As filed with the Securities and Exchange Commission on June 9, 2011

Registration No. 333-173177

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 3

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

C&J Energy Services, Inc.

(Exact name of registrant as specified in its charter)

 

 

10375 Richmond Avenue, Suite 2000

Houston, Texas 77042

(713) 260-9900

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

 

Theodore R. Moore

Vice President-General Counsel

C&J Energy Services, Inc.

10375 Richmond Avenue, Suite 2000

Houston, Texas 77042

(713) 260-9900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

Copies to:

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

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

(Do not check if a smaller reporting company)

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

Subject to Completion, Dated June 9, 2011

 

PRELIMINARY PROSPECTUS

 

 

C&J Energy Services, Inc.

 

Common Stock

 

 

 

 

C&J Energy Services, Inc. is offering           shares of its common stock and the selling stockholders named in this prospectus are offering           shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.

 

This is the initial public offering of shares of our common stock. Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price of our common stock will be between $      and $      per share.

 

We have applied to list our common stock on the New York Stock Exchange under the symbol “CJES.”

 

Investing in our common stock involves risks. Please read “Risk Factors” beginning on page 13 of this prospectus.

 

 

 

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

 

 

The selling stockholders have granted the underwriters the right to purchase up to an additional           shares of common stock.

 

 

 

 

The underwriters expect to deliver the shares of common stock to purchasers on or about          , 2011.

 

 

Co-Managers

 

 

 

 

 

 

Prospectus dated          , 2011.

TABLE OF CONTENTS

 

 

 

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus and any free writing prospectus. We and the selling stockholders are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock.

 

We have not taken any action to permit a public offering of the shares of common stock outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the shares of common stock and the distribution of this prospectus outside the United States.

 

Until          , 2011, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

Industry and Market Data

 

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. Some data is also based on our good-faith estimates.

 

PROSPECTUS SUMMARY

	•	monthly payments for the committed hydraulic fracturing fleets under term contracts as well as prevailing market rates for spot market work, together with associated charges or handling fees for chemicals and proppants that are consumed during the fracturing process; and
	•	prevailing market rates for coiled tubing, pressure pumping and other related well stimulation services, together with associated charges for stimulation fluids, nitrogen and coiled tubing materials.

Common stock offered by C&J Energy Services, Inc.		shares

Common stock offered by the Selling Stockholders		shares (           shares if the underwriters’ option to purchase additional shares is exercised in full)

Common stock to be outstanding after this offering(1)		shares

Common stock owned by Selling Stockholders after this offering		shares (           shares if the underwriters’ option to purchase additional shares is exercised in full)

Use of Proceeds		We expect to receive approximately $      million of net proceeds from the sale of the common stock offered by us in this offering, based upon an assumed initial public offering price of $      per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses. Each $1.00 increase (decrease) in the initial public offering price would increase (decrease) our net proceeds by approximately $      million.

		We intend to use the net proceeds we receive from this offering to repay all outstanding indebtedness under our credit facility, approximately $107.1 million of which was outstanding on May 31, 2011, and we intend to use any remaining net proceeds to fund a portion of the purchase price of Fleet 5 in June 2011. We will not receive any proceeds from the sale of shares by the selling stockholders, including pursuant to the underwriters’ option to purchase additional shares. Affiliates of certain of the underwriters are lenders under our credit facility and, accordingly, will receive a portion of the proceeds from this offering. Please read “Use of Proceeds” on page 27 of this prospectus.

Dividend Policy		We do not anticipate paying cash dividends on shares of our common stock for the foreseeable future. In addition, our credit facility contains restrictions on the payment of dividends to holders of our common stock.
Risk Factors		Investing in our common stock involves a high degree of risk. For a discussion of factors you should consider before making an investment, please read “Risk Factors” beginning on page 13 of this prospectus.
Proposed New York Stock Exchange Symbol		CJES

(1)		The number of outstanding shares as of June 8, 2011 excludes (i) 5,716,589 shares of common stock issuable upon exercise of options to be outstanding immediately after this offering, of which 1,907,318 currently are exercisable, and (ii) an aggregate of approximately 1,890,618 shares of common stock reserved and available for future issuance under the C&J Energy Services, Inc. 2010 Stock Option Plan, or the 2010 Plan. For additional information regarding the 2010 Plan,

		please read “Executive Compensation and Other Information — Components of Executive Compensation Program — Stock Options” on page 78 of this prospectus.

	•	Our business depends on the oil and natural gas industry and particularly on the level of exploration, development and production of oil and natural gas in the United States. Our markets may be adversely affected by industry conditions that are beyond our control.
	•	Because the oil and gas industry is cyclical, our operating results may fluctuate.
	•	Delays in delivery of our new fracturing fleets or future orders of specialized equipment from suppliers could harm our business, results of operations and financial condition.
	•	Delays in deliveries of key raw materials or increases in the cost of key raw materials could harm our business, results of operations and financial condition.
	•	There is potential for excess capacity in our industry.
	•	Federal legislation and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays as well as adversely affect our support services.
	•	We participate in a capital-intensive industry. We may not be able to finance future growth of our operations or future acquisitions.

	•	The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering. In addition, an active liquid trading market for our common stock may not develop and our stock price may be volatile.
	•	Purchasers of common stock in this offering will experience immediate and substantial dilution of $      per share.
	•	Subject to certain limitations, our existing stockholders may sell common stock in the public markets, which could have an adverse impact on the trading price of our common stock.
	•	Provisions in our organizational documents and under Delaware law could delay or prevent a change in control of our company, which could adversely affect the price of our common stock.

		Year Ended December 31,												Three Months Ended March 31,
		2010				2009				2008				2011				2010
		(In thousands, except per share data)
														Unaudited
Statement of Operations Data:
Revenue		$	244,157			$	67,030			$	62,441			$	127,204			$	32,636
Cost of sales			154,297				54,242				42,401				70,048				23,176
Gross profit			89,860				12,788				20,040				57,156				9,460
Selling, general and administrative expenses			17,998				9,533				8,950				8,825				2,867
Loss (gain) on sale/disposal of assets			1,571				920				397				(90	)			(16	)
Operating income			70,291				2,335				10,693				48,421				6,609
Other income (expense):
Interest income			9				4				5				1				—
Interest expense			(17,350	)			(4,712	)			(6,913	)			(1,959	)			(2,998	)
Lender fees			(322	)			(391	)			(511	)			(25	)			(53	)
Other income			163				—				—				13				102
Other expense			(150	)			(52	)			(68	)			—				(1	)
Total other expenses			(17,650	)			(5,151	)			(7,487	)			(1,970	)			(2,950	)
Income (loss) before income taxes			52,641				(2,816	)			3,206				46,451				3,659
Provision (benefit) for income taxes			20,369				(386	)			2,085				17,366				1,416
Net income (loss)		$	32,272			$	(2,430	)		$	1,121			$	29,085			$	2,243
Basic income (loss) per share		$	0.70			$	(0.05	)		$	0.02			$	0.61			$	0.05
Diluted income (loss) per share		$	0.67			$	(0.05	)		$	0.02			$	0.60			$	0.05
Other Supplementary Data:
Adjusted EBITDA(1)		$	82,606			$	13,083			$	19,927			$	51,934			$	9,111
Capital expenditures			44,473				4,301				21,526				29,784				2,515
Balance Sheet Data (as of end of period):
Cash and cash equivalents		$	2,817			$	1,178			$	109			$	2,056
Net working capital(2)			24,747				2,936				6,503				52,307
Property, plant and equipment, net			88,395				65,404				71,441				117,277
Total assets			226,088				150,231				155,212				285,358

(1)		EBITDA and Adjusted EBITDA are non-GAAP financial measures, and when analyzing our operating performance, investors should use EBITDA and Adjusted EBITDA in addition to, and not as an alternative for, operating income and net (loss) income (each as determined in accordance

		with GAAP). We use EBITDA and Adjusted EBTIDA as supplemental financial measures. EBITDA is defined as net income (loss) before interest expense (net), income taxes and depreciation and amortization. Adjusted EBTIDA is EBITDA further adjusted for certain other items which are not indicative of future performance or cash flow, including lender fees, other non-operating expenses and loss on sale/disposal of property, plant and equipment. We believe Adjusted EBITDA is a useful supplemental indicator of our performance.
		EBITDA and Adjusted EBITDA, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and are not measures of performance calculated in accordance with GAAP. There are significant limitations to using EBITDA and Adjusted EBITDA as measures of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of operations of different companies and the different methods of calculating EBITDA and Adjusted EBITDA reported by different companies, and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP.
		For example, EBITDA does not reflect:
		• cash expenditures or future requirements for capital expenditures or contractual commitments, changes in, or cash requirements for, working capital needs;
		• interest expense or the cash requirements necessary to service interest or principal payments on debt; and
		• any cash requirements for assets being depreciated and amortized that may have to be replaced in the future.
		EBITDA and Adjusted EBITDA do not represent funds available for discretionary use because those funds are required for debt service, capital expenditures, working capital and other commitments and obligations. However, our management team believes EBITDA and Adjusted EBITDA are useful to an investor in evaluating us because these measures:
		• are widely used by investors in our industry to measure a company’s operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;
		• help investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure, which is useful for trending, analyzing and benchmarking the performance and value of our business; and
		• are used by our management team for various other purposes in presentations to our board as bases for strategic planning and forecasting and is an important measure in our incentive compensation plans.
(2)		Consists of (a) current assets less cash and cash equivalents minus (b) current liabilities less current portion of debt.

		The following table sets forth the reconciliation of our net income (loss) to EBITDA and Adjusted EBITDA for the periods indicated:

		Year Ended December 31,												Three Months Ended March 31,
		2010				2009				2008				2011				2010
		(In thousands)
														Unaudited
Net income (loss)		$	32,272			$	(2,430	)		$	1,121			$	29,085			$	2,243
Interest expense, net			17,341				4,708				6,909				1,958				2,998
Provision (benefit) for income taxes			20,369				(386	)			2,085				17,366				1,416
Depreciation and amortization			10,744				9,828				8,836				3,603				2,517
EBITDA		$	80,726			$	11,720			$	18,951			$	52,012			$	9,174
Adjustments to EBITDA:
Lender fees			322				391				511				25				53
Other (income) expense(1)			(13	)			52				68				(13	)			(100	)
Loss (gain) on sale/disposition of property, plant & equipment			1,571				920				397				(90	)			(16	)
Adjusted EBITDA		$	82,606			$	13,083			$	19,927			$	51,934			$	9,111

(1)		Consists of state franchise taxes and other non-operating expenses.

 

You should carefully consider each of the following risk factors and all of the other information set forth in this prospectus before deciding to invest in our common stock. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occur, our business, financial condition and results of operations could be harmed and we may not be able to achieve our goals. If that occurs, the value of our common stock could decline and you could lose some or all of your investment.

 

Risks Relating to Our Business

 

Our business depends on the oil and natural gas industry and particularly on the level of exploration, development and production of oil and natural gas in the United States. Our markets may be adversely affected by industry conditions that are beyond our control.

 

We depend on our customers’ willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas in the United States. If these expenditures decline, our business may suffer. Our customers’ willingness to explore, develop and produce depends largely upon prevailing industry conditions that are influenced by numerous factors over which our management has no control, such as:

 

 

The level of activity in the oil and natural gas exploration and production industry in the United States is volatile. In 2009, our industry experienced an unprecedented decline in drilling activity in the United States as rig counts dropped by approximately 57% from 2008 highs. Correlating with this decline, the Henry Hub spot price for natural gas decreased from an average of $8.90 per mcf in 2008 to $4.16 per mcf in 2009. As of June 3, 2011, the Henry Hub spot price for natural gas was $4.71 per mcf. Unexpected material declines in oil and natural gas prices, or drilling or completion

activity in the southern United States oil and natural gas shale regions, could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, a decrease in the development rate of oil and natural gas reserves in our market areas may also have an adverse impact on our business, even in an environment of stronger oil and natural gas prices.

 

The cyclicality of the oil and natural gas industry in the United States may cause our operating results to fluctuate.

 

We have experienced in the past, and may experience in the future, significant fluctuations in operating results as a result of the reactions of our customers to actual and anticipated changes in oil and natural gas prices in the United States. For example, in 2009, due to fluctuations in our operating results caused largely by the volatility of commodity prices, we faced potential payment and covenant defaults under our then-existing subordinated term loan agreement. In connection with such potential defaults, we obtained a waiver from our lenders to extend the maturity date and amend certain payment terms and maintenance covenants under such facility. If our operating results are adversely impacted by actual or anticipated changes in oil and natural gas prices, or for any other reason, then we may be in default under our debt arrangements and be required to seek a waiver from our lenders in the future, and such measures may not be successful.

 

There is potential for excess capacity in our industry, which could adversely affect our business and operating results.

 

Currently, the demand for hydraulic fracturing services exceeds the availability of fracturing equipment and crews across the industry and in our operating areas in particular. The accelerated wear and tear of hydraulic fracturing equipment due to its deployment in unconventional, as opposed to conventional, oil and natural gas fields characterized by longer lateral lengths and larger numbers of fracturing stages has further amplified this equipment and crew shortage. As a result, we and our competitors have ordered additional fracturing equipment to meet existing and projected long-term demand. If demand for fracturing services decreases or the supply of fracturing equipment and crews increases, then the increase in supply relative to demand may result in lower prices and utilization of our services and could adversely affect our business and results of operations.

 

Our inability to acquire or delays in the delivery of our new fracturing fleets or future orders of specialized equipment from suppliers could harm our business, results of operations and financial condition.

 

We expect to take delivery of two new fracturing fleets during 2011, Fleet 5 in June 2011 and Fleet 6 in the fourth quarter of 2011. We expect to take delivery of another two hydraulic fracturing fleets during 2012, Fleet 7 in the first half of 2012 and Fleet 8 in the second half of 2012. The delivery of Fleets 5, 6, 7 and 8 or any other fracturing fleets we may order in the future could be materially delayed or not delivered at all. Total is constructing our hydraulic fracturing pumps for all four of our on-order fleets. The overall number of hydraulic fracturing equipment suppliers in the industry is limited, and there is high demand for such equipment, which may increase the risk of delay or failure to deliver and limit our ability to find alternative suppliers. Any material delay or failure to deliver new fleets could defer or substantially reduce our revenue from the deployment of these fracturing fleets. Additionally, if the delivery of Fleet 5 is materially delayed or not delivered, we may be unable to fulfill our term fracturing contract relating to this fleet. In the event that we were unable to commence service under our contract relating to Fleet 5 (due to equipment delivery delay or otherwise) by a specified date, the customer has the right to terminate the contract without penalty.

 

Delays in deliveries of key raw materials or increases in the cost of key raw materials could harm our business, results of operations and financial condition.

 

We have established relationships with a limited number of suppliers of our raw materials and finished products. Should any of our current suppliers be unable to provide the necessary raw

materials (such as proppant, chemicals or coiled tubing) or finished products (such as fluid-handling equipment) or otherwise fail to deliver the products in a timely manner and in the quantities required, any resulting delays in the provision of services could have a material adverse effect on our business, financial condition, results of operations and cash flows. During 2008, our industry faced sporadic proppant shortages associated with pressure pumping operations requiring work stoppages, which adversely impacted the operating results of several competitors. We may not be able to mitigate any future shortages of raw materials, including proppants.

 

Federal legislation and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays as well as adversely affect our support services.

 

The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or the UIC program. Hydraulic fracturing generally is exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. The United States Environmental Protection Agency, or EPA, has recently taken the position that hydraulic fracturing with fluids containing diesel fuel are subject to regulation under the UIC program, specifically as “Class II” UIC wells. At the same time, the EPA has commenced a study of the potential environmental impacts of hydraulic fracturing activities, and a committee of the U.S. House of Representatives recently concluded an investigation of hydraulic fracturing practices. As part of these studies, both the EPA and the House committee have requested that certain companies provide them with information concerning the chemicals used in the hydraulic fracturing process. These studies, depending on their results, could spur initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Legislation, which has not passed, has been introduced before Congress in the last few sessions to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the fracturing process. If similar federal legislation is introduced and becomes law in the future, the legislation could establish an additional level of regulation at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing our costs of compliance and doing business.

 

In addition, various state 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 Texas Senate and House of Representatives have both passed bills that would require the disclosure of information regarding the substances used in the hydraulic fracturing process to the Railroad Commission of Texas and the public. If signed into law by the Governor, this bill could increase our costs of compliance and doing business. Moreover, the availability of information regarding the constituents of hydraulic fracturing fluids could 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. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to us.

 

The adoption of new laws or regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process could make it more difficult to complete natural gas wells in shale formations, increase our costs of compliance and adversely affect the hydraulic fracturing services that we render for our exploration and production customers. In addition, if hydraulic fracturing becomes regulated at the federal level as a result of federal legislation or regulatory initiatives by the EPA, fracturing activities could become subject to additional permitting requirements, and also to attendant permitting delays and potential increases in cost, which could adversely affect our business and results of operations.

Our executive officers and certain key personnel are critical to our business and these officers and key personnel may not remain with us in the future.

 

Our future success depends upon the continued service of our executive officers and other key personnel, particularly Joshua E. Comstock, our Chief Executive Officer, President and Chairman. If we lose the services of Mr. Comstock, our other executive officers or other key personnel, our business, operating results and financial condition could be harmed. Additionally, proceeds from the key person life insurance on Mr. Comstock would not be sufficient to cover our losses in the event we were to lose his services.

 

Reliance upon a few large customers may adversely affect our revenues and operating results.

 

Our top five customers accounted for approximately 81.0%, 67.4% and 61.1% of our revenue for the years ended December 31, 2010, 2009 and 2008, respectively. Our top ten customers represented approximately 90.2%, 90.6% and 79.9% of our revenue for the years ended December 31, 2010, 2009 and 2008, respectively. For the three months ended March 31, 2011, our top five customers accounted for 89.8% of our revenues and our top ten customers accounted for 97.2% of our revenues. It is likely that we will continue to derive a significant portion of our revenue from a relatively small number of customers in the future. If a major customer fails to pay us or decides not to continue to use our services, revenue could decline and our operating results and financial condition could be harmed.

 

We may not be able to renew our term contracts on attractive terms or at all, which could adversely impact our results of operations, financial condition and cash flows.

 

A significant amount of our revenue is currently derived from term contracts. For the three months ended March 31, 2011, we derived 53.6% of our total revenues from our term contracts. The term of these contracts ranges from one to three years. Once these contracts expire, we may not be able to extend the contracts, enter into additional term contracts on favorable terms or at all or deploy our hydraulic fracturing fleets in the spot market on attractive terms. If we are not able to do so, our results of operations, financial condition and cash flows could be adversely impacted.

 

We are vulnerable to the potential difficulties associated with rapid growth and expansion.

 

We have grown rapidly over the last several years. For example, from the year ended December 31, 2008 through the year ended December 31, 2010, our Adjusted EBITDA increased $62.7 million from $19.9 million to $82.6 million. For the year ended December 31, 2010, our revenues were $244.2 million and net income was $32.3 million. We believe that our future success depends on our ability to manage the rapid growth that we have experienced and the demands from increased responsibility on our management personnel. The following factors could present difficulties to us:

 

 

 

 

In addition, we recently completed the acquisition of Total and may in the future seek to grow our business through acquisitions that enhance our existing operations. The success of any completed acquisition, including our acquisition of Total, will depend on our ability to integrate effectively the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and

financial resources. Our operating results could be adversely affected if we do not successfully manage these potential difficulties.

 

We may be unable to employ a sufficient number of skilled and qualified workers.

 

The delivery of our services and products requires personnel with specialized skills and experience who can perform physically demanding work. As a result of the volatility in the energy service industry and the demanding nature of the work, workers may choose to pursue employment in fields that offer a more desirable work environment. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force. The demand for skilled workers in our geographic area of operations is high, and the supply is limited. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. If either of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired.

 

Our operations are subject to hazards inherent in the energy services industry.

 

Risks inherent to our industry, such as equipment defects, vehicle accidents, explosions and uncontrollable flows of gas or well fluids, can cause personal injury, loss of life, suspension of operations, damage to formations, damage to facilities, business interruption and damage to, or destruction of property, equipment and the environment. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages. The existence, frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our safety record as unacceptable, which could cause us to lose customers and substantial revenues.

 

Our operational personnel have experienced accidents which have, in some instances, resulted in serious injuries. Our safety procedures may not always prevent such damages. Our insurance coverage may be inadequate to cover our liabilities. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable or on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations and cash flows.

 

We participate in a capital-intensive industry. We may not be able to finance future growth of our operations or future acquisitions.

 

Historically, we have funded the growth of our operations and equipment purchases from bank debt, capital contributions from our equity sponsors and cash generated by our business. If we do not generate sufficient cash from operations to expand our business, our growth could be limited unless we are able to obtain additional capital through equity or debt financings or bank borrowings. Our inability to grow our business may adversely impact our ability to sustain or improve our profits.

 

Our industry is highly competitive and we may not be able to provide services that meet the specific needs of oil and natural gas exploration and production companies at competitive prices.

 

Our industry is highly competitive. The principal competitive factors in our markets are generally technical expertise, fleet capability and experience. We compete with large national and multi-national companies that have longer operating histories, greater financial resources and greater name recognition than we do and who can operate at a loss in the regions in which we operate. Several of our competitors provide a broader array of services and have a stronger presence in more geographic

markets. In addition, there are several smaller companies capable of competing effectively on a regional or local basis. Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. As a result of competition, we may lose market share or be unable to maintain or increase prices for our present services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, competition among oilfield service and equipment providers is affected by each provider’s reputation for safety and quality. Our reputation for safety and quality may not be sufficient to enable us to maintain our competitive position.

 

Covenants in our debt agreement restrict our business in many ways.

 

Our credit facility contains restrictive covenants and requires us to maintain a debt coverage ratio, to maintain a fixed charge coverage ratio and to satisfy other financial condition tests. Our ability to meet those financial requirements can be affected by adverse industry conditions and other events beyond our control, and we cannot be certain that we will meet those requirements. In addition, our credit facility contains a number of additional restrictive covenants, including a covenant limiting, subject to certain exceptions, our ability to make capital expenditures in excess of $100.0 million in any fiscal year, provided that up to $50.0 million of such amount in any fiscal year may be rolled over to the subsequent fiscal year and up to $50.0 million of such amount may also be pulled forward from the subsequent fiscal year. The capital expenditure restrictions do not apply to capital expenditures financed with proceeds from the issuance of common equity interests or to maintenance capital expenditures.

 

A breach of any of these covenants could result in a default under our credit facility. Upon the occurrence of an event of default under our credit facility, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our credit facility could proceed against the collateral granted to them to secure that indebtedness.

 

We have pledged a significant portion of our and our subsidiary’s assets as collateral under our credit facility. If the lenders under our credit facility accelerate the repayment of borrowings, we may not have sufficient assets to repay indebtedness under such facilities and our other indebtedness. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Description of Our Indebtedness” beginning on page 44 of this prospectus for additional information regarding our credit facility.

 

Energy Spectrum and Citigroup/Stepstone will continue to have significant influence over us, including influence over decisions that require stockholder approval, which could limit your ability to influence the outcome of key transactions, including a change in control.

 

Energy Spectrum Partners IV LP, whom we refer to in this prospectus as Energy Spectrum, holds approximately 16.3% of our outstanding common stock prior to giving effect to this offering and will hold approximately     % of our outstanding common stock after this offering (assuming the underwriters’ option to purchase additional shares is not exercised). StepStone Capital Partners II Onshore, L.P., StepStone Capital Partners II Cayman Holdings, L.P., 2006 Co-Investment Portfolio, L.P. and Citigroup Capital Partners II Employee Master Fund, L.P., whom we collectively refer to in this prospectus as Citigroup/StepStone, hold approximately 14.0% of our outstanding common stock prior to giving effect to this offering and will hold approximately  % of our outstanding common stock after this offering (assuming the underwriters’ option to purchase additional shares is not exercised). In addition, pursuant to our Amended and Restated Stockholders’ Agreement, each of Citigroup/StepStone and Energy Spectrum, collectively referred to in this prospectus as our Sponsors, has the right to name one director to our board of directors for so long as each holds 10% of our common stock. As a result, our Sponsors have significant influence over our decisions to enter into any corporate transaction regardless of whether others believe that the transaction is in our best interests.

Please read “Certain Relationships and Related Party Transactions — Amended and Restated Stockholders’ Agreement” beginning on page 89 of this prospectus.

 

As long as our Sponsors continue to hold a large portion of our outstanding common stock, they will have the ability to influence the vote in any election of directors and over decisions that require stockholder approval. In addition, the concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

 

Our Sponsors are also in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsors may also pursue acquisition opportunities that are complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

 

Failure to establish and maintain effective internal control over financial reporting could have a material adverse effect on our business, operating results and the trading price of our common stock.

 

As a privately held company, we are not currently required to comply with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Following the effectiveness of the registration statement of which this prospectus forms a part, we will be a public company and be required to comply with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. We will not be required to make our first assessment of our internal control over financial reporting until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a public company, we will need to upgrade our systems, including information technology, implement additional financial and management controls, reporting systems and procedures and hire additional accounting, finance and legal staff. Implementing these requirements may occupy a significant amount of time of our board of directors and management and significantly increase our costs and expenses.

 

Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future and comply with the certification and reporting obligations under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002. Any failure to maintain effective controls, or any difficulties encountered in our implementation or improvement of our internal controls over financial reporting could result in material misstatements that are not prevented or detected on a timely basis, which could potentially subject us to sanctions or investigations by the SEC, the New York Stock Exchange, or NYSE, or other regulatory authorities. Ineffective internal controls could also cause investors to lose confidence in our reported financial information.

 

Weather conditions could materially impair our business.

 

Our operations in Louisiana and parts of Texas may be adversely affected by hurricanes and tropical storms, resulting in reduced demand for our well completion services. Adverse weather can also directly impede our own operations. Repercussions of severe weather conditions may include:

 

 

 

These constraints could also delay our operations, reduce our revenues and materially increase our operating and capital costs.

 

Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for our services.

 

On December 15, 2009, the EPA published its findings that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and welfare because emissions of such gases are, according to the EPA, contributing to the warming of the earth’s atmosphere and other climate changes. Based on these findings, the EPA has begun to adopt and implement regulations that would restrict emissions of GHGs under existing provisions of the federal Clean Air Act, or the CAA. The EPA recently adopted two sets of rules regulating greenhouse gas emissions under the CAA, one of which requires a reduction in emissions of greenhouse gases from motor vehicles and the other of which will require that certain large stationary sources obtain permits for their emissions of greenhouse gases, effective January 2, 2011. The EPA has also adopted rules requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources, on an annual basis, beginning in 2011 for emissions occurring after January 1, 2010, as well as certain oil and natural gas production facilities, on an annual basis, beginning in 2012 for emissions occurring in 2011.

 

In addition to the EPA, both houses of Congress have actively considered legislation to reduce emissions of GHGs, and more than one-third of the states have already taken legal measures to reduce emissions of GHGs, primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. Most of these cap and trade programs work by requiring either major sources of emissions or major producers of fuels to acquire and surrender emission allowances, with the number of allowances available for purchase reduced each year until the overall GHG emission reduction goal is achieved.

 

Any new federal, regional or state restrictions on emissions of carbon dioxide or other GHGs that may be imposed in areas in which we conduct business could result in increased compliance costs or additional operating restrictions on our customers. Such legislation could potentially make our customers’ products more expensive and thus reduce demand for them, which could have a material adverse effect on the demand for our services and our business. Finally, some scientists have concluded that increasing concentrations of GHGs in the earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our results of operations. Please read “Business — Environmental Matters” beginning on page 60 of this prospectus for a more detailed description of our climate-change related risks.

 

We are subject to extensive and costly environmental, health and safety laws, rules and regulations that may require us to take actions that will adversely affect our results of operations.

 

Our business is significantly affected by stringent and complex federal, state and local laws and regulations governing the discharge of substances into the environment or otherwise relating to protection of the environment or human health and safety. As part of our business, we handle, transport, and dispose of a variety of fluids and substances used by our customers in connection with their oil and natural gas exploration and production activities. We also generate and dispose of hazardous waste. The generation, handling, transportation, and disposal of these fluids, substances, and waste are regulated by a number of laws, including the Resource Recovery and Conservation Act; the Comprehensive Environmental Response, Compensation, and Liability Act; the Clean Water

Act; the Safe Drinking Water Act; and analogous state laws. Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to liability for governmental penalties, third-party claims, cleanup costs associated with releases of such materials, damages to natural resources, and other damages, as well as potentially impair our ability to conduct our operations. We could be exposed to liability for cleanup costs, natural resource damages and other damages under these and other environmental laws as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Environmental laws and regulations have changed in the past, and they are likely to change in the future. If existing regulatory requirements or enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures.

 

Any failure by us to comply with applicable environmental, health and safety laws, rules and regulations may result in governmental authorities taking actions against our business that could adversely impact our operations and financial condition, including the:

 

 

The effect of environmental laws and regulations on our business is discussed in greater detail under “Business — Environmental Matters” beginning on page 60 of this prospectus.

 

More stringent trucking regulations may increase our costs and negatively impact our results of operations.

 

As part of the services we provide, we operate as a motor carrier and therefore are subject to regulation by the United States Department of Transportation, or the DOT, and by other various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations and regulatory safety, and hazardous materials labeling, placarding and marking. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period, onboard black box recorder devices or limits on vehicle weight and size.

 

Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations.

 

From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted.

 

New technology may hurt our competitive position.

 

The energy service industry is subject to the introduction of new completion techniques and services using new technologies, some of which may be subject to patent protection. As competitors and others use or develop new technologies or technologies comparable to ours in the future, we may lose market share or be placed at a competitive disadvantage. Further, we may face competitive

pressure to implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources than we do, which may allow them to gain technological advantages or implement new technologies before we can. Additionally, we may be unable to implement new technologies or products at all, on a timely basis or at an acceptable cost. Limits on our ability to effectively use or implement new technologies may have a material adverse effect on our business, financial condition and results of operations.

 

Our senior executive officers and several of our directors may not be able to organize and effectively manage a publicly traded company, which could adversely affect our business, financial condition and results of operations.

 

Some of our senior executive officers or directors have not previously organized or managed a publicly traded company, and our senior executive officers and directors may not be successful in doing so. The demands of organizing and managing a publicly traded company are much greater as compared to a private company and some of our senior executive officers and directors may not be able to meet those increased demands. Failure to organize and effectively manage us could adversely affect our business, financial condition and results of operations.

 

Risks Related to this Offering and Our Common Stock

 

The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering. In addition, an active liquid trading market for our common stock may not develop and our stock price may be volatile.

 

Prior to this offering, our common stock was not traded on a national stock exchange or in the over-the-counter markets. An active and liquid trading market for our common stock may not develop or be maintained after this offering. Liquid and active trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. Moreover, the initial public offering price of our common stock will be negotiated between us, the selling stockholders and representatives of the underwriters, based on numerous factors, including prevailing market conditions, our historical performance, estimates of our business potential and our earnings prospects, an assessment of our management and the consideration of these factors in relation to market valuation of companies in related businesses. The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price paid by you in this offering.

 

Even if an active trading market develops, the market price for our common stock may be highly volatile and could be subject to wide fluctuations after this offering. In addition to the factors described in this section, some of the factors that could negatively affect the market price of our common stock include:

 

 

 

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

 

Purchasers of common stock in this offering will experience immediate and substantial dilution of $      per share.

 

Based on an assumed initial public offering price of $      per share, purchasers of our common stock in this offering will experience an immediate and substantial dilution of $      per share in the pro forma as adjusted net tangible book value per share of common stock from the initial public offering price, and our pro forma as adjusted net tangible book value as of March 31, 2011 after giving effect to this offering would be $      per share. Please read “Dilution” on page 29 of this prospectus for a complete description of the calculation of net tangible book value.

 

We do not anticipate paying any dividends on our common stock in the foreseeable future.

 

For the foreseeable future, we intend to retain earnings to grow our business. Payments of dividends, if any, will be at the discretion of our board of directors and will depend on many factors, including general economic and business conditions, our strategic plans, our financial results and condition, legal requirements and other factors as our board of directors deems relevant. Our credit facility restricts our ability to pay cash dividends on our common stock and we may also enter into credit agreements or borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our common stock.

 

We will incur increased costs as a result of being a public company.

 

As a privately held company, we have not been responsible for the corporate governance and financial reporting practices and policies required of a publicly traded company. Following the effectiveness of the registration statement of which this prospectus forms a part, we will be a public company. As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related regulations of the SEC and the requirements of the NYSE with which we are not required to comply with as a private company. Complying with these laws, regulations and requirements will occupy a significant amount of time of our board of directors and management and will significantly increase our costs and expenses. We will need to:

 

 

 

In addition, we also expect that being a public company subject to these rules and regulations will require us to accept less director and officer liability insurance coverage than we desire or to incur substantial costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our Audit Committee, and qualified executive officers.

 

Future issuances by us of common stock or convertible securities could lower our stock price and dilute your ownership in us.

 

We may issue additional shares of common stock or securities convertible into shares of our common stock in public offerings or privately negotiated transactions following this offering. As of June 8, 2011, we had 47,499,074 shares of common stock outstanding. We are currently authorized to issue up to 100,000,000 shares of common stock and 20,000,000 shares of preferred stock with terms designated by our board. The potential issuance of additional shares of common stock or convertible securities could lower the trading price of our common stock and may dilute your ownership interest in us.

 

Subject to certain limitations, our existing stockholders may sell common stock in the public markets, which could have an adverse impact on the trading price of our common stock.

 

In December 2010, we sold 28,768,000 shares of our common stock to institutional investors, accredited investors and one of our executive officers in a private offering. We have filed a shelf registration statement covering the resale of the common stock sold in the offering. Pursuant to the terms of a registration rights agreement we entered into with the purchasers in the private offering, we anticipate that the shelf registration statement will be declared effective by the SEC no earlier than 60 days following the completion of this offering. Additionally, pursuant to the terms of the registration rights agreement, if an existing stockholder elects to include shares of our common stock for resale in this offering, such selling stockholder will be prohibited from selling shares of our common stock (other than shares of common stock included in this offering) for 180 days following the effective date of the registration statement of which this prospectus forms a part. On the effective date of the shelf registration statement, and subject to the lock-up period for selling stockholders, shares owned by our existing stockholders may be sold in the public markets. The sale of common stock by our existing stockholders following the effectiveness of the shelf registration statement, or the perception that these sales may occur, could cause the market price of our common stock to decline and impair our ability to raise capital. Please read “Shares Eligible for Future Sale — Registration Rights” beginning on page 103 of this prospectus for additional information regarding the registration rights agreement.

 

Following completion of this offering, our Sponsors will own an aggregate     % of our outstanding common stock. Pursuant to the terms of a stockholders’ agreement among us and our Sponsors, our Sponsors have piggyback rights with regard to this offering and the shelf registration statement covering the resale of common stock sold in the private offering. In addition, pursuant to the stockholders’ agreement, our Sponsors and the other parties to that agreement have the right to demand that we file a shelf registration statement covering the resale of their shares of common stock any time following 180 day after the earlier of: (i) the effective date of the shelf registration statement covering the resale of the shares issued in the private offering in December 2010, or (ii) completion of this offering. Each Sponsor, assuming such Sponsor holds at least 5% of our common stock, has demand registration rights on three occasions. The filing of a shelf registration statement following a request by our Sponsors, or the sale of common stock by our Sponsors following the effectiveness of the shelf registration statement, or the perception that these sales may occur, could cause the market price of our common stock to decline and impair our ability to raise capital.

 

Please read “Certain Relationships and Related Party Transactions — Amended and Restated Stockholders’ Agreement” beginning on page 89 of this prospectus for additional information on our Sponsors’ demand rights and piggyback rights. For additional information regarding shares of our common stock available for sale, please read “Shares Eligible for Future Sale” beginning on page 103 of this prospectus.

 

The underwriters of this offering may waive or release parties to the lock-up agreements entered into in connection with this offering, which could adversely affect the price of our common stock.

 

Certain of our stockholders, directors and members of our senior management team have entered into lock-up agreements with respect to their common stock, pursuant to which they are subject to certain resale restrictions for a period of 180 days following the effectiveness date of the registration statement this prospectus forms a part. Goldman, Sachs & Co. and J.P. Morgan Securities LLC, at any time and without notice, may release all or any portion of the common stock subject to the foregoing lock-up agreements. If the restrictions under the lock-up agreements are waived, then common stock will be available for sale into the public markets, which could cause the market price of our common stock to decline and impair our ability to raise capital.

 

Provisions in our organizational documents and under Delaware law could delay or prevent a change in control of our company, which could adversely affect the price of our common stock.

 

The existence of some provisions in our organizational documents and under Delaware law could delay or prevent a change in control of our company that a stockholder may consider favorable, which could adversely affect the price of our common stock. The provisions in our amended and restated certificate of incorporation and amended and restated bylaws that could delay or prevent an unsolicited change in control of our company include board authority to issue preferred stock without stockholder approval, and advance notice provisions for director nominations or business to be considered at a stockholder meeting. In addition, once our Sponsors’ beneficial ownership percentage drops below 25% of the outstanding shares of common stock, we will be governed by Section 203 of the Delaware General Corporation Law, or DGCL. These provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. Please read “Description of Capital Stock — Anti-Takeover Effects of Provisions of Our Certificate of Incorporation, Our Bylaws and Delaware Law” beginning on page 100 of this prospectus.

 

Future offerings of debt securities and preferred stock, which would rank senior to our common stock upon liquidation, may adversely affect the market value of common stock.

 

In the future, we may attempt to increase our capital resources by making offerings of debt or additional offerings of equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock. Upon liquidation, holders of our debt securities and preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Our preferred stock, which may be issued without stockholder approval, if issued, could have a preference on liquidating distributions or a preference on dividend payments that would limit amounts available for distribution to holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market value of our common stock.

 

Various statements contained in this prospectus, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects, our future revenues, income and capital spending and our strategy. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this prospectus speak only as of the date of this prospectus; we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors, including those discussed under “Risk Factors” beginning on page 13 of this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 32 of this prospectus, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, contingencies and uncertainties include, but are not limited to, the following:

 

 

We expect to receive net proceeds of approximately $      million from the sale of the common stock offered by us in this offering, assuming an initial public offering price of $      per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated offering expenses and underwriting discounts and commissions of approximately $      million. We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders, including pursuant to the underwriters’ option to purchase additional shares.

 

We intend to use the net proceeds we receive from this offering to repay all outstanding indebtedness under our new senior secured credit facility entered into in April 2011, approximately $107.1 million of which was outstanding on May 31, 2011. We intend to use any remaining net proceeds to fund a portion of the purchase price of Fleet 5 in June 2011.

 

The following table illustrates our use of proceeds from this offering:

 

 

As of May 31, 2011, we had approximately $92.9 million available for borrowing under our new credit facility. Indebtedness under our credit facility was incurred to repay $49.6 million of indebtedness under our previous revolving credit facility and $29.9 million of indebtedness, accrued interest and early termination penalties under our subordinated term loan and to fund $25.0 million of the purchase price for our acquisition of Total. Indebtedness under our previous revolving credit facility and our subordinated term loan, which were terminated in connection with the repayment, were incurred primarily to fund the acquisitions of Fleet 3 and Fleet 4. Our new credit facility will mature on April 19, 2016. As of May 31, 2011, the interest rate under our credit facility was 2.7%. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Description of Our Indebtedness” beginning on page 44 of this prospectus for a description of our credit facility. Affiliates of certain of the underwriters are lenders under our credit facility and, accordingly, will receive a portion of the proceeds from this offering.

 

We estimate that the selling stockholders will receive net proceeds of approximately $      million from the sale of           shares of our common stock in this offering based upon the assumed initial offering price of $      per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions. If the underwriters’ option to purchase additional shares is exercised in full, we estimate that the selling stockholders will receive net proceeds of approximately $           million. We will pay all expenses related to this offering, other than underwriting discounts and commissions related to the shares sold by the selling stockholders.

 

An increase (decrease) in the initial public offering price of $1.00 per share of common stock would cause the net proceeds that we will receive from the offering, after deducting estimated expenses and underwriting discounts and commissions, to increase (decrease) by approximately $      million.

 

 

For the foreseeable future, we intend to retain earnings to grow our business. Payments of dividends, if any, will be at the discretion of our board of directors and will depend on many factors, including general economic and business conditions, our strategic plans, our financial results and condition, legal requirements and other factors that our board of directors deems relevant. Our credit facility restricts our ability to pay cash dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our common stock. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Description of Our Indebtedness” beginning on page 44 of this prospectus.

 

The following table sets forth our cash and cash equivalents and capitalization at March 31, 2011:

 

 

You should refer to “Use of Proceeds” on page 27 of this prospectus, “Selected Consolidated Financial Data” beginning on page 30 of this prospectus, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 32 of this prospectus and the financial statements included elsewhere in this prospectus in evaluating the material presented below.

 

 

 

 

 

Purchasers of the common stock in this offering will experience immediate and substantial dilution in the net tangible book value per share of the common stock for accounting purposes. Our net tangible book value as of March 31, 2011 was approximately $      million, or $      per share of common stock. Net tangible book value per share is determined by dividing our tangible net worth (tangible assets less total liabilities) by the total number of outstanding shares of common stock that will be outstanding immediately prior to the closing of this offering. After giving effect to the sale of the shares in this offering at an assumed initial offering price of $      and assuming the receipt of the estimated net proceeds (after deducting estimated underwriting discounts and commissions and expenses of this offering), our net tangible book value as of March 31, 2011 would have been approximately $      million, or $      per share. This represents an immediate increase in the net tangible book value of $      per share to our existing stockholders and an immediate dilution (i.e., the difference between the offering price and the adjusted net tangible book value after this offering) to new investors purchasing shares in this offering of $      per share. The following table illustrates the per share dilution to new investors purchasing shares in this offering:

 

 

The following table summarizes, on an adjusted basis as of March 31, 2011, the total number of shares of common stock owned by existing stockholders and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by new investors in this offering at $          , the midpoint of the range of the initial public offering prices set forth on the cover page of this prospectus, calculated before deduction of estimated underwriting discounts and commissions:

 

 

 

A $1.00 increase or decrease in the assumed initial offering price of $           per share would increase or decrease our as adjusted net tangible book value as of March 31, 2011 by approximately $           million, the as adjusted net tangible book value per share after this offering by $           per share and the dilution in as adjusted net tangible book value per share to new investors in this offering by $           per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and expenses of this offering.

 

The following table presents our summary historical financial data for the periods and as of the dates indicated. The selected consolidated statement of operations data and statement of cash flows data for the years ended December 31, 2008, 2009 and 2010 and the selected consolidated balance sheet data as of December 31, 2009 and 2010 are derived from our audited consolidated financial statements and the notes thereto included elsewhere in this prospectus. The selected consolidated statement of operations data and statement of cash flows data for the periods ended December 31, 2007 and 2006 and October 16, 2006 and the selected consolidated balance sheet data as of December 31, 2008, 2007 and 2006 and October 16, 2006 were audited by Flackman Goodman & Potter, P.A., or Flackman, an accounting firm not registered with the PCAOB, and are considered “unaudited” for purposes of the registration statement of which this prospectus is a part. The unaudited consolidated statement of operations data and unaudited statement of cash flows data for the three months ended March 31, 2011 and 2010 and the selected unaudited consolidated balance sheet data as of March 31, 2011 are derived from our unaudited consolidated financial statements and the notes thereto included elsewhere in this prospectus. The unaudited financial data has, in our opinion, been prepared on a basis consistent with the audited consolidated financial statements and notes thereto and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this information.

 

Historical results are not necessarily indicative of the results we expect in future periods. The information presented below should be read in conjunction with, and is qualified in its entirety by reference to, “Capitalization” on page 28 of this prospectus, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 32 of this prospectus and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 

 

 

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” beginning on page 30 of this prospectus and our financial statements and related notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements based on our current expectations, estimates and projections about our operations and the industry in which we operate. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in this prospectus under “Cautionary Note Regarding Forward-Looking Statements” on page 26 of this prospectus and “Risk Factors” beginning on page 13 of this prospectus. We assume no obligation to update any of these forward-looking statements.

 

Overview

 

We are a rapidly growing independent provider of premium hydraulic fracturing and coiled tubing services with a focus on complex, technically demanding well completions. We have historically operated in what we believe to be some of the most geologically challenging basins in South Texas, East Texas/North Louisiana and Western Oklahoma. We are in the process of acquiring additional hydraulic fracturing fleets and are evaluating opportunities with existing and new customers to expand our operations into new areas throughout the United States with similarly demanding completion and stimulation requirements.

 

How We Generate Our Revenues

 

We have completed thousands of fracturing stages and more than 9,000 coiled tubing projects. During the three months ended March 31, 2011, we completed 633 fracturing stages and 638 coiled tubing projects. We seek to differentiate our services from those of our competitors by providing customized solutions for our customers’ most challenging well completions. We believe our customers value the experience, technical expertise, high level of customer service and demonstrated operational efficiencies that we bring to projects.

 

We have entered into term contracts with EOG Resources (executed April 2010), Penn Virginia (executed May 2010), Anadarko Petroleum (executed August 2010), EXCO Resources (executed August 2010), and Plains Exploration (executed March 2011) for the provision of hydraulic fracturing services. We began service under the Penn Virginia, EOG Resources, Anadarko Petroleum and EXCO Resources contracts in July 2010, August 2010, February 2011 and April 2011, respectively. We anticipate beginning service under the Plains Exploration contract in July 2011. Our existing hydraulic fracturing fleets (Fleets 1, 2, 3 and 4) are dedicated through mid-2012, mid-2012, early 2013 and mid-2014, respectively, to producers operating in the Eagle Ford, Haynesville and Granite Wash basins. We are scheduled to take delivery of Fleet 5 in June 2011 for deployment under a two-year term contract. We are scheduled to take delivery of Fleets 6, 7 and 8 in the fourth quarter of 2011, the first half of 2012 and the second half of 2012, respectively. We expect that each of these new fleets will be deployed under term contracts similar to our existing term contracts.

 

Our revenues are derived from two sources:

 

 

Hydraulic Fracturing.  Our term contracts generally range from one year to three years. Under the term contacts, our customers are obligated to pay us on a monthly basis for a specified number of

hours of service, whether or not those services are actually utilized. To the extent customers utilize more than the specified contract minimums, we will be paid a pre-agreed amount for the provision of such additional services. Our current term contracts restrict the ability of the customer to terminate or require our customers to pay us a lump-sum early termination fee, generally representing all or a significant portion of the remaining economic value of the contracts to us.

 

Although our term contracts provide us some visibility on anticipated future minimum asset utilization, our term contracts do not provide us with sufficient certainty to present backlog information on an ongoing basis. Unlike long-term contracts for equipment or services at fixed prices or on a day rate or turnkey basis, where future revenue or earnings can be reliably forecasted based on the dollar amount of backlog believed to be firm, future revenues generated from our term contracts are subject to a number of variables that prevent us from providing similar information with any degree of certainty. Under our term contracts, we derive revenues from:

 

 

 

 

Given these variables, revenues from our term contracts vary substantially from customer-to-customer and from month-to-month depending on the number of hours of services actually provided and chemicals and proppant materials consumed. Generally, when we exceed the number of hours of service included in our base monthly rate, we consume more chemicals and proppants and provide additional pumping and related services to complete the project, each of which will significantly impact our revenues. Mandatory monthly payments under our term contracts have historically accounted for less than half of our total revenues.

 

Although we have entered into term contracts for each of our hydraulic fracturing fleets, we also have the flexibility to pursue spot market projects. Our term contracts allow us to supplement monthly contract revenue by deploying equipment on short-term spot market jobs on those days when the contract customer does not require our services or is not entitled to our services under the applicable term contract. We charge prevailing market prices per hour for spot market work. We may also charge fees for set up and mobilization of equipment depending on the job. Generally, these fees and other charges vary depending on the equipment and personnel required for the job and market conditions in the region in which the services are performed. We also source chemicals and proppants that are consumed during the fracturing process and we charge our customers a fee for materials consumed in the process, or we charge our customers a handling fee for chemicals and proppants supplied by the customer. Materials charges reflect the cost of the materials plus a markup and are based on the actual quantity of materials based on the actual quantity of materials used in the fracturing process. We believe our ability to provide services in the spot market allows us to take advantage of any favorable pricing that may exist in this market and allows us to develop new customer relationships. Approximately 80% of our revenues for the three months ended March 31, 2011 were derived from hydraulic fracturing services.

 

Coiled Tubing and Pressure Pumping.  Our coiled tubing, pressure pumping and other related well stimulation services are provided in the spot market at prevailing prices per hour. We may also charge fees for set up and mobilization of equipment depending on the job. The set-up charges and hourly rates are determined by a competitive bid process and vary with the type of service to be performed, the equipment and personnel required for the job and market conditions in the region in which the service is performed. We also charge customers for the materials, such as stimulation fluids, nitrogen and coiled tubing materials, that we use in each job. Materials charges reflect the cost of the materials plus a markup and are based on the actual quantity of materials used for the project.

How We Manage Costs and Maintain Our Equipment

 

The principal expenses involved in conducting our business are product and material costs, the costs of acquiring, maintaining and repairing our equipment, labor expenses and fuel costs. Additionally, we incur freight costs to deliver and stage our hydraulic fracturing fleets to the worksite. We maintain and repair all equipment we use in our operations. We purchase our equipment, including engines, transmissions, radiators, motors and pumps, from third-party vendors.

 

Depreciation costs represented approximately 4.0% of our revenues for the year ended December 31, 2010 and 2.6% of our revenues for the three months ended March 31, 2011. Direct labor costs represented approximately 10.7% of our revenues for the year ended December 31, 2010 and 9.4% of our revenues for the three months ended March 31, 2011. Other costs, including sand, chemical and freight costs, represented approximately 34.7% of our revenues for the year ended December 31, 2010 and 31.1% of our revenues for the three months ended March 31, 2011. We also incur significant fuel costs in connection with the operation of our hydraulic fracturing fleets and the transportation of our equipment and products.

 

How We Manage Our Operations

 

Our management team uses a variety of tools to monitor and manage our operations in the following four areas: (1) asset utilization; (2) equipment maintenance performance; (3) customer satisfaction; and (4) safety performance.

 

Asset Utilization.  We measure our activity levels by the total number of jobs completed by each of our hydraulic fracturing fleets and coiled tubing units on a monthly basis. By consistently monitoring the activity level, pricing and relative performance of each of our fleets and units, we can more efficiently allocate our personnel and equipment to maximize revenue generation. During the three months ended March 31, 2011, we completed 69 fracturing jobs and 633 fracturing stages, and we generated average revenue per fracturing job of $1.5 million and average revenue per fracturing stage of $165,717. Additionally, our hydraulic fracturing fleets were nearly 100% utilized during the quarter, based on available working days per month, which excludes scheduled maintenance days. During the three months ended March 31, 2011, we completed 638 coiled tubing jobs, and we generated average revenue per job of $27,337.

 

Equipment Maintenance Performance.  Preventative maintenance on our equipment is an important factor in our profitability. If our equipment is not maintained properly, our repair costs may increase and, during periods of high activity, our ability to operate efficiently could be significantly diminished due to having trucks and other equipment out of service. Our maintenance crews perform regular inspections and preventative maintenance on each of our trucks and other mechanical equipment. Our management monitors the performance of our maintenance crews at each of our service centers by reviewing ongoing inspection and maintenance activity and monitoring the level of maintenance expenses as a percentage of revenue. These repair and maintenance costs represented approximately 6.3% of our revenues for the year ended December 31, 2010 and 6.0% of our revenues for the three months ended March 31, 2011. A rising level of maintenance expenses as a percentage of revenue at a particular service center can be an early indication that our preventative maintenance schedule is not being followed. In this situation, management can take corrective measures to help reduce maintenance expenses as well as ensure that maintenance issues do not interfere with operations.

 

Customer Satisfaction.  Upon completion of each job, we encourage our customers to provide feedback on their satisfaction level. Customers evaluate our performance under various criteria and comment on their overall satisfaction level. This feedback gives our management valuable information from which to identify performance issues and trends. Our management also uses this information to evaluate our position relative to our competitors in the various markets in which we operate.

 

Safety Performance.  Maintaining a strong safety record is a critical component of our operational success. Many of our larger customers have safety standards we must satisfy before we can perform services for them. We maintain a safety database so that our customers can review our historical safety

record. Our management also uses this safety database to identify negative trends in operational incidents so that appropriate measures can be taken to maintain and enhance our safety standards.

 

Our Challenges

 

We face many challenges and risks in the industry in which we operate. Although many factors contributing to these risks are beyond our ability to control, we continuously monitor these risks, and we have taken steps to mitigate them to the extent practicable. In addition, we believe that we are well positioned to capitalize on the current growth opportunities available in the hydraulic fracturing market. However, we may be unable to capitalize on our competitive strengths to achieve our business objectives and, consequently, our results of operations may be adversely affected. Please read “Risk Factors” beginning on page 13 of this prospectus, for additional information about the risks we face.

 

Equipment Supply.  The overall number of hydraulic fracturing equipment suppliers in the industry in which we operate is limited, and there has historically been high demand for such equipment. This limited capacity of supply increases the risk of delay and failure to timely deliver both our on-order equipment and any future equipment that may be necessary in the growth of our business. We currently expect to take delivery of two new hydraulic fracturing fleets during 2011, Fleet 5 in June 2011 and Fleet 6 in the fourth quarter of 2011. We expect to take delivery of another two hydraulic fracturing fleets during 2012, Fleet 7 in the first half of 2012 and Fleet 8 in the second half of 2012. If the delivery of Fleet 5 is materially delayed, then we may be unable to commence service under our term contract relating to this fleet, and, in turn, the customer may terminate the contract without penalty. To mitigate the risk of a potential delay in equipment delivery, we actively monitor the progression of the production schedule of our on-order equipment. Our recent acquisition of Total, a significant supplier of our new order hydraulic fracturing equipment, has provided us with added monitoring capabilities and control over access to, and delivery of, fracturing equipment.

 

Hydraulic Fracturing Legislation.  Legislation has been introduced before Congress in the last few sessions to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the fracturing process. Although the federal legislation did not pass, if similar federal legislation is introduced and becomes law in the future, the legislation could establish an additional level of regulation that could lead to operational delays or increased operating costs. In addition, various state and local governments have implemented, or are considering, increased regulatory oversight of hydraulic fracturing and the Texas legislature has passed a bill, which has been sent to the Governor for signature, that would require disclosure of information regarding the substances used in the hydraulic fracturing process.

 

The adoption of new laws or regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process could make it more difficult to complete oil and natural gas wells in shale formations, increase our costs of compliance, and adversely affect the hydraulic fracturing services that we render for our exploration and production customers. In addition, if hydraulic fracturing becomes regulated at the federal level as a result of federal legislation or regulatory initiatives by the EPA, fracturing activities could become subject to additional permitting requirements, and also to attendant permitting delays and potential increases in cost, which could adversely affect our business and results of operations.

 

Financing Future Growth.  Historically, we have funded our growth through bank debt, capital contributions from our Sponsors and cash generated from our business. The successful execution of our growth strategy depends on our ability to raise capital as needed to, among other things, finance the purchase of additional hydraulic fracturing fleets. If we are unable to generate sufficient cash flows or to obtain additional capital on favorable terms or at all, we may be unable to sustain or increase our current level of growth in the future. However, we believe we are well positioned to finance our future growth. On April 19, 2011, we entered into a new five-year $200.0 million senior secured revolving credit facility, which increased the amount of funds we are permitted to borrow by $48.3 million and increased the amount of borrowings we can incur in a given fiscal year for capital expenditures by $60.0 million. We intend to repay in full all amounts outstanding under our credit

facility with the proceeds of this offering. In addition, our cash flows from operations have continued to increase dramatically, with cash flows from operations during the three months ended March 31, 2011 increasing by $16.6 million from the same period in 2010. After giving effect to this offering, we believe that our cash flows from operations and available borrowings under our credit agreement will be sufficient to allow us to sustain or increase our current growth through at least 2012.

 

Outlook

 

Demand for hydraulic fracturing services has increased significantly over the last two years in the markets in which we operate and we have made substantial investments in the acquisition of additional fracturing fleets in order to capitalize on the market opportunity, which has led to significant growth in our business. We believe the following trends impacting our industry have increased the demand for our services and will continue to support the sustained growth that we have experienced to date:

 

 

Results of Operations

 

Our results of operations are driven primarily by four interrelated variables: (1) drilling and stimulation activities of our customers; (2) the prices we charge for our services; (3) cost of products, materials and labor; and (4) our service performance. Because we typically pass the cost of raw materials such as proppants, sand and chemicals onto our customers in our term contracts, our profitability is not materially impacted by changes in the costs of such materials. To a large extent, the pricing environment for our services will dictate our level of profitability. To mitigate the volatility in utilization and pricing for the services we offer, we have entered into term contracts covering each of our four existing fleets and one of our two on-order hydraulic fracturing fleets.

 

In the near term, we expect that our revenues and results of operations will be positively impacted by: (i) the addition and deployment of Fleet 2 in July 2010; (ii) the addition and deployment of Fleet 3 in January 2011; (iii) the addition and deployment of Fleet 4 in April 2011 and (iv) the scheduled delivery and deployment of Fleet 5 in June 2011. We also expect to take delivery and deploy Fleets 6, 7 and 8 in the fourth quarter of 2011, the first half of 2012 and the second half of 2012, respectively. Each of our fleets is, or is expected to be, deployed under a term contract. We expect that our results of operations in 2011 compared to 2010 will be significantly impacted by the dramatic growth of our asset base over the last twelve months.

Results for the Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010

 

The following table summarizes the dollar changes for our results of operations for the three months ended March 31, 2011 when compared to the three months ended March 31, 2010 (in thousands):

 

 

Revenue

 

Revenue increased $94.6 million, or 290%, to $127.2 million for the three months ended March 31, 2011 compared to $32.6 million for the same period in 2010. This increase was primarily due to the deployment of additional hydraulic fracturing equipment. Fleet 2, which was deployed in the third quarter of 2010, contributed $29.3 million of revenue in the first quarter of 2011 and Fleet 3, which was deployed early in the first quarter of 2011, contributed $28.1 million of revenue in the first quarter of 2011. In addition, we experienced increased utilization of our equipment across all service lines as well as improved pricing for our services. We continued to benefit from increased horizontal drilling and completion related activity in unconventional resource plays, which enabled us to obtain higher revenues for our hydraulic fracturing services due to the complexity of the work performed in these areas.

 

Cost of Sales

 

Cost of sales increased $46.9 million, or 202%, to $70.0 million for the three months ended March 31, 2011 compared to $23.2 million for the same period in 2010. As a percentage of revenue, cost of sales decreased to 55% for the three months ended March 31, 2011 from 71% for the same period in 2010 due primarily to the significant increase in revenue in the first quarter of 2011 compared to the same period in the prior year.

 

Selling, General and Administrative Expenses (SG&A)

 

SG&A increased $6.0 million, or 208%, to $8.8 million for the three months ended March 31, 2011 compared to $2.9 million for the same period in 2010. The increase primarily relates to $2.6 million in higher long-term and short-term incentive costs and $1.8 million in higher payroll and related personnel costs associated with the continued hiring of personnel to support our growth. We

also incurred $0.6 million in additional costs associated with our marketing and promotional efforts and $0.2 million in increased professional fees.

 

Interest Expense

 

Interest expense decreased by $1.0 million, or 35%, to $2.0 million for the three months ended March 31, 2011 compared to $3.0 million for the same period in 2010. This decrease was due primarily to charges of $1.5 million incurred in the first quarter of 2010 in connection with the change in fair value of our warrant liability. The warrants were exercised in December 2010. Partially offsetting the decrease was higher interest expense of approximately $0.2 million related to higher average outstanding debt balances and $0.2 million of increased amortization of deferred financing costs during the first quarter of 2011 as compared to the same period in 2010.

 

Income Taxes

 

We recorded a tax provision of $17.4 million for the three months ended March 31, 2011, at an effective rate of 37.4%, compared to a tax provision of $1.4 million for the three months ended March 31, 2010, at an effective rate of 38.7%.

 

Results for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

 

The following table summarizes the dollar changes for our results of operations for the year ended December 31, 2010 when compared to the year ended December 31, 2009 (in thousands):

 

 

Revenue

 

Revenue increased $177.1 million, or 264%, to $244.2 million for the year ended December 31, 2010 compared to $67.0 million for the same period in 2009. This increase was due primarily to increased utilization of our hydraulic fracturing and coiled tubing equipment and, to a lesser extent, improved pricing for our services and the deployment of Fleet 2 in the third quarter of 2010, which contributed $67.6 million of revenue during the year. We continued to benefit from increased horizontal drilling and completion related activity in unconventional resource plays, which enabled us to obtain higher revenues for our hydraulic fracturing services due to the complexity of the work performed in these areas.

Cost of Sales

 

Cost of sales increased $100.1 million, or 184%, to $154.3 million for the year ended December 31, 2010 compared to $54.2 million for the same period in 2009. As a percentage of revenue, cost of sales decreased to 63% for the year ended December 31, 2010 from 81% for the same period in 2009 due primarily to the significant increase in our revenues from 2009 to 2010.

 

Selling, General and Administrative Expenses (SG&A)

 

SG&A increased $8.5 million, or 89%, to $18.0 million for the year ended December 31, 2010 compared to $9.5 million for the same period in 2009. The increase primarily relates to $4.0 million in higher long-term and short-term incentive costs and $2.3 million in higher payroll and related personnel costs associated with the continued hiring of personnel to support our growth. We also incurred $0.7 million in additional costs associated with our marketing and promotional efforts and $0.5 million in increased professional fees.

 

Interest Expense

 

Interest expense increased by $12.6 million, or 268%, to $17.4 million for the year ended December 31, 2010 compared to $4.7 million for the same period in 2009. This increase was due primarily to $10.1 million in increased charges incurred in 2010 in connection with the change in fair value of our warrant liability during the year. Also contributing to the increase in interest expense was approximately $2.2 million related to higher average interest rates during 2010 as compared to 2009.

 

Income Taxes

 

We recorded a tax provision of $20.4 million for the year ended December 31, 2010, at an effective rate of 38.7%, compared to a benefit of $386,000 for the year ended December 31, 2009, at an effective rate of 13.7%. For the year ended December 31, 2009, we incurred intangible amortization expense for book purposes that was non-deductible for federal income tax purposes, giving way to a lower effective benefit rate during the year.

 

Results for the Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

 

The following table summarizes the dollar changes for our results of operations for the year ended December 31, 2009 when compared to the year ended December 31, 2008 (in thousands):