(2) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying audited consolidated financial statements of the Company have been prepared by management in accordance with the instructions to Form 10-K of the United States Securities and Exchange Commission (the “SEC”). These statements include all normal recurring adjustments considered necessary by management to present a fair statement of the consolidated balance sheets, results of operations, and cash flows.

 

The business comprising the Company’s Industrial Solutions segment is presented as discontinued operations in the Company’s consolidated financial statements for the years ended December 31, 2013 and 2012 (since its acquisition on April 10, 2012). The business comprising the Company’s former Bottled Water segment is presented as discontinued operations in the Company’s consolidated financial statements for the year ended December 31, 2011. See Note 20 for additional information. Unless stated otherwise, any reference to balance sheet, income statement and cash flow items in these consolidated financial statement notes refers to results from continuing operations.

All dollar amounts in the footnote tabular presentations are in thousands, except per share amounts and unless otherwise noted.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts, transactions and profits are eliminated in consolidation.

Use of Estimates

The Company’s consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”). The preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information, however actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to prior period amounts in the consolidated statements of financial position, operations and cash flows in order to conform to the current year’s presentation, including recasting our Industrial Solutions business as held-for-sale and discontinued operations. Certain similar line items in the consolidated statements of operations and cash flows have been combined to present a more concise and easier to follow presentation.

Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains bank accounts in the United States. A majority of funds considered cash equivalents are invested in institutional money market funds. The Company has not experienced any historical losses in such accounts and believes that the risk of any loss is minimal.

Restricted Cash

In connection with the Power Fuels merger (Note 3) assets received in exchange for the merger consideration excluded accounts receivable greater than ninety days as of November 30, 2012. Subsequent collections on these accounts receivable by the Company are required to be remitted to the former owner of Power Fuels (Note 18). At December 31, 2013 and 2012, such unremitted collections totaled $0.1 million and $3.5 million, respectively. Such amounts are classified as restricted cash and the corresponding liability due to the former owner is classified as a component of accrued liabilities in the accompanying consolidated balance sheets.

 

Accounts Receivable

Accounts receivable are recognized and carried at original billed and unbilled amounts less allowances for estimated uncollectible amounts and estimates for potential credits. Unbilled accounts receivable result from revenue earned for services rendered where customer billing is still in progress at the balance sheet date. Such amounts totaled approximately $21.2 million at December 31, 2013. Inherent in the assessment of these allowances are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, the Company’s compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. The Company writes off trade receivables when it determines that they have become uncollectible. Bad debt expense is reflected as a component of general and administrative expenses in the consolidated statements of operations.

The following table summarizes activity in the allowance for doubtful accounts:

 

		2013				2012				2011
Beginning balance at January 1,		$	6,128			$	2,636			$	1,232
Bad debt expense			3,275				6,517				2,206
Write-offs, net			(3,875	)			(3,025	)			(802	)
Ending balance at December 31,		$	5,528			$	6,128			$	2,636

Fair Value of Financial Instruments

Fair value is 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. The carrying amounts of the Company’s cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying value of the Company’s contingent consideration is adjusted to fair value at the end of each reporting period using a probability-weighted discounted cash flow model. See Note 11 for disclosures on the fair value of the Company’s contingent consideration at December 31, 2013 and 2012.

The Company’s 2018 Notes are carried at cost. Their estimated fair values are based on quoted market prices. The fair value of the Company’s Amended Revolving Credit Facility and other debt obligations including capital leases, secured by various properties and equipment, bears interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value. See Note 10 for disclosures on the fair value of the Company’s debt instruments at December 31, 2013.

Property and Equipment

Property and equipment is recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets ranging from three to thirty nine years. The Company’s landfill is depreciated using the units-of-consumption method based on estimated remaining airspace. Leasehold improvements are depreciated over the life of the lease or the life of the asset, whichever is shorter. The range of useful lives for the components of property, plant and equipment are as follows:

 

Buildings			15-39 years
Building improvements			5-20 years
Pipelines			10-30 years
Disposal wells			3-10 years
Machinery and equipment			3-15 years
Equipment under capital leases			4-6 years
Motor vehicles and trailers			3-11 years
Rental equipment			5-15 years
Office equipment			3-7 years

 

Expenditures for betterments that increase productivity and/or extend the useful life of an asset are capitalized. Maintenance and repair costs are charged to expense as incurred. Upon disposal, the related cost and accumulated depreciation of the assets are removed from their respective accounts, and any gains or losses are included in cost of revenues in the consolidated statements of operations. Depreciation expense was $78.8 million, $40.1 million, and $21.4 million for the years ended December 31, 2013, 2012 and 2011, respectively, and is characterized primarily as a component of cost of revenues in the consolidated statements of operations.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net assets of businesses acquired. The Company has made acquisitions over the years that have resulted in the recognition and accumulation of significant goodwill. The carrying values of goodwill at December 31, 2013 and 2012 were $408.7 million and $415.2 million, respectively (Note 6).

Goodwill is tested for impairment annually at September 30^th and more frequently if events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The goodwill impairment test involves a two-step process; however, if, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.

In the event a determination is made that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the first step of the two-step process must be performed. The first step of the test, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test must be performed to measure the amount of the impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

Due to the existence of a number of potential impairment indicators at June 30, 2013, the Company performed a company-wide impairment review of its long-lived assets and goodwill which it completed during the third quarter of 2013. In connection with the impairment review, the Company recorded a goodwill impairment charge of $98.5 million for its Industrial Solutions reporting unit in the three months ended September 30, 2013 (Note 7). Such amount is included in loss from discontinued operations in the Company’s consolidated statements of operations for the year ended December 31, 2013 (Note 20).

Debt Issuance Costs

The Company capitalizes costs associated with the issuance of debt and amortizes them as additional interest expense over the lives of the respective debt instrument on a straight-line basis, which approximates the effective interest method. The unamortized balance of deferred financing costs was $20.8 million and $24.4 million at December 31, 2013 and 2012, respectively, and is included in other long-term assets in the consolidated balance sheets. Upon the prepayment of related debt, the Company accelerates the recognition of the unamortized cost, which is characterized as loss on extinguishment of debt in the consolidated statements of operations. During the year ended December 31, 2012 the Company wrote-off the unamortized balance of issuance costs related to its Old Credit Facility in connection with the repayment of the Old Credit Facility and the issuance of the New Credit Facility (Note 10).

 

Impairment of Long-Lived Assets and Intangible Assets with Finite Useful Lives

Long-lived assets including intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of a long-lived asset (or asset group) may not be recoverable. If an impairment indicator is present, the Company evaluates recoverability by comparing the estimated future cash flows of the category classes, on an undiscounted basis, to their carrying values. The category class represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the undiscounted cash flows exceed the carrying value, the asset group is recoverable and no impairment is present. If the undiscounted cash flows are less than the carrying value, the impairment is measured as the difference between the carrying value and the fair value of the long-lived asset (or asset group).

Due to the existence of a number of potential impairment indicators at June 30, 2013, the Company performed a company-wide impairment review of its long-lived assets and goodwill which it completed during the third quarter of 2013. The Company recorded long-lived asset impairment charges of $111.9 million and $6.0 million for the years ended December 31, 2013 and 2012, respectively (Note 7).

Asset Retirement Obligations

The Company records the fair value of estimated asset retirement obligations (AROs) associated with tangible long-lived assets in the period incurred. Retirement obligations associated with long-lived assets are those for which there is an obligation for closures and/or site remediation at the end of the assets’ useful lives. These obligations, which are initially estimated based on discounted cash flow estimates, are accreted to full value over time through charges to interest expense (Note 15). In addition, asset retirement costs are capitalized as part of the related asset’s carrying value and are depreciated on a straight line basis for disposal wells and using a units-of-consumption basis for landfill costs over the assets’ respective useful lives.

Revenue Recognition

The Company recognizes revenues in accordance with Accounting Standards Codification 605 (ASC 605 “Revenue Recognition”) and Staff Accounting Bulletin No 104, and accordingly all of the following criteria must be met for revenues to be recognized: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectability is reasonably assured. Revenues are generated upon the performance of contracted services under formal and informal contracts with direct customers.

The Company’s Shale Solutions segment derives a significant portion of its revenue from the transportation of fresh and saltwater by Company-owned trucks or through temporary or permanent water transport pipelines to customer sites for use in drilling and hydraulic fracturing activities and from customer sites to remove and dispose of flowback and produced water originating from oil and gas wells. Revenue also includes fees charged for disposal of oilfield wastes in the Company’s landfill, disposal of fluids in the Company’s disposal wells and from the rental of tanks and other equipment. Certain customers are under contract with the Company to utilize its saltwater pipeline and have an obligation to dispose of a minimum quantity (number of barrels) of saltwater over the contract period. Transportation and disposal rates are generally based on a fixed fee per barrel of disposal water or, in certain circumstances transportation is based on an hourly rate. Revenue is recognized based on the number of barrels transported or disposed of or at hourly rates for transportation services, depending on the customer contract. Rates for other services are based on negotiated rates with the Company’s customers and revenue is recognized when the services have been performed.

The Company’s discontinued Industrial Solutions segment derives the majority of its revenue from the sale of used motor oil and antifreeze after it is refined by one of its processing facilities. Revenue is recognized upon shipment or delivery, dependent on contracted terms, of salable fuel oil or upon recovery service provided in the receipt of waste oil and antifreeze per specific customer contract terms. Transportation costs charged to customers are included in revenue.

The Company presents its revenues net of any sales taxes collected by the Company from its customers that are required to be remitted to governmental taxing authorities.

Cost of Revenues

Cost of revenues consists primarily of wages and benefits for employees performing operational activities; fuel expense associated with transportation and logistics activities; costs to repair and maintain transportation and rental equipment and disposal wells and; depreciation of operating assets included in property, plant and equipment (including rental assets).

Concentration of Customer Risk

Three of the Company’s customers comprised 40% and 39% of the Company’s consolidated revenues for the years ended December 31, 2013 and 2012, respectively, and 31% and 34% of the Company’s consolidated accounts receivable at December 31, 2013 and 2012, respectively, consisted of amounts due from three customers. One of the Company’s customers comprised 25% of the Company’s consolidated revenues and 29% of the Company’s consolidated accounts receivable for the year ended December 31, 2011.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases including temporary differences related to assets acquired in business combinations (see Note 3). Deferred tax assets are also recognized for net operating loss, capital loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which realization of the related benefits is not more likely than not.

The Company measures and records tax contingency accruals in accordance with GAAP which prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return. Only positions meeting the “more likely than not” recognition threshold may be recognized or continue to be recognized. A tax position is measured at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

Reverse Stock Split

On December 3, 2013, the Company filed a Certificate of Amendment to its Restated Certificate of Incorporation in order to effect a one-for-ten reverse split of its common stock and its common stock began trading on the New York Stock Exchange (“NYSE”) on a split-adjusted basis on the same date. No fractional shares were issued in connection with the reverse stock split. As a result of the reverse stock split, the number of authorized, issued and outstanding shares of its common stock was reduced to approximately 50.0 million, 27.4 million and 26.0 million, respectively, at December 31, 2013. Furthermore, proportional adjustments were made to stock options, warrants, and restricted stock units. The change in the number of shares resulting from the reverse stock split has been applied retroactively to all shares and per share amounts presented in the consolidated financial statements and accompanying notes.

 

Share-Based Compensation

Share-based compensation for all share-based payment awards granted is based on the grant-date fair value. Generally, awards of stock options granted to employees vest in equal increments over a three-year service period from the date of grant and awards of restricted stock vest over a two or three year service period from the date of grant. The grant date fair value of the award is recognized to expense on a straight-line basis over the service period for the entire award, that is, over the requisite service period of the last separately vesting portion of the award. As of December 31, 2013 there was approximately $2.5 million of unrecognized compensation cost related to unvested stock options, which are expected to vest over a weighted average period of approximately of 0.8 years. As of December 31, 2013 there was approximately $1.6 million of unrecognized compensation cost related to unvested shares of restricted stock, which are expected to vest over a weighted average period of approximately 1.3 years. As of December 31, 2013 there was approximately $1.4 million of unrecognized compensation cost related to unvested restricted stock units. See Note 13 for additional information.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (“ASU 2013-02”). The amendments in this update do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2012, which for the Company is the reporting period starting January 1, 2013. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements. As permitted under ASU 2013-02, the Company has elected to present reclassification adjustments from each component of accumulated other comprehensive income within a single note to the financial statements. There were no reclassification adjustments from any components of accumulated other comprehensive income during the year ended December 31, 2013. There was a less than $0.1 million reclassification adjustment out of the unrealized losses from available-for-sale securities component of accumulated other comprehensive income during the year ended December 31, 2012.

In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amendments in this update provide an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Accounting Standards Codification subtopic 350-30, General Intangibles other than Goodwill. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, which for the Company were the annual and interim periods starting January 1, 2013. As of December 31, 2013 and 2012, the Company did not have any intangible assets with indefinite lives.

 

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). The amendments in this update provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. The amendment does not change the requirement to perform the second step of the interim goodwill impairment test to measure the amount of an impairment loss, if any, if the carrying amount of a reporting unit exceeds its fair value. Under the amendments in this update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments in this update were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which for the Company were the annual and interim periods starting January 1, 2012. During the second quarter of 2013, the Company experienced a number of potential impairment indicators. As a result of these impairment indicators, the Company performed a company-wide impairment review of its long-lived assets and goodwill which it completed during the third quarter of 2013. In connection with the impairment review, the Company recorded a goodwill impairment charge of $98.5 million for its Industrial Solutions reporting unit in the three months ended September 30, 2013 (Note 7). Such amount is included in loss from discontinued operations in the Company’s consolidated statements of operations for the year ended December 31, 2013 (Note 20).