NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
ORGANIZATION AND BASIS OF PRESENTATION
Organization
Emerge Energy Services LP (“Emerge”) is a Delaware limited partnership that completed its initial public offering (“IPO”) on May 14, 2013 to become a publicly traded partnership. The combined entities of Superior Silica Sands LLC (“SSS”), a Texas limited liability company and Emerge Energy Services Operating LLC (“Emerge Operating”), a Delaware limited liability company, currently represent Emerge.
References to the “Partnership,” “we,” “our” or “us” refer collectively to Emerge and all of its subsidiaries.
We are engaged in the business of mining, processing, and distributing silica sand, a key input for the hydraulic fracturing of oil and gas wells. We conduct our operations through our subsidiary SSS, and we believe our Superior Silica Sands brand has name recognition and a positive reputation with our customers. The Sand business conducts mining and processing operations from facilities located in Wisconsin and Texas. In addition to mining and processing silica sand for the oil and gas industry, the Sand business sells its product for use in building products and foundry operations.
We previously owned a fuel business that operated transmix processing facilities located in the Dallas-Fort Worth area and in Birmingham, Alabama. The Fuel business also offered third-party bulk motor fuel storage and terminal services, biodiesel refining, sale and distribution of wholesale motor fuels, reclamation services (which consists primarily of cleaning bulk storage tanks used by other petroleum terminal and others) and blending of renewable fuels.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with our
2017
Annual Report on Form 10-K. These financial statements include the accounts of all of our subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included.
2.
ASSET ACQUISITIONS
Oklahoma
On May 11, 2018, we signed a
25
-year lease deal for the mining rights to approximately
600
acres located in Kingfisher County, Oklahoma, about 60 miles northwest of Oklahoma City. We purchased
40
acres of land adjoining the leased acreage on which to construct wet and dry processing plants expected to have a capacity of
1.5 million
tons per year. This facility will serve the Mid-Continent region. We began construction in the third quarter, with production anticipated to come online in early 2019. The site is connected to a highway and has close proximity to railway, which could facilitate product shipment if we choose to develop rail loadout infrastructure.
San Antonio
On April 12, 2017, we closed the transaction to acquire substantially all of the assets of Materials Holding Company, Inc., Osburn Materials, Inc., Osburn Sand Co. and South Lehr, Inc. for
$20 million
. The transaction was funded with a
$40 million
term loan. The San Antonio site is located 25 miles south of San Antonio, Texas, and previously produced and sold construction, foundry and sports sands, but did not serve the energy markets. We upgraded the existing operations for conversion into frac sand production and commenced frac sand production in July 2017. Our San Antonio site’s reserves consist mostly of 40/70 and 100 mesh sands and meet American Petroleum Institute (“API”) specifications for all grades.
We early adopted the provisions of Accounting Standards Codification (“ASC”) 805,
Business Combinations
and Accounting Standards Update (“ASU”) 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, in accounting for this transaction. Under this guidance, if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets, the transaction can be accounted for as an asset purchase. Based on our analysis of the transaction, substantially all of the fair value is concentrated in the sand reserves acquired, and thus we accounted for the transaction as an asset purchase. Significant judgment is often required in estimating the fair values of assets acquired. We engaged a third-party valuation specialist in estimating fair values of the assets acquired. We used our best estimates and assumptions to allocate the cost of the
acquisition to the assets acquired on a relative fair value basis at the acquisition date. The fair value estimates are based on available historical information and on expectations and assumptions about the future production and sales volumes, market demands, the average selling price of sand, and the discount factor used in estimating future cash flows. While we believe those expectations and assumptions are reasonable, they are inherently uncertain. Transaction costs of
$434,000
incurred for the acquisition are capitalized as a component of the cost of the assets acquired.
3.
OTHER FINANCIAL DATA
Adoption of ASC 606, Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09,
Revenue from Contracts with Customers
, ASC 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASC 606 replaced most existing revenue recognition guidance in United States Generally Accepted Accounting Principles (“GAAP”) when it became effective for fiscal years beginning after December 15, 2017. ASC 606 permits the use of either the retrospective or cumulative effect transition method. We conducted and completed a comprehensive review of contracts and their associated business terms and conditions and performed detailed analyses on the impact of this standard to our contracts. We adopted the new standard on January 1, 2018, using the full retrospective method. Because accounting for revenue under contracts did not materially change for us under the new standard as explained below, prior period consolidated financial statements did not require adjustment.
We recognize revenue at a point in time when obligations under the terms of a contract with our customer are satisfied. This occurs with the transfer of control of our products to customers when products are shipped for direct sales to customers or when the product is picked up by a customer either at our plant location or transload location. Our contracts contain one performance obligation which is the delivery of sand to the customer at a point in time. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. We recognize the cost for shipping as an expense in cost of sales when control over the product has transferred to the customer. Sales taxes collected concurrently with revenue-producing activities are excluded from revenue.
Our sand products are sold to United States and Canada-based customers primarily in the energy industry. Demand for our product is impacted by the economic conditions related to the energy industry, particularly fluctuations in oil and gas prices. This affects the nature, amount, timing and uncertainty of our revenue. Changes in the price of oil and gas relative to other inflationary measures could make our products more or less affordable and therefore affect our sales. We also sell a small quantity of non-frac sand to customers outside the energy industry.
Our payment terms vary by type and location of our customers. In most cases, the term between invoicing and the payment due date is
30
days. For certain customers, we require payment before the product is delivered.
The following tables present our revenues disaggregated by nature of product for the
three and nine
months ended
September 30, 2018
, and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
$ in Thousands
|
|
Tons in Thousands
|
|
$ in Thousands
|
|
Tons in Thousands
|
|
|
|
|
|
|
|
|
|
|
Frac sand revenues
|
$
|
61,597
|
|
|
985
|
|
|
$
|
101,795
|
|
|
1,361
|
|
|
Non-frac sand revenues
|
1,364
|
|
|
88
|
|
|
1,420
|
|
|
119
|
|
|
Total revenues
|
$
|
62,961
|
|
|
1,073
|
|
|
$
|
103,215
|
|
|
1,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
$ in Thousands
|
|
Tons in Thousands
|
|
$ in Thousands
|
|
Tons in Thousands
|
|
|
|
|
|
|
|
|
|
|
Frac sand revenues
|
$
|
268,356
|
|
|
3,941
|
|
|
$
|
258,055
|
|
|
3,890
|
|
|
Non-frac sand revenues
|
3,197
|
|
|
224
|
|
|
3,106
|
|
|
233
|
|
|
Total revenues
|
$
|
271,553
|
|
|
4,165
|
|
|
$
|
261,161
|
|
|
4,123
|
|
|
We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers to make required payments. On an ongoing basis, the collectability of accounts receivable is assessed based upon historical collection trends, current economic factors and the assessment of the collectability of specific accounts. We evaluate the collectability of specific accounts and determine when to grant credit to our customers using a combination of factors, including the age of the outstanding balances, evaluation of customers’ current and past financial condition, recent payment history, current economic environment, and discussions with our personnel and with the customers directly. Accounts are written off when it is determined the receivable will not be collected. If circumstances change, our estimates of the collectability of amounts could change by a material amount.
A limited number of our contracts have variable consideration, including shortfall fees and demurrage fees. For a limited number of customers, we sell under long-term, minimum purchase supply agreements. These agreements define, among other commitments, the volume of product that our customers must purchase, the volume of product that we must provide, and the price that we will charge for each product. The shortfall fees are billed when the customer does not meet the minimum purchases over a period of time defined in each contract. As we do not have the ability to predict the customer’s orders over the period, there are constraints around our ability to recognize the variability in consideration related to this condition. Demurrage fees are assessed to customers for not returning the railcar timely and according to the terms of the contract. Estimation of demurrage fees is also constrained as we cannot estimate when the customer will pick up the product from the railcar upon delivery. Shortfall fees and demurrage represent an immaterial amount of revenue historically. For these contracts we estimate our position quarterly using the most likely outcome method, including customer-provided forecasts and historical buying patterns, and we accrue for any asset or liability these arrangements may create. The effect of accruals for variable consideration on our consolidated financial statements is immaterial.
After a thorough and extensive analysis of all of our long-term, minimum purchase supply agreements and a review of the standard terms of the purchase orders, we determined that there is no material change in the transaction price and amounts allocated to performance obligations, or the timing of satisfaction of performance obligations under ASC 606 compared to our accounting for these items in previous periods.
Discontinued Operations
On August 31, 2016, we completed the sale of our Fuel business pursuant to the terms of the Fuel Business Purchase Agreement. The purchase price was
$167.7 million
, subject to adjustment based on actual working capital conveyed at closing. The following escrow accounts were established at closing:
|
|
•
|
$7 million
of the sales price was withheld as a general escrow associated with certain indemnification obligations. Any unutilized escrow balance, plus any accrued interest thereon, will be paid
54 months
from the closing date.
|
|
|
•
|
$4 million
of the sales price was withheld as a hydrotreater escrow to satisfy any cost overruns of the Birmingham hydrotreater completion. In 2017, we wrote off the entire receivable relating to hydrotreator completion delays and cost overruns.
|
|
|
•
|
$2.25 million
of the sales price was withheld as the Renewable Fuel Standard escrow account. The entire amount, along with interest thereon, was collected in April 2017.
|
|
|
•
|
$1 million
of the sales price was withheld as a pipeline escrow account. Any unutilized escrow balance, along with any accrued interest thereon, will be released with the general escrow.
|
Escrow receivables are recorded at the net present values of estimated future recoveries and will be adjusted as contingencies are resolved.
During the nine months ended
September 30, 2017
, we wrote off a non-cash charge of
$3.1 million
of the hydrotreator and pipeline escrow receivables relating to completion delays and cost overruns.
Private Placement
In connection with our private placement in August 2016, we issued to the purchaser a warrant to purchase approximately
890,000
common units at an exercise price of
$10.82
per common unit. The warrant, which expires on August 16, 2022, was exercisable immediately upon issuance and contains a cashless exercise provision and other customary provisions and protections, including anti-dilution protections. This warrant is classified as a liability in accordance with ASC 480,
Distinguishing Liabilities from Equity,
and is included in Other long-term liabilities on our Condensed Consolidated Balance Sheets. This warrant has not been exercised as of
September 30, 2018
.
Allowance for Doubtful Accounts
The allowance for doubtful accounts totaled
$327 thousand
at
September 30, 2018
, and
$17 thousand
at
December 31, 2017
.
Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Sand work in process
|
$
|
22,012
|
|
|
$
|
14,650
|
|
|
Sand finished goods
|
10,471
|
|
|
12,914
|
|
|
Sand raw materials and supplies
|
71
|
|
|
261
|
|
|
Total
|
$
|
32,554
|
|
|
$
|
27,825
|
|
|
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Prepaid services
|
$
|
6,071
|
|
|
$
|
1,011
|
|
|
Prepaid lease assets, current (1)
|
2,251
|
|
|
2,496
|
|
|
Prepaid transload services
|
1,888
|
|
|
1,274
|
|
|
Prepaid insurance
|
1,231
|
|
|
875
|
|
|
Other
|
1,458
|
|
|
675
|
|
|
Total
|
$
|
12,899
|
|
|
$
|
6,331
|
|
|
|
|
(1)
|
The cost to transport leased railcars from the manufacturer to our site for initial placement in service is capitalized and amortized over the term of the lease (typically
five
to
seven
years). This balance reflects the current portion of these capitalized costs.
|
Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Machinery and equipment (1)
|
$
|
99,849
|
|
|
$
|
92,353
|
|
|
Buildings and improvements (1)
|
94,115
|
|
|
66,444
|
|
|
Mineral reserves
|
49,091
|
|
|
49,091
|
|
|
Land and improvements (1)
|
48,273
|
|
|
45,567
|
|
|
Construction in progress
|
34,170
|
|
|
15,696
|
|
|
Capitalized reclamation costs
|
2,521
|
|
|
2,521
|
|
|
Total cost
|
328,019
|
|
|
271,672
|
|
|
Accumulated depreciation and depletion
|
98,146
|
|
|
85,702
|
|
|
Net property, plant and equipment
|
$
|
229,873
|
|
|
$
|
185,970
|
|
|
(1) Includes assets under capital lease
.
We recognized
$14.2 million
and
$14.1 million
of depreciation and depletion expense for the
nine months ended September 30, 2018
, and
2017
, respectively.
We capitalize a portion of the interest on funds borrowed to finance the construction of our plants. During the
three and nine
months ended
September 30, 2018
, we capitalized
$0.6 million
and
$1.7 million
of interest for the construction of the San Antonio facility.
Intangible Assets
Our intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
September 30, 2018:
|
|
|
|
|
|
|
Non-compete agreement
|
$
|
100
|
|
|
$
|
42
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
|
|
|
|
|
Patents
|
$
|
7,443
|
|
|
$
|
6,188
|
|
|
$
|
1,255
|
|
|
Supply and transportation agreements
|
569
|
|
|
226
|
|
|
343
|
|
|
Non-compete agreement
|
100
|
|
|
34
|
|
|
66
|
|
|
Total
|
$
|
8,112
|
|
|
$
|
6,448
|
|
|
$
|
1,664
|
|
|
We recognized
$1.3 million
and
$2.3 million
of amortization expense for the
nine months ended September 30, 2018
, and
2017
, respectively.
Other Assets, Net
Other assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Deferred lease asset (1)
|
$
|
8,727
|
|
|
$
|
8,775
|
|
|
Prepaid lease assets, net of current portion (2)
|
5,963
|
|
|
7,153
|
|
|
Escrow receivable, non-current (3)
|
5,953
|
|
|
5,684
|
|
|
Other
|
465
|
|
|
2,810
|
|
|
Total
|
$
|
21,108
|
|
|
$
|
24,422
|
|
|
|
|
(1)
|
During 2016, we completed negotiations with various railcar lessors pursuant to which we terminated future orders of railcars, deferred future railcar deliveries and reduced and deferred payments on existing leases. The cost of deferring future railcar deliveries was recorded as a deferred lease asset. This asset will be amortized over the terms of the associated leases as those railcars enter service.
|
|
|
(2)
|
The cost to transport leased railcars from the manufacturer to our site for initial placement in service is capitalized and amortized over the term of the lease (typically
five
to
seven
years). This balance reflects the non-current portion of these capitalized costs.
|
|
|
(3)
|
Non-current receivables are recorded at net present value of estimated recoveries and will be adjusted as contingencies are resolved.
|
Accrued Liabilities
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Mining
|
$
|
3,461
|
|
|
$
|
170
|
|
|
Logistics
|
3,202
|
|
|
5,898
|
|
|
Fuel sale related liabilities
|
2,483
|
|
|
2,475
|
|
|
Construction
|
1,327
|
|
|
7,122
|
|
|
Sales, excise, property and income taxes
|
1,269
|
|
|
1,953
|
|
|
Current portion of business acquisition obligations
|
1,255
|
|
|
1,952
|
|
|
Salaries and other employee-related
|
860
|
|
|
4,633
|
|
|
Deferred compensation
|
848
|
|
|
848
|
|
|
Accrued interest
|
367
|
|
|
2,552
|
|
|
Professional fees
|
273
|
|
|
373
|
|
|
Sand purchases and royalties
|
258
|
|
|
311
|
|
|
Current portion of contract termination
|
85
|
|
|
210
|
|
|
Other
|
790
|
|
|
1,221
|
|
|
Total
|
$
|
16,478
|
|
|
$
|
29,718
|
|
|
Other Long-term Liabilities
Other long-term liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Deferred lease obligation (1)
|
$
|
11,000
|
|
|
$
|
9,561
|
|
|
Long-term promissory note
|
3,376
|
|
|
9,370
|
|
|
Asset retirement obligation
|
2,800
|
|
|
2,792
|
|
|
Warrants
|
912
|
|
|
2,811
|
|
|
Contract and project terminations
|
891
|
|
|
5,348
|
|
|
Total
|
$
|
18,979
|
|
|
$
|
29,882
|
|
|
|
|
(1)
|
We recognize lease expense for operating leases on a straight-line basis over the term of the lease, beginning on the date we take possession of the property. The difference between the cash paid to the lessor and the amount recognized as lease expense on a straight-line basis is included in deferred lease obligation.
|
Long-term Promissory Note
During the second quarter of 2016, we negotiated significant concessions on the majority of our railcar leases pursuant to which we cancelled or deferred deliveries on railcars and reduced cash payments on a substantial portion of the existing railcars in our fleets. In exchange for these concessions, we issued at par an unsecured promissory note in the aggregate principal amount of
$8 million
(the “PIK Note”) for delivery deferrals. The PIK Note bears interest at a rate of
10%
per annum payable in cash or, in certain situations, in-kind, when certain financial metrics have been met. We began paying interest in cash as of January 1, 2018. The PIK Note will mature on June 2, 2020. We paid
$1.5 million
of the principal balance in January 2018, as part of our debt refinancing described in Note 4 to our Condensed Consolidated Financial Statements. We also issued warrants to purchase
370,000
common units representing limited partnership interests in the Partnership in exchange for these concessions during the second quarter of 2016.
Contract and Project Terminations
In December 2015, we gained access to a significant reserve base in Jackson County, Wisconsin through a business arrangement with a contracted customer. The assets acquired included certain owned and leased land, sand deposit leases and related prepaid royalties, and transferable mining and reclamation permits. In consideration for the assets, we amended and restated the existing supply agreement between the parties and entered into a new sand purchase option agreement that provided the customer with a
market-based discount on sand purchased from us. Under the agreements, we have the option to supply the contracted tons from our existing footprint of northern white sand operations or construct a new sand mine and dry plant in Jackson County, Wisconsin. Due to changing market conditions and changing preferences of customer demand, we determined that these projects were no longer economically viable and decided to terminate the land owner agreements and the mine permits. We recorded a
$1.9 million
charge to earnings to write off the related prepaid royalties during the
nine months ended September 30, 2018
. As we terminated our permits for these properties, we will not owe any future royalty payments related to these properties.
During 2016, we negotiated concessions on the majority of our railcar leases pursuant to which we cancelled or deferred deliveries on railcars and reduced cash payments on a substantial portion of the existing railcars in our fleets. In exchange for these concessions, we incurred a contract termination charge of
$4 million
. We issued at par an unsecured promissory note in the aggregate principal amount of
$4 million
with interest payable in cash or, in certain situations, in-kind, when certain financial metrics have been met. This note bore interest at a rate of
five percent
per annum. We fully extinguished this liability and paid
$4.4 million
in January 2018 as part of our debt refinancing described in Note 4 to our Condensed Consolidated Financial Statements.
The following table illustrates the various contract termination liabilities and exit and disposal reserves included in Accrued liabilities and Other long-term liabilities in our Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
($ in thousands)
|
|
Balance at December 31, 2017
|
$
|
5,557
|
|
|
Adjustments
|
(221
|
)
|
|
Accretion
|
22
|
|
|
Payments
|
(4,382
|
)
|
|
Balance at September 30, 2018
|
$
|
976
|
|
|
Mining and Wet Sand Processing Agreement
In April 2014, a
five
-year contract with a sand processor (“Processor”) became effective to support our Sand business in Wisconsin. In January 2015, the agreement was amended and extended to expire on December 31, 2021. Under this contract, the Processor financed and built a wet wash processing plant near our Wisconsin operations. As part of the agreement, the Processor wet washes our sand, creates stockpiles of washed sand and maintains the plant and equipment. During the term of the agreement the Processor will own the wet plant along with the equipment and other temporary structures used to support this activity. At the end of the term of the agreement or following a default under the contract by the Processor, we have the right to take ownership of the wet plant and other equipment without charge. Subject to certain conditions, ownership of the plant and equipment will transfer to us at the expiration of the term. We accounted for the wet plant as a capital lease obligation.
Fair Value Measurements
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and debt instruments. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable are representative of their fair values due to their short maturities. The carrying amounts of our revolving credit facility approximates fair value because the underlying instrument includes provisions that adjust our interest rates based on current market rates.
The fair values of our other long-term liabilities are not materially different from their carrying values.
On August 8, 2016, we, as part of the private placement described above, also issued a warrant to the purchaser to purchase approximately
890,000
common units at an exercise price of
$10.82
per common unit. This warrant shall be exercisable for a period of
six years
from the closing date and include customary provisions and protections, including anti-dilution protections. The fair value of this warrant at issuance date was calculated at
$5.56
per unit based on a Black Scholes valuation model, utilizing Level 2 inputs based on the hierarchy established in ASC 820,
Fair Value Measurement.
This liability is marked to market each quarter with fair value gains and losses recognized immediately in earnings and included in Other income (expense) on our Consolidated Statements of Operations. The warrant liability was
$0.9 million
and
$2.8 million
at
September 30, 2018
, and
December 31, 2017
, respectively. We recorded a non-cash mark-to-market gain of
$1.5 million
and
$1.9 million
during the
three and nine
months ended
September 30, 2018
, and a gain of
$0.9
million and
$3.2
million during the
three and nine
months ended
September 30, 2017
.
Retirement Plan
We sponsor a 401(k) plan for substantially all employees that provides for us to match
100%
of participant contributions up to
5%
of the participant’s pay. Additionally, we can make discretionary contributions as deemed appropriate by management.
As of May 1, 2017, we reestablished the employer 401(k) contributions, which was previously suspended on July 1, 2016. Employer contributions to these plans totaled
$0.7 million
and
$0.3 million
for the
nine
months ended
September 30, 2018
, and
2017
, respectively.
Seasonality
Winter weather affects the months during which we can wash and wet-process sand in Wisconsin. Seasonality is not a significant factor in determining our ability to supply sand to our customers because we accumulate a stockpile of wet sand feedstock during non-winter months. During the winter, we process the stockpiled sand to meet customer requirements. However, we sell sand for use in oil and natural gas production basins where severe weather conditions may curtail drilling activities. This is particularly true in drilling areas located in the northern U.S. and western Canada. If severe winter weather precludes drilling activities, our frac sand sales volume may be adversely affected. Generally, severe weather episodes affect production in the first quarter with effects possibly continuing into the second quarter.
Concentration of Credit Risk
We provide credit, in the normal course of business, to customers located throughout the United States and Canada. We encounter a certain amount of credit risk as a result of a concentration of receivables among a few significant customers. We perform ongoing credit evaluations of our customers and generally do not require collateral. The trade receivables (as a percentage of total trade receivables) as of
September 30, 2018
, and
December 31, 2017
, from such significant customers are set forth below:
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Customer A
|
20
|
%
|
|
*
|
|
|
Customer B
|
18
|
%
|
|
17
|
%
|
|
Customer C
|
12
|
%
|
|
*
|
|
|
Customer D
|
12
|
%
|
|
20
|
%
|
|
Customer E
|
*
|
|
|
13
|
%
|
|
An asterisk indicates trade receivables less than ten percent.
Significant customers
The table shows the percent of revenue of our significant customers for our continuing operations represented for the
nine months ended September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
Customer B
|
26
|
%
|
|
17
|
%
|
|
Customer D
|
13
|
%
|
|
*
|
|
|
Customer A
|
12
|
%
|
|
21
|
%
|
|
Customer E
|
*
|
|
|
10
|
%
|
|
An asterisk indicates revenue is less than ten percent.
Geographical Data
Although we own
no
long-term assets outside the United States, we began selling sand in Canada during 2013. We recognized
$24.8 million
and
$15.9 million
of revenues in Canada for the
nine months ended September 30, 2018
, and
2017
, respectively. All other sales have occurred in the United States.
Recent Issued Accounting Pronouncement
In February 2016, the FASB issued ASU 2016-02,
Leases.
This ASU requires lessees to recognize lease assets and lease liabilities generated by contracts longer than a year on their balance sheets. The ASU also requires companies to disclose in the footnotes to their financial statements information about the amount, timing, and uncertainty for the payments they make for the lease agreements. ASU 2016-02 is effective for public companies for annual periods and interim periods within those annual periods beginning after December 31, 2018. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, which simplifies the implementation by allowing entities the option to instead apply the provisions of the new guidance at the effective date, without adjusting the comparative periods presented. We currently have significant long-term operating leases for railcars and other assets. Pursuant to the adoption, we will record substantial liabilities and corresponding assets for these leases. We are working with our independent consultant to assist us in our assessment of our lease contracts. Many factors will impact the ultimate measurement of the lease obligation to be recognized upon adoption. We continue to evaluate the impact this guidance will have on our consolidated financial statements. We expect to take advantage of the transition relief provided by the amendment to ASU 2016-02 which allows us to elect not to restate 2017 and 2018 comparative periods upon adoption and continue to apply ASC 840 to such periods. With respect to the available practical expedients, we expect to elect the primary package of expedients whereby we will reassess neither the existence, nor the classification nor the amount and
treatment of initial direct costs of existing leases. We do not expect to apply hindsight to the evaluation of lease options (e.g., renewal) and, accordingly, do not expect to utilize the practical expedient that would allow such an approach. Finally, we plan to elect the expedient to not separate the lease components from the non-lease components for most lease arrangements. We have selected a lease accounting system, and our implementation of it is underway. While we are not yet in a position to assess the full impact of the application of this ASU, we expect that the impact of recording the lease liabilities and the corresponding additional assets will have a significant impact on our financial position and results of operations and related disclosures in the notes to our consolidated financial statements. We will adopt this guidance on January 1, 2019.
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software.
The new guidance requires a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The update is effective for calendar-year public business entities in 2020. For all other calendar-year entities, it is effective for annual periods beginning in 2021 and interim periods in 2022. Early adoption is permitted. We are currently evaluating the effect that the guidance will have on our financial statements and related disclosures.
4.
LONG-TERM DEBT
Following is a summary of our long-term debt:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Second lien term loan - principal
|
$
|
215,000
|
|
|
$
|
40,000
|
|
|
Revolving credit facility - principal
|
—
|
|
|
143,700
|
|
|
Less: Deferred financing costs, net
|
(18,696
|
)
|
|
(7,349
|
)
|
|
Total debt
|
196,304
|
|
|
176,351
|
|
|
Less current portion
|
(13,438
|
)
|
|
—
|
|
|
Long-term debt
|
$
|
182,866
|
|
|
$
|
176,351
|
|
|
Revolving Credit Facility
On January 5, 2018, we entered into a
$75.0 million
Second Amended and Restated Revolving Credit and Security Agreement (the “Credit Agreement”), among the Partnership, as parent guarantor, each of its subsidiaries, as borrowers, PNC Bank, National Association (“PNC Bank”), as administrative agent and collateral agent, and the other lenders party thereto. The Credit Agreement replaced the Prior Credit Agreement. The Credit Agreement provides for a
$75.0 million
asset-based revolving credit facility, and a
$20.0 million
sublimit for the issuance of letters of credit. The Credit Agreement matures on January 5, 2022. Substantially all our assets are pledged as collateral on a first lien basis. This revolving credit facility is available to (i) refinance existing indebtedness, (ii) fund fees and expenses incurred in connection with the credit facility and (iii) for general business purposes, including working capital requirements, capital expenditures, permitted acquisitions, making debt payments when due, and making distributions and dividends.
The Credit Agreement contains various covenants and restrictive provisions and also requires the maintenance of certain financial covenants as follows:
|
|
•
|
a minimum liquidity requirement of
$20.0 million
at all times;
|
|
|
•
|
beginning with the fiscal quarter ending March 31, 2018, a total leverage ratio of a maximum of
5.50
:1.00 decreasing quarterly thereafter to
3.00
:1.00 for the fiscal quarter ending December 31, 2018, and thereafter;
|
|
|
•
|
beginning with the fiscal quarter ending March 31, 2018, a minimum fixed charge coverage ratio of
1.10
:1.00; and
|
|
|
•
|
a limit on capital expenditures, subject to certain availability thresholds.
|
Loans under the Credit Agreement bear interest at our option at either (i) a base rate, which will be the base commercial lending rate of PNC Bank, as publicly announced to be in effect from time to time, plus an applicable margin ranging from
0.75%
to
1.25%
based on total leverage ratio; or (ii) LIBOR plus an applicable margin ranging from
1.75%
to
2.25%
based on the Partnership’s total leverage ratio.
During the
nine months ended September 30, 2018
, we wrote off
$3.9 million
of deferred financing costs relating to the reduction of our revolving credit facility.
At
September 30, 2018
, we did not have any outstanding borrowings under the Credit Agreement. Our weighted average interest rate for all borrowings under the Credit Agreement was
10.8%
for the
three months ended September 30,
2018
.
Second Lien Note Purchase Agreement
On January 5, 2018, the Partnership as guarantor, and the Partnership’s wholly owned subsidiaries Emerge Energy Services Operating LLC and Superior Silica Sands LLC, as issuers, entered into a
$215.0 million
Second Lien Note Purchase Agreement with HPS Investment Partners, LLC as notes agent and collateral agent (the “Second Lien Note Purchase Agreement”). The notes issued under the Second Lien Note Purchase Agreement will mature on January 5, 2023. Proceeds of the sale of the notes under the Second Lien Note Purchase Agreement will be used (i) to fully pay off the Partnership’s existing second lien term credit facility, (ii) to fully pay off the obligations under the Partnership’s Prior Credit Agreement, (iii) to finance capital expenditures, (iv) to pay fees and expenses incurred in connection with the new second lien facility and (v) for general business purposes. Substantially all of the Partnership’s assets are pledged as collateral on a second lien basis.
The Second Lien Note Purchase Agreement contains various covenants and restrictive provisions and also requires the maintenance of certain financial covenants as follows:
|
|
•
|
a minimum liquidity requirement of
$20.0 million
at all times;
|
|
|
•
|
beginning with the fiscal quarter ending March 31, 2018, a total leverage ratio of a maximum of
6.00
:1.00 decreasing quarterly thereafter to
3.00
:1.00 for the fiscal quarter ending March 31, 2019, and thereafter;
|
|
|
•
|
beginning with the fiscal quarter ending March 31, 2018, a minimum fixed charge coverage ratio of
1.10
:1.00, increasing quarterly to
2.00
:1.00 for the fiscal quarter ending March 31, 2019, and thereafter; and
|
|
|
•
|
a limit on capital expenditures, subject to certain availability thresholds.
|
Commencing on September 30, 2018, we are required to make quarterly principal payments (without premium or penalty) equal to (i) for each fiscal quarter ending on or prior to December 31, 2019,
1.25%
, and (ii) for each fiscal quarter thereafter,
1.875%
, of the original principal amount. Accordingly, on
September 30, 2018
, we have classified
$13.4 million
of principal as a current liability.
The notes under the Second Lien Note Purchase Agreement bear interest at
11%
per annum until December 31, 2018, and ranging from
10.00%
per annum to
12.00%
per annum thereafter, depending on the our leverage ratio.
In lieu of paying cash for certain transaction costs, we also issued
814,295
common units representing limited partnership interests in the Partnership to the Second Lien Note holders in a private placement in January 2018. Proceeds from this issuance, net of expenses, was
$6.0 million
.
Covenants Compliance
At
September 30, 2018
, we were in compliance with our loan covenants and had undrawn availability under the Credit Agreement totaling
$61.5 million
, well above the minimum availability required under our current covenants. However, if in the future we are unable to comply with the financial covenants and the lenders are unwilling to provide us with additional flexibility or a waiver, it could result in a default, and we may be forced to repay or refinance amounts then outstanding under the Credit Agreement or the Second Lien Note Purchase Agreement and seek alternative sources of capital to fund our business and anticipated capital expenditures. Any such alternative sources of capital, such as equity transactions or debt financing, may be on terms less favorable or at higher costs than our current financing sources, depending on future market conditions and other factors, or may not be available at all.
5.
RELATED PARTY TRANSACTIONS
Related party transactions included in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Employee-related and other costs (1)
|
$
|
20,401
|
|
|
$
|
13,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Accounts receivable, net
|
$
|
97
|
|
|
$
|
962
|
|
|
Accounts payable and accrued liabilities
|
$
|
521
|
|
|
$
|
800
|
|
|
|
|
(1)
|
We do not have any employees. Our general partner manages our human resource assets, including fringe benefits and other employee-related charges. We routinely and regularly reimburse our general partner for any employee-related costs paid on our behalf, and report such costs as operating expenses.
|
The Company follows ASC 850,
Related Party Disclosures
, for the identification of related parties and disclosure of related party transactions. In 2017, Mr. Paul Shearer, the son of our President and Chief Executive Officer, was hired as the Director of Business Relations and he currently serves as the Director of Sales. During the
nine months ended September 30,
2018
, we paid Paul Shearer
$163 thousand
in total compensation, including base salary, bonus, company contributions under our 401(k) plan and contributions to his health savings account.
6.
EQUITY-BASED COMPENSATION
Effective May 14, 2013, we adopted our 2013 Long-Term Incentive Plan (the “LTIP”) for providing long-term incentives for employees, directors, and consultants who provide services to us. The LTIP provides for the issuance of an aggregate of up to
2,321,968
common units to be granted either as options, restricted units, phantom units, distribution equivalent rights, unit appreciation rights, unit award, profits interest units, or other unit-based award granted under the plan. All of our outstanding grants will be settled through issuance of limited partner common units.
For remaining phantom units granted to employees in 2013, we currently assume a
67
-month vesting period, which represents management’s estimate of the amount of time until all vesting conditions have been met. For other phantom units granted to employees, we have a
24
to
36
-month vesting period. Restricted units are awarded to our independent directors on each anniversary of our IPO, each with a vesting period of
one
year. Regarding distributions for independent directors and other employees, distributions are credited to a distribution equivalent rights account for the benefit of each participant and become payable generally within
45 days
days following the date of vesting. As of
September 30, 2018
, the unpaid liability for distribution equivalent rights totaled
$0.8 million
.
During the nine months of 2018, we granted
24,800
time-based phantom units to certain officers and employees to vest in equal installments on each anniversary date of the grant over a period of
two
years.
The following table summarizes awards granted during the
nine
months ended
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Units
|
|
Phantom
Units
|
|
Restricted
Units
|
|
Fair Value per Unit
at Award Date
|
|
Outstanding at December 31, 2017
|
333,821
|
|
|
310,780
|
|
|
23,041
|
|
|
$
|
13.10
|
|
|
Granted
|
61,768
|
|
|
24,800
|
|
|
36,968
|
|
|
$
|
7.90
|
|
|
Vested
|
(53,656
|
)
|
|
(30,616
|
)
|
|
(23,040
|
)
|
|
$
|
13.44
|
|
|
Forfeitures
|
(2,000
|
)
|
|
(2,000
|
)
|
|
—
|
|
|
$
|
6.98
|
|
|
Outstanding at September 30, 2018
|
339,933
|
|
|
302,964
|
|
|
36,969
|
|
|
$
|
12.14
|
|
|
For the
nine
months ended
September 30, 2018
, and
2017
, we recorded non-cash equity-based compensation expense of
$1.2 million
and
$1.0 million
, respectively, in selling, general and administrative expenses.
As of
September 30, 2018
, the unrecognized compensation expense related to the grants discussed above amounted to
$1.0 million
to be recognized over a weighted average of
0.8 years
.
7.
INCOME TAXES
Our provision for income taxes relates to: (i) Texas margin taxes for the Partnership, and (ii) a Canadian income taxes on SSS earnings in Canada (most of our earnings are exempted under a U.S/Canada tax treaty). For federal income tax purposes, we report our income, expenses, gains, and losses as a partnership not subject to income taxes. As such, each partner is responsible for his or her share of federal and state income tax. Net earnings for financial statement purposes may differ significantly from taxable income reportable to each partner because of differences between the tax basis and financial reporting basis of assets and liabilities.
The composition of our provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Texas margin tax
|
$
|
128
|
|
|
$
|
(58
|
)
|
|
Canadian income tax
|
55
|
|
|
—
|
|
|
Total provision for income taxes
|
$
|
183
|
|
|
$
|
(58
|
)
|
|
We are responsible for our portion of the Texas margin tax that is included in our subsidiaries’ consolidated Texas franchise tax returns. For our operations in Texas, the effective margin tax rate is approximately
0.375%
as defined by applicable state law. The margin tax qualifies as an income tax under GAAP, which requires us to recognize the impact of this tax on the temporary differences between the financial statement assets and liabilities and their tax basis attributable to such tax.
8.
EARNINGS PER COMMON UNIT
We compute basic earnings (loss) per unit by dividing net income (loss) by the weighted-average number of common units outstanding including certain participating securities. Participating securities include unvested equity-based payment awards that contain rights to distributions, as well as convertible preferred units and warrants that contain contractual rights to participate in any distributions that are declared. It is our policy to exclude participating securities, convertible preferred units and warrants from the calculation of basic earnings (loss) per unit in periods of net losses from continuing operations since these securities are not contractually obligated to share in losses.
Diluted earnings per unit is computed by dividing net income by the weighted-average number of common units outstanding, including the number of common units that would have been outstanding had potential dilutive units been exercised. The dilutive effect of restricted units is reflected in diluted net income per unit by applying the treasury stock method. For periods in which warrants are dilutive, we reverse the income effects of the warrants and include incremental units in our computation of diluted earnings per unit. Under FASB ASC 260-10-45,
Contingently Issuable Shares
,
93,806
of our outstanding phantom units are not included in basic or diluted earnings per common unit calculations as of
September 30, 2018
, and
2017
.
Basic and diluted earnings per unit for the three months ended
September 30, 2018
, and
2017
, is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
|
|
Discontinued
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands, except unit and per unit data)
|
|
Net income (loss)
|
$
|
(3,853
|
)
|
|
$
|
5,482
|
|
|
$
|
—
|
|
|
$
|
(468
|
)
|
|
$
|
(3,853
|
)
|
|
$
|
5,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding
|
31,034,186
|
|
|
30,150,915
|
|
|
31,034,186
|
|
|
30,150,915
|
|
|
31,034,186
|
|
|
30,150,915
|
|
|
Weighted average units deemed participating securities
|
—
|
|
|
119,657
|
|
|
—
|
|
|
119,657
|
|
|
—
|
|
|
119,657
|
|
|
Weighted average number of common units outstanding - basic
|
31,034,186
|
|
|
30,270,572
|
|
|
31,034,186
|
|
|
30,270,572
|
|
|
31,034,186
|
|
|
30,270,572
|
|
|
Add incremental units from assumed exercise of warrants
|
—
|
|
|
130,012
|
|
|
—
|
|
|
130,012
|
|
|
—
|
|
|
130,012
|
|
|
Weighted average number of common units outstanding - diluted
|
31,034,186
|
|
|
30,400,584
|
|
|
31,034,186
|
|
|
30,400,584
|
|
|
31,034,186
|
|
|
30,400,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per unit, basic
|
$
|
(0.12
|
)
|
|
$
|
0.19
|
|
|
$
|
—
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.17
|
|
|
Earnings (loss) per unit, diluted
|
$
|
(0.12
|
)
|
|
$
|
0.18
|
|
|
$
|
—
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.16
|
|
|
Basic and diluted earnings per unit for the
nine months ended September 30, 2018
, and
2017
is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
|
|
Discontinued
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands, except unit and per unit data)
|
|
Net income (loss) used to compute earnings (loss) per common unit, basic
|
$
|
7,061
|
|
|
$
|
(9,333
|
)
|
|
$
|
—
|
|
|
$
|
(3,125
|
)
|
|
$
|
7,061
|
|
|
$
|
(12,458
|
)
|
|
Unrealized (gain) loss on fair value of warrant
|
—
|
|
|
(3,212
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,212
|
)
|
|
Net income (loss) used to compute earnings (loss) per common unit, diluted
|
$
|
7,061
|
|
|
$
|
(12,545
|
)
|
|
$
|
—
|
|
|
$
|
(3,125
|
)
|
|
$
|
7,061
|
|
|
$
|
(15,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding
|
31,020,310
|
|
|
30,120,216
|
|
|
31,020,310
|
|
|
30,120,216
|
|
|
31,020,310
|
|
|
30,120,216
|
|
|
Weighted average units deemed participating securities
|
213,213
|
|
|
—
|
|
|
213,213
|
|
|
—
|
|
|
213,213
|
|
|
—
|
|
|
Weighted average number of common units outstanding - basic
|
31,233,523
|
|
|
30,120,216
|
|
|
31,233,523
|
|
|
30,120,216
|
|
|
31,233,523
|
|
|
30,120,216
|
|
|
Weighted average potentially dilutive units outstanding
|
15,757
|
|
|
—
|
|
|
15,757
|
|
|
—
|
|
|
15,757
|
|
|
—
|
|
|
Add incremental units from assumed exercise of warrants
|
121,872
|
|
|
62,875
|
|
|
121,872
|
|
|
62,875
|
|
|
121,872
|
|
|
62,875
|
|
|
Weighted average number of common units outstanding - diluted
|
31,371,152
|
|
|
30,183,091
|
|
|
31,371,152
|
|
|
30,183,091
|
|
|
31,371,152
|
|
|
30,183,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per unit, basic
|
$
|
0.23
|
|
|
$
|
(0.31
|
)
|
|
$
|
—
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.23
|
|
|
$
|
(0.41
|
)
|
|
Earnings (loss) per unit, diluted
|
$
|
0.23
|
|
|
$
|
(0.42
|
)
|
|
$
|
—
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.23
|
|
|
$
|
(0.52
|
)
|
|
9.
RECURRING FAIR VALUE MEASUREMENTS
We follow FASB ASC 820,
Fair Value Measurement
, which defines fair value, establishes a framework for measuring fair value, and specifies disclosures about fair value measurements. This guidance establishes a hierarchy for disclosure of the inputs to valuations used to measure fair value. The hierarchy prioritizes the inputs into three broad levels as follows.
|
|
•
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
|
|
|
•
|
Level 3 inputs are measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources.
|
Our valuation models consider various inputs including (a) mark to market valuations, (b) time value and, (c) credit worthiness of valuation of the underlying measurement.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
We do not designate our derivative instruments as hedges under GAAP. As a result, we recognize derivatives at fair value on the consolidated balance sheet with resulting gains and losses reflected in interest expense (for interest rate swap agreements). Our derivative instruments serve the same risk management purpose whether designated as a hedge or not. We derive fair values principally from published market interest rates (Level 2 inputs). We do not use derivative financial instruments for trading or speculative purposes.
On August 8, 2016, we, as part of the private placement described above, issued a warrant to the purchaser to purchase approximately
890,000
common units at an exercise price of
$10.82
per common unit. The warrant shall be exercisable for a period of
six
years from the closing date and include customary provisions and protections, including anti-dilution protections. The fair value of this warrant at issuance date was calculated at
$5.56
per unit based on a Black Scholes valuation model, utilizing Level 2 inputs based on the hierarchy established in ASC 820, Fair Value Measurement. This liability is marked to market each quarter with fair value gains and losses recognized immediately in earnings and included in Other expense (income) on our Condensed Consolidated Statements of Operations. We recorded a non-cash mark-to-market gain of
$1.5 million
and
$1.9 million
during the
three and nine
months ended
September 30, 2018
, and a non-cash mark-to-market gain of
$0.9
million and
$3.2
million during the
three and nine
months ended
September 30, 2017
.
The fair values of outstanding derivative instruments and warrant and their classifications within our Condensed Consolidated Balance Sheets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Classification
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Warrant liability
|
$
|
912
|
|
|
$
|
2,811
|
|
|
Other long-term liabilities
|
The effect of derivative instruments, none of which has been designated for hedge accounting, on our Condensed Consolidated Statements of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Classification
|
|
|
|
|
|
|
|
|
|
|
|
((income) expense $ in thousands)
|
|
|
Interest rate swaps
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(62
|
)
|
|
Interest expense, net
|
Warrant
|
(1,467
|
)
|
|
(900
|
)
|
|
(1,899
|
)
|
|
(3,212
|
)
|
|
Other expense (income)
|
|
$
|
(1,467
|
)
|
|
$
|
(898
|
)
|
|
$
|
(1,899
|
)
|
|
$
|
(3,274
|
)
|
|
|
10.
SUPPLEMENTAL CASH FLOW DISCLOSURES
The following supplemental disclosures may assist in the understanding of our Condensed Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Cash paid for interest, net of capitalized interest
|
$
|
13,878
|
|
|
$
|
10,934
|
|
|
Cash paid for income taxes, net of refunds
|
$
|
28
|
|
|
$
|
(22
|
)
|
|
Issuance of equity
|
$
|
5,974
|
|
|
$
|
—
|
|
|
Purchases of PP&E accrued but not paid at period-end
|
$
|
7,670
|
|
|
$
|
1,432
|
|
|
Purchases of PP&E accrued in a prior period and paid in the current period
|
$
|
11,372
|
|
|
$
|
170
|
|
|