You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes in Item 1. "Financial Statements" contained herein and our audited consolidated financial statements as of
December 31, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2021(our "Annual Report"), as filed with the Securities and Exchange Commission(the "SEC") on March 30, 2022. The information provided below supplements, but does not form part of, our unaudited condensed consolidated financial statements. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this "Quarterly Report") contains "forward-looking statements" as defined in Section 27A of the United StatesSecurities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements usually relate to future events, conditions and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. Forward-looking statements are often identified by words such as "believes," "expects," "intends," "estimates," "projects," "anticipates," "will," "plans," "may," "should," "would," "foresee," or the negative thereof. The absence of these words, however, does not mean that these statements are not forward-looking. These statements are based on our current expectations, beliefs and assumptions concerning future developments and business conditions and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All of our forward-looking statements involve risks and uncertainties (some of which are significant or beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. These factors include geological, operating and economic factors and changes in prices and market conditions, including changes in expected or realized oil and gas prices and demand for oilfield services and changes in supply or demand for maintenance, repair and operating products, equipment and service; the effectiveness of management's strategies and decisions; our ability to obtain financing, raise capital and continue as a going concern; our ability to implement our internal growth and acquisition growth strategies; general economic and business conditions specific to our primary customers; our ability to collect accounts receivable; compliance with our debt agreements and equity-related securities; volatility in market prices; our ability to satisfy the continued listing requirements of Nasdaq with respect to our Class A common stock and warrants or to cure any continued listing standard deficiency with respect thereto; changes in government regulations; our ability to effectively integrate businesses we may acquire; new or modified statutory or regulatory requirements; availability of materials and labor; inability to obtain or delay in obtaining government or third-party approvals and permits; non-performance by third parties of their contractual obligations; unforeseen hazards such as natural disasters, catastrophes and severe weather conditions, including floods, hurricanes and earthquakes; public health crises, such as a pandemic, including the COVID-19 pandemic and new and potentially more contagious variants of COVID-19; acts of war or terrorist acts and the governmental or military response thereto; and cyber-attacks adversely affecting our operation. This Quarterly Report identifies other factors that could cause such differences. There can be no assurance that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. Factors that could cause or contribute to such differences also include, but are not limited to, those discussed in our filings with the SEC, including under "Risk Factors" in this Quarterly Report and in our Annual Report. We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We assume no obligation and do not intend to update these forward-looking statements. Unless the context otherwise requires, references in this Quarterly Report to the "Company", "USWS", "we", or "our" shall mean U.S. Well Services, Inc.and its subsidiaries.
We provide pressure pumping services in oil and natural gas basins. Our Clean Fleet® electric fleets are among the most reliable and highest performing fleets in the industry, with the capability to meet the most demanding pressure and pump rate requirements. In
May 2021, we announced the next generation of our Clean Fleet® technology with the unveiling of our newly designed Nyx Clean Fleet®. We anticipate the first Nyx Clean Fleet® to be delivered in the second quarter of 2022. We operate in many of the active shale and unconventional oil and natural gas basins of the United Statesand our clients benefit from the performance and reliability of our equipment and personnel. Specifically, all our fleets operate on a 24-hour basis and have the ability to withstand high utilization rates, which results in more efficient operations. Our senior management team has extensive industry experience providing pressure pumping services to exploration and production companies across North America. Since announcing our commitment to becoming an all-electric pressure pumping services provider in May 2021, we have sold most of our legacy, diesel-powered pressure pumping equipment. We have retained some of our legacy, diesel-powered pressure pumping equipment for use during our transition to support our electric fleets and bridge the time gap between our customers' current service needs and the deployment of our newbuild Nyx Clean Fleets®. Upon delivery, our Nyx Clean Fleets® are intended to replace any conventional fleet in operation. 29 --------------------------------------------------------------------------------
How the business generates revenue
We generate revenue by providing pressure pumping services to our customers. We own and operate fleets of pressure pumping equipment to perform these services. We seek to enter into contractual arrangements with our customers or fleet dedications, which establish pricing terms for a fixed duration. Under the terms of these agreements, we charge our customers base monthly rates, adjusted for activity and provision of materials such as proppant and chemicals, or we charge a variable rate based on the nature of the job including pumping time, well pressure, proppant and chemical volumes and transportation.
Our costs of doing business
The principal costs involved in conducting our pressure pumping services are labor, maintenance, equipment rentals, including the rental of power generation equipment, materials, and transportation costs. A large portion of our costs are variable, based on the number and requirements of pressure pumping jobs. We manage our fixed costs, other than depreciation and amortization, based on factors including industry conditions and the expected demand for our services. Materials include the cost of proppant delivered to the basin of operations, chemicals, and other consumables used in our operations. These costs vary based on the quantity and type of proppant and chemicals utilized when providing pressure pumping services. Transportation represents the costs to transport materials and equipment from receipt points to customer locations. Labor costs include payroll and benefits related to our field crews and other employees. Most of our employees are paid on an hourly basis. Maintenance costs include preventative and other repair costs that do not require the replacement of major components of our fleets. Maintenance and repair costs are expensed as incurred. The following table presents our cost of services for the periods indicated (in thousands): Three Months Ended March 31, 2022 2021 Labor
$ 13,180 $ 23,686Maintenance 5,119 16,595 Power generation equipment rentals 8,492 - Materials 3,459 7,030 Transportation 1,948 3,039 Other (1) 8,525 12,281 Cost of services $ 40,723 $ 62,631(1)
Others include fuel, lubricants, rental of other equipment, travel and accommodation costs for our teams, site security costs and other costs incurred in carrying out our operations. .
Since our announcement in
May 2021of our commitment to becoming an all-electric pressure pumping services provider, we have sold most of our legacy, diesel-powered pressure pumping equipment. The proceeds received from these sales were used to reduce the outstanding principal balance of our Term A and Term B Loan (collectively the "Senior Secured Term Loan"), which resulted in no cash interest payments for the first quarter of 2022 and an interest rate of (i) 1.0% per annum in cash and (ii) 4.125% per annum PIK interest from April 1, 2022through December 31, 2022. Our revenues and operating costs remained lower in the first quarter of 2022 versus the first quarter of 2021, as we continued to experience a lower average active fleet count resulting from our ongoing exit from the diesel pressure pumping market. However, we experienced an uptick in our utilization rate as a greater proportion of our fleets were working under contract as opposed to the spot market, and thus less exposed to customer "white space." We expect to see our average active fleet count continue to increase as we begin taking delivery of our newbuild Nyx Clean Fleets® beginning in the second quarter of 2022. During the first quarter of 2022, prompt month futures contracts for WTI crude oil and Henry Hubnatural gas averaged $94.92per Bbl and $4.57per MMBtu, respectively, as compared to $77.17per Bbl and $4.85per MMBtu, respectively, in the fourth quarter of 2021. We benefitted from the upward trend in commodity prices, as higher demand for pressure pumping services combined with increasing scarcity of available crews and equipment resulted in a favorable environment for deploying crews and negotiating pricing and other terms with customers. However, during the period, we continued to experience cost inflation for certain goods and services as well as non-productive time driven by supply chain issues such as our customers' inability to source sufficient materials and transportation for goods. We anticipate that these trends will persist throughout the remainder of 2022. We expect that completions activity and demand for pressure pumping services will remain elevated throughout the year. We also anticipate that the rising price of diesel fuel will continue to improve the economic benefit of switching from conventional to electric pressure pumping, further increasing demand for next-generation, all-electric fleets such as our Clean Fleets® and Nyx Clean Fleets®. 30 --------------------------------------------------------------------------------
Three months ended
March 31, 2022, compared to the three months ended March 31, 2021(in thousands, except percentages) Three Months Ended March 31, 2022 % (1) 2021 % (1) Variance % Variance Revenue $ 41,150100.0% $ 76,258100.0% $ (35,108 )(46.0)% Costs and expenses: Cost of services (excluding depreciation and amortization) 40,723 99.0% 62,631 82.1% (21,908 ) (35.0)% Depreciation and amortization 5,700 13.9% 11,106 14.6% (5,406 ) (48.7)% Selling, general and administrative expenses 8,372 20.3% 7,390 9.7% 982 13.3% Loss on disposal of assets 3,056 7.4% 2,436 3.2% 620 25.5% Loss from operations (16,701 ) (40.6)% (7,305 ) (9.6)% (9,396 ) * (2) Interest expense, net (7,968 ) (19.4)% (6,183 ) (8.1)% (1,785 ) 28.9% Change in fair value of warrant liabilities (746 ) (1.8)% (7,151 ) (9.4)% 6,405 *(2) Loss on extinguishment of debt (1,651 ) (4.0)% - 0.0% (1,651 ) 100.0% Other income 1,321 3.2% 29 0.0% 1,292 * (2) Income tax expense (benefit) - 0.0% - 0.0% - * (2) Net loss $ (25,745 )(62.6)% $ (20,610 )(27.0)% $ (5,135 )* (2) (1) As a percentage of revenues. Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding. (2) Not meaningful. Revenue. The decrease in revenue was primarily attributable to a lower active fleet count in the first quarter of 2022 compared to the prior comparable period as we began to transition to an all-electric pressure pumping service provider in May 2021. For the three months ended March 31, 2022, our average active fleet count decreased to 4.7 fleets compared to 10.0 fleets in the prior comparable period. Cost of services, excluding depreciation and amortization. The decrease in cost of services, excluding depreciation and amortization, was attributable to the decrease in variable costs as activity was reduced with a lower number of active fleets in the first quarter of 2022 compared to the prior period. This was offset by costs associated with procuring third-party power generation services as we transitioned away from owning power generation assets starting in October 2021.
Depreciation and amortization. The decrease in depreciation is mainly due to the sale of most of our diesel-powered pressure pumping equipment in the second half of 2021.
Selling, general and administrative expenses. The increase in selling, general, and administrative expenses was primarily attributable to an increase in consulting fees, information technology costs and reinstatement of salary levels after the first quarter of 2021. Loss on disposal of assets. The amount of gain or loss on disposal of assets fluctuates period over period due to differences in the operating conditions of our pressure pumping equipment, such as wellbore pressure and rate of barrels pumped per minute, which impacts the timing of disposals of our pump components. Additionally, during the three months ended
March 31, 2022, we recognized $2.9 millionof losses associated with the sale of property and equipment. Interest expense, net. The increase was primarily attributable to the interest expense associated with the Convertible Senior Notes issued during the second quarter of 2021. Loss on extinguishment of debt. During the three months ended March 31, 2022, we recognized a loss on extinguishment of debt for the unamortized debt discount and issuance costs and prepayment fees associated with the early repayment of our Senior Secured Term Loan.
Cash and capital resources
Our primary sources of liquidity and capital resources have historically been cash, cash flow generated from operating activities, proceeds from the issuance of debt or equity and borrowings under our ABL Credit Facility. As of
March 31, 2022, our total liquidity was $49.6 million, consisting of $41.1 millionof cash and restricted cash and $8.5 millionof availability under our ABL Credit Facility. 31 --------------------------------------------------------------------------------
Our short-term and long-term cash requirements consist primarily of capital expenditures, payments of contractual obligations, including debt service obligations, and working capital.
We believe that our current cash position, current and expected working capital balances, favorable cash interest payment terms under our Senior Secured Term Loan Agreement, availability under our ABL Credit Facility, proceeds received from issuance of debt or equity, as well as amounts raised from the issuance of Class A common stock under our 2022 ATM Agreement, and other anticipated sources of credit will be sufficient to satisfy cash requirements associated with our existing operations, capital expenditures and contractual obligations for the next twelve months. Although there is no assurance, we plan to satisfy our long-term financial obligations through operating cash flows that we could generate as we increase our number of working fleets with our planned additions of Nyx Clean Fleets® and additional financing as our long-term financial obligations mature.
Sources of cash
During the first quarter of 2022, we raised approximately
$68.4 millionof gross proceeds from the issuance of approximately $46.9 millioncommon equity through a registered direct offering and under our ATM Agreement and borrowings of $21.5 millionunder the last-out senior secured term loan (the "Term C Loan"). We intend to use the proceeds for general working capital, including the funding of capital expenditures related to our newbuild Nyx Clean Fleets®. Registered Direct Offering. On March 11, 2022, we completed a registered direct offering of 14,180,375 shares of Class A common stock and 14,180,375 RDO Investor Warrants for gross proceeds of approximately $25.0 million, before deducting placement agent fees and other offering expenses. We intend to use the net proceeds for working capital purposes, including the funding of certain capital expenditures. ATM Agreement. During the three months ended March 31, 2022, we sold 9,767,941 shares of Class A common stock for total net proceeds of $21.3 millionand paid $0.6 millionin commissions under the ATM Agreement. Since inception on June 26, 2020through March 31, 2022, we sold a total of 15,086,100 shares of Class A common stock under the ATM Agreement for total net proceeds of $36.4 millionand paid $1.1 millionin commissions. 2022 ATM Agreement. On April 26, 2022, we entered into a new Equity Distribution Agreement (the "2022 ATM Agreement") with Piper Sandler & Co.relating to our shares of Class A common stock to replace the former ATM Agreement, which expired on April 26, 2022. We may offer and sell up to a total of $50.0 millionin shares of our Class A common stock in an "at-the-market" offering program over a period of time pursuant to the 2022 ATM Agreement. No shares may be sold under the 2022 ATM Agreement until the registration statement filed on April 26, 2022has been declared effective by the SEC. Cash Flows (in thousands) Three Months Ended March 31, 2022 2021 Net cash provided by (used in): Operating activities $ (7,445 ) $ (11,016 )Investing activities 6,158 (7,825 ) Financing activities 33,310 31,824 Operating Activities. Net cash used in operating activities primarily represents the results of operations exclusive of non-cash expenses, including depreciation, amortization, provision for losses on accounts receivable and inventory, interest, impairment losses, (gains) losses on disposal of assets, changes in fair value of warrant liabilities, loss on extinguishment of debt and share-based compensation and the impact of changes in operating assets and liabilities. Net cash used in operating activities was $7.4 millionfor the three months ended March 31, 2022primarily due to the working capital build associated with the deployment of additional fleets during the quarter. Net cash used in operating activities was $11.0 millionfor the three months ended March 31, 2021, primarily attributable to the redeployment of pressure pumping fleets. While we experienced an increase in customer activity during the second half of the quarter, the related collection of receivables is not expected until the second quarter of 2021. Additionally, we made working capital payments of $3.0 millionusing proceeds from our USDA Loan. Investing Activities. Net cash provided by investing activities increased by $14.0 millionfrom the prior corresponding period, primarily related to insurance proceeds related to damaged property and equipment. Net cash provided by investing activities was $6.2 millionfor the three months ended March 31, 2022, primarily due to $5.2 millionin proceeds from the sale of property and equipment and $12.0 millionof insurance proceeds related to damaged property and equipment. This was offset by $11.1 millionin purchases of property and equipment, consisting of $10.3 millionrelated to growth capital expenditures and the remainder related to maintaining and supporting our existing pressure pumping equipment. 32 -------------------------------------------------------------------------------- Net cash used in investing activities was $7.8 millionfor the three months ended March 31, 2021, primarily due to $14.2 millionin purchases of property and equipment, related to maintaining and supporting our existing pressure pumping equipment and payments made to replace damaged property and equipment. This was offset by $6.4 millionof insurance proceeds related to damaged property and equipment. Financing Activities. Net cash provided by financing activities was $33.3 millionfor the three months ended March 31, 2022, primarily attributable to gross proceeds of $68.4 millionfrom the issuance of long-term debt, common stock and warrants, offset in part by $17.8 millionof payments on our Senior Secured Term Loan, $14.2 millionof net payments on our ABL Credit Facility and debt issuance costs of $1.1 million. Net cash provided by financing activities was $31.8 millionfor the three months ended March 31, 2021, primarily attributable to net borrowings of $12.2 millionon our ABL Credit Facility, $8.1 millionof net proceeds from notes payable and net proceeds of $10.7 millionfrom the issuance of common stock.
Cash contractual obligations and other commitments
Our significant cash commitments arising from known contractual and other obligations consist primarily of debt service obligations, including interest, operating and finance leases and purchase commitments.
Senior Secured Term Loan. As of
March 31, 2022, the outstanding principal balance of our Term A and Term B Loan (collectively the "Senior Secured Term Loan") was $103.0 million, of which $5.0 millionis due within one year. The Senior Secured Term Loan matures on December 5, 2025. As of March 31, 2022, we were in compliance with all of the covenants under our Senior Secured Term Loan. The Senior Secured Term Loan interest rate is 0.0% for the first quarter of 2022 and an interest rate of (i) 1.0% per annum in cash and (ii) 4.125% per annum PIK interest from April 1, 2022through December 31, 2022. The Senior Secured Term Loan requires quarterly principal payments of $1.25 millionuntil March 31, 2023and $5.0 millionfrom June 30, 2023through September 30, 2025, with final payment due at maturity. Term C Loan. As of March 31, 2022, the outstanding principal balance of our Term C Loan was $21.8 millionand matures on December 5, 2025. Our Term C Loan has a PIK interest rate of 14.0% and contains provisions with up to a 100% premium payable upon any repayment, prepayment or acceleration. As of March 31, 2022, we were in compliance with all of the covenants under our Term C Loan. ABL Credit Facility. All borrowings under our ABL Credit Facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties and certifications regarding sales of certain inventory, and to a borrowing base. As of March 31, 2022, we had no outstanding balance on our ABL Credit Facility. The ABL Credit Facility matures on April 1, 2025. As of March 31, 2022, we were in compliance with all of the covenants under our ABL Credit Facility. Capital Expenditures. Our business requires continual investments to upgrade or enhance existing property and equipment and to ensure compliance with safety and environmental regulations. Capital expenditures primarily relate to maintenance capital expenditures, growth capital expenditures and fleet enhancement capital expenditures. Maintenance capital expenditures include expenditures needed to maintain and to support our current operations. Growth capital expenditures include expenditures to add additional fleets and generate incremental distributable cash flow. Fleet enhancement capital expenditures include expenditures on new equipment related to technology enhancements to existing fleets that increase the productivity of the fleet. During the three months ended March 31, 2022, our capital expenditures was $11.1 million. We currently expect that growth capital expenditures, on an accrual basis, will be approximately $95 millionto $115 millionfor the remainder of 2022, primarily related to the buildout of our four new Nyx Clean Fleets® and associated equipment. Capital expenditures for growth and fleet enhancement initiatives are discretionary. We continuously evaluate our capital expenditures and the amount we ultimately spend will depend on several factors, including expected industry activity levels and company initiatives. 33
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