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EXCEL - IDEA: XBRL DOCUMENT - U.S. Well Services, LLCFinancial_Report.xls
EX-32 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 18 U.S.C. 1350 - U.S. Well Services, LLCa2013q210-qex32.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 - U.S. Well Services, LLCa2013q210-qex311.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 - U.S. Well Services, LLCa2013q210-qex312.htm


 
 
 
 
 

UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______

Commission File Number: 333-184491

U.S. WELL SERVICES, LLC
(Exact name of registrant as specified in its charter)

Delaware
90-0794304
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
770 South Post Oak Lane, Suite 405, Houston, Texas
77056
(Address of principal executive offices)

(Zip Code)

 
 
(832) 562-3730
(Registrant’s telephone number, including area code )



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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller
reporting company)
Smaller reporting company [x]

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



 
 
 
 
 




TABLE OF CONTENTS



1



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

U.S. Well Services, LLC's (together with its subsidiary, “we,” “us,” or “our”) reports, filings and other public announcements may from time to time contain certain forward-looking statements. When used, statements which are not historical in nature, including those containing words such as “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “future” and similar expressions are intended to identify forward-looking statements in this report regarding us and our subsidiary.

These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties described under “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2012 and Part II, Item 1A of this Quarterly Report on Form 10-Q, including the following:

our limited operating history;
concentration of our customer base;
our ability to renew our existing customer contracts and enter into additional service contracts;
fulfillment of our existing customer contracts;
our ability to obtain raw materials and specialized equipment;
dependence on the spending levels and drilling activity of the onshore oil and natural gas industry;
the availability of water;
our ability to maintain pricing;
competition within the oilfield services industry;
the cyclical nature of the oil and natural gas industry;
changes in customer ownership or management;
delays in obtaining required permits;
our ability to raise additional capital to fund future capital expenditures;
increased vulnerability to adverse economic conditions due to our levels of indebtedness;
technological developments or enhancements affecting us or our competitors;
asset impairment and other charges;
the potential for excess capacity in the oil and natural gas industry;
our identifying, making and integrating acquisitions;
the loss of key executives;
potential conflicts of interest faced by our managers, sponsors and members;
the control of our sponsor over voting and management;
our ability to employ skilled and qualified workers;
work stoppages or other labor disputes;
hazards and environmental risks inherent to the oil and natural gas industry;
inadequacy of insurance coverage for certain losses or liabilities;
product liability, personal injury, property damage and other claims against us;
laws and regulations affecting the oil and natural gas industry;
costs and liabilities associated with environmental, health and safety laws, including any changes in the interpretation or enforcement thereof;
future legislative and regulatory developments;
federal legislation and state legislative and regulatory initiatives relating to hydraulic fracturing;
changes in trucking regulations;
changing demand for oil and natural gas due to conservation measures;
the effects of climate change or severe weather;
terrorist attacks and armed conflict;

2



additional obligations and increased costs associated with being a reporting company;
evaluations of internal controls required by Sarbanes-Oxley;
the status of available exemptions for emerging growth companies under the JOBS Act; and
the risks described elsewhere in our reports and registration statements filed from time to time with the United States Securities and Exchange Commission (“SEC”).

Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements.

Many of these factors are beyond our ability to control or predict. Any, or a combination, of these factors could materially affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements.

All forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q, and we do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we become aware after the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.



3


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

U.S. WELL SERVICES, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS

 
June 30, 2013
 
December 31, 2012
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,694,126

 
$
11,811,715

Restricted cash
155,284

 
166,205

Accounts receivable
17,487,642

 
8,010,321

Inventory
3,617,573

 
3,355,213

Prepaids and other current assets
2,651,217

 
1,154,672

Total current assets
30,605,842

 
24,498,126

Property and equipment, net
77,617,134

 
61,780,627

Deferred financing costs
4,975,401

 
4,723,049

TOTAL ASSETS
$
113,198,377

 
$
91,001,802

 
 
 
 
LIABILITIES & MEMBERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,559,254

 
$
3,290,358

Accrued liabilities
2,763,306

 
1,859,152

Accrued interest
4,383,109

 
3,657,984

Short-term note payable
1,171,604

 

Current portion of long-term debt
395,210

 
415,070

Revolving credit facility
1,381,566

 

Total current liabilities
16,654,049

 
9,222,564

Long-Term Debt
77,250,339

 
65,484,582

Redeemable Series A Units, 600,000 units authorized, issued and outstanding
29,994,000

 
29,994,000

Accrued interest, non-current
5,611,103

 
3,461,260

TOTAL LIABILITIES
129,509,491

 
108,162,406

Commitments and Contingencies


 
 
MEMBERS' EQUITY:
 
 
 
Members' interest
846,825

 
768,324

Accumulated deficit
(17,157,939
)
 
(17,928,928
)
Total Members' Equity
(16,311,114
)
 
(17,160,604
)
TOTAL LIABILITIES & MEMBERS' EQUITY
$
113,198,377

 
$
91,001,802


See accompanying notes to condensed consolidated financial statements.

4



U.S. WELL SERVICES, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Successor
 
Three Months Ended
 
June 30,
 
2013
 
2012
Revenue
$
39,296,318

 
$
9,159,594

Costs and expenses:
 
 
 
Cost of services
28,194,009

 
10,311,755

Depreciation and amortization
3,018,654

 
1,475,090

Selling, general and administrative expenses
3,508,677

 
733,609

Income (loss) from operations
4,574,978

 
(3,360,860
)
Interest expense, net
(4,357,930
)
 
(4,308,136
)
Other income
72,434

 

Income (loss) before income taxes
289,482

 
(7,668,996
)
Income tax expense

 

Net income (loss)
$
289,482

 
$
(7,668,996
)

See accompanying notes to condensed consolidated financial statements.

5



U.S. WELL SERVICES, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Successor
 
Predecessor
 
Six months Ended
 
February 21, 2012
 
January 1, 2012
 
June 30,
 
(inception) to
 
to
 
2013
 
June 30, 2012
 
February 20, 2012
Revenue
$
75,053,296

 
$
9,159,594

 
$

Costs and expenses:
 
 
 
 
 
Cost of services
55,725,723

 
11,001,350

 

Depreciation and amortization
5,719,474

 
1,484,862

 

Selling, general and administrative expenses
4,908,221

 
1,439,606

 
432,773

Other operating expenses

 

 
40,587

Income (loss) from operations
8,699,878

 
(4,766,224
)
 
(473,360
)
Interest expense, net
(8,156,769
)
 
(6,076,382
)
 

Other income
227,880

 
 
 

Income (loss) before income taxes
770,989

 
(10,842,606
)
 
(473,360
)
Income tax expense

 

 

Net income (loss)
$
770,989

 
$
(10,842,606
)
 
$
(473,360
)

See accompanying notes to condensed consolidated financial statements.


6



U.S. WELL SERVICES, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Successor
 
Predecessor
 
Six Months
 
February 21, 2012
 
January 1, 2012
 
Ended
 
(inception) to
 
to
 
June 30, 2013
 
June 30, 2012
 
February 20, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
770,989

 
$
(10,842,606
)
 
$
(473,360
)
Adjustments to reconcile net income (loss) to cash used in operating activities:
 
 

 
 
Depreciation and amortization
5,719,474

 
1,484,862

 

Bond discount amortization
171,420

 
87,748

 

Deferred financing costs amortization
609,767

 
347,831

 

Unit-based compensation expense
78,501

 
216,924

 

Changes in assets and liabilities:
 
 

 
 
Accounts receivable
(9,477,321
)
 
(4,749,340
)
 

Inventory
(262,360
)
 
(3,866,843
)
 

Prepaids and other current assets
(1,496,545
)
 
(2,318,200
)
 

Accounts payable
3,020,853

 
4,242,370

 

Accrued liabilities
904,154

 
417,066

 
473,360

Accrued interest
2,874,968

 
5,824,510

 

Net cash provided by (used) in operating activities
2,913,900

 
(9,155,678
)
 

 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
Purchase of property and equipment
(21,307,938
)
 
(45,746,643
)
 

Net cash used in investing activities
(21,307,938
)
 
(45,746,643
)
 

 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
Net proceeds from revolving credit facility
1,381,566

 

 
 
Proceeds from issuance of note payable
1,748,721

 
2,023,019

 

Repayments of note payable
(577,117
)
 
(606,905
)
 
 
Proceeds from issuance of long-term debt
11,769,600

 
80,287,200

 

Repayments of long-term debt
(195,123
)
 

 

Proceeds from issuance of Series A Units

 
29,994,000

 

Proceeds from issuance of Series B and Series C Units

 
6,325

 

Deferred financing costs
(862,119
)
 
(3,620,267
)
 

Restricted cash
10,921

 
(37,655,045
)
 

Net cash provided by financing activities
13,276,449

 
70,428,327

 

 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(5,117,589
)
 
15,526,006

 

Cash and cash equivalents, beginning of period
11,811,715

 

 

Cash and cash equivalents, end of period
$
6,694,126

 
$
15,526,006

 
$





7




U.S. WELL SERVICES, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)

 
Successor
 
Predecessor
 
Six Months
 
February 21, 2012
 
January 1, 2012
 
Ended
 
(inception) to
 
to
 
June 30, 2013
 
June 30, 2012
 
February 20, 2012
Supplemental cash flow disclosure:
 
 
 
 
 
Interest paid
$
5,022,735

 
$
14,535

 
$

Non-cash investing and financing activities:
 
 

 
 
Accrued and unpaid capital expenditures
$
248,043

 
$
590,597

 
$

Bond units exchanged for debt placement services
$

 
$
3,964,800

 
$

Value of convertible bond warrants issued
$

 
$
1,165,500

 
$

Discount on notes payable
$

 
$
1,913,500

 
$

Short-term liabilities assumed from USWS, Inc
$

 
$
684,570

 
$

 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.


8

U.S. WELL SERVICES, LLC
Notes to Condensed Consolidated Financial Statements
June 30, 2013
(Unaudited)



NOTE 1 - DESCRIPTION OF BUSINESS
On February 21, 2012, U.S. Well Services, LLC (the “Company,” “we,” “our” or “USWS”) was formed as a Delaware limited liability company. The Company is a Houston, Texas based oilfield service provider of well stimulation services to the upstream oil and natural gas industry. We engage in high-pressure hydraulic fracturing in unconventional oil and natural gas basins. The fracturing process consists of pumping a specially formulated fluid into perforated well casing, tubing or open holes under high pressure, causing the underground formation to crack or fracture, allowing nearby hydrocarbons to flow more freely up the wellbore.
The predecessor to the Company was U.S. Well Services, Inc. (“USWS, Inc.”), which was incorporated in Delaware on August 18, 2011. The Company was capitalized via a contribution by USWS, Inc. of substantially all of the assets and contracts of USWS, Inc. in exchange for 167,500 of the Company’s Series C Units (the “Restructuring”). Contemporaneously with the formation of the Company, ORB Investments, LLC, a Louisiana limited liability company (“ORB”), made a $30 million equity investment in the Company (the “Sponsor Equity Investment”), in exchange for 600,000 of the Company’s Series A Units and 600,000 of the Company’s Series B Units. In addition, concurrently with the formation of the Company, USW Financing Corp. ("USW Finance") was formed as a wholly-owned finance subsidiary of the Company for the purpose of acting as a co-obligor for an offering of 85,000 units with each unit consisting of $1,000 principal amount of 14.50% Senior Secured Notes due 2017 (the "Original Notes") and a warrant to purchase the Company’s Series B Units (the “Unit Offering”).
The predecessor company was a development stage enterprise and had primarily been involved in start-up activities, including acquiring property and equipment and securing customer contracts.
The Company began operations under a take or pay contract with Antero Resources Appalachian Corporation (“Antero”), for a 24 month service period commencing on April 12, 2012 to perform hydraulic fracturing services in the Marcellus and Utica Shales in Ohio, West Virginia, New York and Pennsylvania. Prior to beginning operations in the second quarter of 2012, the Company was in the development stage.

NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiary, USW Finance. All significant intercompany balances and transactions have been eliminated in consolidation.
These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented have been included. These unaudited consolidated financial statements and other information included in this Quarterly Report should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.
 
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We regularly evaluate estimates and judgments based on historical experience and other relevant facts and circumstances. Significant estimates included in these financial statements primarily relate to estimated useful lives of property and equipment and the valuation of unit-based compensation. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Fair value is defined under Accounting Standards Codification (ASC) 820, Fair Value Measurement, as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are defined as follows:
Level 1–inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

9

U.S. WELL SERVICES, LLC
Notes to Condensed Consolidated Financial Statements
June 30, 2013
(Unaudited)

Level 2–inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3–inputs are unobservable for the asset or liability.
The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of June 30, 2013:
Cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities. These carrying amounts approximate fair value because of the short maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date.
14.5% Senior Secured Notes due 2017. The fair value of the notes is estimated using level 2 inputs by obtaining from the broker the quoted price as of June 30, 2013. The carrying value of these notes as of June 30, 2013 was $80.4 million, and the fair value was $79.6 million (99.0% of carrying value).
Major Customer and Concentration of Credit Risk
The concentration of our customers in the oil and natural gas industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables.
During the three months ended June 30, 2013 and 2012, Antero accounted for approximately 81.8% and 98.2%, respectively, of our consolidated revenues. One other customer accounted for 18.0% of the consolidated revenues during the quarter ended June 30, 2013. No customer other than Antero accounted for more than 10% of our consolidated revenues during the three months ended June 30, 2012.
Antero accounted for approximately 83.2% and 98.2% of our consolidated revenues for the six months ended June 30, 2013 and 2012, respectively. No customer other than Antero accounted for more than 10% of our consolidated revenues during the six months ended June 30, 2013 and the period from February 21, 2012 (inception) through June 30, 2012.
Receivables outstanding from Antero were approximately 68.3% of our total accounts receivable as of June 30, 2013. One other customer accounted for approximately 31.2% of our total accounts receivable as of June 30, 2013.
Recently Issued Accounting Pronouncements
We do not expect the adoption of recently issued accounting pronouncements to have a material impact on the Company’s results of operations, balance sheet or cash flows.

NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
 
 
Estimated
Useful Lives
 
June 30, 2013
 
December 31, 2012
Fracturing equipment
 
7 years
 
$
81,832,286

 
$
63,491,282

Light duty vehicles
 
5 years
 
1,798,207

 
1,512,144

Furniture and fixtures
 
5 years
 
110,518

 
84,435

IT equipment
 
3 years
 
271,041

 
192,061

Auxiliary equipment
 
2 years
 
3,382,923

 
2,404,156

Leasehold improvements
 
Term of lease
 
467,567

 
407,492

Non-refundable deposits on equipment
 
 
 
1,785,009

 

 
 
 
 
89,647,551

 
68,091,570

Less: accumulated depreciation and amortization
 
 
 
(12,030,417
)
 
(6,310,943
)
Property and equipment, net
 
 
 
$
77,617,134

 
$
61,780,627


Depreciation and amortization expense for the three months ended June 30, 2013 and 2012 was $3,018,654 and $1,475,090, respectively. Depreciation and amortization expense for the six months ended June 30, 2013 was $5,719,474. Depreciation and amortization expense for the period February 21, 2012 (inception) through June 30, 2012 was $1,484,862.

10

U.S. WELL SERVICES, LLC
Notes to Condensed Consolidated Financial Statements
June 30, 2013
(Unaudited)

The Company capitalized interest of $75,837 for the three months ended June 30, 2012 and $198,197 for the period February 21, 2012 (inception) through June 30, 2012. The Company did not capitalize any interest during the six months ended June 30, 2013.

NOTE 5 – SHORT-TERM NOTE PAYABLE
On March 15, 2013, the Company obtained insurance for its general liability, workers' compensation, umbrella, auto and pollution coverage needs. The Company made an initial down payment and entered into a premium finance agreement with a credit finance institution to pay the remainder of the premiums. The aggregate amount of the premiums financed is $1,748,721 at an interest rate of 3.9%. Under the terms of the agreement, the Company has agreed to pay 9 equal monthly payments of $197,473 beginning April 15, 2013 through maturity on December 15, 2013. As of June 30, 2013, the note had a balance of $1,171,604.

NOTE 6 – REVOLVING CREDIT FACILITY
On May 9, 2013, we entered into a Credit and Security Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (the “Lender”) pursuant to which the Lender agreed to extend credit to us in the form of a revolving credit facility up to $7.5 million (the “Revolving Credit Facility”). The Revolving Credit Facility includes a sublimit for the issuance of letters of credit in an aggregate amount of up to $1.0 million.
The Lender will make revolving loans (“Loans”) by way of Fixed Rate LIBOR Loans and Variable Rate LIBOR Loans to the Company in aggregate amounts outstanding at any time not to exceed an amount (the “Borrowing Base”) that is the lesser of (i) $7.5 million less the sum of (A) the aggregate undrawn amount of all outstanding letters of credit, and (B) the aggregate amount of outstanding reimbursement obligations with respect to letters of credit which remain unreimbursed or which have not been paid through a Loan, or (ii) an amount equal to the result of: (A) the lesser of (y) 85% (less the amount, if any, of the Dilution Reserve (as defined in the Credit Agreement), if applicable) of the amount of Eligible Accounts (as defined in the Credit Agreement), and (z) $7.5 million, minus (B)$500,000, as such amount may be adjusted by the Lender from time to time, in its sole discretion, minus (C) the aggregate amount of Reserves (as defined in the Credit Agreement), if any, established by the Lender in its Permitted Discretion (as defined in the Credit Agreement). Loans may be repaid by the Company and, subject to the terms and conditions of the Credit Agreement, reborrowed at any time during the term of the Credit Agreement.
The interest rate per annum on the Revolving Credit Facility is equal to (i) at our option, (A) the daily three month LIBOR with respect to Variable Rate LIBOR loans, which interest rate shall change whenever daily three month LIBOR changes, or (B) LIBOR for the specified interest period with respect to Fixed Rate LIBOR loans, and (ii) the applicable margin. The applicable margin is determined as one percentage point when the Interest Rate is based on the Prime Rate, or three percentage points with respect to Fixed Rate LIBOR loans or Variable Rate LIBOR loans.
The Credit Agreement contains financial covenants, which require us to:
Ÿ     maintain a fixed charge coverage ratio, measured monthly on a trailing twelve-month basis at the end of each month, commencing no later than the month ended May 31, 2014, of not less than 1.0:1.0.
Ÿ     maintain (i) liquidity of at least $5 million, (ii) gross availability of at least $1 million, and (iii) cash plus availability of at least $1 million, in each case, at all times during the period commencing on August 1, 2013, through and including the date upon which the Company has maintained a fixed charge coverage ratio of not less than 1.0:1.0 for two consecutive calendar months. After the Company has maintained a fixed charge coverage ratio of not less than 1.0:1.0 for two consecutive calendar months, the Lender shall not test the covenants set forth in Section 8.1(b) of the Credit Agreement regarding maintenance of liquidity, gross availability and cash plus availability.
All obligations of the Company under the Credit Agreement are secured by a continuing security interest in all of the Company's right, title, and interest in and to substantially all of the Company's assets.
All of the Company's obligations outstanding under the Credit Agreement shall be payable in full on the earliest of (i) May 9, 2017, or (ii) ninety days prior to the maturity date of the Company's 14.50% Senior Secured Notes due 2017, or (iii) ninety days prior to the maturity date of the Company's Series A Units (the earliest of these dates set forth in items (i), (ii), and (iii), the “Maturity Date”), or (iv) the date the Company terminates the Revolving Credit Facility, or (v) the date the Revolving Credit Facility terminates pursuant to the Credit Agreement following an Event of Default (the earliest of these dates set forth in items (i)-(v), the “Termination Date”).

11

U.S. WELL SERVICES, LLC
Notes to Condensed Consolidated Financial Statements
June 30, 2013
(Unaudited)

As of June 30, 2013, we had borrowings of $1.4 million outstanding under the Revolving Credit Facility, leaving $5.6 million of available borrowing capacity under our current Borrowing Base. The weighted average interest rate on the outstanding borrowings under the Revolving Credit Facility was 3.4% for the three months ended June 30, 2013.

NOTE 7 – LONG TERM DEBT
Long-term debt consisted of the following:
 
June 30, 2013
 
December 31, 2012
Senior Secured Notes
$
80,414,660

 
$
68,414,660

Equipment financing agreement
1,578,384

 
1,773,507

Less current maturities of long-term debt
(395,210
)
 
(415,070
)
Unamortized discount on Senior Secured Notes
(1,847,495
)
 
(1,788,515
)
Treasury bonds
(2,500,000
)
 
(2,500,000
)
Total long-term debt
$
77,250,339

 
$
65,484,582

Senior Secured Notes. On April 10, 2013, the Company completed an offering of $12.0 million in aggregate principal amount of 14.50% Senior Secured Notes due 2017 (the "Additional Notes" and together with the Original Notes, the "Notes"), the net proceeds of which were used to acquire a third hydraulic fracturing fleet. We issued the Additional Notes as additional notes under the Indenture dated February 21, 2012 (the “Base Indenture”), by and among us, the guarantors party thereto, and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent, as supplemented by that First Supplemental Indenture dated as of July 16, 2012 (the “First Supplemental Indenture”), and as further supplemented by that Second Supplemental Indenture dated as of April 10, 2013 (the “Second Supplemental Indenture” and, together with the Base Indenture and the First Supplemental Indenture, the “Indenture”). On February 21, 2012, we issued $85.0 million aggregate principal amount of the Original Notes under the Base Indenture. In August 2012, we repurchased and retired $21,066,046 aggregate principal amount of the Original Notes and made our first interest payment on the Original Notes by increasing the principal amount of the outstanding notes by $4,480,706. In November 2012, we repurchased but did not retire $2.5 million aggregate principal amount of the Original Notes. As of June 30, 2013, we had outstanding $80.4 million aggregate principal amount of the Notes. The Notes will mature on February 15, 2017. The Notes have a fixed annual interest rate of 14.50% on the principal amount which is due semi-annually, on February 15 and August 15 of each year. Accrued interest on the Notes was $4,372,547 at June 30, 2013.
Our sole subsidiary, USW Finance, is a co-issuer of the Notes. The Notes may be fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by each of our current and future domestic subsidiaries, other than subsidiaries designated as unrestricted subsidiaries. None of our future foreign subsidiaries will guarantee the Notes. The Notes and any future guarantees are subject to a lien on substantially all of our and our future subsidiaries' assets, subject to certain exceptions. If and when we incur permitted first lien indebtedness, the liens on the assets securing the Notes and any future guarantees will likely be contractually subordinated and junior to liens securing such permitted first lien indebtedness pursuant to an intercreditor agreement. The indenture governing the Notes restricts us and our restricted subsidiaries from making certain payments, including dividends and intercompany loans or advances.
The Notes are subject to optional redemption features whereby: (a) on or after February 15, 2015, we may redeem some or all of the Notes at a premium that will decrease over time, (b) prior to February 15, 2015, we may, at our option, redeem up to 35% of the aggregate principal amount of the Notes using the net proceeds of certain equity offerings at a price equal to 110% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, to the date of redemption; provided that, following any and all such redemptions, at least 65% of the aggregate principal amount of the Notes originally issued under the indenture remain outstanding and the redemption occurs within 90 days of the closing of such equity offering, and (c) at any time prior to February 15, 2015, we may, at our option, redeem all or a part of the Notes, upon not less than 30 nor more than 60 days’ notice, at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus a specified make-whole premium, plus accrued and unpaid interest and additional interest, if any, to the applicable date of redemption. The Notes are also subject to certain mandatory redemption provisions whereby within 45 days after each March 31 or September 30 beginning on March 31, 2013, for which our cash and cash equivalents are greater than $12.1 million, we are required to offer to repurchase Notes in the amount of such excess cash amount at an offer price in cash equal to 100% of their principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.

12

U.S. WELL SERVICES, LLC
Notes to Condensed Consolidated Financial Statements
June 30, 2013
(Unaudited)

Equipment financing agreement. On July 30, 2012, the Company entered into a security agreement with a financing institution for the purchase of certain fracturing equipment. The aggregate principal amount of the financing agreement is $1,951,610 and bears effective interest at 6.5%. Under the terms of the agreement, the Company is required to pay 48 equal monthly payments of $46,386, including interest, beginning September 13, 2012 through maturity on September 13, 2016. As of June 30, 2013, the financing agreement had a balance of $1,578,384, of which $395,210 is due within one year.

NOTE 8 - REDEEMABLE SERIES A UNITS
As part of the Sponsor Equity Investment, the Company authorized and issued 600,000 of its Series A Units. The holders of the Series A Units are not entitled to receive any ordinary distributions from the Company, are subject to certain drag-along rights, and do not have any preemptive rights relating to the Company. Pursuant to the terms of our Amended and Restated Limited Liability Company Agreement, ORB has the right to appoint all of the members of the Company's Board of Managers, except for one position on the Board of Managers which is required to be filled by the Company's Chief Executive Officer. The Board of Managers is to have the discretion to manage and conduct all the business and affairs of the Company.
The holders of Series A Units, in certain instances, are entitled to have their Series A Units redeemed by the Company for a distribution in an amount that provides each Series A Unit holder with an internal rate of return of 13% on their investment with respect to their Series A Units. The payment of the redemption price to Series A Unit holders shall be paid, upon the occurrence of one of the following triggering events: (i) a liquidation of the Company (whether by consent of the Company’s Board of Managers and ORB, or withdrawal of all members or in accordance with Section 18-202 of the Delaware Limited Liability Company Act), (ii) a transfer of all of the assets or units of the Company, a merger or similar transaction or certain initial public offerings of the Company’s or its successor’s securities, or (iii) February 17, 2017. The payment of the redemption price to the Series A Unit holders shall occur before any distribution is made to the holders of the Series B, C or D Units.
The Series A Units have an optional redemption feature whereas, subject to the prior approval of ORB, the Company retains the option to redeem all or any portion of the Series A Units at any time in exchange for payment of an amount that provides each Series A Unit holder with an internal rate of return of 13% on their capital contribution with respect to their Series A Units.
Because of the mandatory redemption features of the Series A Units which unconditionally obligate the Company to provide each holder with an internal rate of return of 13% on their investment, regardless of the triggering events, the units demonstrate characteristics of debt and therefore are accounted for as a long-term liability.
At June 30, 2013, the mandatorily redeemable Series A Units totaling $29,994,000 are reported as a long-term liability on the balance sheet with accrued interest in the amount of $5,611,103. The maximum amount the Company could be required to pay to redeem the units on the mandatory redemption date of February 17, 2017 includes the face value of the units of $29,994,000 and interest to be accrued of $26,213,401.

NOTE 9 – MEMBERS’ INTEREST
The Company’s equity consists of four classes of membership interests, each designated with its own series of units. Series A Units are the Company’s preferred equity and Series B, C and D Units represent the Company’s common equity. See Note 8 - Redeemable Series A Units for further discussion of Series A Units. The Series B, C and D Units are equal in most respects, except that the Series B Units have anti-dilution protections and pre-emptive rights that the Series C and D Units generally do not have. Series D Units granted to certain officers have anti-dilution protections. Additionally, the Series B Units have more limited transfer restrictions than the Series C and D Units have. The Series D Units constitute profits interests, and are granted to certain officers and employees of the Company as performance incentives. See Note 10 - Unit-Based Compensation for further discussion of the Series D Units.
As of June 30, 2013 and December 31, 2012, there were 630,000 Series B Units, 192,500 Series C Units, and 27,500 Series D Units issued and outstanding.
In conjunction with the Unit Offering, the Note holders received 85,000 warrants that entitle each holder to receive 1.7647 Series B Units at an exercise price of $0.01 per unit, representing approximately 150,000 Series B Units in aggregate or 15% of the Company’s common equity interests. The holders of the warrants have anti-dilution protections. The warrants became exercisable after they separated from the Notes on April 21, 2012 and will expire on February 21, 2019. As of June 30, 2013, none of these warrants had been exercised.

NOTE 10 – UNIT‑BASED COMPENSATION
During the three months ended June 30, 2013 and 2012, we recognized unit-based compensation expense totaling $39,251 and $3,249, respectively, which were included in selling, general and administrative expenses. During the six months ended June

13

U.S. WELL SERVICES, LLC
Notes to Condensed Consolidated Financial Statements
June 30, 2013
(Unaudited)

30, 2013, we recognized unit-based compensation expense totaling $78,502, which was included in selling, general and administrative expenses. For the period from February 21, 2012 to June 30, 2012, we recognized unit-based compensation expense totaling $216,924, of which $77,700 was included in cost of services and $139,224 was included in selling, general and administrative expenses.
As of June 30, 2013, the total unrecognized compensation cost related to unvested awards was approximately $325,281, which is expected to be recognized over a weighted-average period of 1.08 years.
 
NOTE 11 – EMPLOYEE BENEFIT PLAN
On March 1, 2013, the Company established the U.S. Well Services 401(k) Plan. We match 100% of employee contributions up to 6% of the employee’s salary, subject to cliff vesting after two years of service. Our matching contributions were $124,377 and $149,846 for the three months ended and six months ended June 30, 2013, respectively.

NOTE 12 – COMMITMENTS AND CONTINGENCIES
Litigation
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
In August 2012, the Company, together with certain of its officers, became co-defendants in an action filed by Calfrac Well Services, Ltd. and Calfrac Well Services Corp. (collectively, "Calfrac") alleging conspiracy to steal Calfrac's trade secrets, proprietary business and confidential information, customers and employees and other information for the purpose of setting up the Company's predecessor. Further, Calfrac sought actual and compensatory damages in connection with allegations of breach of contract and certain duties by certain of the Company's officers. On June 28, 2013, the Company entered into a settlement agreement and mutual release with Calfrac. The Company recorded a loss relating to the settlement during the second quarter of 2013.
Sand Purchase Agreement
On November 9, 2012, we entered into an agreement with a supplier to purchase sand for use in our hydraulic fracturing operations. The agreement is effective on November 1, 2012 for a term of two years, subject to renewal options. Under the terms of this agreement, we are required to purchase from this supplier a quarterly minimum quantity of sand at a fixed price, amounting to approximately $1.1 million per quarter. In the event we fail to purchase any portion of sand required to be purchased on a quarterly basis, we are required to make payments to the supplier for amounts not taken, up to the contractual minimum and subject to the terms of the agreement. For the three months ended and six months ended June 30, 2013, the total amount purchased under the agreement was $2.7 million and $8.6 million. We do not believe that non-performance on our part would have a material impact on our financial position, cash flows or results of operations.


14



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, include forward-looking statements that involve risks and uncertainties. You should review the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2012 and Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a Houston, Texas based oilfield services provider of well stimulation services to the upstream oil and gas industry. We currently engage in high-pressure hydraulic fracturing in unconventional oil and natural gas basins. The fracturing process consists of pumping a specially formulated fluid into perforated well casing, tubing, or open holes under high pressure, causing the underground formation to crack or fracture, allowing nearby hydrocarbons to flow more freely up the wellbore.
We believe our hydraulic fracturing fleets are reliable and high performing fleets with the capability to meet the most demanding pressure and flow rate requirements in the field. Our management team has extensive industry experience providing completion services to exploration and production companies. We intend to focus on the most active shale and unconventional oil and natural gas plays in the United States.
We are Delaware limited liability company. Our corporate office is located at 770 South Post Oak Lane, Suite 405, Houston, Texas 77056 and our main telephone number is (832) 562-3730.
We began operations under a take or pay contract, our original contract, with Antero, for a 24-month service period commencing on April 12, 2012. Prior to beginning operations in the second quarter of 2012, the Company was in the development stage. We currently perform services in the Marcellus and Utica Shales in Ohio, West Virginia, New York and Pennsylvania. We are also evaluating opportunities with existing and new customers to expand our operations into new areas throughout North America, which may include the Bakken Shale in North Dakota and Montana, the Haynesville Shale in northwestern Louisiana and eastern Texas, the Eagle Ford Shale in southern Texas, and other formations in Texas, New Mexico, Colorado, Wyoming, Nebraska, Oklahoma and Canada.
Current Contracts
Original Antero Contract.  Our original contract with Antero provides for a 24-month service period commencing when services began on April 12, 2012. The contract is renewable for one additional year upon the mutual written consent of both parties. The contract includes minimum performance requirements related to the number of stages to be completed quarterly.
If Antero requires more than the minimum agreed upon fracturing days per quarter, it will give us written notice thereof, and we will charge a per-stage price for such additional services at the same rate. We will operate on a 24-hour service schedule. We will be paid mobilization fees (based on mileage from the location of our fleet, charged at the initial stage of each job), as well as operating stage/well rates described in the contract and standby time rates under certain circumstances, dedicated fracturing fleet charges ("DFFCs"), and agreed upon down-time rates per stage. If Antero does not provide us with the minimum quarterly stages through no fault of ours, Antero will owe us an agreed upon rate of DFFCs per stage for any stages less than the minimum quarterly stages. The contract also provides for force majeure payment rates and payments in the event a governmental body or regulatory agency issues a mandate that either makes it impossible for us to continue operations or causes an increase in our rate. Antero may terminate the contract on 60 days’ written notice, in which case it must pay us a lump sum payment of up to a maximum agreed upon amount within an agreed upon time. The contract also allows Antero to direct the stoppage of services on reasonable written notice to us, in which case it must pay us a standby time rate. The rates described in the contract are to be revised on an agreed upon schedule to reflect certain cost increases or decreases if the costs exceed an agreed upon percentage of start date costs.
Rider to Original Antero Contract. On June 5, 2012, we entered into Rider No. 1 to Contract to Provide Dedicated Fleet(s) for Fracturing Services with Antero (the "Rider"). The Rider amends certain terms of our original contract with Antero. The Rider gives Antero, in its sole discretion, a right of first refusal to engage all or any portion of our second hydraulic fracturing fleet at negotiated rates. In addition, the Rider modifies our original contract with Antero to discount all services performed by us for Antero (whether such services are performed under our original contract with Antero or in the future by our second hydraulic fracturing fleet) by ten percent. We believe that entering into the Rider strengthened our relationship with Antero and provides us with the opportunity to grow revenues by participating in Antero's expanding drilling program.

15



Although we have entered into a term contract for our first hydraulic fracturing fleet, we also have the flexibility to pursue spot market projects. Our agreements with Antero allow us to supplement monthly contract revenue by deploying equipment on short-term spot market jobs on those days when Antero does not require our services or is not entitled to our services. When providing these types of short-term services we will charge prevailing market prices per hour for spot market work. We may also charge fees for the set up and mobilization of equipment depending on the job. These fees and other charges vary depending on the equipment and personnel required for the job and the market conditions in the region in which the services are performed. We believe our ability to provide services in the spot market allows us to develop new customer relationships.
We may also source chemicals and proppants that are consumed during the fracturing process and charge our customers a fee for providing such materials. We may also charge our customers a handling fee for chemicals and proppants supplied by the customer. Such charges for materials will generally reflect the cost of the materials plus a markup and will be based on the actual quantity of materials used in the fracturing process.
How We Obtain Our Equipment
On November 9, 2011, we entered into an agreement with a vendor to purchase a hydraulic fracturing fleet to service our original contract with Antero. This is our initial hydraulic fracturing fleet and was manufactured to our specifications. This hydraulic fracturing fleet is equipped to perform all aspects of hydraulic fracturing operations, including acid stimulation, high-pressure pumping and pressure testing. The fleet includes twenty FT-2251T Trailer Mounted Fracturing Units with Triplex Pumps with 2,000 hydraulic horsepower ("HHP") per pump, three MT-132 Trailer Mounted 130bpm Fracturing Blenders with AccuFrac Systems, two data trailers, one chemical additive trailer and two CT-5CAS/HYD hydration units. Initial deliveries of our first fracturing fleet began in February 2012 and were completed in April 2012.
In July and August 2012, we entered into agreements with various vendors for the purchase of our second hydraulic fracturing fleet.  The fleet includes fourteen FT-2251T Trailer Mounted Fracturing Units with Triplex Pumps with 2,000 HHP per pump, two MT-132 Trailer Mounted 130bpm Fracturing Blenders with AccuFrac Systems, one data van and two CT-5CAS/HYD hydration units. Delivery of the equipment was completed in August 2012.
In April 2013, we entered into agreements with various vendors for the purchase of a third hydraulic fracturing fleet. The fleet includes twelve F-2500 Trailer-Mounted Fracturing Units with Quintuplex Pumps with 2,500 brake horsepower ("BHP") per pump, two Trailer Mounted 130bpm Fracturing Blenders, one data van, and one CT 250bbl hydration unit. Delivery of the equipment was completed in May 2013.
In April 2013, we entered into an agreement with a vendor for the purchase of additional fracturing equipment.  The fracturing equipment includes seven FT-2251Q Trailer Mounted Fracturing Units with Quintuplex Pumps with 2,250 BHP per pump, and one MT-132 Trailer Mounted 130bpm Fracturing Blender with AccuFrac System. Delivery of the equipment is expected to be completed in September 2013.
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 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 the "Risk Factors" section in our Annual Report on Form 10-K for the year ended December 31, 2012 and the sections titled “Cautionary Statement Regarding Forward-Looking Statements” and "Risk Factors" in this Quarterly Report on Form 10-Q for additional information about the risks we face.
Hydraulic Fracturing Legislation and Regulation. Congress has from time to time, including during the current session, considered legislation to provide for the federal regulation of hydraulic fracturing and to require public disclosure of the chemicals used in the fracturing process. If such current or any future legislation becomes law, it could establish an additional level of regulation that could lead to us experiencing operational delays or increased operating costs. The United States Environmental Protection Agency (the "EPA") promulgated rules that establish new air emission controls for oil and natural gas production and natural gas processing operations. Among other controls, the rules require operators to use “green completions” for hydraulic fracturing by January 1, 2015 (unless required earlier under a state or local law), meaning operators will have to recover rather than vent the gas and natural gas liquids that come to the surface during completion of the fracturing process. In addition, various state and local governments have implemented, or are considering, increased regulatory oversight of hydraulic fracturing. The adoption of new laws or regulations imposing reporting obligations on, or otherwise limiting or regulating, the hydraulic fracturing process could make it more difficult to complete oil and natural gas wells in shale formations, increase our and our customers’ costs of compliance and adversely affect the quality of the hydraulic fracturing services that we provide for our customers. Additionally, if hydraulic fracturing becomes further regulated at the federal level

16



as a result of federal legislation or regulatory initiatives by the EPA or if states or localities impose additional regulatory requirements, fracturing activities could become subject to additional permitting or regulatory requirements and also to permitting delays and potential cost increases, all of which could adversely affect our business and results of operations.
Financing Future Growth. To date, we have used the proceeds of the Unit Offering, the Sponsor Equity Investment, the offering of Additional Notes, the Revolving Credit Facility, and cash flows generated from operations to acquire three hydraulic fracturing fleets and to fund our operations. The successful execution of our business strategy depends on our ability to raise capital as needed to, among other things, finance the purchase of additional hydraulic fracturing fleets and to maintain the equipment we have already purchased. If we are unable to generate sufficient cash flows from operations or obtain additional capital, we may be unable to sustain or increase our current level of growth in the future. There is no guarantee that we will be able to raise the additional capital that will be needed to grow our business on favorable terms or at all.
Outlook
While the demand for hydraulic fracturing services has increased significantly in recent years, the pressure pumping market currently has excess capacity. We believe the following trends, among others, will lead to increased demand for our services and have the potential to continue to support the growth of our business going forward:
Increased Horizontal Drilling. Drilling has increased in unconventional resource basins, particularly liquids-rich formations, through the application of horizontal drilling and completion technologies. Horizontal wells generally are completed with multiple stages, resulting in increased demand for pressure pumping services.
Implementation of New Drilling Technologies. New horizontal drilling and completion technologies which use hydraulic fracturing to produce oil and natural gas from unconventional resources plays have been implemented across the United States.
Improvements to Fracturing Processes. Hydraulic fracturing utilization is greater due to increasingly longer laterals equating to a greater number of fracturing stages. Utilization has further increased due to new horizontal well completion techniques incorporating the use of sliding sleeves as opposed to more conventional "plug and perf" wireline techniques.
Results of Operations
Three Months Ended June 30, 2013
 
 
Three months ended
 
 
June 30,
 
 
2013
 
2012
 
 
(unaudited)
 
(unaudited)
Revenue
 
$
39,296,318

 
$
9,159,594

Costs and expenses:
 
 
 
 
Cost of services
 
28,194,009

 
10,311,755

Depreciation and amortization
 
3,018,654

 
1,475,090

Selling, general and administrative expenses
 
3,508,677

 
733,609

Income (loss) from operations
 
4,574,978

 
(3,360,860
)
Interest expense, net
 
(4,357,930
)
 
(4,308,136
)
Other income
 
72,434

 

Income (loss) before income taxes
 
289,482

 
(7,668,996
)
Income tax expense
 

 

Net income (loss)
 
$
289,482

 
$
(7,668,996
)
Revenues for the three months ended June 30, 2013 increased $30.1 million, or 329.0%, to $39.3 million from $9.2 million for the three months ended June 30, 2012, due mainly to three hydraulic fracturing fleets being operational in the second quarter of 2013 as compared to only one fleet in the second quarter of 2012.
Cost of services increased $17.9 million, or 173.4%, to $28.2 million for the three months ended June 30, 2013 compared to $10.3 million for the three months ended June 30, 2012. The increase was a direct result of increase hydraulic fracturing activity.

17



Depreciation and amortization totaled $3.0 million for the three months ended June 30, 2013 compared to $1.5 million for the three months ended June 30, 2012. The $1.5 million, or 104.6%, increase is mainly due to depreciation for three fleets in the second quarter 2013 compared to only one fleet in the second quarter 2012.
Our selling, general and administrative expenses increased $2.8 million, or 378.3%, to $3.5 million during the three months ended June 30, 2013 from $0.7 million during the three months ended June 30, 2012. The increase was primarily due to professional fees and settlement of litigation. Litigation related fees, expenses and settlement costs were $2.5 million for the three months ended June 30, 2013.
Interest expense for the second quarter 2013 totaled $4.4 million compared to $4.3 million for the second quarter 2012. Interest expense primarily relates to interest accrued in conjunction with the Notes and the mandatorily redeemable Class A Units.
Six Months Ended June 30, 2013
 
 
Successor
 
Predecessor
 
 
Six months
 
February 21, 2012
 
January 1, 2012
 
 
ended
 
(inception) to
 
to
 
 
June 30, 2013
 
June 30, 2012
 
February 20, 2012
 
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenue
 
$
75,053,296

 
$
9,159,594

 
$

Costs and expenses:
 

 

 
 
Cost of services
 
55,725,723

 
11,001,350

 

Depreciation and amortization
 
5,719,474

 
1,484,862

 

Selling, general and administrative expenses
 
4,908,221

 
1,439,606

 
432,773

Other operating expenses
 

 

 
40,587

Income (loss) from operations
 
8,699,878

 
(4,766,224
)
 
(473,360
)
Interest expense, net
 
(8,156,769
)
 
(6,076,382
)
 

Other income
 
227,880

 

 

Income (loss) before income taxes
 
770,989

 
(10,842,606
)
 
(473,360
)
Income tax expense
 

 

 

Net income (loss)
 
$
770,989

 
$
(10,842,606
)
 
$
(473,360
)
Revenues increased $65.9 million, or 719.4%, to $75.1 million for the six months ended June 30, 2013 from $9.2 million for the period from February 21, 2012 (inception) to June 30, 2012. The increase is mainly due to increased hydraulic fracturing activity with three fleets being operational beginning May 2013, as compared to only one fleet in service during the period from February 21, 2012 to June 30, 2012.
Cost of services for the six months ended June 30, 2013 increased $44.7 million, or 406.5% , to $55.7 million from $11.0 million for the period from February 21, 2012 (inception) to June 30, 2012. The increase was a direct result of increased hydraulic fracturing activity.
Depreciation and amortization increased $4.2 million, or 285.2%, to $5.7 million for the six months ended June 30, 2013 from $1.5 million for the period from February 21, 2012 (inception) to June 30, 2012. The increase is mainly due to depreciation for three fleets beginning May 2013 compared to only one fleet for the period from February 21, 2012 to June 30, 2012.
Selling, general and administrative expenses increased $3.5 million, or 240.9%, to $4.9 million during the six months ended June 30, 2013 from $1.4 million during the period from February 21, 2012 (inception) to June 30, 2012. The increase was primarily due to higher salaries and wages, professional fees and settlement of litigation. Litigation related fees, expenses and settlement costs were $2.9 million for the six months ended June 30, 2013.
Interest expense for the six months ended June 30, 2013 increased $2.1 million, or 34.2%, to $8.2 million from $6.1 million for the period from February 21, 2012 (inception) to June 30, 2012. The increase is mainly due to increased debt balance with the issuance of $12.0 million in aggregate principal amount of Notes in April 2013, and due to shorter interest accrual period from February 21, 2012 to June 30, 2012.
The operating activities of our predecessor for the period from January 1, 2012 to February 20, 2012, primarily consisted of start-up activities. Consequently, no revenues were earned during this period. Selling, general and administrative

18



expenses for the period from January 1, 2012 to February 20, 2012 were $0.4 million and were primarily for salaries and wages to officers and various professional fees.
Liquidity and Capital Resources
Our primary sources of liquidity were the proceeds we received in February 2012 from the Unit Offering, the Sponsor Equity Investment, the proceeds we received in April 2013 for the offering of Additional Notes, the Revolving Credit Facility, and cash flows generated from operations. Our primary uses of capital have been the acquisition of our three hydraulic fracturing fleets, working capital requirements, and interest payments. We continually monitor potential sources of capital, including equity and debt financings, in order to meet our planned capital expenditures and liquidity requirements. As of June 30, 2013, we had a balance of cash and cash equivalents totaling approximately $6.7 million.
Our ability to meet our future liquidity requirements for satisfying our debt service obligations, funding operations and funding future capital expenditures will depend in large part on our future performance, some of which are subject to factors beyond our control. However, we believe that our cash on hand, our available borrowing capacity from our Revolving Credit Facility, and future cash flows from operating activities related to our three hydraulic fracturing fleets, are sufficient to fund ongoing operations and to meet our debt servicing obligations. We expect future cash flows from operating activities to improve as our original contract with Antero continues, as we gain new customers, and as we improve efficiencies regarding the number of stages completed, billed and collected. We also expect future gross margin to improve as we gain synergies from operating multiple fleets in the same region.
Capital Requirements
The energy services business is capital intensive, requiring significant investment to expand, upgrade and maintain equipment. Our capital requirements have consisted primarily of, and we anticipate will continue to be:
Growth capital expenditures, such as those to acquire additional equipment and other assets or upgrade our existing equipment to grow our business; and
Maintenance capital expenditures, which are capital expenditures made to extend the useful life of our assets. There have been no maintenance capital expenditures to date.
Additionally, we continually monitor new advances in hydraulic fracturing equipment and down-hole technology as well as technologies that may complement our business, and opportunities to acquire additional equipment to meet our customers’ needs. Our ability to make any significant acquisition for cash would likely require us to obtain additional equity or debt financing, which may not be available to us on favorable terms or at all.
Financial Condition and Cash Flows
The net cash provided by or used in our operating, investing and financing activities is summarized below:
 
 
Successor
 
Predecessor
 
 
Six months
 
February 21, 2012
 
January 1, 2012
 
 
ended
 
(inception) to
 
to
 
 
June 30, 2013
 
June 30, 2012
 
February 20, 2012
 
 
 (unaudited)
 
 (unaudited)
 
 (unaudited)
Cash flow provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
2,913,900

 
$
(9,155,678
)
 
$

Investing activities
 
(21,307,938
)
 
(45,746,643
)
 

Financing activities
 
13,276,449

 
70,428,327

 

Change in cash and cash equivalents
 
$
(5,117,589
)
 
$
15,526,006

 
$

Cash Provided By (Used In) Operating Activities. Net cash provided by operating activities was $2.9 million for the six months ended June 30, 2013 compared to operating cash outflows of $9.2 million for the period February 21, 2012 (inception) through June 30, 2012. The increase was due primarily to improved operating activity, as a result of three fleets being operational by the end of the second quarter of 2013, as compared to only one fleet in service during the period from February 21, 2012 to June 30, 2012.
Cash Flows Used in Investing Activities. Net cash used in investing activities for the six months ended June 30, 2013 was $21.3 million and was mainly due to the acquisition of the third hydraulic fracturing fleet. Investing cash outflows for the period from February 21, 2012 (inception) through June 30, 2012 was $45.7 million, which mainly relates to the acquisition of the initial fleet and non-refundable deposits for the purchase of the second fleet.

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Cash Flows Provided by Financing Activities. Net cash provided by financing activities for the six months ended June 30, 2013 was $13.3 million and was due primarily to proceeds from the issuance of Additional Notes in April 2013 and borrowings from the Revolving Credit Facility.
Net cash provided by financing activities was $70.4 million for the period February 21, 2012 (inception) through June 30, 2012 and was due primarily to the net proceeds received from the Unit Offering and the Sponsor Equity Investment, partially offset by the restricted cash held in escrow for the future purchase of additional property and equipment.
Off-Balance Sheet Arrangements
As of June 30, 2013, we had no off-balance sheet arrangements other than the operating leases discussed in Note 11 - Commitments and Contingencies in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
Critical Accounting Policies and Estimates
The discussion of Critical Accounting Policies and Estimates is incorporated herein by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012. There have been no significant changes in the critical accounting policies and estimates since year-end.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks including credit risk, interest rate risk and commodity price risk. The principal market risk to which we are exposed is the risk related to increases in the prices of fuel and raw materials consumed in performing our services. We do not engage in commodity price hedging activities. To a lesser extent, we are also exposed to risks related to interest rate fluctuations.
Credit Risk. We monitor our exposure to counterparties on service contracts and the collectability of our accounts receivable, primarily by reviewing our counterparties' credit ratings, financial statements and payment history. We extend credit terms based on our evaluation of each counterparty's creditworthiness. Antero is our primary customer to date. Our current customers are, and our future customers will be, engaged in the oil and natural gas industry. This concentration of customers may impact our overall exposure to credit risk, either positively or negatively, in that our current customers and any future customers may be similarly affected by changes in economic and industry conditions.
Interest Rate Risk. Our exposure to changes in interest rates relates primarily to our long-term debt obligations. We may be exposed to changes in interest rates as a result of any future indebtedness. We do not believe our interest rate exposure warrants entry into interest rate hedges and have, therefore, not hedged our interest rate exposure. The Original Notes issued as part of the Unit Offering, the Additional Notes, and Fixed Rate LIBOR Loans on our Revolving Credit Facility, like all fixed rate securities, will be subject to interest rate risk and will likely fall in value if market interest rates increase.
Commodity Price Risk. Our fuel and material purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our stimulation services such as fracturing sand, fracturing chemicals and fluid supplies. Our fuel costs consist primarily of diesel fuel used by our various tractors and other motorized equipment. The prices for fuel and the materials in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages.

ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on this evaluation, management concluded that our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the second quarter of 2013 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.


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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
In August 2012, we, along with certain of our officers, became co-defendants in an action styled Calfrac Well Services Ltd. and Calfrac Well Services Corp. v. Edward S. Self, Jeffrey D. McPherson, Robert C. Kurtz, Charles Johnson and U.S. Well Services, Inc. d/b/a U.S. Well Services LLC, Civil Action No. 12-1260, in the United States District Court for the Western District of Pennsylvania. Calfrac Well Services Ltd. and Calfrac Well Services Corp. (collectively, “Calfrac”) alleged conspiracy to steal Calfrac's trade secrets, proprietary business and confidential information, customers and employees and other information for the purpose of setting up our predecessor. Further, Calfrac sought actual and compensatory damages in connection with its allegations of breach of contract and certain duties by certain of our officers. On June 28, 2013, we entered into a settlement agreement and mutual release with Calfrac. We recorded a loss relating to the settlement during the second quarter of 2013.

ITEM 1A. RISK FACTORS
We are subject to certain risks and hazards due to the nature of the business activities we conduct. For a discussion of these risks, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, and in our Registration Statement on Form S-4 (SEC Registration No. 333-189916). There have been no material changes to the risk factors disclosed in the 2012 Annual Report on Form 10-K, in the Form 10-Q for the quarterly period ended March 31, 2013, and in the Registration Statement on Form S-4 (SEC Registration No. 333-189916) during the quarter ended June 30, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITITES AND USE OF PREOCEEDS
The Indenture governing the 14.50% Senior Secured Notes Due 2017 limits the payment of dividends by us.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5. OTHER INFORMATION
None.
    

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ITEM 6. EXHIBITS
Exhibit No.
 
Description
4.1
 
Second Supplemental Indenture dated April 10, 2013, among U.S. Well Services, LLC, USW Financing Corp., the guarantors party thereto, and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-k filed with the SEC on April 15, 2013).

4.2
 
Registration Rights Agreement dated April 8, 2013, among U.S. Well Services, LLC, USW Financing Corp., the individual purchasers named therein, and Global Hunter Securities, LLC (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the SEC on April 15, 2013).

10.1
 
Credit and Security Agreement dated May 9, 2013, by and between U.S. Well Services, LLC, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on May 15, 2013).

31.1*
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
* Filed herewith.


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SIGNATURES

U.S. Well Services, LLC, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
U.S. WELL SERVICES, LLC
 
 
 
 
Date:
August 12, 2013
By:
/s/ Brian Stewart
 
 
 
Brian Stewart
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
By:
/s/ Kenneth I. Sill
 
 
 
Kenneth I. Sill
 
 
 
Chief Financial Officer


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