due to the specialized nature of our operations in the oil and gas industry, we qualify for an exception in the federal HOS rules (i.e., the “Oilfield Exemption”). Drivers of most property-carrying commercial motor vehicles have to take at least 34 hours off duty in order to reset their accumulated hours under the 60/70-hour rule, but drivers of property-carrying commercial motor vehicles that are used exclusively to support oil and gas activities can restart with just 24 hours off under the Oilfield Exemption. However, there are other HOS regulations that affect our operations, including the 11-Hour Driving Limit, 14-Hour On Duty Limit, 30-Minute Rest Break, 60/70-Hour Limit On Duty in 7/8 consecutive days. Compliance with these rules directly impacts our operating costs.
Hydraulic Fracturing
Although we do not directly engage in hydraulic fracturing activities, certain of our shale solutions customers perform hydraulic fracturing operations. While we believe that the adoption of new federal and/or state laws or regulations imposing increased regulatory burdens on hydraulic fracturing could increase demand for our services, it is possible that it could harm our business by making it more difficult to complete, or potentially suspend or prohibit, crude oil and natural gas wells in shale formations, increasing our and our customers’ costs of compliance and adversely affecting the services we provide.

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Due at least in part to public concerns that have been raised regarding the potential impact of hydraulic fracturing on drinking water, the EPA has commenced a comprehensive study, at the order of the United States Congress, to assess the potential environmental and health impacts of hydraulic fracturing activities. Additionally, a committee of the United States House of Representatives is also conducting an investigation of hydraulic fracturing practices.
On February 11, 2014, the EPA released a revised underground injection control (UIC) program permitting guidance for wells that use diesel fuels during hydraulic fracturing activities. The EPA developed the guidance to clarify how companies can comply with a law passed by Congress in 2005, which exempted hydraulic fracturing operations from the requirement to obtain a UIC permit, except in cases where diesel fuel is used as a fracturing fluid. On July 16, 2015, EPA’s Inspector General (IG) issued a report entitled “Enhanced EPA Oversight and Action Can Further Protect Water Resources From the Potential Impacts of Hydraulic Fracturing” stating that the EPA should enhance its oversight of permit issuance for hydraulic fracturing by states and develop a plan for responding to concerns about chemicals used in hydraulic fracturing. On May 19, 2014, the EPA issued an Advance Notice of Proposed Rulemaking announcing its intention to develop a rule under the Toxic Substances Control Act (“TSCA”) to require disclosure of chemicals used in hydraulic fracturing, and the EPA’s current regulatory agenda estimates that the proposed TSCA rule will be issued in June 2018.
On October 15, 2012, the new EPA regulations under the Clean Air Act went into effect that require reductions in certain criteria and hazardous air pollutant emissions from hydraulic fracturing wells. The rule includes New Source Performance Standards, or “NSPS,” to address emissions of sulfur dioxide and volatile organic compounds, or “VOCs,” and a separate set of emission standards to address hazardous air pollutants associated with oil and natural gas production and processing activities. The EPA’s final rule requires the reduction of VOC emissions from crude oil and natural gas production facilities by mandating the use of “green completions” for hydraulic fracturing, which requires the operator to recover rather than vent the gas and natural gas liquids that come to the surface during completion of the fracturing process.
On June 13, 2016, the EPA finalized regulations under the Clean Water Act to prohibit wastewater discharges from hydraulic fracturing and other natural gas production to municipal sewage plants (called publicly owned treatment works (or “POTWs”)), with an effective date of August 29, 2016. In December 2016, the EPA announced that it was extending the compliance date of this new rule to August 29, 2019 for those onshore unconventional oil and gas extraction facilities that had been lawfully discharging extraction wastewater to POTWs prior to August 29, 2019, while keeping the August 29, 2016 effective date for all other facilities. In December 2016, the EPA issued a final report entitled “Hydraulic Fracturing for Oil and Gas: Impacts from the Hydraulic Fracturing Water Cycle on Drinking Water Resources in the United States” that concluded that hydraulic fracturing can impact drinking water resources under some circumstances, but stated that the national frequency of impacts on drinking water could not be estimated due to significant data gaps and uncertainties in the available data.
In March 2015, the Department of the Interior (“DOI”) issued regulations requiring that hydraulic fracturing wells constructed on federal lands comply with certain standards and requiring companies engaged in hydraulic fracturing on federal lands to disclose certain chemicals used in the hydraulic fracturing process. The regulations were enjoined by a federal district court in June 2016, and the DOI is currently appealing the ruling to the U.S. Court of Appeals. Legislation, including bills known collectively as the Fracturing Responsibility and Awareness of Chemicals Act, or FRAC Act, have been introduced before both houses of Congress to remove the exemption of hydraulic fracturing under the SDWA and to require disclosure to a regulatory agency of chemicals used in the fracturing process and otherwise restrict hydraulic fracturing. If adopted, such legislation would add an additional level of regulation and necessary permitting at the federal level and could make it more difficult to complete wells using hydraulic fracturing. Similar laws and regulations with respect to chemical disclosure also exist or are being considered in several states, including certain states in which we operate, that could restrict hydraulic fracturing. The Delaware River Basin Commission is also considering regulations which may impact “hydrofracturing” water practices in certain areas of Pennsylvania, New York, New Jersey and Delaware. Some local governments have also sought to restrict drilling in certain areas.
Various state, regional and local governments have implemented, or are considering, increased regulatory oversight of hydraulic fracturing through additional permit requirements, operational restrictions, disclosure requirements, and temporary or permanent bans on hydraulic fracturing in certain environmentally sensitive areas such as certain watersheds. The North Dakota Industrial Commission, Oil and Gas Division proposed regulations requiring owners, operators, and service companies to post the composition of the hydraulic fracturing fluid used during certain hydraulic fracturing stimulations on the FracFocus Chemical Disclosure Registry. The availability of information regarding the constituents of hydraulic fracturing fluids could potentially make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, North Dakota proposed regulations prohibiting the discharge of fluids, wastes, and debris other than drill cuttings into open pits.

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Employees
As of December 31, 2016, we had 799 full time employees, of whom 152 were executive, managerial, sales, general, administrative, and accounting staff, and 647 were truck drivers, service providers and field workers. In December 2015, a collective bargaining representative election was conducted among a unit of drivers in the Utica shale area. Of the eligible voters, 13 cast votes for Teamsters Local Union No. 348 and 12 cast votes against. On December 28, 2015, we filed three objections to the election, beginning the process of contesting the election. Around the same time, we received several unfair labor practice complaints from the National Labor Relations Board (or "NLRB") related to the yard subject to the contested election. In November 2016, we fully resolved all matters related to the collective bargaining unit by entering into a settlement agreement with the NLRB to resolve all pending unfair labor practice charges without admitting any violations of the National Labor Relations Act, and receiving a disclaimer of interest from Teamsters Local Union No. 348, disclaiming any interest in representing the bargaining unit and waiving any claim to being the collective bargaining representative of the employees in the bargaining unit. We have not experienced, and do not expect, any work stoppages, and believe that we maintain a satisfactory working relationship with our employees.
Available Information
Information that we file with or furnish to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to or exhibits included in these reports, are available free of charge on our website at www.nuverra.com soon after such reports are filed with or furnished to the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of all recent press releases. Our reports, including any exhibits included in such reports, that are filed with or furnished to the SEC are also available on the SEC’s website at www.sec.gov. You may also read and copy any materials we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549; information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. You may request copies of these documents from the SEC, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, and Washington, D.C. 20549.
Neither the contents of our website nor that maintained by the SEC are incorporated into or otherwise a part of this filing. Further, references to the URLs for these websites are intended to be inactive textual references only.
Item 1A. Risk Factors
This section describes material risks to our businesses that currently are known to us. You should carefully consider the risks described below. If any of the risks and uncertainties described in the cautionary factors described below actually occurs, our business, financial condition and results of operations could be materially and adversely affected. The risks and factors listed below, however, are not exhaustive. Other sections of this Annual Report on Form 10-K include additional factors that could materially and adversely impact our business, financial condition and results of operations. Moreover, we operate in a rapidly changing environment. Other known risks that we currently believe to be immaterial could become material in the future. We also are subject to legal and regulatory changes. New factors emerge from time to time and it is not possible to predict the impact of all these factors on our business, financial condition or results of operations.
Risks Related to the Restructuring and Our Indebtedness
We have a substantial level of indebtedness and we are not able to generate sufficient cash flow to meet our debt service and other obligations. Due to contraction in our business and constraints imposed by our asset-based revolving credit facility (the “ABL Facility”), coupled with substantial interest payments, there is doubt about our ability to continue as a going concern as we are unable to generate sufficient liquidity to meet our debt obligations, including the interest payments on our 9.875% Senior Notes due 2018 (the “2018 Notes”) and 12.5%/10.0% Senior Secured Second Lien Notes due 2021 (the “2021 Notes”), and operating needs. As a result, we are in default under our ABL Facility, which has caused cross-defaults under our term loan and indentures governing our 2018 Notes and 2021 Notes. We plan to restructure under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) to address our liquidity, capital structure, and debt service obligations.
We are highly leveraged and a substantial portion of our liquidity needs results from debt service requirements and from funding our costs of operations and capital expenditures. As of December 31, 2016, we had $487.6 million of indebtedness outstanding, consisting of $40.4 million of 2018 Notes, $351.3 million of 2021 Notes, $60.7 million under a term loan (the “Term Loan”), $22.7 million under our ABL Facility, $12.5 million of capital leases for vehicle financings and a note payable for the purchase of the remaining interest in AWS. As of February 28, 2017, we had approximately $7.3 million of net availability under our ABL Facility. Our interest expense, net, was approximately $54.5 million in the year ended

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December 31, 2016. We have incurred operating losses from continuing operations of $167.6 million, $195.2 million and $457.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The substantial and extended decline in oil and natural gas prices has resulted in significant reductions in our customers’ operating and capital expenditures. This extended downturn has resulted in reduced demand for our services as well as lower prices and operating margins, and has adversely affected our financial condition, results of operations and cash flows, resulting in a decline in liquidity available to fund our operations. Recent amendments to our ABL Facility have further constrained our liquidity by reducing the maximum revolver commitments and availability thereunder through the implementation of additional reserves and availability blocks. These recent amendments have resulted in a material reduction in the amount we can borrow under the ABL Facility.

Since March 31, 2017, we have been in default under our ABL Facility as we were unable to repay our obligations under the ABL Facility or extend or refinance the ABL Facility before maturity. As a result, the lenders under our ABL Facility are entitled to exercise their rights and remedies under the ABL Facility, the other Loan Documents (as defined under the ABL Facility), and applicable law. In addition, the default under the ABL Facility constitutes an event of cross-default under the Term Loan and indentures governing our 2018 Notes and 2021 Notes. The Company does not currently have sufficient liquidity to repay the obligations under the ABL Facility, Term Loan, or indentures governing our 2018 Notes and 2021 Notes. As such, the holders of the Company’s indebtedness may initiate foreclosure actions at any time.

As we are in default under our ABL Facility, Term Loan, and indentures governing our 2018 Notes and 2021 Notes, and unable to repay the obligations thereunder, the Company intends to file a prepackaged plan of reorganization (the “Plan”) under chapter 11 of the Bankruptcy Code. The Company has entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with the holders of over 80% (the “Supporting Noteholders”) of the Company’s outstanding 2021 Notes to support a financial restructuring pursuant to chapter 11 of the Bankruptcy Code (the "Restructuring"). There can be no assurances that we will be able to successfully consummate the Plan, restructure under chapter 11 of the Bankruptcy Code, or realize all or any of the expected benefits from the Restructuring.

We plan to seek the protection of the Bankruptcy Court, which subjects us to the risks and uncertainties associated with chapter 11 proceedings and may harm our business and place our equity holders at significant risk of losing all of their investment in the Company.

For the duration of our bankruptcy proceedings, our operations and ability to develop and execute our business plan, and our ability to continue as a going concern, are subject to the risks and uncertainties associated with bankruptcy. As such, seeking Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as a chapter 11 case continues, our senior management would be required to spend a significant amount of time and effort attending to the reorganization instead of focusing exclusively on our business operations. Bankruptcy Court protection also might make it more difficult to retain management, including Mark D. Johnsrud, our Chief Executive Officer and Chairman, and other employees necessary to the success and growth of our business. Other significant risks include the following:

our ability to prosecute, confirm and consummate a plan of reorganization with respect to the chapter 11 proceedings;

the high costs of bankruptcy and related fees;

our ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute our business plan post-emergence;

our ability to maintain our relationships with our suppliers, service providers, customers, employees, and other third parties;

our ability to maintain contracts that are critical to our operations;

our ability to execute our business plan in the current depressed commodity price environment; and

the actions and decisions of our debtholders and other third parties who have interests in our chapter 11 proceedings that may be inconsistent with our plans.


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Delays in our chapter 11 proceedings increase the risks of our being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process.

Our Restructuring Support Agreement contemplates the confirmation of the Plan through an orderly prepackaged plan of reorganization, but there can be no assurance that we will be able to implement such a Plan. In order for any proposed plan of reorganization to be confirmed, the Bankruptcy Code, in addition to other legal requirements, requires that at least one impaired class of creditors votes to accept the plan of reorganization. In order for a class to approve a plan of reorganization, approval of over one-half in number of creditors and at least two-thirds in claim amount by those who vote in each impaired class of creditors are required. In addition to obtaining the required votes, the requirements for a Bankruptcy Court to approve a plan of reorganization include, among other judicial findings, that:

we acted in accordance with the applicable provisions of the Bankruptcy Code; and

the plan of reorganization has been proposed in good faith and not by any means forbidden by law.

In the event at least one class of impaired creditors or interest holders that do not vote to accept the plan of reorganization, we would have to satisfy the ‘‘cram down’’ requirements of the Bankruptcy Code and show that the plan of reorganization does not unfairly discriminate and is fair and equitable with respect to those classes of claims and interests that did not vote to accept the plan of reorganization.

We may not be able to obtain approval of a disclosure statement and/or the required votes or the required judicial approval to the proposed plan of reorganization promptly, if at all. In such event, a prolonged chapter 11 bankruptcy proceeding could adversely affect our relationships with customers, suppliers and employees, among other parties, which in turn could adversely affect our business, competitive position, financial condition, liquidity and results of operations and our ability to continue as a going concern. A weakening of our financial condition, liquidity and results of operations could adversely affect our ability to implement our proposed Plan. In addition, if the Plan is not confirmed by the Bankruptcy Court, we may be forced to liquidate our assets.

Once our bankruptcy proceeding is commenced, it is also possible that the Bankruptcy Court may dismiss the proceeding or otherwise decide to abstain from hearing it on procedural grounds. In addition, the confirmation and effectiveness of our Plan is subject to certain conditions and requirements in addition to those described above that may not be satisfied, and the Bankruptcy Court may conclude that the requirements for confirmation and effectiveness have not been satisfied.

Additionally, we have a significant amount of secured indebtedness that is senior to our unsecured indebtedness and a significant amount of total indebtedness that is senior to our existing common stock in our capital structure. The Plan contemplated by the Restructuring Support Agreement provides for a limited recovery for unsecured noteholders and potentially no recovery to equity holders. If the Plan is confirmed, equity holders are at significant risk of losing all of their investment in our Company. Further, there can be no assurances as to the value of any recoveries to our secured creditors.

The Restructuring Support Agreement is subject to significant conditions and milestones that may be difficult for us to satisfy.

There are certain material conditions we must satisfy under the Restructuring Support Agreement, including the timely satisfaction of milestones in the chapter 11 proceedings, such as meeting specified milestones related to the solicitation of votes to approve the Plan, commencement of the chapter 11 cases, confirmation of the Plan, consummation of the Plan, and the entry of orders relating to the debtor-in-possession credit facilities. Our ability to timely complete such milestones is subject to risks and uncertainties many of which are beyond our control.

The Restructuring Support Agreement is subject to significant conditions and milestones that may be beyond our control and may be difficult for us to satisfy. If the Restructuring Support Agreement is terminated, our ability to confirm and consummate the Plan could be materially and adversely affected.

The Restructuring Support Agreement contains a number of termination events, the occurrence of which gives each Supporting Noteholder the right to terminate the Restructuring Support Agreement solely with respect to such Supporting Noteholder. Such termination may result in the loss of support for the Plan by the parties to the Restructuring Support Agreement, which could adversely affect our ability to confirm and consummate the Plan. If the Plan is not consummated, there can be no assurance that we would be able to enter into a new plan or that any new plan would be as favorable to holders of claims as the Plan. In

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addition, our chapter 11 proceedings could become protracted, which could significantly and detrimentally impact our relationships with vendors, suppliers, employees, and customers

We may not be able to obtain confirmation of the Plan.

There can be no assurance that the Plan as outlined in the Restructuring Support Agreement (or any other plan of reorganization) will be approved by the Bankruptcy Court. As a result, investors should exercise caution with respect to existing and future investments in our securities. The success of any reorganization will depend on approval by the Bankruptcy Court and the willingness of existing debt and security holders to agree to the exchange or modification of their interests as outlined in the Plan, and there can be no guarantee of success with respect to the Plan or any other plan of reorganization. For instance, we might receive objections to confirmation of the Plan from various stakeholders in the chapter 11 cases. We cannot predict the impact that any objection might have on the Plan or on a Bankruptcy Court’s decision to confirm the Plan. Any objection may cause us to devote significant resources in response which could materially and adversely affect our business, financial condition and results of operations.

If the Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our business and what, if any, distributions holders of claims against us, including holders of our secured and unsecured debt and equity, would ultimately receive with respect to their claims. As a result, we believe that implementation of any plan is likely to result in a limited recovery for noteholders, and place equity holders at significant risk of losing most or all of their interests in our company.

There can be no assurance as to whether we will successfully reorganize and emerge from the chapter 11 cases or, if we do successfully reorganize, as to when we would emerge from the chapter 11 cases. If we are unable to successfully reorganize, we may not be able to continue our operations.

We may not have adequate liquidity to operate our business.

We have historically relied on cash on hand, cash provided by operating activities and borrowings available under our ABL Facility and Term Loan for our liquidity needs. As we are in default under our ABL Facility, the commitments under the ABL Facility have terminated and the lenders under the ABL Facility have no obligation to provide additional loans or otherwise extend credit under the ABL Facility. In connection with entering into the Restructuring Support Agreement, the Supporting Noteholders agreed to provide interim financing to the Company in the amount of $9.1 million prior to the commencement of the chapter 11 cases. In addition, the Restructuring Support Agreement provides that we will receive debtor-in-possession financing, proceeds from the $150.0 million rights offering, and, if needed, exit financing. While we anticipate having sufficient liquidity from these transactions to fund our operations and consummate the Restructuring, there can be no assurances to that effect. In addition, there can be no assurance that we will be able to maintain sufficient liquidity or access other sources of liquidity when needed in the future.

Upon emergence from bankruptcy, our historical financial information may not be indicative of our future financial performance.

Our capital structure will likely be significantly altered under the Plan or any other plan of reorganization ultimately confirmed by the Bankruptcy Court. Under fresh-start reporting rules that may apply to us upon the effective date of a plan of reorganization, our assets and liabilities would be adjusted to fair values and our accumulated deficit would be restated to zero. Accordingly, if fresh-start reporting rules apply, our financial condition and results of operations following our emergence from chapter 11 would not be comparable to the financial condition and results of operations reflected in our historical financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

Upon our emergence from bankruptcy, the composition of our board of directors will change significantly.

Under the Plan, the composition of our board of directors will change significantly. The Restructuring Support Agreement contemplates upon emergence, the board of directors will be comprised of five directors. The Supporting Noteholders will designate four members in the aggregate, and the remaining director will be the chief executive officer of the reorganized Company. Accordingly, four of our five directors are expected to be new to the Company. The new directors are likely to have different backgrounds, experiences and perspectives from those individuals who previously served on our board of directors

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and, thus, may have different views on the issues that will determine the future of the Company. As a result, the future strategy and plans of the Company may differ materially from those of the past.

The pursuit of the chapter 11 cases has consumed and will continue to consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.

Leading up to and following commencement of the chapter 11 cases contemplated by the Restructuring Support Agreement, our management will be required to spend a significant amount of time and effort focusing on the cases. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, on our financial condition and results of operations, particularly if the chapter 11 cases are protracted. During the pendency of the chapter 11 cases, our employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a materially adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of operations. The failure to retain or attract members of our management team, including Mark D. Johnsrud, our Chief Executive Officer and Chairman, and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations. Likewise, we could experience losses of customers who may be concerned about our ongoing long-term viability.

In certain instances, a chapter 11 case may be converted to a case under chapter 7 of the Bankruptcy Code.

Following the commencement of our chapter 11 cases, upon a showing of cause, the Bankruptcy Court may convert our chapter 11 case to a case under chapter 7 of the Bankruptcy Code. In such event, a chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in our Plan because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.

Transfers of our equity, or issuances of equity before or in connection with our chapter 11 proceedings, may impair our ability to utilize our federal income tax net operating loss carryforwards in future years.

Under federal income tax law, a corporation is generally permitted to deduct from taxable income net operating losses carried forward from prior years. We have net operating loss carryforwards for federal income tax purposes of approximately $316.8 million as of December 31, 2016. Our ability to utilize our net operating loss carryforwards to offset future taxable income and to reduce federal income tax liability is subject to certain requirements and restrictions. If we experience an “ownership change,” as defined in section 382 of the Internal Revenue Code, then our ability to use our net operating loss carryforwards and amortizable tax basis in our properties may be substantially limited, which could have a negative impact on our financial position and results of operations. Generally, there is an “ownership change” if one or more stockholders owning 5% or more of a corporation’s common stock have aggregate increases in their ownership of such stock of more than 50 percentage points over the prior three-year period. Under section 382 of the Internal Revenue Code, absent an applicable exception, if a corporation undergoes an “ownership change,” the amount of its net operating losses that may be utilized to offset future taxable income generally is subject to an annual limitation. Further, future deductions for depreciation, depletion and amortization could be limited if the fair value of our assets is determined to be less than the tax basis. In April 2016, we undertook certain restructuring transactions that resulted in an ownership change. As a result of the implementation of a plan of reorganization or following such implementation, it is possible that another “ownership change” may be deemed to occur.

The terms of the debtor-in-possession financing and exit financing, if any, may restrict our future operations, particularly our ability to respond to changes in our business or to take certain actions.

The terms of the debtor-in-possession financing and exit financing may contain, and the terms of any of other future indebtedness would likely contain, a number of restrictive covenants that impose certain operating and other restrictions.

Such financing may include covenants that, among other things, restrict our ability to:

incur additional debt;

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repurchase our indebtedness;

pay dividends, redeem stock or make other distributions;

make other restricted payments and investments;

create liens;

enter into sale and leaseback transactions;

merge, consolidate or transfer or dispose of substantially all of our assets; and

enter into certain types of transactions with affiliates.

The operating and financial restrictions and covenants in those agreements and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.

Since March 31, 2017, we have been in default under our ABL Facility as we were unable to repay our obligations under the ABL Facility or extend or refinance the ABL Facility before maturity. The default under the ABL Facility constitutes an event of cross-default under the Term Loan and indentures governing our 2018 Notes and 2021 Notes. Such default under our debt agreements could result in the acceleration of all of our indebtedness. The acceleration of all of our indebtedness would materially and adversely affect our ability to implement the Plan and finance and continue our operations.

Since March 31, 2017, we have been in default under our ABL Facility as we were unable to repay our obligations under the ABL Facility or extend or refinance the ABL Facility before maturity. As a result, the lenders under our ABL Facility are entitled to exercise their rights and remedies under the ABL Facility, the other Loan Documents (as defined under the ABL Facility), and applicable law. In addition, the default under the ABL Facility constitutes an event of cross-default under the Term Loan and indentures governing our 2018 Notes and 2021 Notes. The Company does not currently have sufficient liquidity to repay the obligations under the ABL Facility, Term Loan, or indentures governing our 2018 Notes and 2021 Notes. As such, the holders of the Company’s indebtedness may initiate foreclosure actions at any time; however, holders of over 80% in aggregate outstanding principal amount of the Company’s 2021 Notes have agreed to provide the Company interim financing prior to the filing of the Plan and support the Company’s Restructuring under the Restructuring Support Agreement.

If the debt under our ABL Facility, Term Loan, or Indentures were to be accelerated as a result of the continuing events of default, we currently do not have sufficient liquidity to repay these borrowings and we may not have sufficient liquidity to do so in the future. In such an event, there can be no assurances that we would be able to obtain alternative financing to enable us to repay our indebtedness or, if we were able to obtain such financing, there can be no assurances that we would be able to obtain it on terms acceptable to us. As a result, our ability to finance and continue our operations could be materially and adversely affected and we may not be able to implement the Plan and consummate an orderly prepackaged restructuring pursuant to chapter 11 of the Bankruptcy Code.

We may not make interest payments in respect of our 2018 and 2021 Notes.

Both our 2018 and 2021 Notes have an interest payment due on April 17, 2017. We currently do not have the liquidity to make those payments when due. The indentures governing the 2018 Notes and the 2021 Notes provide for a 30 day grace period prior to the exercise of remedies by holders for defaults related to missed interest payments. The Restructuring Support Agreement contemplates that we will file chapter 11 cases prior to the expiration of that grace period. Even if we do not file the chapter 11 cases in the timeframe contemplated, it is still possible that the next interest payments on the 2018 and 2021 Notes will not be made prior to the expiration of the grace period.

Our ability to meet our obligations under our indebtedness depends in part on our earnings and cash flows and those of our subsidiaries and on our ability and the ability of our subsidiaries to pay dividends or advance or repay funds to us.

We conduct all of our operations through our subsidiaries. Consequently, our ability to service our debt is dependent, in large part, upon the earnings from the businesses conducted by our subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts to us, whether by dividends, loans, advances or other payments. The ability of our subsidiaries to pay dividends and make other payments to us depends on their earnings, capital requirements and general financial conditions

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and is restricted by, among other things, applicable corporate and other laws and regulations as well as, in the future, agreements to which our subsidiaries may be a party.
Our borrowings under future credit facilities will expose us to interest rate risk.
Our earnings will likely be exposed to interest rate risk associated with borrowings under future credit facilities. Any future credit facility will likely carry a floating interest rate; therefore, as interest rates increase, so will our interest costs, which may have a material adverse effect on our financial condition, results of operations and cash flows.
Risks Related to Our Company
We are currently operating at a loss and have substantial debt and declining liquidity to cover our operations, which raises substantial doubt about our ability to continue as a going concern and to generate sufficient liquidity to meet our operating needs. Absent successfully consummating the Restructuring on acceptable terms before our available cash necessary to sustain our ongoing operations is depleted, we may not be able to continue operations .

As reflected in the accompanying consolidated financial statements, we had an accumulated deficit at December 31, 2016 and December 31, 2015, and a net loss for the fiscal years ended December 31, 2016, 2015, and 2014. These factors, coupled with our large outstanding debt balance, raise substantial doubt about our ability to continue as a going concern and to generate sufficient liquidity to meet our operating needs. We are attempting to generate sufficient revenue and reduce costs; however, our cash position may not be sufficient enough to support our daily operations beyond April 2017. While we are in the process of implementing the Restructuring aimed at recapitalizing the Company to address our liquidity, capital structure, and debt service obligations, there can be no assurances that the Restructuring will be successful. (See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Subsequent Events Related to Indebtedness and Restructuring Plan".) Our ability to continue as a going concern is also dependent upon our ability to restructure our debt to generate sufficient liquidity to meet our obligations and operating needs. We cannot assure you that our business will generate sufficient cash flows from operations or future borrowings or that our Restructuring will be successful.

We currently do not have enough liquidity, including cash on hand, to service our debt obligations and to fund day-to-day operations through fiscal 2017. As such, we will be dependent on the financing provided for in the Restructuring Support Agreement in order to fund continuing operations, which may not be available to us if the Restructuring Support Agreement terminates or we are unable to successfully consummate the Restructuring. There can be no assurances that the Supporting Noteholders will extend additional borrowings to us, or, if so, on what terms. Without the implementation of the Plan and consummation of the Restructuring, our existing cash and other sources of liquidity may only be sufficient to fund our operations (excluding debt payments) through April 2017. If we do not consummate the Restructuring on acceptable terms before our available cash necessary to sustain our ongoing operations is depleted, we may not be able to continue our operations.

Our business depends on spending by our customers in the oil and natural gas industry in the United States, and this spending and our business has been, and may continue to be, adversely affected by industry and financial market conditions that are beyond our control. The substantial and extended decline in oil and natural gas prices has resulted in lower expenditures by our customers, which have had a material adverse effect on our financial condition, results of operations and cash flows, and the continuation of such decline could further materially adversely affect our financial condition, results of operations and cash flows.
We depend on our customers’ willingness to make operating and capital expenditures to explore, develop and produce oil and natural gas in the United States. These expenditures are generally dependent on current oil and natural gas prices and the industry’s view of future oil and natural gas prices, including the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. The substantial and extended decline in oil and natural gas prices has resulted in significant reductions in our customers’ operating and capital expenditures, which has had a material adverse effect on our financial condition, results of operations and cash flows. The continuation or extension of such declines in these expenditures could result in project modifications, delays or cancellations, general business disruptions, delays in, or nonpayment of, amounts owed to us, increased exposure to credit risk and bad debts, and a general reduction in demand for our services. These effects could have a further material adverse effect on our financial condition, results of operations and cash flows.
Industry conditions are influenced by numerous factors over which we have no control, including:

the domestic and worldwide price and supply of gas, natural gas liquids and oil, including the natural gas inventories and oil reserves of the United States;

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changes in the level of consumer demand;

the price and availability of alternative fuels;

weather conditions;

the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities;

the level and effect of trading in commodity futures markets, including by commodity price speculators and others;

the nature and extent of domestic and foreign governmental regulations and taxes;

actions of the members of the Organization of the Petroleum Exporting Countries or "OPEC," relating to oil price and production controls;

the level of excess production and projected rates of production growth;

geo-political instability or armed conflict in oil and natural gas producing regions; and

overall domestic and global economic and market conditions.
The oil and natural gas industry is currently experiencing a prolonged downturn due to a global oversupply of crude oil and natural gas, resulting in dramatic declines in oil and natural gas prices. Since the second half of 2014 and throughout both 2015 and 2016, oil prices have remained substantially below historic highs and may remain depressed for the foreseeable future. The current downturn in the industry has resulted in diminished demand for oilfield services and downward pressure on the prices customers are willing to pay for services such as ours. A continuation of the downturn in the oil and natural gas industry could result in a further reduction in demand for oilfield services as well as lower prices and operating margins, and could have a further material adverse effect on our financial condition, results of operations and cash flows.
In the past, we have experienced periods of low demand and have incurred operating losses. In the future, we may not be able to achieve or maintain our profitability due to an inability to reduce costs, increase revenue, or reduce our debt obligations. Under such circumstances, we may incur further operating losses and experience negative operating cash flow.
Our operating margins and profitability may be negatively impacted by changes in fuel and energy costs. In addition, due to certain fixed costs, our operating margins and earnings may be sensitive to changes in revenues.
Our business is dependent on availability of fuel for operating our fleet of trucks. Changes and volatility in the price of crude oil can adversely impact the prices for these products and therefore affect our operating results. The price and supply of fuel is unpredictable and fluctuates based on events beyond our control, including geopolitical developments, supply and demand for oil and natural gas, actions by OPEC and other oil and natural gas producers, war and unrest in oil producing countries, regional production patterns, and environmental concerns.
Furthermore, our facilities, fleet and personnel subject us to fixed costs, which make our margins and earnings sensitive to changes in revenues. In periods of declining demand, we may be unable to cut costs at a rate sufficient to offset revenue declines, which may put us at a competitive disadvantage to firms with lower or more flexible cost structures, and may result in reduced operating margins and/or higher operating losses. These effects could have a material adverse effect on our financial condition, results of operations and cash flows.
Future charges due to possible impairments of assets may have a material adverse effect on our results of operations and stock price.
As discussed more fully in Note 6 of the Notes to the Consolidated Financial Statements, during the year ended December 31, 2016 we recorded total impairment charges for long-lived assets of $42.2 million. During the year ended December 31, 2015 we recorded a goodwill impairment charge of $104.7 million. As of December 31, 2015, there is no remaining goodwill on the consolidated balance sheet. Additionally, during the year ended December 31, 2015 we recorded an impairment charge of $5.9 million related to some of the remaining assets in the MidCon basin which we exited in fiscal 2015. If there is further deterioration in our business operations or prospects, our stock price, the broader economy or our industry, including further declines in oil and natural gas prices, the value of our long-lived assets, or those we may acquire in the future, could decrease significantly and result in additional impairment and financial statement write-offs.

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The testing of long-lived assets for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in the composition of our reporting units; changes in economic, industry or market conditions; changes in business operations; changes in competition; or potential changes in the share price of our common stock and market capitalization. Changes in these factors, or differences in our actual performance compared with estimates of our future performance, could affect the fair value of long-lived assets, which may result in further impairment charges. We perform the assessment of potential impairment at least annually, or more often if events and circumstances require.
Should the value of our long-lived assets become impaired, we would incur additional charges which could have a material adverse effect on our consolidated results of operations and could result in us incurring additional net operating losses in future periods. We cannot accurately predict the amount or timing of any impairment of assets. Any future determination requiring the write-off of a significant portion of long-lived assets, although not requiring any additional cash outlay, could have a material adverse effect on our results of operations and stock price.
We depend on the continued service of Mark D. Johnsrud, our Chief Executive Officer and Chairman, and other senior management.
Our success is largely dependent on the skills, experience and efforts of our people and, in particular, the continued services of Mr. Johnsrud, our Chief Executive Officer and Chairman. We currently have no Chief Financial Officer and Mr. Johnsrud is serving as our Principal Financial Officer. We depend on our finance and accounting team and outside consultants to guide corporate accounting and financial reporting, financial planning, and treasury management. Members of our senior management team, including Mr. Johnsrud, may resign at any time. The loss of the services of Mr. Johnsrud, or of other members of our senior management, could have a negative effect on our business, financial condition and results of operations and future growth, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause the price of our common stock to decline, or by current or potential providers of debt financing, which may make it more difficult or costly to refinance outstanding indebtedness or incur new or additional indebtedness. We do not carry key-person life insurance on any of our senior management.
Our Chief Executive Officer and Chairman, Mark D. Johnsrud, owns a significant amount of our voting stock and may have interests that differ from other shareholders. Mr. Johnsrud, as a significant shareholder, may, therefore, take actions that are not in the interest of other shareholders.
Mark D. Johnsrud, our Chief Executive Officer and Chairman, owns shares representing approximately 85% of our common stock as of December 31, 2016, and, therefore, he has significant control on the outcome of matters submitted to a vote of shareholders, including, but not limited to, electing directors, adopting amendments to our certificate of incorporation and approving corporate transactions. In addition, due to Mr. Johnsrud's ownership percentage, he may approve certain matters requiring shareholder approval by written consent without soliciting the votes of other shareholders. Further, Mr. Johnsrud, as Chief Executive Officer and Chairman, has the power to exert significant influence over our corporate management and policies. Circumstances may occur in which the interests of Mr. Johnsrud, as a significant shareholder, could be in conflict with the interests of other shareholders, and Mr. Johnsrud would have significant influence to cause us to take actions that align with his interests. Should conflicts of interest arise, we can provide no assurance that Mr. Johnsrud would act in the best interests of our other shareholders or that any conflicts of interest would be resolved in a manner favorable to our other shareholders.
The litigation environment in which we operate poses a significant risk to our businesses.
We are often involved in the ordinary course of business in a number of lawsuits involving employment, commercial, and environmental issues, other claims for injuries and damages, and various shareholder and class action litigation, among other matters. We may experience negative outcomes in such lawsuits in the future. Any such negative outcomes could have a material adverse effect on our business, liquidity, financial condition and results of operations. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of judgment. Actual outcomes or losses may differ materially from such assessments and estimates. The settlement or resolution of such claims or proceedings may have a material adverse effect on our results of operations. In addition, judges and juries in certain jurisdictions in which we conduct business have demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage and other tort cases. We use appropriate means to contest litigation threatened or filed against us, but the litigation environment in these areas poses a significant business risk to us and could cause a significant diversion of management's time and resources, which could have a material adverse effect on our financial condition, results of operations and cash flows.

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The hazards and risks associated with the transport, storage, and handling, treatment and disposal of our customers’ waste (such as fires, spills, explosions and accidents) may expose us to personal injury claims, property damage claims and/or products liability claims from our employees, customers or third parties. As protection against such claims and operating hazards, we maintain insurance coverage against some, but not all, potential losses. However, we may sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. As more fully described in Note 17 of the Notes to Consolidated Financial Statements herein, due to the unpredictable nature of personal injury litigation, it is not possible to predict the ultimate outcome of these claims and lawsuits, and we may be held liable for significant personal injury or damage to property or third parties, or other losses, that are not fully covered by our insurance, which could have a material adverse effect on our financial condition, results of operations and cash flows.
Significant capital expenditures are required to conduct our business, and our failure or inability to make sufficient capital investments could significantly harm our business prospects.
The development of our business and services, excluding acquisition activities, requires capital expenditures. During the year ended December 31, 2016, we made capital expenditures of approximately $3.8 million, which primarily related to expenditures to extend the useful life and productivity on our fleet of trucks, tanks, equipment and disposal wells. We continue to focus on finding ways to improve the utilization of our existing assets and optimizing the allocation of resources in the various shale areas in which we operate. Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. In addition to capital expenditures required to maintain our current level of business activity, we may incur capital expenditures to support future growth of our business.
We expect capital spending levels in 2017 to increase to approximately $10.0 million if we are able to obtain financing for capital expenditures following our Restructuring. Prolonged reductions or delays in capital expenditures could delay or diminish future cash flows and adversely affect our business and results of operations. Our planned capital expenditures for 2017 are expected to be financed through cash flow from operations, borrowings under new credit facilities if available, issuances of debt or equity, capital leases, alternative financing structures, or a combination of the foregoing. Future cash flows from operations are subject to a number of risks and variables, such as the level of drilling activity and oil and natural gas production of our customers, prices of natural gas and oil, and the other risk factors discussed herein. Our ability to obtain capital from other sources, such as the capital markets, is dependent upon many of those same factors as well as the orderly functioning of credit and capital markets. To the extent we fail to have adequate funds, we could be required to further reduce or defer our capital spending, or pursue other funding alternatives which may not be as economically attractive to us, which in turn could have a materially adverse effect on our financial condition, results of operations and cash flows.
The compensation we offer our drivers is subject to market conditions, and we may find it necessary to increase driver compensation and/or modify the benefits provided to our employees in future periods.
We employed approximately 385 truck drivers as of December 31, 2016. Maintaining a staff of qualified truck drivers is critical to the success of our operations. We and other companies in the oil and natural gas industry suffer from a high turnover rate of drivers. The high turnover rate requires us to continually recruit a substantial number of drivers in order to operate existing equipment. If we are unable to continue to attract and retain a sufficient number of qualified drivers, we could be forced to, among other things, increase driver compensation and/or modify our benefit packages, or operate with fewer trucks and face difficulty meeting customer demands, any of which could adversely affect our growth and profitability. Additionally, in anticipation of or in response to geographical and market-related fluctuations in the demand for our services, we strategically relocate our equipment and personnel from one area to another, which may result in operating inefficiencies, increased labor, fuel and other operating costs and could adversely affect our growth and profitability. As a result, our driver and employee training and orientation costs could be negatively impacted. We also utilize the services of independent contractor truck drivers to supplement our trucking capacity in certain shale areas on an as-needed basis. There can be no assurance that we will be able to enter into these types of arrangements on favorable terms, or that there will be sufficient qualified independent contractors available to meet our needs, which could have a material adverse effect on our financial condition, results of operations and cash flows.
We depend on certain key customers for a significant portion of our revenues. The loss of any of these key customers or the loss of any contracted volumes could result in a decline in our business.
We rely on a limited number of customers for a significant portion of our revenues. Our three largest customers represented 12%, 9% and 8%, respectively, of our total consolidated revenues for the year ended December 31, 2016 and in total equaled 19% of our consolidated accounts receivable at December 31, 2016. The loss of all, or even a portion, of the revenues from these customers, as a result of competition, market conditions or otherwise, could have a material adverse effect on our business, results of operations, financial condition, and cash flows. A reduction in exploration, development and production

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activities by key customers due to the current declines in oil and natural gas prices, or otherwise, could have a material adverse effect on our financial condition, results of operations and cash flows.
Customer payment delays of outstanding receivables could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
We often provide credit to our customers for our services, and are therefore subject to our customers delaying or failing to pay outstanding invoices. In weak economic environments, customers’ delays and failures to pay often increase due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to credit markets. If our customers delay or fail to pay a significant amount of outstanding receivables, it could reduce our availability under our revolving credit facility or otherwise have a material adverse effect on our liquidity, financial condition, results of operations and cash flows.

We may be unable to achieve or maintain pricing to our customers at a level sufficient to cover our costs, which would negatively impact our profitability.

We may be unable to charge prices to our customers that are sufficient to cover our costs. Our pricing is subject to highly competitive market conditions, and we may be unable to increase or maintain pricing as market conditions change. Likewise, customers may seek pricing declines more precipitously than our ability to reduce costs. In certain cases, we have entered into fixed price agreements with our customers, which may further limit our ability to raise the prices we charge our customers at a rate sufficient to offset any increases in our costs. Additionally, some customers’ obligations under their agreements with us may be permanently or temporarily reduced upon the occurrence of certain events, some of which are beyond our control, including force majeure events. Force majeure events may include (but are not limited to) events such as revolutions, wars, acts of enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions, mechanical or physical failures of our equipment or facilities of our customers. If the amounts we are able to charge customers are insufficient to cover our costs, or if any customer suspends, terminates or curtails its business relationship with us, the effects could have a material adverse impact on our financial condition, results of operations and cash flows.

We operate in competitive markets, and there can be no certainty that we will maintain our current customers or attract new customers or that our operating margins will not be impacted by competition.

The industries in which our business operates are highly competitive. We compete with numerous local and regional companies of varying sizes and financial resources. Competition has intensified during this downturn, and could further intensify in the future. Furthermore, numerous well-established companies are focusing significant resources on providing similar services to those that we provide that will compete with our services. We cannot assure you that we will be able to effectively compete with these other companies or that competitive pressures, including possible downward pressure on the prices we charge for our products and services, or customer perception of our contemplated chapter 11 filing, will not arise. In addition, the current declines in oil and natural gas prices may result in competitors moving resources from higher-cost exploration and production areas to relatively lower-cost exploration and production areas where we are located thereby increasing supply and putting further downward pressure on the prices we can charge for our products and services, including our rental business. In the event that we cannot effectively compete on a continuing basis, or competitive pressures arise, such inability to compete or competitive pressures could have a material adverse effect on our financial condition, results of operations and cash flows.

Any interruption in our services due to pipeline ruptures or spills or necessary maintenance could impair our financial performance and negatively affect our brand.

Our water transport pipelines are susceptible to ruptures and spills, particularly during start up and initial operation, and require ongoing inspection and maintenance. We may experience difficulties in maintaining the operation of our pipelines, which may cause downtime and delays. We also may be required to periodically shut down all or part of our pipelines for regulatory compliance and inspection purposes. Any interruption in our services due to pipeline breakdowns or necessary maintenance, inspection or regulatory compliance could reduce revenues and earnings and result in remediation costs. Transportation interruptions at our pipelines, even if only temporary, could severely harm our business and reputation, and could have a material adverse effect on our financial condition, results of operations and cash flows.
Our operations are subject to risks inherent in the oil and natural gas industry, some of which are beyond our control. These risks may not be fully covered under our insurance policies.
Our operations are subject to operational hazards, including accidents or equipment failures that can cause pollution and other damage to the environment. Pursuant to applicable law, we may be required to remediate the environmental impact of any such accidents or incidents, which may include costs related to site investigation and soil, groundwater and surface water cleanup. In

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addition, hazards inherent in the oil and natural gas industry, such as, but not limited to, accidents, blowouts, explosions, pollution and other damage to the environment, fires and hydrocarbon spills, may delay or halt operations at extraction sites which we service. These conditions can cause:
personal injury or loss of life;
liabilities from pipeline breaks and accidents by our fleet of trucks and other equipment;
damage to or destruction of property, equipment and the environment; and
the suspension of operations.
The occurrence of a significant event or a series of events that together are significant, or adverse claims in excess of the insurance coverage that we maintain or that are not covered by insurance, could have a material adverse effect on our financial condition, results of operations and cash flows. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims.
We maintain insurance coverage that we believe to be customary in the industry against these hazards. We may not be able to maintain adequate insurance in the future at rates we consider reasonable. In addition, insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, the coverage provided by such insurance may be inadequate, or insurance premiums or other costs could make such insurance prohibitively expensive. It is also possible that, when we renew our insurance coverages, our premiums and deductibles will be higher, and certain insurance coverage either will be unavailable or considerably more expensive, than it has been in the past. In addition, our insurance is subject to coverage limits, and some policies exclude coverage for damages resulting from environmental contamination.
Improvements in or new discoveries of alternative energy technologies or our customers' operating methodologies could have a material adverse effect on our financial condition and results of operations.
Because our business depends on the level of activity in the oil and natural gas industry, any improvement in or new discoveries of alternative energy technologies (such as wind, solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the demand for oil and natural gas could have a material adverse effect on our financial condition, results of operations and cash flows. In addition, technological changes in our customers' operating methods could decrease the need for management of water and other wellsite environmental services or otherwise affect demand for our services.
Seasonal weather conditions and natural disasters could severely disrupt normal operations and harm our business.
Areas in which we operate are adversely affected by seasonal weather conditions, primarily in the winter and spring. During periods of heavy snow, ice or rain, our customers may curtail their operations or we may be unable to move our trucks between locations or provide other services, thereby reducing demand for, or our ability to provide services and generate revenues. For example, many municipalities impose weight restrictions on the roads that lead to our customers’ job sites in the spring due to the muddy conditions caused by spring thaws, limiting our access and our ability to provide service in these areas. In addition, the regions in which we operate have in the past been, and may in the future be, affected by natural disasters such as hurricanes, windstorms, floods and tornadoes. In certain areas, our business may be dependent on our customers’ ability to access sufficient water supplies to support their hydraulic fracturing operations. To the extent severe drought conditions or other factors prevent our customers from accessing adequate water supplies, our business could be negatively impacted. Future natural disasters or inclement weather conditions could severely disrupt the normal operation of our business, or our customers’ business, and have a material adverse effect on our financial condition, results of operations and cash flows.
Our financial and operating performance may be affected by the inability to renew landfill operating permits, obtain new landfills and expand existing ones.
We currently own one landfill and our ability to meet our financial and operating objectives may depend, in part, on our ability to acquire, lease, or renew landfill operating permits, expand existing landfills and develop new landfill sites. It has become increasingly difficult and expensive to obtain required permits and approvals to build, operate and expand solid waste management facilities, including landfills. Operating permits for landfills in states where we operate must generally be renewed every five to ten years, although some permits are required to be renewed more frequently. These operating permits often must be renewed several times during the permitted life of a landfill. The permit and approval process is often time consuming, requires numerous hearings and compliance with zoning, environmental and other requirements, is frequently challenged by special interest and other groups, and may result in the denial of a permit or renewal, the award of a permit or renewal for a shorter duration than we believed was otherwise required by law, or burdensome terms and conditions being imposed on our operations. We may not be able to obtain new landfill sites or expand the permitted capacity of our landfills when necessary. In

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addition, we may be unable to make the contingent consideration payment required upon the issuance of a second special waste disposal permit to expand the current landfill. Any of these circumstances could have a material adverse effect on our financial condition, results of operations and cash flows.

Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of the Internal Revenue Code, and it is possible any restructuring transactions could result in material additional limitations on our ability to use our net operating loss and tax credit carryforwards.

Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving shareholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long term tax exempt rate and the value of the company’s stock immediately before the ownership change. In April 2016, we undertook certain restructuring transactions that resulted in an ownership change. In addition, the execution of any future restructuring transactions or other future transactions in our shares could result in an additional ownership change which could in turn reduce our ability to offset our taxable income with losses, or our tax liability with credits, before such losses and credits expire and therefore may cause us to incur a larger federal income tax liability.
We are self-insured against many potential liabilities, and our reserves may not be sufficient to cover future claims.
We maintain high deductible or self-insured retention insurance policies for certain exposures including automobile, workers’ compensation and certain employee group health insurance plans. We carry policies for certain types of claims to provide excess coverage beyond the underlying policies and per incident deductibles or self-insured retentions. Because many claims against us do not exceed the deductibles under our insurance policies, we are effectively self-insured for a substantial portion of our claims. Our insurance accruals are based on claims filed and estimates of claims incurred but not reported. The insurance accruals are influenced by our past claims experience factors, which have a limited history, and by published industry development factors. The estimates inherent in these accruals are determined using actuarial methods that are widely used and accepted in the insurance industry. If our insurance claims increase or if costs exceed our estimates of insurance liabilities, we could experience a decline in profitability and liquidity, which would adversely affect our business, financial condition or results of operations. In addition, should there be a loss or adverse judgment or other decision in an area for which we are self-insured, then our business, financial condition, results of operations and liquidity may be adversely affected.
We evaluate our insurance accruals, and the underlying assumptions, regularly throughout the year and make adjustments as needed. While we believe that the recorded amounts are reasonable, there can be no assurance that changes to our estimates will not occur due to limitations inherent in the estimation process. Changes in our assumptions and estimates could have a material adverse effect on our financial condition, results of operations and cash flows.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, storage, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, and damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business, operating margins, revenues and competitive position. These effects could have a material adverse effect on our financial condition, results of operations and cash flows.
A failure in our operational systems, or those of third parties, may adversely affect our business.
Our business is dependent upon our operational and technological systems to process a large amount of data. If any of our financial, operational, or other data processing systems fail or have other significant shortcomings, our financial results could be adversely affected. Our financial results could also be adversely affected if an employee causes our operational systems to

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fail, either as a result of inadvertent error or by deliberately tampering with or manipulating our operational systems. In addition, dependence upon automated systems may further increase the risk that operational system flaws, employee tampering or manipulation of those systems could result in losses that are difficult to detect. We are heavily reliant on technology for communications, financial reporting, treasury management and many other important aspects of our business. Any failure in our operational systems could have a material adverse impact on our business. Third-party systems on which we rely could also suffer operational failures. Any of these occurrences could disrupt our business, including the ability to close our financial ledgers and report the results of our operations publicly on a timely basis or otherwise have a material adverse effect on our financial condition, results of operations and cash flows.

Risk Factors Related To Our Common Stock

Trading in our securities is highly speculative and poses substantial risks. We expect that the existing common stock of the Company will be extinguished under the Plan and the common stock of the reorganized company issued to holders of our 2018 Notes, 2021 Notes, and, potentially, existing holders of equity interests may not have any value.

The Plan, as outlined in the Restructuring Support Agreement, provides that the holders of our outstanding 2018 Notes, and 2021 Notes will receive equity of the reorganized company Holders of 2021 Notes, and, subject to certain elections by the Company and the Supporting Noteholders, holders of 2018 Notes and possibly existing equity may also receive rights to purchase common stock of the newly reorganized company in a rights offering. The Plan provides that all equity interests of existing equity holders will be extinguished. Even if the Plan is confirmed as currently outlined, the value of any securities or rights that are issued is highly speculative and the exercise prices of such rights are based upon assumed equity values that may never be attained.

We were delisted from the New York Stock Exchange, and there is a limited trading volume for our common stock on the OTCQB.

In January 2016, our common stock was delisted from the New York Stock Exchange (or “NYSE”). Our common stock currently trades on the OTCQB U.S. Market (the “OTCQB”) under the symbol NESC, and there is a limited trading volume for our common stock. As a result, relatively small trades of our common stock may have a significant impact on the price of our common stock and, therefore, may contribute to the price volatility of our common stock. Because of limited trading volume in our common stock and the price volatility of our common stock, you may be unable to sell your shares of common stock when you desire or at the price you desire. The inability to sell your shares in a declining market because of such illiquidity or at a price you desire may substantially increase your risk of loss.

The delisting of our common stock from the NYSE may have an adverse affect on institutional investor interest in holding or acquiring our common stock and otherwise reduce the number of investors willing to hold or acquire our common stock. This could negatively affect our ability to raise capital necessary to maintain operations and service our debt or effect any contemplated strategic alternatives to restructure our outstanding indebtedness. In addition, the delisting of our common stock from the NYSE may cause a loss of confidence among our employees and customers and otherwise negatively affect our financial condition, results of operations and cash flows.

We do not currently meet the listing standards of the NYSE or any other national securities exchange. We presently anticipate that our common stock will continue to be quoted on the OTCQB. As a result of the limited trading volume for our common stock, investors may be unable to sell shares of common stock at the times or in the quantities desired and, therefore, may be required to hold some or all of their shares for an indefinite period of time.

Our stock price may be volatile, which could result in substantial losses for investors in our securities.

The stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. The market price of our common stock may also fluctuate significantly in response to the following factors, some of which are beyond our control:

variations in our quarterly operating results and changes in our liquidity position;

changes in securities analysts’ estimates of our financial performance;

inaccurate or negative comments about us on social networking websites or other media channels;


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changes in market valuations of similar companies;

announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new products or product enhancements, as well as our or our competitors’ success or failure in successfully executing such matters;

announcements by us of strategic plans to restructure our indebtedness or of a bankruptcy filing;

changes in the price of oil and natural gas;
 
loss of a major customer or failure to complete significant transactions; and

additions or departures of key personnel.

There is no assurance that an active public trading market will continue, or that there will be an active public trading market for the newly issued common stock of the reorganized company.

There can be no assurance that an active public trading market for our common stock will be sustained, or that there will be an active public trading market for the newly issued common stock of the reorganized company. If for any reason an active public trading market does not continue, or there is no active public trading market for the newly issued common stock of the reorganized company, purchasers of the shares of our common stock may have difficulty in selling their securities should they desire to do so and the price of our common stock may decline.

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

The trading market for our shares of common stock could rely in part on the research and reporting that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our stock, the price of our stock could decline. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

Future sales by us or our existing shareholders could depress the market price of our common stock.

If we or our existing shareholders sell a large number of shares of our common stock, the market price of our common stock could decline significantly. Further, even the perception in the public market that we or our existing shareholders might sell shares of common stock could depress the market price of the common stock.

The exercise of our warrants may result in substantial dilution and may depress the market price of our common stock

As of December 31, 2016, we had outstanding 150.9 million shares of common stock and also (i) 0.6 million shares of our common stock issuable under employee benefit plans, (ii) the Exchange Warrants exercisable for 16.5 million shares of our common stock at an exercise price equal to $0.01 per share, and (iii) the First Lien Term Loan (or "FLTL") Warrants exercisable for 8.8 million shares of our common stock at an exercise price of $0.01 per share. If the shares issuable under employee stock purchase plans are issued or the Warrants are exercised and the shares of common stock are issued pursuant to the employee stock purchase plans or upon such exercise are sold, our common shareholders may experience substantial dilution and the market price of our shares of common stock could decline. Further, the perception that such securities might be exercised could adversely affect the market price of our shares of common stock. In addition, holders of the Warrants are likely to exercise them when, in all likelihood, we could obtain additional capital on terms more favorable to us than those provided by the Warrants. Further, during the time that the foregoing securities are outstanding, they may adversely affect the terms on which we could obtain additional capital. We have filed a resale registration statement to facilitate the resale of shares of common stock issuable upon exercise of the Warrants, and any such resale could reduce the market trading price of our common stock.

We may issue a substantial number of shares of our common stock in the future and shareholders may be adversely affected by the issuance of those shares.

We may raise additional capital or refinance or restructure our existing debt by issuing shares of common stock, or other securities convertible into common stock, which will increase the number of shares of common stock outstanding and may result in substantial dilution in the equity interest of our current shareholders and may adversely affect the market price of our

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common stock. We have previously issued 1.8 million shares of our common stock under a shelf registration statement and pursuant to private placement exemptions from Securities Act registration requirements, and may do so in connection with refinancing or restructuring our existing debt, financings, acquisitions, the settlement of litigation and other strategic transactions in the future. The issuance, and the resale or potential resale, of shares of our common stock could adversely affect the market price of our common stock and could be dilutive to our shareholders.

The completion of certain of our restructuring transactions in 2016, including the conversion of Mr. Johnsrud’s 2018 Notes to equity and backstop of the terminated Rights Offering, resulted in substantial dilution to our existing shareholders and significant concentration of our voting stock being held by Mr. Johnsrud. Future refinancing or restructuring transactions may result in further dilution to our existing shareholders.

The conversion of Mr. Johnsrud’s 2018 Notes to equity and backstop of the previously contemplated Rights Offering pursuant to certain restructuring transactions during 2016 resulted in substantial dilution to our existing shareholders. As part of the exchange offer for our 2018 Notes, we converted approximately $31.4 million aggregate principal amount of the 2018 Notes for our common stock at a conversion price per share of $0.32 (the “Conversion Price”) which were held by an entity controlled by Mr. Mark D. Johnsrud, our Chief Executive Officer and Chairman.  Mr. Johnsrud received approximately 98.3 million shares for the conversion of his 2018 Notes.  In addition, as part of our debt restructuring plan, Mr. Johnsrud agreed to backstop the previously contemplated Rights Offering for $5.0 million of common stock in exchange for a 5% backstop fee. As a result of our ongoing restructuring discussions with creditors and the potential that any bankruptcy filing could substantially reduce the value of, or even completely eliminate, shares purchased in the Rights Offering, we elected not to proceed with the Rights Offering and, as a result, on November 15, 2016, we released the 20.3 million shares that were being held in escrow to Mr. Johnsrud. The 20.3 million shares of common stock to Mr. Johnsrud includes the backstop fee of approximately 0.8 million shares of common stock and 19.5 million shares of common stock underlying the subscription rights to be distributed in the Rights Offering. Our shareholders have suffered substantial dilution in their percentage ownership as a result of the conversion of Mr. Johnsrud’s 2018 Notes to equity and the 20.3 million shares issued to him in connection with our election not to consummate the planned equity Rights Offering by November 15, 2016. Mr. Johnsrud currently owns approximately 85% of our issued and outstanding common stock.

Future refinancing or restructuring transactions may result in further dilution to our existing shareholders. We may issue a substantial number of shares of our common stock in future refinancing or restructuring transactions and shareholders may suffer further dilution as a result.

We currently do not intend to pay any dividends on our common stock.

We currently do not intend to pay any dividends on our common stock, and restrictions and covenants in our debt agreements may prohibit us from paying dividends now or in the future. While we may declare dividends at some point in the future, subject to compliance with such restrictions and covenants, we cannot assure you that you will ever receive cash dividends as a result of ownership of our common stock and any gains from investment in our common stock may only come from increases in the market price of our common stock, if any.

We are subject to anti-takeover effects of certain charter and bylaw provisions and Delaware law, as well as of our substantial insider ownership.

Provisions of our certificate of incorporation and bylaws, each as amended and restated, and Delaware law may discourage, delay or prevent a merger or acquisition that shareholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our shareholders to replace or remove our management and board of directors. These provisions include:

authorizing the issuance of “blank check” preferred stock without any need for action by shareholders;

establishing a classified board of directors, so that only approximately one-third of our directors are elected each year;

providing our board of directors with the ability to set the number of directors and to fill vacancies on the board of directors occurring between shareholder meetings;

providing that directors may only be removed for “cause” and only by the affirmative vote of the holders of at least a majority in voting power of our issued and outstanding capital stock; and
 

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limiting the ability of our shareholders to call special meetings.

We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years following the date the beneficial owner acquired at least 15% of our stock, unless various conditions are met, such as approval of the transaction by our board of directors. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

The existence of the foregoing provisions and anti-takeover measures, as well as the significant percentage of common stock beneficially owned by our Chief Executive Officer and Chairman, Mr. Johnsrud, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
Risks Related to Environmental and Other Governmental Regulation
We are subject to United States federal, state and local laws and regulations relating to health, safety, transportation, and protection of natural resources and the environment. Under these laws and regulations, we may become liable for significant penalties, damages or costs of remediation. Any changes in laws and regulations could increase our costs of doing business.
Our operations, and those of our customers, are subject to United States federal, state and local laws and regulations relating to health, safety, transportation and protection of natural resources and the environment and worker safety, including those relating to waste management and transportation and disposal of produced water and other materials. For example, we are subject to environmental regulation relating to disposal into injection wells, which can pose some risks of environmental liability, including leakage from the wells to surface or subsurface soils, surface water or groundwater. Liability under these laws and regulations could result in cancellation of well operations, fines and penalties, expenditures for remediation, and liability for property damage and personal injuries. In addition, federal, state and local laws and regulations may be passed which would have the effect of increasing costs to our customers and possibly decreasing demand for our services. For example, if new laws and regulations are passed requiring increased safety measures for rail transport of crude oil, such laws and regulations may make it more difficult and expensive for customers to transport their product, which could decrease our customers’ demand for our services and negatively affect our results of operations and financial condition. Similarly, many of our customers have intrastate pipeline operations that are subject to regulation by various agencies of the states in which they are located. If new laws and/or regulations that further regulate intrastate pipelines are adopted in response to equipment failures, spills, negative environmental effects, or public sentiment, our customers may face increased costs of compliance, and thus reduce demand for our services
Our business involves the use, handling, storage, and contracting for recycling or disposal of environmentally sensitive materials. Accordingly, we are subject to regulation by federal, state, and local authorities establishing investigation and health and environmental quality standards, and liability related thereto, and providing penalties for violations of those standards. We also are subject to laws, ordinances, and regulations governing investigation and remediation of contamination at facilities we operate or to which we send hazardous or toxic substances or wastes for treatment, recycling, or disposal. In particular, CERCLA imposes joint, strict, and several liability on owners or operators of facilities at, from, or to which a release of hazardous substances has occurred; parties that generated hazardous substances that were released at such facilities; and parties that transported or arranged for the transportation of hazardous substances to such facilities. A majority of states have adopted statutes comparable to and, in some cases, more stringent than CERCLA. If we were to be found to be a responsible party under CERCLA or a similar state statute, we could be held liable for all investigative and remedial costs associated with addressing such contamination. In addition, claims alleging personal injury or property damage may be brought against us as a result of alleged exposure to hazardous substances resulting from our operations.
Failure to comply with these laws and regulations could result in the assessment of significant administrative, civil or criminal penalties, imposition of cleanup and site restoration costs and liens, revocation of permits, and orders to limit or cease certain operations. In addition, certain environmental laws impose strict and/or joint and several liability, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time of those actions. For example, if a landfill or disposal operator mismanages our wastes in a way that creates an environmental hazard, we and all others who sent materials could become liable for cleanup costs, fines and other expenses many years after the disposal or recycling was completed. Future events, such as the discovery of currently unknown matters, spills caused by future pipeline ruptures, changes in existing environmental laws and regulations or their interpretation, and more vigorous enforcement policies by regulatory agencies, may give rise to additional expenditures or liabilities, which could impair our operations and could have a material adverse effect on our financial condition, results of operations and cash flows.

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Although we believe that we are in substantial compliance with all applicable laws and regulations, legal requirements are changing frequently and are subject to interpretation. New laws, regulations and changing interpretations by regulatory authorities, together with uncertainty regarding adequate testing and sampling procedures, new pollution control technology and cost benefit analysis based on market conditions are all factors that may increase our future capital expenditures to comply with environmental requirements. Accordingly, we are unable to predict the ultimate cost of future compliance with these requirements or their effect on our operations.
Increased regulation of hydraulic fracturing, including regulation of the quantities, sources and methods of water use and disposal, could result in reduction in drilling and completing new oil and natural gas wells or minimize water use or disposal, which could adversely impact the demand for our services.
Demand for our services depends, in large part, on the level of exploration and production of oil and natural gas and the oil and natural gas industry’s willingness to purchase our services. Most of our customer base uses hydraulic fracturing to drill new oil and natural gas wells. Hydraulic fracturing is a process that is used to release hydrocarbons, particularly natural gas, from certain geological formations. The process involves the injection of water (typically mixed with significant quantities of sand and small quantities of chemical additives) under pressure into the formation to fracture the surrounding rock and stimulate movement of hydrocarbons through the formation. The process is typically regulated by state oil and natural gas commissions and has been exempt (except when the fracturing fluids or propping agents contain diesel fuels) since 2005 from United States federal regulation pursuant to the SDWA.
The EPA is conducting a comprehensive study of the potential environmental impacts of hydraulic fracturing activities, and a committee of the United States House of Representatives is also conducting an investigation of hydraulic fracturing practices. The results of the EPA study and House investigation could lead to restrictions on hydraulic fracturing. On February 11, 2014, the EPA released revised underground injection control (UIC) program permitting guidance for wells that use diesel fuels during hydraulic fracturing activities. The EPA developed the guidance to clarify how companies can comply with a law passed by Congress in 2005, which exempted hydraulic fracturing operations from the requirement to obtain a UIC permit, except in cases where diesel fuel is used as a fracturing fluid. On July 16, 2015, the EPA’s Inspector General (IG) issued a report entitled “Enhanced EPA Oversight and Action Can Further Protect Water Resources From the Potential Impacts of Hydraulic Fracturing” stating that the EPA should enhance its oversight of permit issuance for hydraulic fracturing by state and develop a plan for responding to concerns about chemicals used in hydraulic fracturing. On May 19, 2014, the EPA issued an Advance Notice of Proposed Rulemaking announcing its intention to develop a rule under the Toxic Substances Control Act (“TSCA”) to require disclosure of chemicals used in hydraulic fracturing, and the EPA’s current regulatory agenda estimates that the proposed TSCA rule will be issued in June 2018. On October 15, 2012, the new EPA regulations under the Clean Air Act went into effect that require reductions in certain criteria and hazardous air pollutant emissions from hydraulic fracturing wells.
On June 13, 2016, the EPA finalized regulations under the Clean Water Act to prohibit wastewater discharges from hydraulic fracturing and other natural gas production to municipal sewage plants (called publicly owned treatment works (POTWs)), with an effective date of August 29, 2016. In December 2016, the EPA announced that it was extending the compliance date of this new rule to August 29, 2019 for those onshore unconventional oil and gas extraction facilities that had been lawfully discharging extraction wastewater to POTWs prior to August 29, 2019, while keeping the August 29, 2016 effective date for all other facilities. In December 2016, the EPA issued a final report entitled “Hydraulic Fracturing for Oil and Gas: Impacts from the Hydraulic Fracturing Water Cycle on Drinking Water Resources in the United States” that concluded that hydraulic fracturing can impact drinking water resources under some circumstances, but stated that the national frequency of impacts on drinking water could not be estimated due to significant data gaps and uncertainties in the available data. In March 2015, the Department of the Interior (“DOI”) issued regulations requiring that hydraulic fracturing wells constructed on federal lands comply with certain standards and requiring companies engaged in hydraulic fracturing on federal lands to disclose certain chemicals used in the hydraulic fracturing process. The regulations were enjoined by a federal district court in June 2016, and the DOI is currently appealing the ruling to the U.S. Court of Appeals. Legislation has been introduced before Congress to provide for federal regulation of hydraulic fracturing, including, for example, requiring disclosure of chemicals used in the fracturing process or seeking to repeal the exemption from the SWDA. If adopted, such legislation would add an additional level of regulation and necessary permitting at the federal level and could make it more difficult to complete wells using hydraulic fracturing. Similar laws and regulations with respect to chemical disclosure also exist or are being considered in several states, including certain states in which we operate, that could restrict hydraulic fracturing. The Delaware River Basin Commission is also considering regulations which may impact “hydrofracturing” water practices in certain areas of Pennsylvania, New York, New Jersey and Delaware. Some local governments have also sought to restrict drilling in certain areas.
Additionally, in response to concerns about seismic activity being triggered by the injection of produced waters into underground wells, certain regulators have adopted or are considering additional requirements related to seismic safety for hydraulic fracturing activities. For example, in January 2012, the Ohio Department of Natural Resources issued a temporary

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moratorium on the development of hydraulic fracturing disposal wells in northeast Ohio due to minor earthquakes reported in the area. In Texas, the Texas Railroad Commission (the "RRC") amended its existing oil and natural gas disposal well regulations to require applicants for new disposal wells to conduct seismic activity searches utilizing the U.S. Geological Survey to assess whether the RRC should impose limits on existing wells, including a temporary injection ban. Finally, the state of Arkansas imposed a moratorium on waste water injection in certain areas due to concerns that hydraulic fracturing may be related to increased earthquake activity. Such laws and regulations could delay or curtail production of oil and natural gas by our customers, and thus reduce demand for our services.
Future United States federal, state or local laws or regulations could significantly restrict, or increase costs associated with hydraulic fracturing and make it more difficult or costly for producers to conduct hydraulic fracturing operations, which could result in a decline in exploration and production. New laws and regulations, and new enforcement policies by regulatory agencies, could also expressly restrict the quantities, sources and methods of water use and disposal in hydraulic fracturing and otherwise increase our costs and our customers’ cost of compliance, which could minimize water use and disposal needs even if other limits on drilling and completing new wells were not imposed. Any decline in exploration and production or any restrictions on water use and disposal could result in a decline in demand for our services and have a material adverse effect on our business, financial condition, results of operations and cash flows.
Delays or restrictions in obtaining permits by our customers for their operations or by us for our operations could impair our business.
In most states, our customers are required to obtain permits from one or more governmental agencies in order to perform drilling and completion activities and we may be required to procure permits for construction and operation of our disposal wells and pipelines. Such permits are typically required by state agencies, but can also be required by federal and local governmental agencies. The requirements for such permits vary depending on the location where our, or our customers’, activities will be conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued, and the conditions which may be imposed in connection with the granting of the permit. Delays or restrictions in obtaining saltwater disposal well permits could adversely impact our growth, which is dependent in part on new disposal capacity.
Our customers have been affected by moratoriums that have been imposed on the issuance of permits for drilling and completion activities in certain jurisdictions. For example, in December 2010, the State of New York imposed a moratorium on certain drilling and completion activities. In 2011, the state announced plans to lift the moratorium, however, in December 2014 the state announced that it intended to take action to prohibit certain drilling and completion activities, including hydraulic fracturing, in the state. A similar moratorium has been in place within the Delaware River Basin pending issuance of regulations by the Delaware River Basin Commission. Other states, including Texas, Arkansas, Pennsylvania, Wyoming and Colorado, have enacted laws and regulations applicable to our business activities, including disclosure of information regarding the substances used in hydraulic fracturing. California is presently considering similar requirements. The EPA published a rule on January 9, 2014 requiring oil and natural gas companies using hydraulic fracturing off the coast of California to disclose the chemicals they discharge into the ocean. Some of the drilling and completion activities of our customers may take place on federal land, requiring leases from the federal government to conduct such drilling and completion activities. In some cases, federal agencies have canceled oil and natural gas leases on federal lands. Consequently, our operations in certain areas of the country may be interrupted or suspended for varying lengths of time, causing a loss of revenue and potentially having a materially adverse effect on our financial condition, results of operations and cash flows.
We are subject to the trucking safety regulations, which are likely to be amended, and made stricter, as part of the initiative known as Compliance, Safety, Accountability, or “CSA.” If our current USDOT safety rating of “Satisfactory” is downgraded in connection with this initiative, our business and results of our operations may be adversely affected.
As part of the CSA initiative, the FMCSA is continuously revising its safety rating methodology and implementation of the same. These revisions will likely link safety ratings more closely to roadside inspection and driver violation data gathered and analyzed from month to month under the FMCSA’s new Safety Measurement System, or “SMS” and may place increased scrutiny on carriers transporting significant quantities of hazardous material. This linkage could result in greater variability in safety ratings than the current system. Preliminary studies by transportation consulting firms indicate that “Satisfactory” ratings (or any equivalent under a new SMS-based system) may become more difficult to achieve and maintain under such a system. If our operations lose their current “Satisfactory” rating, which is the highest and best rating under this initiative, we may lose some of our customer contracts that require such a rating, adversely affecting our financial condition, results of operations and cash flows.

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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease our corporate headquarters in Scottsdale, Arizona and we own or lease numerous facilities including administrative offices, sales offices, truck yards, maintenance and warehouse facilities, a landfill facility, and a water treatment facility in 11 other states. We also own or lease 50 saltwater disposal wells in Louisiana, Montana, North Dakota, Ohio and Texas as of December 31, 2016. We believe that we have satisfactory title to the properties owned and used in our businesses, subject to liens for taxes not yet payable, liens incident to minor encumbrances, liens for credit arrangements (including liens under our credit facility) and easements and restrictions that do not materially detract from the value of these properties, our interests in these properties, or the use of these properties in our businesses.
We believe all properties that we currently occupy are suitable for their intended uses. We believe that we have sufficient facilities to conduct our operations. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires.
Item 3. Legal Proceedings
We are party to legal proceedings and potential claims arising in the ordinary course of our business, including, but not limited to, claims related to employment matters, contractual disputes, personal injuries and property damage. In addition, various legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our subsidiaries. See “Legal Matters” section in Note 17 of the Notes to the Consolidated Financial Statements herein for a description of our legal proceedings.
Item 4. Mine Safety Disclosures
None.

34



PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company is a Delaware corporation and was formerly named Heckmann Corporation. At the 2013 annual meeting of shareholders, our shareholders approved an amendment to our Certificate of Incorporation to change our name from “Heckmann Corporation” to “Nuverra Environmental Solutions, Inc.” Our shares began trading on the New York Stock Exchange ("NYSE") under our new name and stock ticker symbol “NES,” effective as of the market open on May 20, 2013.
On January 19, 2016, we received notification from the NYSE Regulation, Inc. that trading of our common stock on the NYSE would be suspended before the opening of trading on January 20, 2016. The NYSE suspended trading and initiated delisting procedures with respect to our common stock as we had fallen below the NYSE's continued listing standard requiring an average global market capitalization during a consecutive 30 trading-day period of not less than $15.0 million. As a result of being delisted by the NYSE, our common shares began trading on the OTCQB U.S. Market (“OTCQB”) beginning January 20, 2016 under the ticker symbol "NESC."
The table below presents the intra-day high and low price per share of our common stock, as reported by the NYSE or OTCQB, for each of the quarters in the years ended December 31, 2015 and 2016, respectively: 
For the Year Ending December 31, 2015
 
High
 
Low
First Quarter
 
$
5.73

 
$
1.65

Second Quarter
 
$
6.78

 
$
3.45

Third Quarter
 
$
6.29

 
$
1.26

Fourth Quarter
 
$
2.28

 
$
0.41

 
 
 
 
 
For the Year Ending December 31, 2016
 
High
 
Low
First Quarter
 
$
0.55

 
$
0.13

Second Quarter
 
$
0.45

 
$
0.22

Third Quarter
 
$
0.30

 
$
0.17

Fourth Quarter
 
$
0.27

 
$
0.14

Holders
As of March 31, 2017, there were 387 holders of record of our common stock. The number of beneficial holders is substantially greater than the number of record holders because a significant portion of our common stock is held of record in broker “street names.”
Dividends
We have not paid any dividends on our common stock to date, and we currently do not intend to pay dividends in the future. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our board of directors and will be subject to other limitations as may be contained in our ABL Facility, the indentures governing the 2018 Notes and 2021 Notes or other applicable agreements governing our indebtedness. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.
Unregistered Sales of Equity Securities

There were no unreported unregistered sales of our equity securities during the fiscal year ended December 31, 2016. Please refer to our Forms 8-K filed with the Securities and Exchange Commission on April 21, 2016, May 26, 2016, and August 3, 2016 for more information.
Repurchases of Equity Securities

During the year ended December 31, 2016, we repurchased an aggregate of 24,801 shares of our common stock. The repurchases were to satisfy tax withholding obligations that arose upon vesting of restricted stock units.


35



Set forth below is a summary of the share repurchases, by period, during the year ended December 31, 2016:
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share (1)
January 1, 2016 to January 31, 2016
 
14,612

 
$
0.30

February 1, 2016 to February 29, 2016
 
862

 
0.33

March 1, 2016 to March 31, 2016
 
2,177

 
0.32

April 1, 2016 to April 30, 2016
 
4,354

 
0.26

May 1, 2016 to May 31, 2016
 
1,253

 
0.27

June 1, 2016 to June 30, 2016
 
109

 
0.22

July 1, 2016 to July 31, 2016
 

 

August 1, 2016 to August 31, 2016
 
570

 
0.25

September 1, 2016 to September 30, 2016
 

 

October 1, 2016 to October 31, 2016
 
60

 
0.24

November 1, 2016 to November 30, 2016
 
804

 
0.15

December 1, 2016 to December 31, 2016
 

 

Total shares repurchased and total average price per share
 
24,801

 
$
0.29

(1) The price paid per share with respect to the tax withholding repurchases was determined using the closing prices on the applicable vesting date, as quoted on the NYSE or OTCQB.

36



Recent Performance
The following performance graph and related information shall not be deemed “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
Stock Performance Graph
The following performance graph compares the performance of our common stock to the Russell 2000 Index and a peer group as established by management. The peer group consists of the following companies, each of which was selected on an industry and/or line-of business basis: Key Energy Services, Inc., Basic Energy Services, Inc., Superior Energy Services, Inc., and Pioneer Energy Services Corp. We feel that the Russell 2000 Index and the selected peer group provides the most meaningful comparison to our common stock's performance.
The graph below compares the cumulative five-year total return to holders of our common stock with the cumulative total returns of the listed Russell 2000 Index and our peer group. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 at January 1, 2012 and tracks the return on the investment through December 31, 2016.
nes_2015123xchart-45772a02.jpg
Company / Index
 
January 1,
2012
 
December 30,
2012
 
December 31,
2013
 
December 31,
2014
 
December 30,
2015
 
December 31,
2016
NES
 
$
100.00

 
$
60.60

 
$
25.25

 
$
8.35

 
$
0.77

 
$
0.27

Russell 2000 Index
 
100.00

 
116.70

 
161.86

 
170.02

 
162.40

 
194.46

Peer Group
 
100.00

 
58.81

 
91.70

 
65.21

 
55.20

 
71.53


37



Item 6. Selected Financial Data
The following table presents selected consolidated financial information and other operational data for our business. You should read the following information in conjunction with Item 7 of this Annual Report on Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Statement of Operations Data
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
($ in thousands, except per share data)
Total revenue
 
$
152,176

 
$
356,699

 
$
536,282

 
$
525,816

 
$
256,671

Loss from operations (1)(2)(3)(4)(5)
 
(117,388
)
 
(144,839
)
 
(417,654
)
 
(149,659
)
 
(37,574
)
Loss from continuing operations (1)(2)(3)(4)(5)
 
(167,621
)
 
(195,167
)
 
(457,178
)
 
(134,040
)
 
(6,597
)
(Loss) income from discontinued operations, net of income taxes (3)(4)
 
(1,235
)
 
(287
)
 
(58,426
)
 
(98,251
)
 
9,124

Net (loss) income attributable to common shareholders
 
(168,856
)
 
(195,454
)
 
(515,604
)
 
(232,291
)
 
2,527

Weighted average shares outstanding used in computing net (loss) income per basic and diluted common share
 
90,979

 
27,681

 
26,090

 
24,492

 
14,994

Basic and diluted loss per share from continuing operations
 
(1.84
)
 
(7.05
)
 
(17.52
)
 
(5.47
)
 
(0.44
)
Basic and diluted (loss) income per share from discontinued operations
 
(0.01
)
 
(0.01
)
 
(2.24
)
 
(4.01
)
 
0.61

Net (loss) income per basic and diluted share
 
(1.85
)
 
(7.06
)
 
(19.76
)
 
(9.48
)
 
0.17

 
(1)
Loss from operations and loss from continuing operations for the year ended December 31, 2016 includes long-lived asset impairment charges of $42.2 million and $14.3 million in costs incurred in connection with our capital restructuring transactions during 2016, which are described in more detail in Note 6 and Note 9 in the Notes to the Consolidated Financial Statements herein, respectively.
(2)
Loss from operations and loss from continuing operations for the year ended December 31, 2015 includes a goodwill impairment charge of $104.7 million, restructuring charges of $7.1 million, approximately $1.4 million in litigation and environmental charges and the write-off of a portion of the unamortized debt issuance costs associated with amendments to our ABL Facility of approximately $2.1 million.
(3)
Loss from operations and loss from continuing operations for the year ended December 31, 2014 includes a goodwill impairment charge of $304.0 million, a long-lived asset impairment charge of $112.4 million, approximately $8.8 million in litigation and environmental charges and the write-off of a portion of the unamortized debt issuance costs of approximately $3.2 million. Additionally, as a result of the on-going sales process of our industrial solutions division, we recorded charges totaling $74.4 million, which is included within "Loss from discontinued operations, net of income taxes" in our consolidated statement of operations herein.
(4)
During the fourth quarter of 2013, our board of directors approved and committed to a plan to divest our Thermo Fluids Inc. ("TFI") subsidiary, which comprises our industrial solutions business and as a result, we considered TFI to be held for sale. As such, all prior periods were restated to reflect TFI as discontinued operations. Loss from discontinued operations, net of income taxes for the year ended December 31, 2013 includes $98.5 million in goodwill impairment charges associated with our industrial solutions business. On April 11, 2015, we completed the TFI disposition with Safety-Kleen, Inc. for $85.0 million in an all-cash transaction, subject to working capital adjustments. See Note 21 in the Notes to the Consolidated Financial Statements herein for further information. Loss from operations and loss from continuing operations for the year ended December 31, 2013 includes long-lived asset impairment charges of $111.9 million, $24.6 million in litigation settlement charges and the write-off of $4.3 million of investments.
(5)
Loss from operations and loss from continuing operations for the year ended December 31, 2012 includes merger and acquisition costs of $7.7 million, impairment charges of $2.4 million and $3.7 million related to write-downs of the carrying values of a customer intangible asset and saltwater disposal wells, respectively, and a $1.4 million charge to accrue for the estimated costs of remediation and testing to comply with Louisiana Department of Environmental Quality

38



requirements. In addition, loss from continuing operations for the year ended December 31, 2012 includes a $2.6 million charge for the write-off of unamortized deferred financing costs due to the repayment and replacement of our prior credit facility. 2012 also includes amounts from the acquisitions of Keystone Vacuum, Inc. and related entities, Thermo Fluids Inc., Homer Enterprises, Inc., JB Transportation Services, Inc. (“All Phase”), Appalachian Water Services, LLC and Badlands Power Fuels, LLC from their transaction dates of February 3, 2012, April 10, 2012, May 31, 2012, June 15, 2012, September 1, 2012 and November 30, 2012, respectively. Finally, 2012 also includes an income tax benefit from the release of a $38.5 million valuation allowance associated with net operating losses because of a determination that the realization of the associated deferred tax assets is more likely than not based on future taxable income arising from the reversal of deferred tax liabilities that we acquired in the TFI acquisition and the Power Fuels merger.
Balance Sheet Data
 
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
($ in thousands)
Consolidated balance sheet data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
 
$
994

 
$
39,309

 
$
13,367

 
$
8,783

 
$
14,776

Total current assets (1)
 
33,478

 
94,481

 
154,672

 
161,691

 
165,981

Property, plant and equipment, net (2)
 
294,179

 
406,188

 
475,982

 
498,541

 
579,022

Goodwill (3)
 

 

 
104,721

 
408,696

 
415,176

Total assets (3)
 
342,604

 
522,619

 
871,572

 
1,410,763

 
1,644,339

Current portion of long-term debt (4)
 
465,835

 
499,709

 
4,863

 
5,464

 
4,699

Current liabilities
 
492,967

 
545,087

 
96,193

 
124,538

 
86,470

Long-term debt (4)
 
5,956

 
11,758

 
592,455

 
549,713

 
561,427

Total liabilities
 
511,670

 
560,890

 
718,625

 
766,394

 
796,578

Total shareholders' (deficit)/equity
 
(169,066
)
 
(38,271
)
 
152,947

 
644,369

 
847,761

(1)
On March 10, 2016, we entered into an amendment to our guaranty and security agreement related to our ABL Facility, which is described in further detail in Note 9 in the Notes to the Consolidated Financial Statements herein under "ABL Facility Amendments." This amendment implemented a daily cash sweep of our collection lockbox and certain depository accounts, the proceeds of which are required to be applied against the outstanding balance of the ABL Facility. As a result of this amendment, our cash and cash equivalents balance decreased in 2016. Due to lower revenues in 2016, accounts receivable decreased by $18.4 million from the prior year, also contributing to the lower total current assets as of December 31, 2016.
(2)
During 2016, we recorded long-lived asset impairment charges of $42.2 million. During 2013, we recorded long-lived asset impairment charges of $111.9 million.
(3)
Goodwill was reduced to zero in 2015 as a result of a goodwill impairment charge of $104.7 million. The 2014 decrease in goodwill and total assets related to a goodwill and intangible asset impairment charge of $304.0 million and $112.4 million, respectively. Total assets as of December 31, 2014 and 2013 also reflect a reduction in goodwill relating to impairment charges for TFI of $48.0 million and $98.5 million, respectively, which were included in assets held for sale at those year ends. Additionally, total assets as of December 31, 2014 also reflected a reduction in intangible assets of $26.4 million for TFI.
(4)
As a result of the probability of breaching one of the financial covenants as of December 31, 2015, the carrying value of the ABL Facility and the 2018 Notes was reclassified as current in the consolidated balance sheet as of December 31, 2015. See Note 9 in the Notes to the Consolidated Financial Statements herein for further discussion on our indebtedness and the capital restructuring transactions that occurred during 2016.


39



Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements, and the Notes and Schedules related thereto, which are included in this Annual Report.
Company Overview
Nuverra Environmental Solutions, Inc. is among the largest companies in the United States dedicated to providing comprehensive, full-cycle environmental solutions to customers focused on the development and ongoing production of oil and natural gas from shale formations. Our strategy is to provide one-stop, total environmental solutions and wellsite logistics management, including delivery, collection, treatment, recycling, and disposal of solid and liquid materials that are used in and generated by the drilling, completion, and ongoing production of shale oil and natural gas.
We operate in shale basins where customer exploration and production (“E&P”) activities are predominantly focused on shale oil and natural gas as follows:
Oil shale areas: includes our operations in the Bakken and Eagle Ford Shale areas.
Natural gas shale areas: includes our operations in the Marcellus, Utica, and Haynesville Shale areas.
We support our customers’ demand for diverse, comprehensive and regulatory compliant environmental solutions required for the safe and efficient drilling, completion and production of oil and natural gas from shale formations. Current services, as well as prospective services in which we have made investments, include (i) logistics managements, including via procurement, delivery, collection, storage, treatment, recycling and disposal of solid and liquid materials and waste products; (ii) temporary and permanent water midstream assets, consisting of temporary and permanent pipeline facilities and other waste management infrastructure assets; (iii) equipment rental and staging services; and (iv) other ancillary services for E&P companies focused on the extraction of oil and natural gas resources from shale formations.
We utilize a broad array of assets to meet our customers' logistics and environmental management needs. Our logistics assets include trucks and trailers, temporary and permanent pipelines, temporary and permanent storage facilities, ancillary rental equipment, treatment facilities, and liquid and solid waste disposal sites. We continue to expand our suite of solutions to customers who demand safety, environmental compliance and accountability from their service providers.
As a result of our historical acquisition activity to expand our presence in existing shale basins, access new markets and to expand the breadth and scope of services we provide, we have accumulated a large level of indebtedness. Due to the continued decline in oil and natural gas prices, and the resulting decrease in drilling and completion activities, there was lower demand for our services during 2016. The decreased demand for our services impacts our overall liquidity and our ability to generate sufficient cash to meet our debt obligations and operating needs. See the "Liquidity and Capital Resources" discussion later in this section for further details.
Trends Affecting Our Operating Results
Our results are driven by demand for our services, which are in turn affected by E&P spending trends in the shale areas in which we operate, in particular the level of drilling activity (which impacts the amount of environmental waste products being managed) and active wells (which impacts the amount of produced water being managed). In general, drilling activity in the oil and natural gas industry is affected by the market prices (or anticipated prices) for those commodities. Persistent low natural gas prices have resulted in reduced drilling activity in “dry” gas shale areas such as the Haynesville and Marcellus Shale areas where natural gas is the predominant natural resource. In addition, the low natural gas prices have in the past caused many natural gas producers to curtail capital budgets and these cuts in spending curtailed drilling programs, as well as discretionary spending on well services in certain shale areas, and accordingly reduced demand for our services in these areas. As a result of the decline in oil prices that began in the fourth quarter of 2014 and continued throughout 2015 and 2016, drilling and completion activities in the oil and "wet" gas basins such as the Eagle Ford, Utica and Bakken shale areas experienced a dramatic decline. Accordingly, our customer base reduced their capital programs and drilling and completion activity levels during both 2015 and 2016.
Due to oil prices remaining more stable in early 2017, we are beginning to see drilling and completion activities increase in all basins. We would expect continued stability or further price growth to lead to increased drilling and completion activities by our customer base during 2017 when compared to 2016. Increased drilling and completion activities would likely lead to a higher demand for our services in 2017; however, there is no guarantee that oil prices will remain stable, drilling and completion activities in basins will continue to increase, or we will see an increase in a demand for our services in 2017.

40



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 and 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 drivers (or alternatively, subcontractors) in the areas in which we operate, particularly in the Bakken and Marcellus/Utica Shale areas, (v) labor costs, which decreased during 2016 but are expected to increase during 2017, (vi) developments in governmental regulations, (vii) seasonality and weather events (viii) pricing and (ix) our health, safety and environmental performance record.
The following table summarizes our total revenues, loss from continuing operations before income taxes, loss from continuing operations and EBITDA (defined below) for the years ended December 31, 2016, 2015 and 2014 (in thousands):
 
Year Ended December 31,
 
2016
 
2015
 
2014
Revenue - from predominantly oil shale areas (a)
$
92,650

 
$
241,403

 
$
403,371

Revenue - from predominantly natural gas shale areas (b)
59,526

 
115,296

 
132,911

Total revenue
$
152,176

 
$
356,699

 
$
536,282

 
 
 
 
 
 
Loss from continuing operations before income taxes
$
(166,814
)
 
$
(195,284
)
 
$
(469,641
)
Loss from continuing operations
(167,621
)
 
(195,167
)
 
(457,178
)
EBITDA (c, d)
(51,521
)
 
(75,579
)
 
(332,844
)
_________________________
(a)
Represents revenues that are derived from predominantly oil-rich areas consisting of the Bakken, Eagle Ford, Mississippian and Tuscaloosa Marine Shale areas (prior to our substantial exit from the Mississippian and Tuscaloosa Marine basins during the three months ended March 31, 2015). Note that the Utica Shale area was previously included in the oil shale areas until the three months ended September 30, 2015 when it was reclassified as a natural gas shale area.
(b)
Represents revenues that are derived from predominantly natural gas-rich areas consisting of the Marcellus, Utica, Haynesville and Barnett Shale areas (prior to our substantial exit from the Barnett basin during the three months ended March 31, 2014). Note that the Utica Shale area was previously included in the oil shale areas until the three months ended September 30, 2015 when it was reclassified as a natural gas shale area.
(c)
Defined as consolidated net loss from continuing operations before net interest expense, income taxes and depreciation and amortization. EBITDA is not a recognized measure under generally accepted accounting principles in the United States (“GAAP”). See the reconciliation between loss from continuing operations and EBITDA under “Item 7. Liquidity and Capital Resources - EBITDA.”
(d)
The financial covenants referred to in Note 9 in the Notes to the Consolidated Financial Statements are based on EBITDA adjusted for certain items as defined in the debt agreements. Most notably, long-lived asset and goodwill impairments are allowed to be adjusted out of EBITDA in calculating the Adjusted EBITDA for the asset-based revolving credit facility financial covenant.

41



Results of Operations
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
The following table sets forth for each of the periods indicated our statements of operations data and expresses revenue and expense data as a percentage of total revenues for the periods presented (dollars in thousands):
 
Year Ended
 
Percent of Revenue
 
 
 
 
 
December 31,
 
December 31,
 
Increase (Decrease)
 
2016
 
2015
 
2016
 
2015
 
2016 versus 2015
Non-rental revenue
$
139,886

 
$
327,655

 
91.9
 %
 
91.9
 %
 
$
(187,769
)
 
(57.3
)%
Rental revenue
12,290

 
29,044

 
8.1
 %
 
8.1
 %
 
(16,754
)
 
(57.7
)%
Total revenue
152,176

 
356,699

 
100.0
 %
 
100.0
 %
 
(204,523
)
 
(57.3
)%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating expenses
129,624

 
279,881

 
85.2
 %
 
78.5
 %
 
(150,257
)
 
(53.7
)%
General and administrative expenses
37,013

 
39,327

 
24.3
 %
 
11.0
 %
 
(2,314
)
 
(5.9
)%
Depreciation and amortization
60,763

 
70,511

 
39.9
 %
 
19.8
 %
 
(9,748
)
 
(13.8
)%
Impairment of long-lived assets
42,164

 

 
27.7
 %
 
 %
 
42,164

 
100.0
 %
Impairment of goodwill

 
104,721

 
 %
 
29.4
 %
 
(104,721
)
 
(100.0
)%
Other, net

 
7,098

 
 %
 
2.0
 %
 
(7,098
)
 
(100.0
)%
Total costs and expenses
269,564

 
501,538

 
177.1
 %
 
140.6
 %
 
(231,974
)
 
(46.3
)%
Loss from operations
(117,388
)
 
(144,839
)
 
(77.1
)%
 
(40.6
)%
 
(27,451
)
 
(19.0
)%
Interest expense, net
(54,530
)
 
(49,194
)
 
(35.8
)%
 
(13.8
)%
 
5,336

 
10.8
 %
Other income, net
5,778

 
894

 
3.8
 %
 
0.3
 %
 
4,884

 
546.3
 %
Loss on extinguishment of debt
(674
)
 
(2,145
)
 
(0.4
)%
 
(0.6
)%
 
(1,471
)
 
(68.6
)%
Loss from continuing operations before income taxes
(166,814
)
 
(195,284
)
 
(109.6
)%
 
(54.7
)%
 
(28,470
)
 
(14.6
)%
Income tax (expense) benefit
(807
)
 
117

 
(0.5
)%
 
 %
 
924

 
789.7
 %
Loss from continuing operations
(167,621
)
 
(195,167
)
 
(110.1
)%
 
(54.7
)%
 
(27,546
)
 
(14.1
)%
Loss from discontinued operations, net of income taxes
(1,235
)
 
(287
)
 
(0.8
)%
 
(0.1
)%
 
948

 
330.3
 %
Net loss attributable to common shareholders
$
(168,856
)
 
$
(195,454
)
 
(111.0
)%
 
(54.8
)%
 
$
(26,598
)
 
(13.6
)%
Non-Rental Revenue
Non-rental revenue consists of fees charged to customers for the sale and transportation of fresh water and saltwater by our fleet of logistics assets and/or through water midstream assets owned by us to customer sites for use in drilling and completion activities and from customer sites to remove and dispose of flowback and produced water originating from oil and natural gas wells. Non-rental revenue also includes fees for solids management services. Non-rental revenue for the year ended December 31, 2016 was $139.9 million, down $187.8 million, or 57.3%, from $327.7 million for the year ended December 31, 2015. Continued lower drilling and completion activities in all divisions during 2016, as well as pricing pressures, led to lower non-rental revenue for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The primary driver of the decreased demand in the basins we serve was a 57% decline in average operating oil rigs from those operating in the prior year.
Rental Revenue
Rental revenue consists of fees charged to customers for use of equipment owned by us over the term of the rental period, as well as other fees charged to customers for items such as delivery and pickup. Rental revenue for the year ended December 31, 2016 was $12.3 million, down $16.8 million, or 57.7%, from $29.0 million for the year ended December 31, 2015. The decrease was the result of lower utilization of our rental fleet in all divisions in conjunction with the continued reduction in drilling and completion activities in 2016 due to depressed oil prices.

42



Direct Operating Expenses
Direct operating expenses for the year ended December 31, 2016 were $129.6 million, versus $279.9 million for the year ended December 31, 2015, a decrease of 53.7%. The decrease in direct operating expenses is attributable to lower revenues as a result of decreased activities, as well as our continued focus on our cost-management initiatives. Additionally, direct operating expenses during the year ended December 31, 2016 included a loss on the sale of assets of $3.5 million, while the year ended December 31, 2015 included a gain on the sale of assets of $0.3 million.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2016 were $37.0 million, down $2.3 million from $39.3 million for the year ended December 31, 2015. The decrease in general and administrative expenses is primarily attributable to lower compensation and benefit expenses as a result of headcount reductions in response to the continued decrease in drilling and completion activities, offset by $14.3 million in legal and professional fees incurred in connection with the restructuring of our indebtedness.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2016 was $60.8 million, down $9.7 million from $70.5 million for the year ended December 31, 2015. The decrease is primarily attributable to a lower depreciable asset base as we have reduced capital spending and sold underutilized or non-core assets as a result of lower oil prices and decreased activities by our customers.
Impairment of Long-Lived Assets
During the year ended December 31, 2016, management approved plans to sell certain assets located in both the Northeast and Southern divisions, including trucks, tanks, and a parcel of land. These assets qualified to be classified as assets held for sale and as a result the assets were recorded at the lower of net book value or fair value less costs to sell. This resulted in a long-lived asset impairment charge of $4.8 million for the year ended December 31, 2016.
Additionally, 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. During the year ended December 31, 2016, there were indicators that the assets in the Bakken, Eagle Ford, Haynesville and Marcellus/Utica basins were not recoverable and as a result we recorded long-lived asset impairment charges of $37.4 million.
No charges were recorded for the impairment of long-lived assets line for the year ended December 31, 2015. See also Note 6 in the Notes to the Consolidated Financial Statements herein for further discussion.
Impairment of Goodwill
We recorded goodwill impairment charges of $104.7 million related to our Rocky Mountain division during the year ended December 31, 2015 as a result of our annual impairment test, thereby eliminating all remaining goodwill on the consolidated balance sheet. See also Note 6 in the Notes to the Consolidated Financial Statements herein for further discussion.
Other, net
During the year ended December 31, 2015, we recorded a charge totaling approximately $7.1 million to restructure our business in certain shale basins and reduce costs, including an exit from the Mississippian shale area and the Tuscaloosa Marine Shale logistics business. Included in the $7.1 million of restructuring charges is approximately $5.9 million for the impairment of certain assets in the Mississippian shale area. See Note 6 and Note 7 in the Notes to the Consolidated Financial Statements herein for further discussion.
Interest Expense, net
Interest expense, net during the year ended December 31, 2016 was $54.5 million compared to $49.2 million for the year ended December 31, 2015. The increase is primarily due to the restructuring of our indebtedness during the year ended December 31, 2016. As part of the debt restructuring, a portion of our 2018 Notes were exchanged for new 2021 Notes whereby the interest due on October 15, 2016 was payable in kind at an annual rate of 12.5%. Additionally, we entered into a new Term Loan with interest payable in kind at 13% compounded monthly. See Note 9 in the Notes to the Consolidated Financial Statements herein for further details.

43



Other Income, net
Other income, net was $5.8 million for the year ended December 31, 2016 compared to $0.9 million for the year ended December 31, 2015. The increase is attributable to the gain on the sale of Underground Solutions Inc. (or "UGSI") of $1.7 million during the year ended December 31, 2016 (see Note 19 in the Notes to the Consolidated Financial Statements). Additionally, we recorded a $3.3 million gain associated with the change in fair value of the derivative warrant liability. We issued warrants with derivative features in connection with our debt restructuring during the year ended December 31, 2016. These instruments are accounted for as derivative liabilities with any decrease or increase in the estimated fair value recorded in "Other income, net." See Note 9, Note 10, and Note 11 in the Notes to the Consolidated Financial Statements for further details on the warrants.
Loss on Extinguishment of Debt
During the year ended December 31, 2016, we executed two amendments to our ABL Facility and as a result wrote-off $0.7 million of unamortized debt issuance costs associated with the ABL Facility. See "Liquidity and Capital Resources - ABL Facility Amendments" later in this section for further discussion on the amendments.
During the year ended December 31, 2015, as a result of two amendments to our ABL Facility, we wrote-off a portion of the unamortized debt issuance costs associated with the ABL Facility of approximately $2.1 million.
Income Taxes
The income tax expense for the year ended December 31, 2016 was $0.8 million (a (0.5)% effective rate) compared to a benefit of $0.1 million (a near zero effective rate) in the prior year. The effective tax rate in 2016 is primarily the result of federal alternative minimum tax and the change in valuation allowance attributable to long-lived assets.

We have significant deferred tax assets consisting primarily of federal net operating losses (“NOLs”), which generally expire between the years 2031 and 2035, long-term debt and capital loss carryforwards, which have a five year carryforward that begins to expire in 2019. Management regularly assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize 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 losses, at December 31, 2016, we determined that our deferred tax liabilities were not sufficient to fully realize our deferred tax assets and, as a result, a valuation allowance continues to be required to be recorded against our deferred tax assets. Accordingly, we have recorded a valuation allowance of approximately $236.1 million as of December 31, 2016.
Loss from Discontinued Operations
Loss from discontinued operations in the years ended December 31, 2016 and 2015 represents the financial results and final closing adjustments of TFI, our industrial solutions business, which was sold in April of 2015. Such loss, which is presented net of income taxes, was $1.2 million and $0.3 million for the years ended December 31, 2016 and 2015, respectively. See Note 21 in the Notes to the Consolidated Financial Statements herein for additional information.

44



Results of Operations
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
The following table sets forth for each of the periods indicated our statements of operations data and expresses revenue and expense data as a percentage of total revenues for the periods presented (dollars in thousands):  
 
Year Ended
 
Percent of Revenue
 
 
 
 
 
December 31,
 
December 31,
 
Increase (Decrease)
 
2015
 
2014
 
2015
 
2014
 
2015 versus 2014
Non-rental revenue
$
327,655

 
463,418

 
91.9
 %
 
86.4
 %
 
$
(135,763
)
 
(29.3
)%
Rental revenue
29,044

 
72,864

 
8.1
 %
 
13.6
 %
 
(43,820
)
 
(60.1
)%
Total revenue
356,699

 
536,282

 
100.0
 %
 
100.0
 %
 
(179,583
)
 
(33.5
)%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating expenses
279,881

 
392,458

 
78.5
 %
 
73.2
 %
 
(112,577
)
 
(28.7
)%
General and administrative expenses
39,327

 
59,187

 
11.0
 %
 
11.0
 %
 
(19,860
)
 
(33.6
)%
Depreciation and amortization
70,511

 
85,880

 
19.8
 %
 
16.0
 %
 
(15,369
)
 
(17.9
)%
Impairment of long-lived assets

 
112,436

 
 %
 
21.0
 %
 
(112,436
)
 
(100.0
)%
Impairment of goodwill
104,721

 
303,975

 
29.4
 %
 
56.7
 %
 
(199,254
)
 
(65.5
)%
Other, net
7,098

 

 
2.0
 %
 
 %
 
7,098

 
100.0
 %
Total costs and expenses
501,538

 
953,936

 
140.6
 %
 
177.9
 %
 
(452,398
)
 
(47.4
)%
Loss from operations
(144,839
)
 
(417,654
)
 
(40.6
)%
 
(77.9
)%
 
(272,815
)
 
(65.3
)%
Interest expense, net
(49,194
)
 
(50,917
)
 
(13.8
)%
 
(9.5
)%
 
(1,723
)
 
(3.4
)%
Other income, net
894

 
2,107

 
0.3
 %
 
0.4
 %
 
(1,213
)
 
(57.6
)%
Loss on extinguishment of debt
(2,145
)
 
(3,177
)
 
(0.6
)%
 
(0.6
)%
 
(1,032
)
 
(32.5
)%
Loss from continuing operations before income taxes
(195,284
)
 
(469,641
)
 
(54.7
)%
 
(87.6
)%
 
(274,357
)
 
(58.4
)%
Income tax benefit
117

 
12,463

 
 %
 
2.3
 %
 
(12,346
)
 
(99.1
)%
Loss from continuing operations
(195,167
)
 
(457,178
)
 
(54.7
)%
 
(85.2
)%
 
(262,011
)
 
(57.3
)%
Loss from discontinued operations, net of income taxes
(287
)
 
(58,426
)
 
(0.1
)%
 
(10.9
)%
 
(58,139
)
 
(99.5
)%
Net loss attributable to common stockholders
$
(195,454
)
 
$
(515,604
)
 
(54.8
)%
 
(96.1
)%
 
$
(320,150
)
 
(62.1
)%
Non-Rental Revenue
Non-rental revenue for the year ended December 31, 2015 was $327.7 million, down $135.8 million, or 29.3%, from $463.4 million for the year ended December 31, 2014. In the Rocky Mountain division, lower drilling and completion activities during the year, as well as pricing pressures, led to lower non-rental revenue as compared to the prior year. Lower non-rental revenue in the Southern division was driven by our exit from the Mississippian shale area and Tuscaloosa Marine Shale logistics business, pricing pressures and overall reduced drilling and completion activities. These decreases were partially offset in the Northeast division due to increased activities from an expanded customer base as compared to the same period in the prior year, and an increase in water treatment revenues as a result of the AWS expansion completed in July 2014.
Rental Revenue
Rental revenue consists of fees charged to customers for use of equipment owned by us over the term of the rental period, as well as other fees charged to customers for items such as delivery and pickup. Rental revenue for the year ended December 31, 2015 was $29.0 million, down $43.8 million, or 60.1%, from $72.9 million for the year ended December 31, 2014. The decrease was the result of lower utilization of our rental fleet primarily in the Rocky Mountain and Southern divisions, in conjunction with the reduction in drilling and completion activities due to lower oil prices.
Direct Operating Expenses
Direct operating expenses for the year ended December 31, 2015 were $279.9 million, compared to $392.5 million for the year ended December 31, 2014, a decrease of 28.7%. The decrease in direct operating expenses was primarily attributable to lower compensation expenses and fuel costs, as well as repairs and maintenance costs associated with decreased activities.

45



Additionally, we implemented various cost-management initiatives to reduce direct operating expenses given the decrease in activities due to lower oil and natural gas prices.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2015 were $39.3 million, down $19.9 million from $59.2 million for the year ended December 31, 2014. The decrease in general and administrative expenses is primarily due to a decrease in business activities and our cost-management initiatives, which resulted in lower bad debt expense and lower compensation expense during the year ended December 31, 2015. Additionally, the year ended December 31, 2014 included $2.1 million of integration and rebranding costs, along with $6.3 million of legal and environmental expenses for certain litigation, which did not occur in such magnitude in 2015.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2015 was $70.5 million, down approximately $15.4 million from $85.9 million for the year ended December 31, 2014. The decrease was primarily attributable to the write-off of the intangible assets in the Rocky Mountain division as of December 31, 2014, resulting from the long-lived asset impairment charges totaling $112.4 million in 2014.
Impairment of Long-Lived Assets
No charges were recorded to the impairment of long-lived assets line for the year ended December 31, 2015. The long-lived asset impairment charges of $112.4 million for the year ended December 31, 2014 consisted of the write-off of our customer relationship intangible assets located in our Rocky Mountain division following impairment testing that resulted from triggering events that occurred during the three months ended December 31, 2014, including the significant decline in oil and natural gas prices and the market price of the our common stock.
Impairment of Goodwill
Goodwill impairment amounted to $104.7 million for the year ended December 31, 2015 and related to our Rocky Mountain division, thereby eliminating all remaining goodwill on the consolidated balance sheet, as a result of our annual impairment test during the three months ended September 30, 2015. For the year ended December 31, 2014, total goodwill impairment charges were $304.0 million and represented a $33.8 million, $66.9 million, and $203.3 million reduction of the carrying value of goodwill associated with our Northeast, Southern and Rocky Mountain divisions, respectively, following impairment testing that resulted from triggering events that occurred throughout the year, including the significant decline in oil and natural gas prices and the market price of our common stock, as well as a redefinition of our reporting unit structure.
Other, net
We recorded a charge totaling approximately $7.1 million in the year ended December 31, 2015 to restructure our business in certain shale basins and reduce costs, including an exit from the Mississippian shale area and the Tuscaloosa Marine Shale logistics business. Included in the $7.1 million of restructuring charges is approximately $5.9 million for the impairment of certain assets in the Mississippian shale area. See Note 7 in the Notes to the Consolidated Financial Statements herein for further discussion.
Interest Expense, net
Interest expense, net during the year ended December 31, 2015 was $49.2 million compared to $50.9 million for the year ended December 31, 2014. The decrease in interest expense was primarily attributable to lower borrowings on the ABL Facility during the year ended December 31, 2015, as compared to the borrowings on the ABL Facility during the year ended December 31, 2014.
Other Income, net
Other income, net was $0.9 million for the year ended December 31, 2015 compared to $2.1 million for the year ended December 31, 2014. The decrease in other income, net was primarily attributable to a $2.0 million gain related to a change in the fair value of our Heckmann Water Resources (CVR), Inc. contingent consideration obligation recognized in the year ended December 31, 2014, which reduced the obligation to zero.

46



Loss on Extinguishment of Debt
During the year ended December 31, 2015, as a result of two amendments to our ABL Facility, we wrote-off a portion of the unamortized debt issuance costs associated with the ABL Facility of approximately $2.1 million. In February 2014, we entered into the ABL Facility and wrote-off a portion of the unamortized debt issuance costs associated with our previous Amended Revolving Credit Facility of approximately $3.2 million during the year ended December 31, 2014.
Income Taxes
The income tax benefit for the year ended December 31, 2015 was $0.1 million (a near zero effective rate) compared to $12.5 million (effective rate of 2.7%) in the prior year. The lower effective tax benefit rate in 2015 is primarily the result of the tax impact of the impairment of goodwill and an increased valuation allowance related to deferred tax assets.

We have significant deferred tax assets consisting primarily of net operating losses (“NOLs”), which have a limited life generally expiring between the years 2029 and 2035, and capital losses, which have a five year carryforward expiring in 2020. Management regularly assesses the available positive and negative evidence 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 this year and 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 losses, at December 31, 2015, we determined that our deferred tax liabilities were not sufficient to fully realize our deferred tax assets and, as a result, a valuation allowance continues to be required to be recorded against our deferred tax assets. Accordingly, we recorded a valuation allowance of approximately $171.7 million as of December 31, 2015.
Loss from Discontinued Operations
Loss from discontinued operations in the years ended December 31, 2015 and 2014 represents the financial results of TFI, which comprised our industrial solutions business, which was sold in April of 2015. Such loss, which is presented net of income taxes, was $0.3 million and $58.4 million for the years ended December 31, 2015 and 2014, respectively. The 2014 loss includes impairment charges of $74.4 million.
Liquidity and Capital Resources
Cash Flows and Liquidity
Our primary source of capital has historically been from borrowings available under our ABL Facility and Term Loan, with additional sources of capital in prior years from debt and equity accessed through the capital markets. Our historical acquisition activity was highly capital intensive and required significant investments in order to expand our presence in existing shale basins, access new markets and to expand the breadth and scope of services we provide. Additionally, we have historically issued equity as consideration in acquisition transactions. Our sources of capital for 2016 included cash generated by our operations, restructuring transactions including borrowings from our Term Loan, asset sales and borrowings under our ABL Facility to the extent our borrowing base and financial covenants permitted such borrowings. Cash generated by our operations alone is not sufficient to fund operations.
At December 31, 2016 our total indebtedness was $487.6 million. We have incurred losses from continuing operations of $167.6 million, $195.2 million and $457.2 million for the years ended December 31, 2016, 2015 and 2014, respectively, including impairments of goodwill and long-lived assets. At December 31, 2016 we had cash and cash equivalents of $1.0 million and $11.6 million of net availability under the ABL Facility.
The maturity date of our ABL Facility occurred on March 31, 2017, and, as a result, all commitments under the ABL Facility have been terminated, the lenders under the ABL Facility have no obligation to provide additional loans or otherwise extend credit under the ABL Facility, and all obligations under the ABL Facility are due and payable. As we have not repaid all outstanding obligations under the ABL Facility, we are in default under the ABL Facility and the lenders under the ABL Facility are entitled to exercise their rights and remedies. In addition, the default under the ABL Facility constituted an event of cross default under the Term Loan and the indentures governing the Company’s 2018 Notes and 2021 Notes. The Company does not have sufficient liquidity to repay the obligations under the ABL Facility, Term Loan, or indentures governing our 2018 Notes and 2021 Notes.

In order to address our liquidity issues and provide for a restructuring of our indebtedness to improve our long-term capital structure, we have entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with holders of over 80% (the “Supporting Noteholders”) of our 2021 Notes on April 9, 2017. Under the Restructuring Support Agreement, the

47



Supporting Noteholders have agreed, subject to certain terms and conditions, to support a financial restructuring of Nuverra (the “Restructuring”) pursuant to a prepackaged plan of reorganization (the “Plan”) to be filed in a case commenced under chapter 11 of the United States Bankruptcy Code (“Chapter 11”). The Company anticipates that it will file the Plan on or before April 24, 2017. Among other terms and conditions, the Restructuring Support Agreement provides for interim financing to the Company prior to the filing of the Plan, debtor in possession financing (“DIP Financing”), a $150 million rights offering (the “Rights Offering”) and, if necessary after the Rights Offering, exit financing to fund required disbursements under the Plan (“Exit Financing”). The Company anticipates that the Restructuring will provide the Company will sufficient liquidity to continue its operations; however, there can be no assurances to that effect. There can also be no assurances that the Company will be able to successfully implement the Plan and consummate the Restructuring. See the "Subsequent Events Related to Indebtedness and Restructuring Plan" discussions later in this section for further details on the Restructuring.

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. As reflected in the consolidated financial statements, we had an accumulated deficit at December 31, 2016 and 2015, and a net loss for the fiscal years ended December 31, 2016, 2015 and 2014. These factors, coupled with our large outstanding debt balance, raise substantial doubt about our ability to continue as a going concern. We are attempting to generate sufficient revenues and reduce costs; however, our cash position may not be sufficient to support our daily operations if we are not successful. Our ability to continue as a going concern is dependent upon our ability to generate sufficient liquidity to meet our obligations and operating needs. While we were in compliance with our existing debt arrangements as of December 31, 2016, we were no longer in compliance as of March 31, 2017. We recognize that absent a successful Restructuring, it is likely that we will not have enough liquidity, including cash on hand, to service our debt obligations and fund day-to-day operations through fiscal 2017. Without receipt of the interim financing, DIP Financing, Rights Offering proceeds, and Exit Financing, our existing cash and other sources of liquidity may only be sufficient to fund our operations (excluding debt payments) through April 2017. See the "Subsequent Events Related to Indebtedness and Restructuring Plan" discussions later in this section for details on the Restructuring.

During 2016, we used cash on hand and liquidity from our 2016 restructuring transactions to repay a portion of our ABL Facility in order to maintain compliance with our ABL Facility financial covenants and to cover the deterioration to our ABL Facility borrowing base due to declining accounts receivable and downward pressure on the orderly liquidation values of our machinery and equipment. If there is further deterioration to our ABL Facility borrowing base, in the event our cash on hand is not adequate to cover any shortfall, we would be required to seek alternate sources of debt at higher rates of interest, and such debt may not be available to us. See Note 9 in the Notes to the Consolidated Financial Statements for details on our debt restructuring in 2016.
The following table summarizes our sources and uses of cash from continuing operations for the years ended December 31, 2016, 2015 and 2014 (in thousands):
 
 
Year Ended December 31,
Net cash (used in) provided by continuing operations:
 
2016
 
2015
 
2014
Operating activities
 
$
(26,251
)
 
49,827

 
17,376

Investing activities
 
14,732

 
68,178

 
(45,539
)
Financing activities
 
(26,796
)
 
(93,118
)
 
32,747

Net (decrease) increase in cash and cash equivalents from continuing operations
 
$
(38,315
)
 
$
24,887

 
$
4,584

As of December 31, 2016, we had cash and cash equivalents of $1.0 million, a decrease of $38.3 million from December 31, 2015. The primary reason for the decrease in cash and cash equivalents is due to net repayments of $79.2 million on our ABL Facility and the execution of an amendment to our guaranty and security agreement related to our ABL Facility in March 2016, which is described in further detail later in this section under "ABL Facility and Amendments." This amendment implemented a daily cash sweep of our collection lockbox and certain depository accounts, the proceeds of which are required to be applied against the outstanding balance of the ABL Facility. We had an ending balance of $1.4 million in our collection lockbox and certain depository accounts on December 31, 2016, which we have classified as "Restricted cash" on the consolidated balance sheet as this cash is not available for operations and was subsequently swept by the lender on January 1, 2017. The amendment also requires the segregation of all receipts and disbursements in separate bank accounts and limits the end of day balance in our operating bank account to an amount not to exceed $1.0 million.

48



Operating Activities
Net cash used by operating activities was $26.3 million for the year ended December 31, 2016. The net loss from continuing operations, after adjustments for non-cash items, used cash of $31.1 million as compared to $6.3 million in 2015, as described below. Changes in operating assets and liabilities provided $4.8 million primarily due to a decrease in accounts receivable as a result of lower activity levels and billings in the current year, offset by a decrease in accounts payable and accrued liabilities. The non-cash items and other adjustments included $60.8 million of depreciation and amortization of intangible assets, $42.2 million in impairment of long-lived assets, $26.7 million in accrued interest added to debt principal, amortization of debt issuance costs of $6.2 million, a $3.5 million loss on the disposal of property, plant and equipment, stock-based compensation of $1.1 million, and the write-off of debt issuance costs of $0.7 million, partially offset by a $3.3 million gain resulting from the change in the fair value of the derivative warrant liability and a $1.7 million gain on the sale of UGSI.
Net cash provided by operating activities was $49.8 million for the year ended December 31, 2015. The net loss from continuing operations, after adjustments for non-cash items, used cash of $6.3 million. Changes in operating assets and liabilities provided $56.1 million primarily due to a decrease in accounts receivable due to a focused effort on collections and lower overall revenues. The non-cash items and other adjustments included $104.7 million in impairment of goodwill, $5.9 million in impairment of long-lived assets, $70.5 million of depreciation and amortization of intangible assets and the write-off of debt issuance costs of $2.1 million.
Net cash provided by operating activities was $17.4 million for the year ended December 31, 2014. The net loss from continuing operations, after adjustments for non-cash items, provided cash of $42.0 million. Changes in operating assets and liabilities used cash of $24.7 million primarily due to an increase in accounts receivable and a decrease in accounts payable which was partially offset by a decrease in prepaid expenses and other receivables. The non-cash items and other adjustments included $304.0 million in impairment of goodwill, $112.4 million impairment of long-lived assets, $85.9 million of depreciation and amortization of intangible assets, and the write-off of debt issuance costs of $3.2 million, partially offset by a deferred income tax benefits of $12.6 million and a $4.8 million gain on the disposal of property, plant and equipment.
Investing Activities
Net cash provided by investing activities was $14.7 million for the year ended December 31, 2016, which primarily consisted of $10.7 million of proceeds from the sale of property, plant and equipment, $5.0 million in proceeds from the sale of UGSI, and a $2.8 million decrease in restricted cash due primarily to the release of funds from escrow as a result of the completion of the post-closing working capital reconciliation related to the sale of TFI, partially offset by $3.8 million of purchases of property, plant and equipment.
Net cash provided by investing activities was $68.2 million for the year ended December 31, 2015 which consisted primarily of $78.9 million of proceeds from the sale of TFI and $12.7 million of proceeds from the sale of property, plant and equipment, offset by $19.2 million of purchases of property, plant and equipment
Net cash used in investing activities was $45.5 million for the year ended December 31, 2014 and consisted primarily of $55.7 million of purchases of property, plant and equipment, partially offset by $10.2 million in proceeds from sales of property, plant and equipment.
Financing Activities
Net cash used in financing activities was $26.8 million for the year ended December 31, 2016 and was primarily comprised of $79.2 million of net repayments on our ABL Facility and $6.6 million for payments under capital leases, notes payable and other financing activities, offset by $55.0 million in proceeds from the issuance of the new Term Loan and $5.0 million due to the issuance of 20,312,500 shares of our common stock to Mr. Johnsrud, our Chairman and Chief Executive Officer, on November 15, 2016 as a result of our election not to proceed with the previously contemplated rights offering (see Note 12 in the Notes to the Consolidated Financial Statements for more information on the rights offering).
Net cash used in financing activities was $93.1 million for the year ended December 31, 2015 and was primarily a result of using the proceeds received from the sale of TFI to make $81.6 million in payments on our ABL Facility. Additionally, we used cash of $11.2 million for payments under capital leases, notes payable and other financing activities, and $0.2 million for payments of debt issuance costs.
Net cash provided by financing activities was $32.7 million for the year ended December 31, 2014 and consisted primarily of $40.2 million in net borrowings under our ABL Facility, partially offset by $6.4 million for payments under capital leases, notes payable and other financing activities, and $1.0 million for payments of debt issuance costs.

49



Capital Expenditures
Cash required for capital expenditures (related to continuing operations) for the year ended December 31, 2016 totaled $3.8 million compared to $19.2 million for the year ended December 31, 2015. Capital expenditures for the year ended December 31, 2016 primarily related to expenditures to extend the useful life and productivity on our fleet of trucks, tanks, equipment and disposal wells. Capital expenditures in the year ended December 31, 2015 included continued investments in our solid treatment capabilities at our Bakken Shale landfill site as well as other equipment. Although we did not enter into any new capital leases during the year ended December 31, 2016, historically, a portion of our transportation-related capital requirements were financed through capital leases, which are excluded from the capital expenditures figures cited in the preceding sentences. Such equipment additions under capital leases were approximately $2.9 million and $0.3 million for the years ended December 31, 2015 and 2014, respectively. We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale areas in which we operate. Our capital expenditures program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. Our planned capital expenditures of approximately $10.0 million for 2017 are expected to be financed through cash flow from operations, borrowings under existing or new credit facilities if available, issuances of debt or equity, capital leases, other financing structures, or a combination of the foregoing.
Indebtedness

We are highly leveraged and a substantial portion of our liquidity needs result from debt service requirements and from funding our costs of operations and capital expenditures. As of December 31, 2016, we had $487.6 million of indebtedness outstanding, consisting of $40.4 million of 2018 Notes, $351.3 million of 2021 Notes, $60.7 million under a Term Loan, $22.7 million under an ABL Facility, and $12.5 million of capital leases for vehicle financings and a note payable for the purchase of the remaining interest in AWS.
Restructuring of Debt in 2016
On March 11, 2016, we entered into a Restructuring Support Agreement with holders of more than 80% of the 2018 Notes relating to a debt restructuring and recapitalization plan (the “Restructuring”), subject to the satisfaction of certain closing conditions including shareholder approval of an amendment to our Amended and Restated Certificate of Incorporation, as amended, and minimum noteholder participation. On April 15, 2016, we closed our exchange offer (the “Exchange Offer”) relating to our 2018 Notes as part of the comprehensive restructuring of our outstanding indebtedness pursuant to the Restructuring Support Agreement.

Pursuant to the Exchange Offer, we offered to exchange our 2021 Notes and shares of our common stock at a conversion price per share of $0.32 (the “Conversion Price”) for any and all of our 2018 Notes validly tendered and not properly withdrawn at or prior to the expiration date, with the exception of approximately $31.4 million in principal 2018 Notes owned by an entity controlled by Mark D. Johnsrud, our Chairman of the Board and Chief Executive Officer. We settled the Exchange Offer on April 15, 2016 by delivering to tendering holders of the 2018 Notes (i) $327.2 million in aggregate principal amount of the new 2021 Notes to those tendering holders electing to exchange for 2021 Notes and $0.9 million in shares of common stock converted at the Conversion Price to those tendering holders electing to exchange for common stock and (ii) a pro-rata share (based on the aggregate principal amount of the 2018 Notes validly tendered) of penny warrants sufficient to purchase 10% of shares of our common stock (the "Exchange Warrants"). In addition, $31.4 million in principal 2018 Notes held by an entity controlled by Mr. Johnsrud were canceled upon closing of the Exchange Offer, and converted to shares of our common stock on May 26, 2016 at the Conversion Price, following shareholder approval at the May 20, 2016 Special Meeting of Shareholders to approve an amendment to our Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of our common stock, par value $0.001 per share, from 50 million to 350 million (the "Johnsrud Note Conversion"). As a result of the exchange, a total of 101,071,875 shares of common stock were issued, with 2,837,500 to tendering holders electing to exchange their 2018 Notes for common stock, and 98,234,375 shares issued for the Johnsrud Note Conversion.

In connection with the issuance of the new 2021 Notes, we entered into a new Indenture that governs the terms of the new 2021 Notes, dated as of April 15, 2016, between the Company, Wilmington Savings Fund Society, FSB, as Trustee, and the Guarantors party thereto. Pursuant to the new Indenture, the 2021 Notes will mature on April 15, 2021. Interest is paid in kind semi-annually by increasing the principal amount payable and due at maturity and/or in cash as follows: interest payable on October 15, 2016 is paid in kind at an annual rate of 12.5%; interest payable after October 15, 2016 but on or before April 15, 2018 will be paid at a rate of 10% with 50% in kind and 50% in cash; interest payable after April 15, 2018 will be paid in cash at a rate of 10% until maturity. As a result, our annual cash interest payment obligations were reduced by approximately $17.8 million for 2016, $17.9 million for 2017 and $8.6 million through April 15, 2018. Interest on the 2021 Notes accrues from the

50



most recent date interest has been paid, or if no interest has been paid, from and including the issue date. The 2021 Notes are secured by junior liens on the same collateral as our ABL Facility and rank equal in right of payment to all senior indebtedness and senior to all subordinated indebtedness of the Company. The 2021 Notes are guaranteed by our subsidiaries.

Upon settlement of the Exchange Offer, there remained outstanding approximately $40.4 million aggregate principal amount of 2018 Notes. Ongoing semi-annual interest expense with respect to the remaining 2018 Notes is approximately $2.0 million. In addition, based on the completion of the Exchange Offer, consents from each exchanging holder of the 2018 Notes for the waiver of certain provisions of the 2018 Notes Indenture became effective. The consents, among other things, waive substantially all of the restrictive covenants in the 2018 Notes Indenture and potential defaults arising from non-compliance with such waived covenants.

Concurrent to the Exchange Offer we entered into a $24.0 million Term Loan funded by certain holders of the 2018 Notes that were also parties to the Restructuring Support Agreement. The Term Loan accrues interest at a rate of 13% compounded monthly to be paid in kind by increasing the principal amount payable thereunder. Principal including the paid in kind interest is due April 15, 2018. The Term Loan is subject to a minimum EBITDA covenant that is identical in all respects to the minimum EBITDA covenant applicable to the ABL Facility. To the extent actual EBITDA (as defined by the Term Loan) falls short of the minimum EBITDA targets, the Term Loan accrues interest at a rate of 17%. The Term Loan is secured by junior liens on the same collateral as our ABL Facility and guaranteed by our subsidiaries. In connection with the Term Loan, we entered into a warrant agreement with the lenders under the Term Loan, pursuant to which, as a commitment fee for entering into the Term Loan, the lenders received warrants to purchase up to 5% of our then-outstanding stock at an exercise price of $0.01 per share (the "Term Loan Warrants").

Proceeds from the Term Loan were applied to pay down a portion of the outstanding balance of the ABL Facility and were partially reborrowed by us to fund the April 15, 2016 interest payment on the 2018 Notes and pay related transaction fees and expenses. Subsequent amendments to the Term Loan Credit Agreement provided additional proceeds of $31.0 million which were also used to pay down a portion of the outstanding balance of the ABL Facility, for total Term Loan proceeds of $55.0 million during the year ended December 31, 2016.

Amendments to our Term Loan and ABL Facility during the year ended December 31, 2016, as well as further details on our outstanding debt including our financial covenants and borrowing limitations, are discussed in Note 9 in the Notes to the Consolidated Financial Statements.

Subsequent Events Related to Indebtedness and Restructuring Plan

Restructuring Support Agreement

On April 9, 2017, the Company and its subsidiaries (collectively, the "Nuverra Parties") entered into the Restructuring Support Agreement with the Supporting Noteholders. Under the RSA, the Supporting Noteholders have agreed, subject to certain terms and conditions, to support the Restructuring pursuant to the prepackaged Plan to be filed in a case commenced under chapter 11 of the United States Bankruptcy Code. The Nuverra Parties expect to commence a solicitation of votes for the Plan no later than April 20, 2017 and expect to commence the chapter 11 cases on or before April 24, 2017.

The Plan will be based on the restructuring term sheet attached to and incorporated into the Restructuring Support Agreement (the “Term Sheet”) which includes:

debtor in possession financing (the “DIP Facilities”), consisting of a super-priority, secured, debtor-in-possession revolving credit facility (the “DIP Revolving Facility”) provided by the lenders under the Company’s ABL Facility and a super-priority, secured, debtor-in-possession term loan facility (the “DIP Term Loan”) provided by the one or more of the lenders under the Company’s Term Loan;

a rights offering (the “Rights Offering”) in connection with the consummation of the Restructuring, pursuant to which the Company will distribute freely transferrable rights (the “Rights”) to permit the holders thereof to acquire, in the aggregate, $150.0 million of newly issued common stock of the reorganized company at an enterprise valuation of $400.0 million (the “Plan Value”);

exit financing, to the extent necessary after the Rights Offering, to fund required disbursements under the Plan, through a new first lien, senior secured exit facility in the form of an asset backed revolver, term loan or combination thereof;

51




cash payment in full of all administrative expense claims, priority tax claims, priority claims, DIP Revolving Facility claims, and ABL Facility claims;

satisfaction in full of all DIP Term Loan claims and Term Loan claims (collectively, the “Term Loan Claims”) as follows: (i) by converting the first $75.0 million of Term Loan Claims to newly issued common stock of the reorganized company at Plan Value, subject to dilution by a new management incentive plan, the Rights Offering, and the conversion of the remainder of the Term Loan Claims, and (ii) the remaining Term Loan Claims, if any, to be paid in cash from the proceeds of the Rights Offering in excess of $50.0 million after repayment of the ABL Facility claims and other expenses, with any remaining balance thereafter to be converted to newly issued common stock of the reorganized company at Plan Value (subject to dilution);

receipt by the holders of the 2021 Notes, in full satisfaction of their claims, (a) their pro rata share of 99.75% of the reorganized company’s newly issued common stock, subject to dilution by a new management incentive plan, the Rights Offering, and the conversion of the Term Loan Claims, and (b) 50.0% of the Rights (which will be exercisable for up to two years following the completion of the Restructuring);

receipt by the holders of the 2018 Notes in full satisfaction of their claims of (a) their pro rata share of up to 0.25% of the reorganized company’s newly issued common stock, subject to dilution by a new management incentive plan, the Rights Offering, and the conversion of the Term Loan Claims, and (b) a portion of 50.0% of the Rights to be determined by the Nuverra Parties (which will be exercisable prior to the completion of the Restructuring);

existing equity interests shall receive no distribution; provided however that, subject to agreement among the Supporting Noteholders and the Nuverra Parties, existing equity holders may receive a portion of the Rights;

payment of all undisputed customer, employee, vendor or other trade obligations; and

continuation as a public reporting company under the Securities Exchange Act of 1934 and best efforts to have the new common stock listed on the New York Stock Exchange.

In accordance with the Restructuring Support Agreement, the Supporting Noteholders agreed, among other things, to: (i) provide interim financing to the Nuverra Parties in the aggregate amount of $9.1 million until the filing of the chapter 11 cases; (ii) support and take all necessary actions in furtherance of the Restructuring; (iii) vote all of its claims against Nuverra in favor of the Plan; (iv) not direct or take any action inconsistent with the Plan or the Supporting Noteholders obligations; (v) not take any action that would, or is intended to in any material respect, interfere with, delay, or postpone the consummation of the Restructuring; and (vi) not transfer claims held by each Supporting Noteholder except with respect to limited and customary exceptions, generally requiring any transferee to become party to the Restructuring Support Agreement.

In accordance with the Restructuring Support Agreement, the Nuverra parties agreed, among other things, to: (i) use its best efforts to launch the solicitation of votes to approve the Plan, file the Plan, and seek confirmation of the Plan; (ii) use its best efforts to obtain orders from the bankruptcy court regarding the Restructuring; (iii) act in good faith and use its best efforts to support and complete the transactions contemplated in the Term Sheet; (iv) use its best efforts to obtain all required regulatory approvals and third-party approvals of the Restructuring; (v) not take any actions inconsistent with the Restructuring Support Agreement, Term Sheet, DIP Facilities, and the Plan; (vi) operate its business in the ordinary course consistent with past practice and preserve its businesses and assets; and (vii) support and take all actions that are necessary and appropriate to facilitate the confirmation of the Plan and the consummation of the Restructuring.

The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones related to the solicitation of votes to approve the Plan, commencement of the chapter 11 cases, confirmation of the Plan, consummation of the Plan, and the entry of orders relating to the DIP Facilities.

Term Loan Credit Agreement Amendments

Fifth Amendment to Term Loan

On April 3, 2017 (the “Effective Date”), we entered into a Fifth Amendment (Increase Amendment) to Term Loan Credit Agreement (the “Fifth Term Loan Agreement Amendment”) by and among the Term Loan Lenders, Agent, Wells Fargo Bank, National Association, as collateral agent, the Company, and the guarantors named therein, which further amends the Term Loan

52



Agreement by increasing the Term Loan Lenders’ commitment, and the principal amount borrowed by the Company, under the Term Loan Agreement from $58.1 million to $59.2 million (the “Fifth Amendment Additional Term Commitment”) and amending the EBITDA financial maintenance covenant.

Pursuant to the Fifth Term Loan Agreement Amendment, we are required to use the net cash proceeds of the Additional Term Commitment of $1.1 million to pay the fees, costs and expenses incurred in connection with the Fifth Term Loan Agreement Amendment. The remaining net cash proceeds, subject to satisfaction of certain release conditions, will be available for general operating, working capital and other general corporate purposes.

As a condition to the effectiveness of the Fifth Term Loan Agreement Amendment, we were required to enter into a letter agreement with the agent under our ABL Facility providing that the agent under the ABL Facility would not exercise any remedies with respect to the Additional Term Commitment deposited in the our Master Account (as defined in the ABL Facility). In addition, we received a waiver of certain events of default under the Term Loan Agreement arising from the inclusion of a going concern qualification from our registered public accounting firm, breach of the EBITDA financial maintenance covenant, and cross-default arising from the default under our ABL Facility.

The Fifth Term Loan Agreement Amendment requires us to (i) on or before April 7, 2017, enter into a restructuring support agreement and other documentation required by the Term Loan Lenders in connection with the restructuring of the indebtedness of the Company and its subsidiaries; (ii) appoint Robert D. Albergotti as the Chief Restructuring Officer to the Company; and (iii) within five days of Fifth Amendment Effective Date, cause mortgage title policies to be issued for all real property collateral under the our ABL Facility and to pay all premiums for such title policies.

Sixth Amendment to Term Loan

On April 6, 2017 (the "Sixth Amendment Effective Date"), we entered into a Sixth Amendment (Increase Amendment) to Term Loan Credit Agreement (the “Sixth Term Loan Agreement Amendment”) by and among the Term Loan Lenders, Wilmington, as administrative agent, Wells Fargo, as collateral agent, the Company, and the guarantors named therein, which further amends the Term Loan Agreement by increasing the Term Loan Lenders’ commitment, and the principal amount borrowed by the Company, under the Term Loan Agreement from $59.2 million to $60.3 million (the “Sixth Amendment Additional Term Commitment”).

Pursuant to the Sixth Term Loan Agreement Amendment, we are required to use a portion of the net cash proceeds of the Sixth Amendment Additional Term Commitment of $1.0 million to pay the fees, costs and expenses incurred in connection with the Sixth Term Loan Agreement Amendment. The remaining net cash proceeds, subject to satisfaction of certain release conditions, will be available for general operating, working capital and other general corporate purposes. We intend to use the additional liquidity provided by the Sixth Amendment Additional Term Commitment to fund our business operations until the filing of the Plan.

As a condition to the effectiveness of the Sixth Term Loan Agreement Amendment, we were required to enter into a letter agreement with the agent under the ABL Facility providing, among other things, that the agent under the ABL Facility would not exercise any remedies with respect to the Sixth Amendment Additional Term Commitment deposited in our Master Account.

The Sixth Term Loan Agreement Amendment requires us, among other things, to (i) on or before April 7, 2017, enter into the Restructuring Support Agreement and other documentation requested by the Term Loan Lenders in connection with the Restructuring; and (ii) within 5 days of Sixth Amendment Effective Date, cause mortgage title policies to be issued for all real property collateral under our Term Loan Agreement and to pay all premiums for such title policies.

Seventh Amendment to Term Loan

On April 10, 2017 (the "Seventh Amendment Effective Date"), we entered into a Seventh Amendment (Increase Amendment) to Term Loan Credit Agreement (the “Seventh Term Loan Agreement Amendment”) by and among the Term Loan Lenders, Wilmington, as administrative agent, Wells Fargo, as collateral agent, the Company, and the guarantors named therein, which further amends the Term Loan Agreement by increasing the Term Loan Lenders’ commitment, and the principal amount borrowed by the Company, under the Term Loan Agreement from $60.3 million to $65.8 million (the “Seventh Amendment Additional Term Commitment”). The Seventh Amendment Additional Term Commitment is in partial satisfaction of the requirement to fund Supplemental Term Loans (as defined the Fifth Amendment to Term Loan Credit Agreement).


53



Pursuant to the Seventh Term Loan Agreement Amendment, we are required to use a portion of the net cash proceeds of the Seventh Amendment Additional Term Commitment of $5.0 million to pay the fees, costs and expenses incurred in connection with the Seventh Term Loan Agreement Amendment. The remaining net cash proceeds, subject to satisfaction of certain release conditions, will be available for general operating, working capital and other general corporate purposes. We intend to use the additional liquidity provided by the Seventh Amendment Additional Term Commitment to fund our business operations until the filing of the Plan.

As a condition to the effectiveness of the Seventh Term Loan Agreement Amendment, we were required to enter into a letter agreement with the agent under the ABL Facility providing, among other things, that the agent under the ABL Facility would not exercise any remedies with respect to the Seventh Amendment Additional Term Commitment deposited in the our Master Account, subject to the terms of such letter agreement.

The Seventh Term Loan Agreement Amendment requires us, among other things, to (i) comply with the terms and conditions of the Restructuring Support Agreement; and (ii) within 5 days of Fifth Amendment Effective Date, cause mortgage title policies to be issued for all real property collateral under our Term Loan Agreement and to pay all premiums for such title policies.

Letter Agreements Regarding Additional Term Loan Commitments

Fifth Amendment Letter Agreement

On April 3, 2017, in connection with the Term Loan Agreement Amendment, we and Wells Fargo Bank, National Association, as Administrative Agent ("Wells Fargo") entered into a letter agreement regarding the Additional Term Commitment (the “Fifth Amendment Letter Agreement”). Pursuant to the Fifth Amendment Letter Agreement, Wells Fargo agreed to not exercise any remedies with respect to the cash proceeds received from the Additional Term Commitment or any additional Term Loans that are deposited in our Master Account. In addition, the Fifth Amendment Letter Agreement provides that in the event Wells Fargo or the lenders under the ABL Facility foreclose or otherwise obtain direct control over the Additional Term Commitment, such Additional Term Commitment shall be deemed to be held in trust by Wells Fargo or the lenders under the ABL Facility for the benefit of the Term Loan Lenders.

Sixth Amendment Letter Agreement

On April 6, 2017, in connection with the Sixth Term Loan Agreement Amendment, we and Wells Fargo entered into a letter agreement regarding the Sixth Amendment Additional Term Commitment (the “Sixth Amendment Letter Agreement”). Pursuant to the Sixth Amendment Letter Agreement, Wells Fargo agreed to not exercise any remedies with respect to the cash proceeds received from the Sixth Amendment Additional Term Commitment that are deposited in our Master Account. In addition, the Sixth Amendment Letter Agreement provides that in the event Wells Fargo or the lenders under the ABL Facility foreclose or otherwise obtain direct control over the Sixth Amendment Additional Term Commitment, such Sixth Amendment Additional Term Commitment shall be deemed to be held in trust by Wells Fargo or the lenders under the ABL Facility for the benefit of the Term Loan Lenders.

Seventh Amendment Letter Agreement

On April 10, 2017, in connection with the Seventh Term Loan Agreement Amendment, we and Wells Fargo entered into a letter agreement regarding the Seventh Amendment Additional Term Commitment (the “Seventh Amendment Letter Agreement”). Pursuant to the Seventh Amendment Letter Agreement, Wells Fargo agreed to not exercise any remedies with respect to the cash proceeds received from the Seventh Amendment Additional Term Commitment that are deposited in our Master Account. In addition, the Seventh Amendment Letter Agreement provides that in the event Wells Fargo or the lenders under the ABL Facility foreclose or otherwise obtain direct control over the Seventh Amendment Additional Term Commitment, such Seventh Amendment Additional Term Commitment shall be deemed to be held in trust by Wells Fargo or the lenders under the ABL Facility for the benefit of the Term Loan Lenders.

Intercreditor Agreement Amendments

Third Intercreditor Agreement Amendments

On April 3, 2017, in connection with the Fifth Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 3 to Intercreditor Agreement (the “Pari Passu Intercreditor Agreement Amendment”), dated April 3, 2017, by and among Wells Fargo, as pari passu collateral agent, Wells Fargo, as revolving credit agreement agent

54



under the ABL Facility, and Wilmington, as administrative agent under the Term Loan Agreement, which further amends the Intercreditor Agreement, dated as of April 15, 2016, between Wells Fargo, as pari passu collateral agent, Wells Fargo, as administrative agent under the ABL Facility, and Wilmington, as administrative agent under the Term Loan Agreement. On April 3, 2017, in connection with the Fifth Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 3 to Intercreditor Agreement (the “Second Lien Intercreditor Agreement Amendment”), dated April 3, 2017, by and among Wells Fargo, as revolving credit agreement agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as second lien agent under the Second Lien Intercreditor Agreement, which further amends the Intercreditor Agreement, dated as of April 15, 2016, between Wells Fargo, as administrative agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as collateral agent under the indenture governing our 2021 Notes. The Pari Passu Intercreditor Agreement Amendment and the Second Lien Intercreditor Agreement Amendment permit the Additional Term Commitment by amending the Term Loan Cap (as defined therein) to increase it from $63.9 million to $65.1 million. The Term Loan Cap is higher than the commitment under the Term Loan, as it includes, in addition to the Term Loan Lenders’ commitment under the Term Loan Agreement, origination fees paid in kind and a 10.0% cushion.

Fourth Intercreditor Agreement Amendments

On April 6, 2017, in connection with the Sixth Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 4 to Intercreditor Agreement (the “Fourth Pari Passu Intercreditor Agreement Amendment”), dated April 6, 2017 by and among Wells Fargo, as pari passu collateral agent, Wells Fargo, as revolving credit agreement agent under the ABL Facility, and Wilmington, as administrative agent under the Term Loan Agreement, which further amends the Pari Passu Intercreditor Agreement. On April 6, 2017, in connection with the Sixth Term Loan Agreement Amendment,we acknowledged and agreed to the terms and conditions under Amendment No. 4 to Intercreditor Agreement (the “Second Lien Intercreditor Agreement Fourth Amendment”), dated April 6, 2017, by and among Wells Fargo, as revolving credit agreement agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as second lien agent under the Second Lien Intercreditor Agreement, which further amends the Second Lien Intercreditor Agreement. The Fourth Pari Passu Intercreditor Agreement Amendment and the Second Lien Intercreditor Agreement Fourth Amendment permit the Sixth Amendment Additional Term Commitment by amending the Term Loan Cap to increase it from $65.1 million to $66.3 million. The Term Loan Cap is higher than the commitment under the Term Loan, as it includes, in addition to the Term Loan Lenders’ commitment under the Term Loan Agreement, origination fees paid in kind and a 10.0% cushion.

Fifth Intercreditor Agreement Amendments

On April 10, 2017, in connection with the Seventh Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 5 to Intercreditor Agreement (the “Fifth Pari Passu Intercreditor Agreement Amendment”), dated April 7, 2017 by and among Wells Fargo, as pari passu collateral agent, Wells Fargo, as revolving credit agreement agent under the ABL Facility, and Wilmington, as administrative agent under the Term Loan Agreement, which further amends the Pari Passu Intercreditor Agreement. On April 10, 2017, in connection with the Seventh Term Loan Agreement Amendment, we acknowledged and agreed to the terms and conditions under Amendment No. 5 to Intercreditor Agreement (the “Second Lien Intercreditor Agreement Fifth Amendment”), dated April 7, 2017, by and among Wells Fargo, as revolving credit agreement agent under the ABL Facility, Wilmington, as administrative agent under the Term Loan Agreement, and Wilmington, as second lien agent under the Second Lien Intercreditor Agreement, which further amends the Second Lien Intercreditor Agreement. The Fifth Pari Passu Intercreditor Agreement Amendment and the Second Lien Intercreditor Agreement Fifth Amendment permit the Seventh Amendment Additional Term Commitment by amending the Term Loan Cap to increase it from to $66.3 million to $72.4 million. The Term Loan Cap is higher than the commitment under the Term Loan, as it includes, in addition to the Term Loan Lenders’ commitment under the Term Loan Agreement, origination fees paid in kind and a 10.0% cushion.

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Contractual Obligations
The following table details our contractual cash obligations as of December 31, 2016 (in thousands). See Note 16 in the Notes to the Consolidated Financial Statements for additional information.
 
 
Payments due by Period
 
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than
5 Years
 
Total
Debt obligations including capital leases (1)
 
$
481,581

 
$
5,398

 
$
618

 
$

 
$
487,597

Interest on debt and capital leases (2)
 
32,145

 
238

 
29

 

 
32,412

Operating leases (3)
 
3,572

 
3,278

 
1,421

 
1,682

 
9,953

Contingent consideration (4)
 

 

 

 
8,500

 
8,500

Asset retirement obligation (5)
 
525

 
176

 
371

 
2,066

 
3,138

Total
 
$
517,823

 
$
9,090

 
$
2,439

 
$
12,248

 
$
541,600

(1)
Principal payments are reflected when contractually required. Due to the default of the ABL Facility as of March 31, 2017, and the resulting cross-default of the 2018 Notes, 2021 Notes and Term Loan, the 2018 Notes, 2021 Notes and Term Loan are included in current portion of long-term debt as of December 31, 2016, and the payoff of those debts is reflected in the "Less than 1 Year" column.
(2)
Estimated interest on debt for all periods presented is calculated using interest rates available as of December 31, 2016 and includes fees for the unused portion of our ABL Facility.
(3)
Represents operating leases primarily for facilities, vehicles and rental equipment.
(4)
Represents contingent consideration payments related to the acquisition of Ideal Oilfield Disposal LLC which is payable in shares of our common stock or cash at our discretion (Note 10).
(5)
Represents estimated future costs related to the closure and/or remediation of our disposal wells and landfill. As we are uncertain as to when these future costs will be paid, the majority of the obligation has been presented in the more than five years column.
Off Balance Sheet Arrangements
As of December 31, 2016, we did not have any material off-balance-sheet arrangements other than operating leases, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
EBITDA
As a supplement to the financial statements in this Annual Report on Form 10-K, which are prepared in accordance with GAAP, we also present EBITDA. EBITDA is consolidated net income (loss) from continuing operations before net interest expense, income taxes and depreciation and amortization. We present EBITDA because we believe this information is useful to financial statement users in evaluating our financial performance. We also use EBITDA to evaluate our financial performance, make business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. EBITDA is not a measure of performance calculated in accordance with GAAP, may not necessarily be indicative of cash flow as a measure of liquidity or ability to fund cash needs, and there are material limitations to its usefulness on a stand-alone basis. EBITDA does not include reductions for cash payments for our obligations to service our debt, fund our working capital and pay our income taxes. In addition, certain items excluded from EBTIDA such as interest, income taxes, depreciation and amortization are significant components in understanding and assessing our financial performance. All companies do not calculate EBITDA in the same manner and our presentation may not be comparable to those presented by other companies. Financial statement users should use EBITDA in addition to, and not as an alternative to, net income (loss) from continuing operations as defined under and calculated in accordance with GAAP.

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The table below provides a reconciliation between loss from continuing operations, as determined in accordance with GAAP, and EBITDA (in thousands):
 
Year Ended December 31,
 
2016
 
2015
 
2014
Loss from continuing operations
$
(167,621
)
 
$
(195,167
)
 
$
(457,178
)
Depreciation and amortization
60,763

 
70,511

 
85,880

Interest expense, net
54,530

 
49,194

 
50,917

Income tax expense (benefit)
807

 
(117
)
 
(12,463
)
EBITDA from continuing operations
$
(51,521
)
 
$
(75,579
)
 
$
(332,844
)
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results, however, may materially differ from our calculated estimates.
We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements and changes in these judgments and estimates may impact future results of operations and financial condition. For additional discussion of our accounting policies see Note 3 in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Allowance for Doubtful Accounts
Accounts receivable are recognized and carried at the original invoice amount less an allowance for doubtful accounts. We provide an allowance for doubtful accounts to reflect the expected uncollectability of trade receivables for both billed and unbilled receivables on our rental and non-rental revenues. We perform ongoing credit evaluations of prospective and existing customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by a review of their current credit information. In addition, we continuously monitor collections and payments from customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, our compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Additionally, if the financial condition of a specific customer or our general customer base were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Accounts receivable are presented net of allowances for doubtful accounts of approximately $1.7 million, $3.5 million and $7.6 million at December 31, 2016, 2015 and 2014 respectively.
Impairment of Long-Lived Assets and Intangible Assets with Finite Useful Lives
We review long-lived assets including intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate the carrying value of a long-lived asset (or asset group) may not be recoverable. If an impairment indicator is present, we evaluate recoverability by comparing the estimated future cash flows of the asset group, on an undiscounted basis, to their carrying values. The asset group represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the undiscounted cash flows exceed the carrying value, no impairment is present. If the undiscounted cash flows are less than the carrying value, the impairment is measured as the difference between the carrying value and the fair value of the long-lived asset (or asset group). Our determination that an event or change in circumstance has occurred potentially indicating the carrying amount of an asset (or asset group) may not be recoverable generally includes but is not limited to one or more of the following: (1) a deterioration in an asset’s financial performance compared to historical results, (2) a shortfall in an asset’s financial performance compared to forecasted results, (3) changes affecting the utility and estimated future demands for the asset, (4) a significant decrease in the market price of an asset, (5) a current expectation that a long-lived asset will be sold or disposed of significantly before the end of its previously estimated useful life, (6) a significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition, and (7) declining operations and severe changes in projected cash flows.
During the year ended December 31, 2016, we recognized impairment charges for long-lived assets of $42.2 million which was recorded in "Impairment of long-lived assets" in the consolidated statement of operations. During the year ended December 31, 2015, we recognized an impairment charge for long lived assets of $5.9 million which was recorded in "Other, net" in the

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consolidated statement of operations as part of restructuring expenses related to the exit of the MidCon Shale area (Note 7). During the year ended December 31, 2014, we recognized impairment charges for intangible assets with finite useful lives of $112.4 million in "Impairment of long-lived assets" in the consolidated statement of operations. We could recognize future impairments to the extent adverse events or changes in circumstances result in conditions in which long-lived assets are not recoverable. See Note 6 in the Notes to the Consolidated Financial Statements for additional information.
Income Taxes and Valuation of Deferred Tax Assets
We are subject to federal income taxes and state income taxes in those jurisdictions in which we operate. We exercise judgment with regard to income taxes in interpreting whether expenses are deductible in accordance with federal income tax and state income tax codes, estimating annual effective federal and state income tax rates and assessing whether deferred tax assets are, more likely than not, expected to be realized. The accuracy of these judgments impacts the amount of income tax expense we recognize each period.
With regard to the valuation of deferred tax assets, we record valuation allowances to reduce net deferred tax assets to the amount considered more likely than not to be realized. All available evidence is considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed.
Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character (for example ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We have had significant pretax losses in recent years. Accordingly, we do not have income in carryback years. These cumulative losses also present significant negative evidence about the likelihood of income in carryforward periods.    
Future reversals of existing taxable temporary differences are another source of taxable income that is used in this analysis. As a result, deferred tax liabilities in excess of deferred tax assets generally will provide support for recognition of deferred tax assets. However, most of our deferred tax assets are associated with net operating loss (“NOL”) carryforwards, which statutorily expire after a specified number of years; therefore, we compare the estimated timing of these taxable timing difference reversals with the scheduled expiration of our NOL carryforwards, considering any limitations on use of NOL carryforwards, and record a valuation allowance against deferred tax assets that would expire unused.
As a matter of law, we are subject to examination by federal and state taxing authorities. We have estimated and provided for income taxes in accordance with settlements reached with the Internal Revenue Service in prior audits. Although we believe that the amounts reflected in our tax returns substantially comply with the applicable federal and state tax regulations, both the IRS and the various state taxing authorities can take positions contrary to our position based on their interpretation of the law. A tax position that is challenged by a taxing authority could result in an adjustment to our income tax liabilities and related tax provision.
We measure and record tax contingency accruals in accordance with GAAP which prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return. Only positions meeting the “more likely than not” recognition threshold at the effective date may be recognized or continue to be recognized. A tax position is measured at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement.
Revenue Recognition
We recognize revenues in accordance with Accounting Standards Codification 605 (ASC 605 “Revenue Recognition”) and Staff Accounting Bulletin No 104, and accordingly all of the following criteria must be met for revenues to be recognized: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectability is reasonably assured.
The majority of our revenues are from the transportation of fresh and saltwater by our trucks or through temporary or permanent water transport pipelines to customer sites for use in drilling and hydraulic fracturing activities and from customer sites to remove and dispose of flowback and produced water originating from oil and natural gas wells. Revenues are also generated through fees charged for disposal of oilfield wastes in our landfill, disposal of fluids in our disposal wells and from the rental of tanks and other equipment. Certain customers are under contract with us to utilize our saltwater pipeline and have an obligation to dispose of a minimum quantity (number of barrels) of saltwater over the contract period. Transportation and disposal rates are generally based on a fixed fee per barrel of disposal water or, in certain circumstances transportation is based on an hourly rate. Revenue is recognized based on the number of barrels transported or disposed of at hourly rates for transportation services, depending on the customer contract. Rates for other services are based on negotiated rates with our customers and revenue is recognized when the services have been performed.

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Our discontinued industrial solutions business derived the majority of its revenue from the sale of used motor oil and antifreeze after it is refined by one of its processing facilities. We recognized revenue upon shipment or delivery, dependent on contracted terms, of salable fuel oil or upon recovery service provided in the receipt of waste oil and antifreeze per specific customer contract terms. Transportation costs charged to customers were also included in revenue.
Environmental and Legal Contingencies
We have established liabilities for environmental and legal contingencies. We record a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In determining the liability, we consider a number of factors including, but not limited to, the jurisdiction of the claim, related claims, insurance coverage when insurance covers the type of claim and our historic outcomes in similar matters, if applicable. A significant amount of judgment and the use of estimates are required to quantify our ultimate exposure in these matters. The determination of liabilities for these contingencies is reviewed periodically to ensure that we have accrued the proper level of expense. The liability balances are adjusted to account for changes in circumstances for ongoing issues, including the effect of any applicable insurance coverage for these matters. While we believe that the amount accrued to-date is adequate, future changes in circumstances could impact these determinations.
We record obligations to retire tangible, long-lived assets on our balance sheet as liabilities, which are recorded at a discount when we incur the liability. A certain amount of judgment is involved in estimating the future cash flows of such obligations, as well as the timing of these cash flows. If our assumptions and estimates on the amount or timing of the future cash flows change, it could potentially have a negative impact on our earnings.
Recently Issued Accounting Pronouncements

See the "Recently Issued Accounting Pronouncements" section of Note 3 on Significant Accounting Policies in the Notes to the Consolidated Financial Statements herein for a complete description of recent accounting standards which may be applicable to our operations. The significant accounting standards that have been adopted during the year ended December 31, 2016 are described in Note 2 on Basis of Presentation in the Notes to the Consolidated Financial Statements herein.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Inflation

Inflationary factors, such as increases in our cost structure, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.

Commodity Risk

We are subject to market risk exposures arising from declines in oil and natural gas drilling activity in unconventional areas, which is primarily a function of the market price for oil and natural gas. Various factors beyond our control affect the market prices for oil and natural gas, including but not limited to the level of consumer demand, governmental regulation, the price and availability of alternative fuels, political instability in foreign markets, weather-related factors and the overall economic environment. Market prices for oil and natural gas historically have been volatile and unpredictable, and we expect this volatility to continue in the future. Prolonged declines in the market price of oil and/or natural gas could contribute to declines in drilling activity and accordingly would reduce demand for our services. We attempt to manage this risk by strategically aligning our assets with those areas where we believe demand is highest and market conditions for our services are most favorable. If there is further deterioration in our business operations or prospects, our stock price, the broader economy or our industry, including further declines in oil and natural gas prices, the value of our long-lived assets, or those we may acquire in the future, could decrease significantly and result in additional impairment and financial statement write-offs which could have a material adverse effect on our financial condition, results of operations and cash flows.
Interest Rates
As of December 31, 2016 the outstanding principal balance on ABL Facility was $22.7 million with variable rates of interest based on, at the Company’s election, (i) the greater of (a) the prime lending rate as publicly announced by Wells Fargo, (b) the Federal Funds rate plus 0.5% or (c) the one month LIBOR plus one percent, plus, in each case, an applicable margin of 4.00% to 4.50% or (ii) the LIBOR rate plus an applicable margin of 5.00% to 5.50%. The weighted average interest rate for the year ended December 31, 2016 was 4.16%. We have assessed our exposure to changes in interest rates on variable rate debt by

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analyzing the sensitivity to our earnings assuming various changes in market interest rates. Assuming a hypothetical increase of 1% to the interest rates on the average outstanding balance of our variable rate debt portfolio during the year ended December 31, 2016, our net interest expense for the year ended December 31, 2016 would have increased by an estimated $0.6 million, respectively.
As of December 31, 2016 the carrying value and the fair value of our 2018 Notes was $40.4 million and $4.7 million, respectively, and the carrying value and fair value of our 2021 Notes was $351.3 million and $65.2 million, respectively. The fair value of our 2018 Notes and 2021 Notes is affected, among other things, by changes to market interest rates. Should we decide to retire our 2018 Notes or 2021 Notes early, a change in interest rates could affect our future repurchase price. We have assessed our exposure to changes in interest rates by analyzing the sensitivity to the fair value of our 2018 Notes and 2021 Notes assuming various changes in market interest rates. Assuming a hypothetical increase to market interest rates of 1%, we estimate the fair value of our 2018 Notes would decrease by approximately $22.3 thousand, while the fair value of our 2021 Notes would decrease by approximately $0.9 million. Assuming a hypothetical decrease to market interest rates of 1%, we estimate the fair value of our 2018 Notes would increase by approximately $22.5 thousand, while the fair value of our 2021 Notes would increase by approximately $1.0 million.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by Regulation S-X are included in Item 15. “Exhibits, Financial Statement Schedules” contained in Part IV, Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountant on Accounting and Financial Disclosure

None.
Item 9A. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures was performed under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of

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Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2016.
Due to our aggregate market value of the voting and non-voting common equity held by non-affiliates falling below $75.0 million as of June 30, 2016, and our corresponding change in filer status, our independent registered public accounting firm, Hein & Associates, LLP, was not required to issue an audit report on the effectiveness of our internal control over financial reporting for the year ended December 31, 2016.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended December 31, 2016 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.

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PART III
Item 10. Directors, Executive Officers and Corporate Governance

Directors

The names of the members of our Board of Directors (each a “Director,” together, the “Board”), their ages, and their positions, as of March 31, 2017, are as follows:
Name
 
Age
 
Position
Mark D. Johnsrud
 
58
 
Chairman of the Board and Chief Executive Officer
Robert B. Simonds, Jr.
 
54
 
Vice Chairman of the Board and Director
William M. Austin
 
71
 
Director
Edward A. Barkett
 
50
 
Director
Tod C. Holmes
 
68
 
Director
R.D. "Dan" Nelson
 
67
 
Director
Dr. Alfred E. Osborne, Jr.
 
72