UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20182019
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-35281
Forbes Energy Services Ltd.
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 98-0581100 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
3000 South Business Highway 281 Alice, Texas | | 78332 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code:
(361) 664-0549
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. x Yes ¨ 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). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ¨ | Accelerated filer | ¨ |
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Non-accelerated filer | ¨ (Do not check if a smaller reporting company) x | Smaller reporting company | x |
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| | Emerging growth company | ¨ |
| | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). ¨ Yes x No
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court (as defined in Exchange Act Rule 12b-2). x Yes ¨ No
Securities registered pursuant to Section 12(b) of the Act: |
| | | | |
Common stock, $0.01 par value | | FLSS | | OTCQX Best Market |
(Title of each class) | | (Trading Symbol) | | (Name of each exchange on which registered) |
The number of shares of common stock, par value $0.01 per share, of Forbes Energy Services Ltd. outstanding as of August 8, 201813, 2019 was 5,336,397.5,446,447.
FORBES ENERGY SERVICES LTD.
TABLE OF CONTENTS
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Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | Other Information | |
Item 6. | Exhibits | |
| Signatures | |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any oral statements made in connection with it include certain forward-looking statements within the meaning of the federal securities laws. You can generally identify forward-looking statements by the appearance in such a statement of words like “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or “should” or other comparable words or the negative of these words. When you consider our forward-looking statements, you should keep in mind the risk factors we describe and other cautionary statements we make in this Quarterly Report on Form 10-Q. Our forward-looking statements are only predictions based on expectations that we believe are reasonable. Our actual results could differ materially from those anticipated in, or implied by, these forward-looking statements as a result of known risks and uncertainties set forth below and elsewhere in this Quarterly Report on Form 10-Q. These factors include or relate to the following:
the effect of the continuing industry-wide downturn in and the cyclical nature of, energy exploration and development activities;
continuing incurrence of operating losses due to such downturn;
oil and natural gas commodity prices;
market response to global demands to curtail use of oil and natural gas;
capital budgets and spending by the oil and natural gas industry;
the ability or willingness of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels for oil;
oil and natural gas production levels by non-OPEC countries;
supply and demand for oilfield services and industry activity levels;
our ability to maintain stable pricing;
possible impairment of our long-lived assets;
potential for excess capacity;
competition;
substantial capital requirements;
significant operating and financial restrictions under our loan and security agreement which provides for a term loan, of $50.0 million, or the NewTerm Loan Agreement;Agreement, excluding paid in kind interest;
technological obsolescence of operating equipment;
dependence on certain key employees;
concentration of customers;
substantial additional costs of compliance with reporting obligations, the Sarbanes-Oxley Act, and NewTerm Loan Agreement, Revolving Loan Agreement and the PIK Notes covenants;
seasonality of oilfield services activity;
collection of accounts receivable;
environmental and other governmental regulation;
the potential disruption of business activities caused by the physical effects, if any, of climate change;
risks inherent in our operations;
ability to fully integrate future acquisitions;
variation from projected operating and financial data;
variation from budgeted and projected capital expenditures;
volatility of global financial markets; and
the other factors discussed under “Risk Factors” beginning on page 10 of the Annual Report on Form 10-K for the year ended December 31, 2017.2018.
We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. To the extent these risks, uncertainties and assumptions give rise to events that vary from our expectations, the forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.
PART I—FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Forbes Energy Services Ltd.
Condensed Consolidated Balance Sheets (unaudited)(unaudited)
(in thousands, except par value amounts)
| |
| Successor | | | | | |
| June 30, 2018 |
|
| December 31, 2017 | June 30, 2019 |
| December 31, 2018 |
Assets |
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Cash and cash equivalents | $ | 5,383 |
|
| $ | 5,465 |
| $ | 1,030 |
| | $ | 8,083 |
|
Cash - restricted | 19,701 |
|
| 30,015 |
| 73 |
| | 73 |
|
Accounts receivable - trade, net | 29,779 |
|
| 24,341 |
| 42,468 |
| | 45,950 |
|
Accounts receivable - other | 315 |
|
| 496 |
| 2,552 |
| | 2,228 |
|
Prepaid expenses and other current assets | 6,745 |
|
| 11,212 |
| 10,516 |
| | 14,691 |
|
Total current assets | 61,923 |
|
| 71,529 |
| 56,639 |
|
| 71,025 |
|
Property and equipment, net | 113,474 |
|
| 117,191 |
| 138,780 |
| | 148,608 |
|
Operating lease right-of-use assets | | 5,785 |
| | — |
|
Intangible assets, net | 11,292 |
|
| 11,852 |
| 13,195 |
| | 13,980 |
|
Goodwill | | 19,700 |
| | 19,700 |
|
Other assets | 1,040 |
|
| 1,185 |
| 2,020 |
| | 3,072 |
|
Total assets | $ | 187,729 |
|
| $ | 201,757 |
| $ | 236,119 |
|
| $ | 256,385 |
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| | | | |
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Current portions of long-term debt | $ | 2,765 |
|
| $ | 7,566 |
| |
Accounts payable - trade | 11,091 |
|
| 7,497 |
| $ | 9,955 |
| | $ | 17,841 |
|
Accounts payable - related parties | — |
|
| 11 |
| |
Accrued interest payable | 741 |
|
| 998 |
| 2,646 |
| | 1,993 |
|
Accrued expenses | 11,415 |
|
| 11,084 |
| 12,633 |
| | 14,348 |
|
Current portion of operating lease liabilities | | 756 |
| | — |
|
Current portion of long-term debt | | 60,273 |
| | 59,321 |
|
Total current liabilities | 26,012 |
|
| 27,156 |
| 86,263 |
|
| 93,503 |
|
Long-term debt, net of current portion | 55,218 |
|
| 51,288 |
| |
Long-term operating lease liabilities, net of current portion | | 5,029 |
| | — |
|
Long-term debt, net of current portion and debt discount | | 74,928 |
| | 71,095 |
|
Deferred tax liability | 362 |
|
| 379 |
| 343 |
| | 357 |
|
Total liabilities | 81,592 |
|
| 78,823 |
| 166,563 |
|
| 164,955 |
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Commitments and contingencies (Note 8) |
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Common stock, $0.01 par value, 40,000 shares authorized, 5,336 shares issued and outstanding at June 30, 2018 and December 31, 2017 | 53 |
| | 53 |
| |
Commitments and contingencies (Note 7) | |
| |
|
Stockholders’ equity | |
|
|
|
Common stock, $0.01 par value, 40,000 shares authorized, 5,446 and 5,439 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | | 54 |
| | 54 |
|
Additional paid-in capital | 149,364 |
| | 148,866 |
| 150,477 |
| | 149,968 |
|
Accumulated deficit | (43,280 | ) |
| (25,985 | ) | (80,975 | ) | | (58,592 | ) |
Total stockholders’ equity | 106,137 |
|
| 122,934 |
| 69,556 |
|
| 91,430 |
|
Total liabilities and stockholders’ equity | $ | 187,729 |
|
| $ | 201,757 |
| $ | 236,119 |
|
| $ | 256,385 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forbes Energy Services Ltd.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)
| | | Successor | | | Predecessor | | | | | |
| Three months ended June 30, 2018 | | April 13 through June 30, 2017 | | | April 1 through April 12, 2017 | Three Months Ended June 30, |
| | | | 2019 | | 2018 |
Revenues | | | | | | | | | |
Well servicing | $ | 27,375 |
| | $ | 18,139 |
| | | $ | 2,449 |
| $ | 25,762 |
| | $ | 20,415 |
|
Coiled tubing | | 13,292 |
| | 6,960 |
|
Fluid logistics | 13,866 |
| | 9,711 |
| | | 1,269 |
| 12,011 |
| | 13,866 |
|
Total revenues | 41,241 |
| | 27,850 |
| | | 3,718 |
| 51,065 |
| | 41,241 |
|
| | | | |
Expenses | | | | | | |
| | |
Well servicing | 23,324 |
| | 13,814 |
| | | 1,813 |
| 20,971 |
| | 17,116 |
|
Coiled tubing | | 13,854 |
| | 6,208 |
|
Fluid logistics | 11,151 |
| | 9,053 |
| | | 1,260 |
| 8,823 |
| | 11,151 |
|
General and administrative | 5,908 |
| | 3,130 |
| | | 500 |
| 5,417 |
| | 5,908 |
|
Depreciation and amortization | 7,652 |
| | 5,681 |
| | | 1,533 |
| 7,013 |
| | 7,652 |
|
Total expenses | 48,035 |
| | 31,678 |
| | | 5,106 |
| 56,078 |
| | 48,035 |
|
Operating loss | (6,794 | ) | | (3,828 | ) | | | (1,388 | ) | (5,013 | ) | | (6,794 | ) |
| | | | |
Other income (expense) | | | | | | |
| | |
Interest income | — |
| | 6 |
| | | — |
| 1 |
| | — |
|
Interest expense | (2,426 | ) | | (1,897 | ) | | | (40 | ) | (5,723 | ) | | (2,426 | ) |
Gain (loss) on reorganization items, net | — |
| | (1,299 | ) | | | 51,090 |
| |
Pre-tax income (loss) | (9,220 | ) | | (7,018 | ) | | | 49,662 |
| |
Income tax benefit | (454 | ) | | (17 | ) | | | (4 | ) | |
Net income (loss) | (8,766 | ) | | (7,001 | ) | | | 49,666 |
| |
Income (loss) per share of common stock | | | | | | | |
Basic and diluted income (loss) per share | $ | (1.64 | ) | | $ | (1.33 | ) | | | $ | 1.81 |
| |
Weighted average number of shares outstanding | | | | | | | |
Pre-tax loss | | (10,735 | ) | | (9,220 | ) |
Income tax expense (benefit) | | 14 |
| | (454 | ) |
Net loss | | $ | (10,749 | ) | | $ | (8,766 | ) |
| |
|
| | |
Loss per share of common stock | | | | |
Basic and diluted | 5,336 |
| | 5,250 |
| | | 27,508 |
| $ | (1.97 | ) | | $ | (1.64 | ) |
| | | | |
Weighted average number of shares of common stock outstanding: | | | | |
Basic and diluted | | 5,446 |
| | 5,336 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forbes Energy Services Ltd.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)
| | | Successor | | | Predecessor | | | | | |
| Six months ended June 30, 2018 | | April 13 through June 30, 2017 | | | January 1 through April 12, 2017 | Six Months Ended June 30, |
| | | | 2019 | | 2018 |
Revenues | | | | | | | | | |
Well servicing | $ | 50,231 |
| | $ | 18,139 |
| | | $ | 19,554 |
| $ | 50,512 |
| | $ | 38,069 |
|
Coiled tubing | | 33,302 |
| | 12,162 |
|
Fluid logistics | 26,601 |
| | 9,711 |
| | | 11,211 |
| 25,639 |
| | 26,601 |
|
Total revenues | 76,832 |
| | 27,850 |
| | | 30,765 |
| 109,453 |
| | 76,832 |
|
| | | | |
Expenses | | | | | | | | | |
Well servicing | 42,339 |
| | 13,814 |
| | | 15,952 |
| 38,520 |
| | 31,968 |
|
Coiled tubing | | 31,792 |
| | 10,371 |
|
Fluid logistics | 21,840 |
| | 9,053 |
| | | 11,207 |
| 19,475 |
| | 21,840 |
|
General and administrative | 10,796 |
| | 3,130 |
| | | 5,012 |
| 12,242 |
| | 10,796 |
|
Depreciation and amortization | 14,815 |
| | 5,681 |
| | | 13,601 |
| 16,452 |
| | 14,815 |
|
Total expenses | 89,790 |
| | 31,678 |
| | | 45,772 |
| 118,481 |
| | 89,790 |
|
Operating loss | (12,958 | ) | | (3,828 | ) | | | (15,007 | ) | (9,028 | ) | | (12,958 | ) |
| | | | |
Other income (expense) | | | | | | | | | |
Interest income | 2 |
| | 6 |
| | | 13 |
| 4 |
| | 2 |
|
Interest expense | (4,793 | ) | | (1,897 | ) | | | (2,254 | ) | (13,409 | ) | | (4,793 | ) |
Gain (loss) on reorganization items, net | — |
| | (1,299 | ) | | | 44,503 |
| |
Pre-tax income (loss) | (17,749 | ) | | (7,018 | ) | | | 27,255 |
| |
Income tax (benefit) expense | (454 | ) | | (17 | ) | | | 27 |
| |
Net income (loss) | (17,295 | ) | | (7,001 | ) | | | 27,228 |
| |
Preferred stock dividends | — |
| | — |
| | | (46 | ) | |
Net income (loss) attributable to common stockholders | $ | (17,295 | ) | | $ | (7,001 | ) | | | $ | 27,182 |
| |
Income (loss) per share of common stock | | | | | | | |
Basic and diluted income (loss) per share | $ | (3.24 | ) | | $ | (1.33 | ) | | | $ | 0.99 |
| |
Weighted average number of shares outstanding | | | | | | | |
Pre-tax loss | | (22,433 | ) | | (17,749 | ) |
Income tax benefit | | (50 | ) | | (454 | ) |
Net loss | | $ | (22,383 | ) | | $ | (17,295 | ) |
| | | | |
Loss per share of common stock | | | | |
Basic and diluted | 5,336 |
| | 5,250 |
| | | 27,508 |
| $ | (4.11 | ) | | $ | (3.24 | ) |
| | | | |
Weighted average number of shares of common stock outstanding: | | | | |
Basic and diluted | | 5,444 |
| | 5,336 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forbes Energy Services Ltd.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| | | Successor | | | Predecessor | | | | | |
| Six months ended June 30, 2018 | | April 13 through June 30, 2017 | | | January 1 through April 12, 2017 | Six Months Ended June 30, |
| | | | | | | 2019 | | 2018 |
Cash flows from operating activities: | | | | | | | | | |
Net income (loss) | $ | (17,295 | ) | | $ | (7,001 | ) | | | $ | 27,228 |
| |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | |
Net loss | | $ | (22,383 | ) | | $ | (17,295 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
Depreciation and amortization | 14,815 |
| | 5,681 |
| | | 13,601 |
| 16,452 |
| | 14,815 |
|
Share-based compensation | 498 |
| | — |
| | | — |
| 509 |
| | 498 |
|
Reorganization items (non-cash) | — |
| | — |
| | | (51,166 | ) | |
Deferred tax benefit | (17 | ) | | (17 | ) | | | (47 | ) | (14 | ) | | (17 | ) |
Gain on disposal of assets | (67 | ) | | — |
| | | (950 | ) | (2,437 | ) | | (67 | ) |
Bad debt expense | 54 |
| | 217 |
| | | 1 |
| 243 |
| | 54 |
|
Amortization of debt discount | 413 |
| | 398 |
| | | 234 |
| |
Amortization of debt discount/deferred financing costs/premium conversion | | 4,391 |
| | 413 |
|
Interest paid in kind | 1,845 |
| | 768 |
| | | — |
| 4,699 |
| | 1,845 |
|
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | (5,311 | ) | | (2,520 | ) | | | (916 | ) | 2,915 |
| | (5,311 | ) |
Prepaid expenses and other assets | (423 | ) | | (178 | ) | | | (748 | ) | (17 | ) | | (423 | ) |
Accounts payable - trade | 1,393 |
| | 131 |
| | | 6,608 |
| (7,886 | ) | | 1,393 |
|
Accounts payable - related parties | (11 | ) | | (20 | ) | | | 2 |
| — |
| | (11 | ) |
Accrued expenses | 1,488 |
| | (782 | ) | | | 324 |
| (1,742 | ) | | 1,488 |
|
Accrued interest payable | (257 | ) | | 63 |
| | | 1,575 |
| 653 |
| | (257 | ) |
Net cash used in operating activities | (2,875 | ) | | (3,260 | ) | | | (4,254 | ) | (4,617 | ) | | (2,875 | ) |
Cash flows from investing activities: | | | | | | |
| |
|
Purchases of property and equipment | | (9,700 | ) | | (7,044 | ) |
Proceeds from sale of property and equipment | 510 |
| | 839 |
| | | 937 |
| 8,651 |
| | 510 |
|
Purchases of property and equipment | (7,044 | ) | | (1,015 | ) | | | (400 | ) | |
Net cash provided by (used in) investing activities | (6,534 | ) | | (176 | ) | | | 537 |
| |
Net cash used in investing activities | | (1,049 | ) | | (6,534 | ) |
Cash flows from financing activities: | | | | | | |
| |
|
Payments for capital leases | (987 | ) | | (285 | ) | | | (444 | ) | |
Payments for debt issuance costs | — |
| | — |
| | | (5,000 | ) | |
Payment of Prior Senior Notes | — |
| | — |
| | | (20,000 | ) | |
Repayment of Prior Loan Agreement | — |
| | — |
| | | (15,000 | ) | |
Proceeds from New Loan Agreement | — |
| | — |
| | | 50,000 |
| |
Net cash provided by (used in) financing activities | (987 | ) | | (285 | ) | | | 9,556 |
| |
Net decrease in cash, cash equivalents, and cash - restricted | (10,396 | ) | | (3,721 | ) | | | 5,839 |
| |
Cash, cash equivalents, and cash - restricted: | | | | | | | |
Payments for finance leases | | (2,387 | ) | | (987 | ) |
Proceeds from Revolving Loan Agreement | | 6,000 |
| | — |
|
Payments on Term Loan Agreement | | (5,000 | ) | | — |
|
Payments for Bridge Loan | | (4,422 | ) | | — |
|
Proceeds from PIK Notes | | 4,422 |
| | — |
|
Net cash used in financing activities | | (1,387 | ) | | (987 | ) |
Net decrease in cash, cash equivalents and cash - restricted | | (7,053 | ) | | (10,396 | ) |
Cash, cash equivalents and cash - restricted: | |
| | |
Beginning of period | 35,480 |
| | 53,839 |
| | | 48,000 |
| 8,156 |
| | 35,480 |
|
End of period | $ | 25,084 |
| | $ | 50,118 |
| | | $ | 53,839 |
| $ | 1,103 |
| | $ | 25,084 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forbes Energy Services Ltd.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
(in thousands)
For the three and six months ended June 30, 2019
|
| | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amount | | | |
Balance at December 31, 2018 | 5,439 |
| | $ | 54 |
| | $ | 149,968 |
| | $ | (58,592 | ) | | $ | 91,430 |
|
Share-based compensation | 7 |
| | — |
| | 253 |
| | — |
| | 253 |
|
Net loss | — |
| | — |
| | — |
| | (11,634 | ) | | (11,634 | ) |
Balance at March 31, 2019 | 5,446 |
| | 54 |
| | 150,221 |
| | (70,226 | ) | | 80,049 |
|
Share-based compensation | — |
| | — |
| | 256 |
| | — |
| | 256 |
|
Net loss | — |
| | — |
| | — |
| | (10,749 | ) | | (10,749 | ) |
Balance at June 30, 2019 | 5,446 |
| | $ | 54 |
| | $ | 150,477 |
| | $ | (80,975 | ) | | $ | 69,556 |
|
For the three and six months ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amount | | | |
Balance at December 31, 2017 | 5,336 |
| | $ | 53 |
| | $ | 148,866 |
| | $ | (25,985 | ) | | $ | 122,934 |
|
Share-based compensation | — |
| | — |
| | 251 |
| | — |
| | 251 |
|
Net loss | — |
| | — |
| | — |
| | (8,529 | ) | | (8,529 | ) |
Balance at March 31, 2018 | 5,336 |
| | 53 |
| | 149,117 |
| | (34,514 | ) | | 114,656 |
|
Share-based compensation | — |
| | — |
| | 247 |
| | — |
| | 247 |
|
Net loss | — |
| | — |
| | — |
| | (8,766 | ) | | (8,766 | ) |
Balance at June 30, 2018 | 5,336 |
| | $ | 53 |
| | $ | 149,364 |
| | $ | (43,280 | ) | | $ | 106,137 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forbes Energy Services Ltd.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Nature of Operations
Nature of BusinessOperations
Forbes Energy Services Ltd., or FES Ltd., is an independent oilfield services contractor that provides a wide range of well site services to oil and natural gas drilling and producing companies to help develop and enhance the production of oil and natural gas. These services include fluid hauling, fluid disposal, well maintenance, completion services, workovers and re-completions,recompletions, plugging and abandonment, and tubing testing. The Company's operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with an additional location in Pennsylvania. The Company believes that its broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of its customers'our customers’ wells.
As used in these Consolidated Financial Statements,condensed consolidated financial statements, the “Company,” “we,”“Company”, “we” and “our” mean FES Ltd. and its direct and indirect subsidiaries, except as otherwise indicated.
2. Basis of Presentation
Fresh Start Accounting
On January 22, 2017, FES Ltd. and its domestic subsidiaries, or collectively, the Debtors, filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas-Corpus Christi Division, or the Bankruptcy Court, pursuant to the terms of a restructuring support agreement that contemplated the reorganization of the Debtors pursuant to a prepackaged plan of reorganization, as amended and supplemented, the Plan. On March 29, 2017, the Bankruptcy Court entered an order confirming the Plan. On April 13, 2017, or the Effective Date, the Plan became effective pursuant to its terms and the Debtors emerged from their chapter 11 cases.
Upon emergence from bankruptcy on the Effective Date, the Company qualified for and adopted fresh start accounting in accordance with the provisions of ASC 852 as (i) the holders of FES Ltd.’s prior common stock, par value $0.04 per share, or the Old Common Stock, received none of the new class of common stock, par value $0.01 per share, or the New Common Stock, issued upon the Debtors' emergence from bankruptcy and (ii) the reorganization value of the Company's assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims. The effects of the Plan and the application of fresh start accounting are reflected in the Company's condensed consolidated financial statements from and after April 13, 2017. References to the "Successor" pertain to the Company from and after the Effective Date. References to "Predecessor" pertain to the Company prior to the Effective Date.
The Company applied fresh start accounting from and after the Effective Date. Fresh start accounting required the Company to present its assets, liabilities and equity as if it were a new entity upon emergence from bankruptcy, with no beginning retained earnings or deficit as of the fresh start reporting date. As a result of the adoption of fresh start accounting, the Company’s unaudited condensed consolidated financial statements from and after the Effective Date will not be comparable to its financial statements prior to such date.
Reorganization Items
Reorganization items represent amounts incurred subsequent to the filing of the Bankruptcy Petitions as a direct result of the filing of the Plan and are comprised of the following (in thousands):
|
| | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | April 13 through June 30, 2017 | | | April 1 through April 12, 2017 | January 1 through April 12, 2017 |
Reorganization legal and professional fees | | $ | (1,299 | ) | | | $ | (2,246 | ) | $ | (6,729 | ) |
Deferred loan costs expensed | | — |
| | | — |
| (2,104 | ) |
Gain on settlement of liabilities subject to compromise | | — |
| | | 140,441 |
| 140,441 |
|
Fresh start adjustments | | — |
| | | (87,105 | ) | (87,105 | ) |
Gain (loss) on reorganization items, net | | $ | (1,299 | ) | | | $ | 51,090 |
| $ | 44,503 |
|
Interim Financial Information
The unaudited condensed consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these condensed consolidated financial statements should be read along with the annual audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments which are of normal recurring natures considered necessary for a fair representation have been made in the accompanying unaudited financial statements.
Use of Estimates,
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated balance sheets and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
Cash - Restricted
Restricted cash at June 30, 2018 (Successor) and December 31, 2017 (Successor) was $19.7 million and $30.0 million, respectively. The components of restricted cash at June 30, 2018 (Successor) included $11.0 million related to the loan and security agreement which provides for a term loan of $50.0 million, or the New Loan Agreement, which is subject to satisfaction of certain release restrictions and $8.7 million in a cash collateral account related to letters of credit and the Company's corporate credit card program under a new letter of credit facility entered into with Regions, or the New Regions Letter of Credit Facility. The release conditions set forth in the New Loan Agreement include, among other things, (i) no default or event of default under the New Loan Agreement having occurred or being continuing as of the date of the requested release of proceeds of the New Loan Agreement, or that would exist after giving effect to the release requested to be made on such date, and (ii) the Company’s unrestricted cash and cash equivalents being less than $7.0 million after giving pro forma effect to the requested release.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," or ASU 2014-09, which provides guidance for revenue recognition and which supersedes nearly all existing revenue recognition guidance under ASU 2014-09 and created ASC 606. This ASU provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On January 1, 2018, the Company adopted ASC 606 on a modified retrospective basis for all contracts. As a result of the Company's adoption, there were no changes to the timing of the revenue recognition or measurement of revenue, and there was no cumulative effect of adoption as of January 1, 2018. Therefore, the only changes to the financial statements related to the adoption are in the footnote disclosures as included here-in.
Revenue is measured as consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by providing service to a customer. Amounts are billed upon completion of service and are generally due within 30 days.
The Company has its principal revenue generating activities organized into two service lines, well servicing and fluid logistics. The Company's well servicing line consists primarily of maintenance, workover, completion, plugging and
abandonment, and tubing testing services. The Company's fluid logistics line provides supporting services to the well servicing line as well as direct sales to customers for fluid management and movement. The Company generally establishes a master services agreement with each customer and provides associated services on a work order basis in increments of days, by the hour for services performed or on occasion, bid/turnkey pricing. Services provided under the well servicing and the fluid logistics segments are short in duration and generally completed within 30 days.
The majority of the Company’s contracts with customers in both the well servicing and fluid logistics segments are short-term in nature and are recognized as “over-time” performance obligations as the services are performed. The Company applies the “as-invoiced” practical expedient as the amount of consideration the Company has a right to invoice corresponds directly with the value of the Company’s performance to date. Because of the short-term nature of the Company’s services, which generally last a few hours to multiple days, the Company does not have any contracts with a duration longer than one year that require disclosure. The Company has no material contract assets or liabilities.
The Company does not have any revenue expected to be recognized in the future related to remaining performance obligations or contracts with a variable consideration related to undelivered performance obligations. There was no revenue recognized in the current period from performance obligations satisfied in previous periods. The Company's significant judgments made in connection with the adoption of ASC 606 included the determination of when the Company satisfies its performance obligation to customers and the applicability of the as invoiced practical expedient.
The following tables show revenue disaggregated by primary geographical markets and major service lines for the three months ended June 30, 2018 (Successor) and the periods of April 13 through June 30, 2017 (Successor) and April 1 through April 12, 2017 (Predecessor).
|
| | | | | | | | | | | |
Successor | | | Three months ended June 30, 2018 |
| | Well Servicing | Fluid Logistics | Total |
Primary Geographical Markets | | (in thousands) |
South Texas | | | $ | 18,131 |
| $ | 6,669 |
| $ | 24,800 |
|
East Texas (1) | | | 1,007 |
| 577 |
| 1,584 |
|
Central Texas | | | — |
| 3,461 |
| 3,461 |
|
West Texas | | | 8,237 |
| 3,159 |
| 11,396 |
|
Total | | | $ | 27,375 |
| $ | 13,866 |
| $ | 41,241 |
|
|
| | | | | | | | | | | |
Successor | | | April 13 through June 30, 2017 |
| | Well Servicing | Fluid Logistics | Total |
Primary Geographical Markets | | (in thousands) |
South Texas | | | $ | 14,470 |
| $ | 5,261 |
| $ | 19,731 |
|
East Texas (1) | | | 617 |
| 626 |
| 1,243 |
|
Central Texas | | | — |
| 2,485 |
| 2,485 |
|
West Texas | | | 3,052 |
| 1,339 |
| 4,391 |
|
Total | | | $ | 18,139 |
| $ | 9,711 |
| $ | 27,850 |
|
|
| | | | | | | | | | | |
Predecessor | | | April 1 through April 12, 2017 |
| | Well Servicing | Fluid Logistics | Total |
Primary Geographical Markets | | (in thousands) |
South Texas | | | $ | 1,885 |
| $ | 659 |
| $ | 2,544 |
|
East Texas (1) | | | 100 |
| 114 |
| 214 |
|
Central Texas | | | — |
| 189 |
| 189 |
|
West Texas | | | 464 |
| 307 |
| 771 |
|
Total | | | $ | 2,449 |
| $ | 1,269 |
| $ | 3,718 |
|
| | | | | |
(1) Includes revenues from the Company's operations in Pennsylvania. | | |
The following tables show revenue disaggregated by primary geographical markets and major service lines for the six months ended June 30, 2018 (Successor) and the periods of April 13 through June 30, 2017 (Successor) and January 1 through April 12, 2017 (Predecessor).
|
| | | | | | | | | | | |
Successor | | | Six months ended June 30, 2018 |
| | Well Servicing | Fluid Logistics | Total |
Primary Geographical Markets | | (in thousands) |
South Texas | | | $ | 34,787 |
| $ | 13,300 |
| $ | 48,087 |
|
East Texas (1) | | | 1,660 |
| 1,152 |
| 2,812 |
|
Central Texas | | | — |
| 6,464 |
| 6,464 |
|
West Texas | | | 13,784 |
| 5,685 |
| 19,469 |
|
Total | | | $ | 50,231 |
| $ | 26,601 |
| $ | 76,832 |
|
|
| | | | | | | | | | | |
Successor | | | April 13 through June 30, 2017 |
| | Well Servicing | Fluid Logistics | Total |
Primary Geographical Markets | | (in thousands) |
South Texas | | | $ | 14,470 |
| $ | 5,261 |
| $ | 19,731 |
|
East Texas (1) | | | 617 |
| 626 |
| 1,243 |
|
Central Texas | | | — |
| 2,485 |
| 2,485 |
|
West Texas | | | 3,052 |
| 1,339 |
| 4,391 |
|
Total | | | $ | 18,139 |
| $ | 9,711 |
| $ | 27,850 |
|
|
| | | | | | | | | | | |
Predecessor | | | January 1 through April 12, 2017 |
| | Well Servicing | Fluid Logistics | Total |
Primary Geographical Markets | | (in thousands) |
South Texas | | | $ | 14,691 |
| $ | 5,872 |
| $ | 20,563 |
|
East Texas (1) | | | 868 |
| 945 |
| 1,813 |
|
Central Texas | | | — |
| 1,593 |
| 1,593 |
|
West Texas | | | 3,995 |
| 2,801 |
| 6,796 |
|
Total | | | $ | 19,554 |
| $ | 11,211 |
| $ | 30,765 |
|
| | | | | |
(1) Includes revenues from the Company's operations in Pennsylvania. | | |
3. Risk Risks and Uncertainties
As an independent oilfield services contractor that provides a broad range of drilling-related and production-related services to oil and natural gas companies, primarily onshore in Texas, the Company's revenue, profitability, cash flows and future rate of growth are substantially dependent on its ability to (1) maintain adequate equipment utilization, (2) maintain adequate pricing for the services it provides, and (3) maintain a trained workforce. Failure to do so could adversely affect the Company's financial position, results of operations, and cash flows.
Because the Company's revenues are generated primarily from customers who are subject to the same factors as the Company, the Company's operations are also susceptible to market volatility resulting from economic, cyclical, weather, or other factors related to such industry. The Company is subject to changes in the level of operating and capital spending in the industry, decreases in oil and natural gas prices, and/or industry perception about future oil and natural gas prices that may materially decrease demand for the Company's services, or may have an adverse effect on our financial position, results of operations and cash flows.
2. Basis of Presentation
Interim Financial Information
The unaudited condensed consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these condensed consolidated financial statements should be read along with the annual audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments which are of normal recurring natures considered necessary for a fair representation have been made in the accompanying unaudited financial statements.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated balance sheets and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation with no material effect on the unaudited condensed consolidated financial statements.
Fair Values of Financial Instruments
Fair value is the price that would be received to sell an asset, or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date.
There is a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
Level 3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
In valuing certain assets and liabilities, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, assets and liabilities are classified in their entirety in the fair value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels.
The carrying amounts of cash and cash equivalents, accounts receivable-trade, accounts receivable-other, accounts payable-trade and insurance notes approximate fair value because of the short maturity of these instruments. The fair values of finance leases approximate their carrying values, based on current market rates at which the Company could borrow funds with similar maturities (Level 2 in the fair value hierarchy). The fair values of the Term Loan Agreement, Bridge Loan and the PIK Notes as of the respective dates are set forth below (in thousands):
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Term Loan Agreement | $ | 60,850 |
| | $ | 64,198 |
| | $ | 62,335 |
| | $ | 65,794 |
|
Bridge Loan | $ | — |
| | $ | — |
| | $ | 49,568 |
| | $ | 50,000 |
|
PIK Notes | $ | 54,131 |
| | $ | 61,919 |
| | $ | — |
| | $ | — |
|
Cash, Cash Equivalents and Cash - Restricted
The following table provides a reconciliation of cash, cash equivalents and cash - restricted reported within the consolidated balance sheets to the same such amounts shown in the consolidated statements of cash flows (in thousands).
|
| | | | | | | | |
| | June 30, |
| | 2019 | | 2018 |
Cash and cash equivalents | | $ | 1,030 |
| | $ | 5,383 |
|
Cash - restricted | | 73 |
| | 19,701 |
|
Cash and cash equivalents and cash - restricted as shown in the consolidated statement of cash flows | | $ | 1,103 |
| | $ | 25,084 |
|
The Company's restricted cash at June 30, 2018 included $11.0 million related to a prior restriction under the Term Loan Agreement and $8.7 million as collateral for certain outstanding letters of credit and the Company's corporate credit card program under a prior credit facility with Regions.
Revenue Recognition
Revenue is measured as consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by providing service to a customer. Amounts are billed upon completion of service and are generally due within 30 days.
The Company has its principal revenue generating activities organized into three service lines, well servicing, coiled tubing and fluid logistics. The Company's well servicing line consists primarily of maintenance, workover, completion, plugging and abandonment, and tubing testing services. The Company's coiled tubing line consists of maintenance, workover and completion services. The Company's fluid logistics line provides supporting services to the well servicing line as well as direct sales to customers for fluid management and movement. The Company generally establishes a master services agreement with each customer and provides associated services on a work order basis in increments of days, by the hour for services performed or on occasion, bid/turnkey pricing. Services provided under the well servicing, coiled tubing and the fluid logistics segments are short in duration and generally completed within 30 days.
The majority of the Company’s contracts with customers in the well servicing, coiled tubing and fluid logistics segments are short-term in nature and are recognized as “over-time” performance obligations as the services are performed. The Company applies the “as-invoiced” practical expedient as the amount of consideration the Company has a right to invoice corresponds directly with the value of the Company’s performance to date. Because of the short-term nature of the Company’s services, which generally last a few hours to multiple days, the Company does not have any contracts with a duration longer than one year that require disclosure. The Company has no material contract assets or liabilities.
The Company does not have any revenue expected to be recognized in the future related to remaining performance obligations or contracts with variable consideration related to undelivered performance obligations. There was no revenue recognized in the current period from performance obligations satisfied in previous periods. The Company's significant judgments made in connection with the adoption of ASC 606 included the determination of when the Company satisfies its performance obligation to customers and the applicability of the as invoiced practical expedient.
Leases
Effective January 1, 2019, the Company adopted an accounting standard update issued by the Financial Accounting Standards Board (FASB) related to accounting for leases, which requires lessees to record assets and liabilities that arise for all leases on their balance sheet and expanded financial statement disclosures for both lessees and lessors. Previously, only capital leases were recorded on the balance sheet. This update requires lessees to recognize a lease liability equal to the present value of its lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities and instead recognize lease expense for such leases generally on a straight-line basis over the lease term. Leases with a term of longer than 12 months will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The Company adopted this standard on a prospective basis using the optional modified retrospective transition method. As such, the comparative financial information has not been restated and continues to be reported under the lease standard in effect during those periods. The Company also elected other practical expedients provided by the new standard, including the package of practical expedients, the hindsight practical expedient and the short-term lease recognition practical expedient in which leases with a term of 12 months or less are not recognized on the balance sheet. The adoption of this standard resulted in the recognition of approximately $6.2 million of operating lease right-of-use assets and operating lease liabilities on the balance sheet as of January 1, 2019. The adoption of this standard did not materially impact the condensed consolidated statements of operations for the three and six months ended June 30, 2019. See Note 8 for the expanded lease disclosures required by the new standard.
3. Acquisition of Cretic Energy Services, LLC
On November 16, 2018, the Company acquired 100% of the outstanding units of Cretic Energy Services, LLC (Cretic). The acquisition of Cretic was accounted for as a business combination using the acquisition method of accounting. The aggregate purchase price was $69.4 million in cash (net of $2.2 million cash acquired).
The purchase price paid in the acquisition has been preliminarily allocated to record the acquired assets and assumed liabilities based on their estimated fair value. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that consideration paid exceeded the fair value of the net assets acquired. The goodwill recorded was primarily attributable to synergies related to the Company’s coiled tubing business strategy that are expected to arise from the Cretic acquisition and was attributable to the Company’s coiled tubing segment.
Proforma Results from the Cretic Acquisition (unaudited)
The following unaudited consolidated pro forma information is presented as if the Cretic acquisition had occurred on January 1, 2018 (in thousands):
|
| | | | | | | | |
| | Pro Forma |
| | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
Revenue | | $ | 57,611 |
| | $ | 107,067 |
|
| | | | |
Net loss | | $ | (8,926 | ) | | $ | (19,498 | ) |
The unaudited pro forma amounts above have been calculated after applying the Company’s accounting policies and adjusting the Cretic acquisition results to reflect the increase to interest expense and depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied from January 1, 2018 and other related pro forma adjustments. The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the Cretic acquisition, and are presented for illustrative purposes only and are not necessarily indicative of results that would have been achieved if the Cretic acquisition had occurred as of January 1, 2018 or of future operating performance.
4. Property and Equipment
Property and equipment consisted of the following:following (in thousands):
| | | | Successor | |
| Estimated Life in Years | | June 30, 2018 | | December 31, 2017 | | | | | | |
| | | (in thousands) | Estimated Life in Years | | June 30, 2019 | | December 31, 2018 |
Well servicing equipment | 9-15 years | | $ | 87,268 |
| | $ | 80,899 |
| 9-15 years | | $ | 132,358 |
| | $ | 128,647 |
|
Autos and trucks | 5-10 years | | 46,121 |
| | 42,831 |
| 5-10 years | | 25,375 |
| | 32,132 |
|
Autos and trucks - finance lease | | 5-10 years | | 23,198 |
| | 20,416 |
|
Disposal wells | 5-15 years | | 3,977 |
| | 3,977 |
| 5-15 years | | 4,159 |
| | 3,977 |
|
Building and improvements | 5-30 years | | 5,668 |
| | 5,474 |
| 5-30 years | | 5,901 |
| | 5,705 |
|
Furniture and fixtures | 3-15 years | | 2,146 |
| | 1,950 |
| 3-15 years | | 3,032 |
| | 2,797 |
|
Land | | 868 |
| | 868 |
| | 868 |
| | 868 |
|
| | 146,048 |
| | 135,999 |
| | 194,891 |
| | 194,542 |
|
Accumulated depreciation | | (32,574 | ) | | (18,808 | ) | |
Accumulated depreciation (1) | | | (56,111 | ) | | (45,934 | ) |
| | $ | 113,474 |
| | $ | 117,191 |
| | $ | 138,780 |
| | $ | 148,608 |
|
(1) Includes accumulated depreciation of finance lease assets of $6.1 million and $4.5 million at June 30, 2019 and December 31, 2018, respectively.
Depreciation expense was $7.4 million, $5.5$6.7 million and $1.5$7.4 million for the three months ended June 30, 2019 and 2018, (Successor)respectively, and the periods of April 13 through June 30, 2017 (Successor) and April 1 through April 12, 2017 (Predecessor), respectively. Depreciation expense was $14.2 million, $5.5$15.7 million and $13.4$14.2 million for the six months ended June 30, 2019 and 2018, (Successor)respectively. Depreciation of assets held under finance leases was $1.1 million and the periods of April 13 through June 30, 2017 (Successor) and January 1 through April 12, 2017 (Predecessor), respectively.
5. Intangible Assets
The Company's major class of intangible assets subject to amortization consists of customer relationships, trade names and covenants not to compete. The Company expenses costs associated with extensions or renewals of intangible assets. There were no such extensions or renewals in each of the three and six months ended June 30, 2018 (Successor), the period of April 13 through June 30, 2017 (Successor) and the period of January 1 through April 12, 2017 (Predecessor). Amortization expense is calculated using the straight-line method over the period indicated. Amortization expense$0.7 million for the three months ended June 30, 2019 and 2018, (Successor), the period of April 13 through June 30, 2017 (Successor)respectively, and the period of April 1 through April 12, 2017 (Predecessor) was $0.3 million, $0.2$2.3 million and less than $0.1$1.4 million respectively. Amortization expense for the six months ended June 30, 2019 and 2018, (Successor),respectively, and is included in depreciation and amortization expense in the periodaccompanying condensed consolidated statements of April 13 throughoperations.
5. Goodwill and Other Intangible Assets
Goodwill
Goodwill totaled $19.7 million at June 30, 2017 (Successor)2019 and December 31, 2018 related to the periodacquisition of January 1 through April 12, 2017 (Predecessor) was $0.6 million, $0.2 millionCretic and $0.2 million, respectively.is deductible for tax purposes.
Other Intangible Assets
The following table sets forth the identified other intangible assets by major asset class:class (in thousands):
| | | Useful Life (years) | | Gross Carrying Value | | Accumulated Amortization | | Net Book Value | Useful Life (years) | | Gross Carrying Value | | Accumulated Amortization | | Net Book Value |
| | | (in thousands) | |
As of June 30, 2018 (Successor) | | | | | | | |
June 30, 2019 | | | | | | | |
Customer relationships | 15 | | $ | 8,678 |
| | $ | (704 | ) | | $ | 7,974 |
| 6-15 | | $ | 11,378 |
| | $ | (1,318 | ) | | $ | 10,060 |
|
Trade names | 15 | | 2,472 |
| | (201 | ) | | 2,271 |
| 10-15 | | 3,072 |
| | (608 | ) | | 2,464 |
|
Covenants not to compete | 4 | | 1,505 |
| | (458 | ) | | 1,047 |
| 4 | | 1,505 |
| | (834 | ) | | 671 |
|
| | $ | 12,655 |
| | $ | (1,363 | ) | | $ | 11,292 |
| | $ | 15,955 |
| | $ | (2,760 | ) | | $ | 13,195 |
|
| | | | | | | |
| Useful Life (years) | | Gross Carrying Value | | Accumulated Amortization | | Net Book Value | |
| | | (in thousands) | |
As of December 31, 2017 (Successor) | | | | | | | |
December 31, 2018 | | | | | | | |
Customer relationships | 15 | | $ | 8,678 |
| | $ | (415 | ) | | $ | 8,263 |
| 6-15 | | $ | 11,378 |
| | $ | (832 | ) | | $ | 10,546 |
|
Trade names | 15 | | 2,472 |
| | (118 | ) | | 2,354 |
| 10-15 | | 3,072 |
| | (496 | ) | | 2,576 |
|
Covenants not to compete | 4 | | 1,505 |
| | (270 | ) | | 1,235 |
| 4 | | 1,505 |
| | (647 | ) | | 858 |
|
| | $ | 12,655 |
| | $ | (803 | ) | | $ | 11,852 |
| | $ | 15,955 |
| | $ | (1,975 | ) | | $ | 13,980 |
|
Amortization expense was $0.3 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively, and $0.8 million and $0.6 million for the six months ended June 30, 2019 and 2018, respectively.
Future amortization of these intangibles will be as follows:
|
| | | |
2019 | $ | 819 |
|
2020 | 1,637 |
|
2021 | 1,367 |
|
2022 | 1,261 |
|
2023 | 1,261 |
|
Thereafter | 6,850 |
|
| $ | 13,195 |
|
6. Long-Term Debt
Long-term debt at June 30, 2018 and December 31, 2017 consisted of the following (in thousands):
| | | Successor | June 30, 2019 | | December 31, 2018 |
| June 30, 2018 | | | December 31, 2017 | |
| (in thousands) | |
Third party equipment notes and capital leases | $ | 6,547 |
| | $ | 5,822 |
| |
Term Loan Agreement of $55.0 million and $60.0 million, plus $8.9 million and $6.0 million of accrued interest paid in kind and net of debt discount of $3.0 million and $3.6 million as of June 30, 2019 and December 31, 2018, respectively | | $ | 60,850 |
| | $ | 62,335 |
|
PIK Notes, including $2.4 million accretion of interest and conversion premium | | 54,131 |
| | — |
|
Bridge Loan of $50.0 million, net of debt discount of $0.4 million as of December 31, 2018 | | — |
| | 49,568 |
|
Revolving Loan Agreement | | 6,000 |
| | — |
|
Finance leases | | 13,258 |
| | 13,319 |
|
Insurance notes | 847 |
| | 5,882 |
| 962 |
| | 5,194 |
|
New Loan Agreement, including $4.7 million and $1.7 million of accrued interest paid in kind and net of debt discount of $4.1 million and $4.5 million as of June 30, 2018 and December 31, 2017, respectively | 50,589 |
| | 47,150 |
| |
Total debt | 57,983 |
| | 58,854 |
| 135,201 |
| | 130,416 |
|
Less: Current portion | (2,765 | ) | | (7,566 | ) | (60,273 | ) | | (59,321 | ) |
Total long-term debt | $ | 55,218 |
| | $ | 51,288 |
| $ | 74,928 |
| | $ | 71,095 |
|
New
Term Loan Agreement
On the Effective Date,April 13, 2017, the Company entered into the NewTerm Loan Agreement. Forbes Energy ServicesFES LLC is the borrower, or the Borrower, is the borrower under the NewTerm Loan Agreement. The Borrower’s obligations have been guaranteed by FES Ltd. and by Texas Energy Services, LLC, C.C. Forbes, LLCTES, CCF and Forbes Energy International, LLC,FEI, each direct subsidiaries of the Borrower and indirect subsidiaries of FES Ltd. The NewTerm Loan Agreement, as amended, provides for a term loan of $50.0$60.0 million, which was fully funded on the Effective Date.excluding paid in kind interest. Subject to certain exceptions and permitted encumbrances, the obligations under this loanthe Term Loan Agreement are secured by a first priority security interest in substantially all the assets of the Company other than accounts receivable, cash collateralizingand related assets, which constitute priority collateral under the New Regions Letters of Credit Facility. Such term loanRevolving Loan Agreement (described below). The Term Loan Agreement has a stated maturity date of April 13, 2021. The proceeds of such term loan are only permitted to be used for (i) the payment on account of the Prior Senior Notes in an amount equal to $20.0 million; (ii) the payment of costs, expenses and fees incurred on or prior to the Effective Date in connection with the preparation, negotiation, execution and delivery of the New Loan Agreement and documents related thereto; and (iii) subject to satisfaction of certain release conditions set forth in the New Loan Agreement, for general operating, working capital and other general corporate purposes of the Borrower not otherwise prohibited by the terms of the New Loan Agreement. The release conditions set forth in the New Loan Agreement include, among other things, (i) no default or event of default under the New Loan Agreement having occurred or being continuing as of the date of the requested release of proceeds of the New Loan Agreement, or that would exist after giving effect to the release requested to be made on such date, and (ii) the Company’s unrestricted cash and cash equivalents being less than $7.0 million after giving pro forma effect to the requested release. At June 30, 2018, $11.0 million included in restricted cash was subject to these release restrictions.
Borrowings under this term loanthe Term Loan Agreement bear interest at a rate equal to five percent (5%) per annum payable quarterly in cash, or the Cash Interest Rate, plus (ii) an initial rate for paid in kind interest rate of seven percent (7%) commencing April 13, 2017 to be capitalized and added to the principal amount of the term loan on the first day of each quarter or, at the election of the Borrower, paid in cash. The paid in kind interest increases by two percent (2%) twelve months after the Effective DateApril 13, 2017 and every twelve months thereafter until maturity. Upon and after the occurrence of an event of default, the Cash Interest Rate will increase by two percentage points per annum. During the six months ended June 30, 2019, $2.9 million of interest was paid in kind. At June 30, 2018,2019, the applicablepaid in kind interest rate was 14% per annum.
11%.
The NewTerm Loan Agreement includes customary negative covenants for an asset-based term loan, including covenants limiting the ability of the Company to, among other things, (i) effect mergers and consolidations, (ii) sell assets, (iii) create or suffer to exist any lien, (iv) make certain investments, (v) incur debt and (vi) transact with affiliates. In addition, the NewTerm Loan Agreement includes customary affirmative covenants for an asset-based term loan, including covenants regarding the delivery of financial statements, reports and notices to the Agent. The NewTerm Loan Agreement also contains customary representations and warranties and event of default provisions for a secured term loan.
Amendment to Term Loan Agreement and Joinder
In connection with the Cretic acquisition, on November 16, 2018, the Company, as a guarantor, FES LLC, as borrower, and certain of their subsidiaries, as guarantors, entered into Amendment No. 1 to Loan and Security Agreement and Pledge and Security Agreement (the “Term Loan Amendment”) with the lenders party thereto and Wilmington Trust, National Association, as agent (the “Term Loan Agent”), pursuant to which the Term Loan Agreement, was amended to, among other things, permit (i) debt under the Revolving Loan Agreement (described below) and the liens securing the obligations thereunder, (ii) the incurrence of add-on term loans under the Term Loan Agreement in an aggregate principal amount of $10.0 million and (iii) the incurrence of one-year “last-out” bridge loans under the Term Loan Agreement in an aggregate principal amount of $50.0 million (the “Bridge Loan”).
In addition, on November 16, 2018, Cretic entered into joinder documentation pursuant to which it became a guarantor under the Term Loan Agreement and a pledgor under the Pledge and Security Agreement referred to in the Term Loan Agreement.
Revolving Loan Agreement
In connection with the Cretic Acquisition, on November 16, 2018, the Company and certain of its subsidiaries, as borrowers, entered into a Credit Agreement (the “Revolving Loan Agreement”) with the lenders party thereto and Regions Bank, as administrative agent and collateral agent (the “Revolver Agent”). The Revolving Loan Agreement provides for $35 million of revolving loan commitments, subject to a borrowing base comprised of 85% of eligible accounts receivable, 90% of eligible investment grade accounts receivable and 100% of eligible cash, less reserves. The loans under the Revolving Loan Agreement accrue interest at a floating rate of LIBOR plus 2.50% - 3.25%, or a base rate plus 1.50% - 2.25%, with the margin based on the fixed charge coverage ratio from time to time.
The Revolving Loan Agreement is secured on a first lien basis by substantially all assets of the Company and its subsidiaries, subject to an intercreditor agreement between the Revolver Agent and the Term Loan Agent which provides that the priority collateral for the Revolving Loan Agreement consists of accounts receivable, cash and related assets, and that the other assets of the Company and its subsidiaries constitute priority collateral for the Term Loan Agreement. At June 30, 2018,2019 we arehad $6.0 million borrowings outstanding, $6.1 million in compliance with our New Loan Agreement.
New Regions Letters of Credit Facility
On the Effective Date the Company entered into the New Regions Letters of Credit Facility pursuant to which Regions may issue, upon request by the Company, letters of credit outstanding and continue to provide charge cards for use byavailability of $9.9 million.
5% Subordinated Convertible PIK Notes
On March 4, 2019, the Company. Amounts available underCompany issued $51.8 million aggregate original principal amount of 5.00% Subordinated Convertible PIK Notes due June 30, 2020 (the “PIK Notes”). On March 4, 2019, the New Regions Letters of Credit Facility are subject to customary feesCompany, as Issuer, and are secured by a first-priority lien on, and security interest in, a cash collateral account with Regions containing cash equal to at least (i) 105%Wilmington Trust, National Association, as Trustee, entered into an Indenture governing the terms of the sumPIK Notes.
The PIK Notes bear interest at a rate of (a) all amounts owing for any drawings under letters5.00% per annum. Interest on the PIK Notes will be capitalized to principal semi-annually in arrears on July 1 and January 1 of credit, including any reimbursement obligations, (b)each year, commencing on July 1, 2019.
The PIK Notes are the aggregate undrawn amount of all outstanding letters of credit, (c) all sums owing to Regions or any affiliate pursuant to any letter of credit document and (d) allunsecured general subordinated obligations of the Company arising thereunder, includingand are subordinated in right of payment to any indemnitiesexisting and obligations for reimbursementfuture secured or unsecured senior debt of expenses and (ii) 120% of the aggregate line of credit for charge cards issued by Regions to the Company. The feespayment of the principal of, premium, if any, and interest on the PIK Notes will be subordinated to the prior payment in full of all of the Company’s existing and future senior
indebtedness. In the event of a liquidation, dissolution, reorganization or any similar proceeding, obligations on the PIK Notes will be paid only after senior indebtedness has been paid in full. Pursuant to the Indenture, the Company is not permitted to (1) make cash payments to pay principal of, premium, if any, and interest on or any other amounts owing in respect of the PIK Notes, or (2) purchase, redeem or otherwise retire the PIK Notes for each lettercash, if any senior indebtedness is not paid when due or any other default on senior indebtedness occurs and the maturity of credit forsuch indebtedness is accelerated in accordance with its terms unless, in any case, the period fromdefault has been cured or waived, and excludingthe acceleration has been rescinded or the senior indebtedness has been repaid in full.
The Indenture also provides that upon a default by the Company in the payment when due of principal of, or premium, if any, or interest on, indebtedness in the aggregate principal amount then outstanding of $5.0 million or more, or acceleration of the Company’s indebtedness so that it becomes due and payable before the date on which it would otherwise have become due and payable, and if such default is not cured or waived within 30 days after notice to the Company by the Trustee or by holders of issuance of such letter of credit to and including the date of expiration or termination, are equal to (x) the average daily faceat least 25% in aggregate principal amount of eachthe PIK Notes then outstanding, letterthe principal of, credit multiplied by (y) a per annum rate determined by Regions(and premium, if any) and accrued and unpaid interest on, the PIK Notes may be declared immediately due and payable.
The PIK Notes are redeemable in whole or from time to time in its discretion based upon such factors as Regions shall determine, including, without limitation,part at the credit quality and financial performanceCompany’s option at a redemption price equal to the sum of (i) 100.0% of the Company.principal amount of the PIK Notes to be redeemed and (ii) accrued and unpaid interest thereon to, but excluding, the redemption date, which amounts may be payable in cash or in shares of the Company’s common stock, (subject to limitations, if any, in the documentation governing the Company’s senior indebtedness). If redeemed for the Company’s common stock the holder will receive a number of shares of the Company’s common stock calculated based on the Fair Market Value of a share of the Company’s common stock at such time, in each case less a 15% discount per share. The 15% discount represents an implied conversion premium at issuance which will be settled in common stock at the date of conversion. As such, the face value of the PIK Notes will be accreted to the settlement amount at June 30, 2018, such rate was 3.00%. In2020. For the event the Company is unable to repay amounts due under the New Regions Letters of Credit Facility, Regions could proceed against such cash collateral account. Regions has no commitment under the New Regions Letters of Credit Facility to issue letters of credit. At June 30, 2018, the facility had $8.6 million in letters of credit outstanding.
Capital Leases
The Company financed the purchase of certain vehiclesthree and equipment through commercial loans and capital leases with aggregate principal amounts outstanding as of June 30, 2018 (Successor) and December 31, 2017 (Successor) of approximately $6.5 million and $5.8 million, respectively. These loans are repayable in a range of 42 to 48 monthly installments with the maturity dates ranging from July 2018 to June 2022. Interest accrues at rates ranging from 3.4% to 4.9% and is payable monthly. The loans are collateralized by equipment purchased with the proceeds of such loans. The Company paid total principal payments of approximately $0.5 million during the threesix months ended June 30, 2018 (Successor)2019, the Company recorded $1.8 million and $2.4 million, respectively in interest expense related to the accretion of the conversion premium.
The Indenture contains provisions permitting the Company and the trustee in certain circumstances, without the consent of the holders of the PIK Notes, and in certain other circumstances, with the consent of the holders of not less than a majority in aggregate principal amount of the PIK Notes at the time outstanding to execute supplemental indentures modifying the terms of the Indenture and the PIK Notes as described It also provided in the Indenture that, subject to certain exceptions, the holders of a majority in aggregate principal amount of the PIK Notes at the time outstanding may on behalf of the holders of all the PIK Notes waive any past default or event of default under the Indenture and its consequences.
The Indenture provides for mandatory conversion of the PIK Notes at maturity (or such earlier date as the Company shall elect to redeem the PIK Notes), $0.3or upon a Marketed Public Offering of the Company’s common stock or a Change of Control, in each case as defined in the Indenture, at a conversion rate per $100 principal amount of PIK Notes into a number of shares of the Company’s common stock calculated based on the Fair Market Value of a share of the Company’s common stock at such time, in each case less a 15% discount per share.
Fair Market Value means fair market value as determined by (A) in the case of a Marketed Public Offering, the offering price per share paid by public investors in the Marketed Public Offering, (B) in the case of a Change of Control, the value of the consideration paid per share by the acquirer in the Change of Control transaction, or (C) in the case of mandatory conversion at the Maturity Date (or such earlier date as the Company shall elect to redeem the PIK Notes), such value as shall be determined by a nationally recognized investment banking firm engaged by the Board of Directors of the Company.
The Company used the gross proceeds of $51.8 million that it received from the issuance of the PIK Notes to repay all of the outstanding principal and accrued and unpaid interest on the Bridge Loan.
Interest on the Bridge Loan prior to its repayment accrued at a rate of 14% (5% cash interest plus 9% PIK interest). The payment obligations of the Borrower under the Bridge Loan have been fully satisfied as of March 4, 2019.
The exchange of the Bridge Loan for the periodPIK Notes was recognized as a modification of April 13 through June 30, 2017 (Successor)the Term Loan as the amended Term Loan, resulting from the exchange, was not substantially different from the Term Loan. As such, the net carrying value of the Term Loan was not adjusted and April 1 through April 12, 2017 (Predecessor). The Company paid total principal paymentsa new effective interest that equates the revised cash flows of the modified Term Loan to the existing carrying value of the Term Loan was computed and applied prospectively. Costs incurred with third parties of approximately $1.0$1.6 million, duringrelated to the issuance of the PIK Notes, were recognized in interest expense for the six months ended June 30, 2018, $0.3 million for the period of April 13 through June 30, 2017 (Successor) and $0.4 million for the period of January 1 through April 12, 2017 (Predecessor).
Following are required principal payments due on capital leases existing as of June 30, 2018:
|
| | | | | | | | | | | | | | | | | | | |
| July - December 2018 | | 2019 | | 2020 | | 2021 | | 2022 and thereafter |
| (in thousands) |
Capital lease principal payments | $ | 958 |
| | $ | 1,939 |
| | $ | 2,017 |
| | $ | 1,488 |
| | $ | 145 |
|
Management has historically acquired all light duty trucks (pickup trucks) through capital leases and may use capital leases or cash to purchase equipment held under operating leases that have reached the end of the lease term. See Note 8 - Commitments and Contingencies.2019.
Insurance Notes
During October of 2017, theThe Company entered into an insurance promissory notenotes for the payment of insurance premiums at an interest rate of 2.9%4.99% and 3.27% respectively, with an aggregate principal amount outstanding of approximately $1.0 million and $5.2 million as of June 30, 2018 (Successor)2019 and December 31, 2017 (Successor),2018, respectively. The amount outstanding could be substantially offset by the cancellation of approximately $0.8 million and $5.9 million, respectively.the related insurance coverage which is classified in prepaid insurance.
7. Fair Value Measurements
Fair value is defined as the amount that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Financial Assets and Liabilities
The carrying amounts of cash and cash equivalents, accounts receivable-trade, accounts receivable-other, accounts payable-trade, and insurance notes, approximate fair value because of the short maturity of these instruments. The fair values of third party notes and equipment notes approximate their carrying values, based on current market rates at which the Company could borrow funds with similar maturities (Level 2 in the fair value hierarchy). The fair values of the New Loan Agreement as of the respective dates are set forth below:
|
| | | | | | | | | | | | | | | | |
| June 30, 2018 | | | December 31, 2017 |
| Carrying Amount | | Fair Value | | | Carrying Amount | | Fair Value |
Successor | (in thousands) |
New Loan Agreement | $ | 50,589 |
| | $ | 50,719 |
| | | $ | 47,150 |
| | $ | 55,550 |
|
8. Commitments and Contingencies
Concentrations of Credit Risk
FDICFinancial instruments which subject the Company to credit risk consist primarily of cash balances maintained in excess of federal depository insurance limits and trade receivables. Insurance coverage is currently $250,000 per depositor at each financial institution, and the Company's non-interest bearing cash balances typically exceedexceeded federally insured limits. The Company restricts investment of temporary cash investments to financial institutions with high credit standings.
The Company'sCompany’s customer base consists primarily of multi-national and independent oil and natural gas producers. The Company does not require collateral on its trade receivables. For the six months ended June 30, 2018 (Successor),2019, the Company's largest customer, five largest customers, and ten largest customers constituted 13.5%10.0%, 43.7%33.8% and 54.3% of consolidated revenues, respectively. For the six months ended June 30, 2018 (Successor), two customers constituted 13.5% and 12.4%46.5% of consolidated revenues, respectively. The loss of any one of the Company's top five customers could have a materially adverse effect on the revenues and profits of the Company. Further, the Company's trade accounts receivable are from companies within the oil and natural gas industry and as such the Company is exposed to normal industry credit risks. As of June 30, 2018,2019, the Company's largest customer, five largest customers, and ten largest customers constituted 7.3%4.8%, 37.3%27.0% and 41.9%44.2% of accounts receivable, respectively. The Company continually evaluates its reserves for potential credit losses and establishes reserves for such losses.
Employee Benefit Plan
The Company has a 401(k) retirement plan for substantially all of its employees based on certain eligibility requirements. The Company may provide profit sharing contributions to the plan at the discretion of management. No such discretionary contributions have been made since inception of the plan.
Litigation
From time to time, theThe Company is subject to various other claims and legal actions that arise in the ordinary course of business. There are no pending material legal proceedings,The Company does not believe that any of the currently existing claims and actions, separately or in the Company is not aware of any material threatened legal proceedings, to which the Company is a party or to which its property is subject that wouldaggregate, will have a material adverse effect on the Company's business, financial statements ascondition, results of June 30, 2018.operations, or cash flows. It is reasonably possible that cases could be resolved and result in liabilities that exceed the amounts currently reserved.
reserved; however, we cannot reasonably estimate a range of loss based on the status of the cases. If one or more negative outcomes were to occur relative to these matters, the aggregate impact to the Company’s financial condition could be material.
Self-Insurance
The Company is self-insured under its Employee Group Medical Plan for the first $150,000$150 thousand per individual. The Company is self-insured with a retention for the first $250,000$250 thousand in general liability. The Company has an additional premium payable clause under its lead $10 million limit excess policy that states in the event a loss exceeds $1 million, a loss additional premium of up to 15% to 17% of paid losses in excess of $1 million will be due. The loss additional premium is payable at the time when the loss is paid and will be payable over a period agreed by insurers. The Company has accrued liabilities totaling $5.6$5.9 million and $7.2$5.2 million as of June 30, 2018 (Successor)2019 and December 31, 2017 (Successor),2018, respectively, for the projected additional premium and self-insured portion of these insurance claims as of the financial statement dates. This accrual includes claims made as well as an estimate for claims incurred but not reported by using third party data and claims history as of the financial statement dates.
Other
The Company is currently undergoing sales and use tax audits for multi-year periods. The Company believes the outcome of these audits will not have a material adverse effect on its results of operations or financial position. Because certain of these audits are in a preliminary stage, an estimate of the possible loss or range of loss cannot reasonably be estimated at this time.
Off-Balance Sheet Arrangements
The Company is often party to certain transactions that constitute off-balance sheet arrangements such as performance bonds, guarantees, operating leases for equipment, and bank guarantees that are not reflected in the Company's condensed consolidated balance sheets. These arrangements are made in the Company's normal course of business and they are not reasonably likely to have a current or future material adverse effect on its financial condition, results of operations, liquidity, or cash flows. The Company's off-balance sheet arrangements include $8.6 million in letters of credit and operating leases for equipment.made.
9. Share-Based Compensation8. Leases
OnThe Company adopted a comprehensive new lease accounting standard effective January 1, 2019. The details of the Effective Date, all prior equity interests (which includedsignificant changes to our accounting policies resulting from the Old Common Stock, FES Ltd.’s prior preferred stock, awardsadoption of the new standard are set out below. The Company adopted the standard on a prospective basis using the optional modified retrospective transition method; accordingly, the comparative information as of December 31, 2018 and for the three and six months ended June 30, 2018 has not been adjusted and continues to be reported under the prior compensation plansprevious lease standard. Under the new lease standard, assets and liabilities that arise from all leases are required to be recognized on the preferred stock purchase rights underbalance sheet for lessees. Previously, only capital leases, which are now referred to as finance leases, were recorded on the Rights Agreement) in FES Ltd. were extinguished without recovery.balance sheet.
Beginning January 1, 2019, for all leases with a term in excess of 12 months, the Company recognized a lease liability equal to the present value of the lease payments and a right-of-use asset representing our right to use the underlying asset for the lease term. For operating leases, lease expense for lease payments is recognized on a straight-line basis over the lease term, while finance leases include both an operating expense and an interest expense component. For all leases with a term of 12 months or less, the Company elected the practical expedient to not recognize lease assets and liabilities. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. The Company has a significant number of short-term leases including month-to-month agreements that continue in perpetuity until the lessor or the Company terminates the lease agreement.
The Company is a lessee for operating leases, primarily related to real estate, salt water disposal wells and equipment. The vast majority of our operating leases have remaining lease terms of 10 years or less, some of which include options to extend the leases, and some of which include options to terminate the leases. The Company generally does not include renewal or termination options in the assessment of leases unless extension or termination is deemed to be reasonably certain. The accounting for some leases may require significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rates to utilize in the net present value calculation of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination options. Salt water disposal well locations have fixed or both fixed and variable lease amounts where the variable lease payments are based on the volume of fluids injected into to the well and/or sales of products by the Company. The Company also has some lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.
The Company is a lessee for finance leases related to autos and trucks and well servicing equipment. The vast majority of the Company's finance leases have remaining lease terms of three years or less, all of which include options to terminate the leases after one year and do not include options to extend the lease. For all finance leases, the Company is subject to a residual value guarantee established by the lessor and based upon the calculated net book value of the vehicle as of the date of early termination of the lease. The loans are collateralized by equipment purchased with the proceeds of such loans. For finance leases, the Company uses discount rates similar to incremental borrowing rates available for comparable equipment financing in our net present value calculation of lease payments. The Company's vehicle finance lease agreements contain lease and non-lease components, which are accounted for separately.
The following tables illustrate the financial impact of the Company's leases as of and for the three and six months ended June 30, 2019, along with other supplemental information about the Company's leases (in thousands, except years and percentages):
|
| | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Components of lease expense: | | | |
Finance lease cost: | | | |
Amortization of right-of-use assets | $ | 1,110 |
| | $ | 2,324 |
|
Interest on lease liabilities | 154 |
| | 293 |
|
Operating lease cost: |
|
| |
|
|
Lease expense (1) | 367 |
| | 733 |
|
Short-term lease cost | 647 |
| | 1,306 |
|
Total lease cost | $ | 2,278 |
| | $ | 4,656 |
|
(1) Includes variable lease costs of $75 thousand and $150 thousand for the three and six months ended June 30, 2019, respectively.
|
| | | |
| As of |
| June 30, 2019 |
Components of balance sheet: | |
Operating leases: | |
Operating lease right-of-use assets (non-current) | $ | 5,785 |
|
Current portion of operating lease liabilities | $ | 756 |
|
Long-term operating lease liabilities, net of current portion | $ | 5,029 |
|
Finance leases: | |
Property and equipment, net | $ | 17,068 |
|
Current portion of long-term debt | $ | 5,180 |
|
Long-term debt, net of current portion and debt discount | $ | 8,078 |
|
|
| | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Other supplemental information: | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows for operating leases | $ | 1,014 |
| | $ | 2,039 |
|
Operating cash flows for finance leases - interest | $ | 154 |
| | $ | 293 |
|
Financing cash flows for finance leases | $ | 1,219 |
| | $ | 2,387 |
|
Noncash activities from right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | — |
| | $ | 6,150 |
|
Finance leases | $ | 890 |
| | $ | 2,326 |
|
Weighted-average remaining lease term: | | | |
Operating leases |
|
| | 8.5 years |
|
Finance leases |
|
| | 2.6 years |
|
Weighted-average discount rate: | | | |
Operating leases |
|
| | 7.50 | % |
Finance leases |
|
| | 4.19 | % |
The following table summarizes the maturity of the Company's operating and finance leases as of June 30, 2019 (in thousands):
|
| | | | | | | | | | | |
| Operating Leases - Related Party | | Operating Leases - Other | | Finance Leases |
2019 | $ | 39 |
| | $ | 1,235 |
| | $ | 3,248 |
|
2020 | 58 |
| | 1,060 |
| | 5,474 |
|
2021 | 8 |
| | 1,035 |
| | 3,974 |
|
2022 | — |
| | 872 |
| | 1,266 |
|
2023 | — |
| | 747 |
| | 96 |
|
Thereafter | — |
| | 3,608 |
| | — |
|
Total minimum lease payments | 105 |
| | 8,557 |
| | 14,058 |
|
Less imputed interest | (10 | ) | | (2,166 | ) | | (800 | ) |
Less short-term leases excluded from the balance sheet | — |
| | (701 | ) | | — |
|
Total lease liabilities per balance sheet | $ | 95 |
| | $ | 5,690 |
| | $ | 13,258 |
|
The Company adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption. Future annual minimum lease payments and capital lease commitments as of December 31, 2018 were as follows (in thousands):
|
| | | | | | | | | | | |
| Operating Leases - Related Party | | Operating Leases - Other | | Capital Leases |
2019 | $ | 30 |
| | $ | 2,027 |
| | $ | 4,559 |
|
2020 | 30 |
| | 986 |
| | 4,334 |
|
2021 | 8 |
| | 946 |
| | 3,375 |
|
2022 | — |
| | 781 |
| | 1,051 |
|
2023 | — |
| | 386 |
| | — |
|
Thereafter | — |
| | 1,350 |
| | — |
|
Total | $ | 68 |
| | $ | 6,476 |
| | $ | 13,319 |
|
9. Share-Based Compensation
Management Incentive Plan
On the Effective Date, pursuant to the operation of the Plan, the Management Incentive Plan became effective.
A summary of the Company's share-based compensation expense during the periods presented are as follows:
follows (in thousands):
| | | | Successor | |
| | Three months ended June 30, 2018 | | Six months ended June 30, 2018 | | | | | |
| | (in thousands) | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Share based compensation expense recognized | Share based compensation expense recognized | $ | 248 |
| | $ | 498 |
| $ | 256 |
| | $ | 509 |
|
| | | | | | | | |
| | | | | Successor | | | As of |
| | | | June 30, 2018 | | | June 30, 2019 |
| | | | | |
Unrecognized compensation cost (in thousands) | Unrecognized compensation cost (in thousands) | | | | $ | 3,164 |
| | | $ | 2,459 |
|
Remaining weighted-average service period (years) | Remaining weighted-average service period (years) | | | | 3.16 |
| | | 3.00 |
|
There was no share based compensation expense recognized during the comparable periods in the prior year. During the period from April 13 through December 31, 2017 (Successor),six months ended June 30, 2019, the Company granted 450,000no restricted stock units to officers and employees subject to the Management Incentive Plan. Below is a summary of the unvested restricted stock units awarded.
units.
| | | | Number of Shares | | Weighted Average Fair Value | Number of Shares | | Weighted Average Fair Value |
Unvested as of December 31, 2017 (Successor) | 363,300 | | $ | 11.00 |
| |
Unvested as of December 31, 2018 | | 329,240 | | $ | 9.68 |
|
Granted | Granted | | — |
| | $ | — |
| — |
| | $ | — |
|
Vested | Vested | | — |
| | $ | — |
| (7,200 | ) | | $ | 11.00 |
|
Forfeited | | — |
| | $ | — |
| — |
| | $ | — |
|
Unvested as of June 30, 2018 (Successor) | | 363,300 |
| | $ | 11.00 |
| |
Unvested as of June 30, 2019 | | 322,040 |
| | $ | 9.99 |
|
10. Related Party Transactions
DuringThe Company incurred related party expenses, primarily related to lease rents, of $0.2 million and $0.3 million during the three months ended June 30, 2019 and 2018, (Successor)respectively, and the periods of April 13 through June 30, 2017 (Successor)$0.5 million and April 1 through April 12, 2017 (Predecessor) the Company incurred $278,000, $186,000 and $109,000, respectively, in related party expenses, primarily related to leases and rents. During$0.6 million for the six months ended June 30, 2019 and 2018, (Successor) and the periods of April 13 through June 30, 2017 (Successor) and January 1 through April 12, 2017 (Predecessor) the Company incurred $566,000, $186,000 and $439,000, respectively, in related party expenses.respectively.
There was no related party revenue for the three months ended June 30, 2019 and 2018 or for the six months ended June 30, 2018 (Successor)2019 and the period of April 13 through June 30, 2017 (Successor). Related party revenue for each of the periods of April 1 through April 12, 2017 (Predecessor) and January 1 through April 12, 2017 (Predecessor) was $1,000. From time to time, vendors of the Company factor their receivables from the Company with a related party. For the period of January 1 through April 12, 2017 (Predecessor), the Company made payments of $65,000 for receivables factored to a related party. The nature of these transactions do not result in recording in the Company’s financial records any revenue, any expense or any receivable and does not result in any payable distinct in amount from the amount payable to such vendors as originally incurred. There were no such payments made during the three and six months ended June 30, 2018 (Successor) or for the period of April 13 through June 30, 2017 (Successor).2018.
As of June 30, 2018 (Successor), thereThere were no related party accounts receivable or accounts payable. Aspayable as of June 30, 2019 or December 31, 2017 (Successor), related party accounts payable were $11,000 and there were no related party accounts receivable. 2018.
In addition to such related party transactions above, Lawrence “Larry” First, a director of FES Ltd., serves as the Chief Investment Officer and Managing Director of Ascribe Capital LLC, or Ascribe, and Brett G. Wyard, also a director of FES Ltd., serves as a Managing Partner of Solace Capital Partners, or Solace. Ascribe and/or one or more of its affiliates own approximately 24.1%23.6% of the outstanding New Common Stockcommon stock as of August 8, 2018,June 30, 2019, and is owed approximately $13.8$16.5 million of the aggregate principal amount of the NewTerm Loan Agreement.Agreement and approximately $27.5 million of the aggregate principle amount of the PIK Notes. Solace and/or one of its affiliates own approximately 15.8%17.4% of the outstanding New Common Stockcommon stock as of August 8, 2018,June 30, 2019, and is owed approximately $12.6$15.1 million of the aggregate principal amount of the term loan covered by the NewTerm Loan Agreement.Agreement and approximately $20.3 million of the aggregate principal amount of the PIK Notes. Moreover, an affiliate of Solace and affiliates of Ascribe are parties to certain registration rights agreement dated as of the Effective Date by and among the Company and certain stockholders of the Company.
11. Earnings per Share
On the Effective Date, the Old Common Stock, the prior Series B Senior Convertible Preferred Stock, or the Prior Preferred Stock, and awards then outstanding under the Prior Compensation Plans were extinguished without recovery.
Basic earnings (loss) per share, or EPS, is computed by dividing net income (loss) available to common stockholders by the weighted-average common stock outstanding during the period. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock, such as options and convertible preferredrestricted stock units or the PIK Notes, were exercised and converted into common stock. Potential common stock equivalents relate to outstanding stock options and unvested restricted stock units, which are determined using the treasury stock method, and the Prior Preferred Stock,PIK Notes, which were determined using the "if-converted" method. In applying the if-converted method, conversion is not assumed for purposes of computing diluted EPS if the effect would be antidilutive.
The following table sets forth the computation of basic and diluted loss per share:share (in thousands, except per share amounts):
| | | Successor | | | | | |
| Three months ended June 30, 2018 | | Six months ended June 30, 2018 | Three Months Ended June 30, |
| (in thousands, except per share amounts) | 2019 | | 2018 |
Basic and diluted: | | | | | | |
Net loss | $ | (8,766 | ) | | $ | (17,295 | ) | $ | (10,749 | ) | | $ | (8,766 | ) |
Weighted-average common shares | 5,336 |
| | 5,336 |
| 5,446 |
| | 5,336 |
|
Basic and diluted net loss per share | $ | (1.64 | ) | | $ | (3.24 | ) | $ | (1.97 | ) | | $ | (1.64 | ) |
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
| April 13 through June 30, 2017 | | | April 1 through April 12, 2017 | | January 1 through April 12, 2017 |
| (in thousands, except per share amounts) | | | (in thousands, except per share amounts) |
Basic and diluted: | | | | | | |
Net income (loss) | $ | (7,001 | ) | | | $ | 49,666 |
| | $ | 27,228 |
|
Preferred stock dividends | — |
| | | — |
| | (46 | ) |
Net income (loss) attributable to common stockholders | $ | (7,001 | ) | | | $ | 49,666 |
| | $ | 27,182 |
|
Weighted-average common shares | 5,250 |
| | | 27,508 |
| | 27,508 |
|
Basic and diluted net income (loss) per share | $ | (1.33 | ) | | | $ | 1.81 |
| | $ | 0.99 |
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Basic and diluted: | | | |
Net loss | $ | (22,383 | ) | | $ | (17,295 | ) |
Weighted-average common shares | 5,444 |
| | 5,336 |
|
Basic and diluted net loss per share | $ | (4.11 | ) | | $ | (3.24 | ) |
There were 322,040 and 363,300 unvested restricted stock units that were not included in the calculation of diluted EPS for the three and six months ended June 30, 2019 and 2018, (Successor) because their effect would have been antidilutive. There were 602,625 stock options that were not included inrespectively, and approximately 28.3 million shares related to the calculationpotential conversion of diluted EPS for the periods of April 1, 2017 through April 12, 2017 (Predecessor) and January 1, 2017 through April 12, 2017 (Predecessor)PIK Notes at June 30, 2019 because their effect would have been antidilutive.
12. Business Segment Information
The Company has determined that it has twothree reportable segments organized based on its products and services—well servicing, coiled tubing and fluid logistics.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Upon the acquisition of Cretic, we evaluated our segment information and determined that coiled tubing represented a separate segment under our current facts. All prior year segment information has been recast to reflect the change in our segment reporting.
Well Servicing
At June 30, 2018, theThe Company's well servicing segment utilized itsutilizes a fleet of 168 well servicing rigs, which was comprised of 154 workover rigs and 14 swabbing rigs in addition to six coiled tubing spreads and other related assets and equipment. These assets are usedequipment to provide the following services:(i) well maintenance, including remedial repairs and removal and replacement of downhole production equipment, (ii) well workovers, including significant downhole repairs, re-completions and re-perforations, (iii) completion and swabbing activities, (iv) plugging and abandonment services, and (v) pressure testing of oil and natural gas production tubing and scanning tubing for pitting and wall thickness using tubing testing units.
Coiled Tubing
The coiled tubing segment utilizes our fleet of coiled tubing units to provide a range of services accomplishing a wide variety of goals including horizontal completions, well bore clean-outs and maintenance, nitrogen services, thru-tubing services, formation stimulation using acid and other chemicals, and other pre- and post-hydraulic fracturing well preparation services.
Fluid Logistics
The Company's fluid logistics segment utilizes the Company'sa fleet of 264 owned or leased fluid transport trucks and related assets, 108 other heavy trucks including specialized vacuum, high pressurehigh-pressure pump and tank trucks, 2,874 frac tanks, 15water wells, salt water disposal wells and facilities, and related equipment. These assets are usedequipment to transport, storeprovide services such as transportation, storage and disposedisposal of a variety of drilling and produced fluids used in, and generated by, oil and natural gas production activities.production. These services are required in most workover and completion projects and are routinely used in the daily operation of producing wells.
The following tables settable sets forth certain financial information with respect to the Company’s reportable segments for the three and six months ended June 30, 2018 (Successor), and the periods of April 13 through June 30, 2017 (Successor), April 1 through April 12, 2017 (Predecessor) and January 1 through April 12, 2017 (Predecessor)(in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Three months ended June 30, 2018 | | | Six months ended June 30, 2018 |
| (in thousands) | | | (in thousands) |
| Well Servicing | | Fluid Logistics | | Total | | | Well Servicing | | Fluid Logistics | | Total |
Operating revenues | $ | 27,375 |
| | $ | 13,866 |
| | $ | 41,241 |
| | | $ | 50,231 |
| | $ | 26,601 |
| | $ | 76,832 |
|
Direct operating costs | 23,324 |
| | 11,151 |
| | 34,475 |
| | | 42,339 |
| | 21,840 |
| | 64,179 |
|
Segment operating profit | $ | 4,051 |
| | $ | 2,715 |
| | $ | 6,766 |
| | | $ | 7,892 |
| | $ | 4,761 |
| | $ | 12,653 |
|
Depreciation and amortization | $ | 4,186 |
| | $ | 3,466 |
| | $ | 7,652 |
| | | $ | 7,918 |
| | $ | 6,897 |
| | $ | 14,815 |
|
Capital expenditures (1) | $ | 4,320 |
| | 1,500 |
| | $ | 5,820 |
| | | $ | 8,463 |
| | $ | 2,494 |
| | $ | 10,957 |
|
Total assets | $ | 157,375 |
| | $ | 30,354 |
| | $ | 187,729 |
| | | $ | 157,375 |
| | $ | 30,354 |
| | $ | 187,729 |
|
Long-lived assets | $ | 83,148 |
| | $ | 41,618 |
| | $ | 124,766 |
| | | $ | 83,148 |
| | $ | 41,618 |
| | $ | 124,766 |
|
| | | | | | | | | | | | |
(1) Capital expenditures listed above include all cash and non-cash additions to property and equipment, including capital leases and fixed assets recorded in accounts payable at period end. |
|
| | | | | | | | | | | |
| Successor |
| April 13, 2017 through June 30, 2017 |
| (in thousands) |
| Well Servicing | | Fluid Logistics | | Total |
Operating revenues | $ | 18,139 |
| | $ | 9,711 |
| | $ | 27,850 |
|
Direct operating costs | 13,814 |
| | 9,053 |
| | 22,867 |
|
Segment operating profit | $ | 4,325 |
| | $ | 658 |
| | $ | 4,983 |
|
Depreciation and amortization | $ | 2,837 |
| | $ | 2,844 |
| | $ | 5,681 |
|
Capital expenditures (1) | $ | 915 |
| | 454 |
| | $ | 1,368 |
|
Total assets | $ | 97,208 |
| | $ | 78,680 |
| | $ | 175,708 |
|
Long-lived assets | $ | 68,672 |
| | $ | 49,269 |
| | $ | 117,941 |
|
|
| | | | | | | | | | | | |
(1) Capital expenditures listed above include all cash and non-cash additions to property and equipment, including capital leases and fixed assets recorded in accounts payable at period end.
|
|
| | | | | | | | | | | | | | | |
| Well Servicing | | Coiled Tubing | | Fluid Logistics | | Total |
Three Months Ended June 30, 2019 | | | | | | | |
Operating revenues | $ | 25,762 |
| | $ | 13,292 |
| | $ | 12,011 |
| | $ | 51,065 |
|
Direct operating costs | 20,971 |
| | 13,854 |
| | 8,823 |
| | 43,648 |
|
Segment profits | $ | 4,791 |
| | $ | (562 | ) | | $ | 3,188 |
| | $ | 7,417 |
|
Depreciation and amortization | $ | 2,783 |
| | $ | 2,531 |
| | $ | 1,699 |
| | $ | 7,013 |
|
Capital expenditures (1) | $ | 2,724 |
| | $ | 2,851 |
| | $ | 1,370 |
| | $ | 6,945 |
|
| | | | | | | |
Three Months Ended June 30, 2018 | | | | | | | |
Operating revenues | $ | 20,415 |
| | $ | 6,960 |
| | $ | 13,866 |
| | $ | 41,241 |
|
Direct operating costs | 17,116 |
| | 6,208 |
| | 11,151 |
| | 34,475 |
|
Segment profits | $ | 3,299 |
| | $ | 752 |
| | $ | 2,715 |
| | $ | 6,766 |
|
Depreciation and amortization | $ | 2,688 |
| | $ | 1,498 |
| | $ | 3,466 |
| | $ | 7,652 |
|
Capital expenditures (1) | $ | 2,016 |
| | $ | 2,304 |
| | $ | 1,500 |
| | $ | 5,820 |
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Capital expenditures listed above include all cash and non-cash additions to property and equipment, including finance leases and fixed assets recorded in accounts payable at year-end. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Predecessor |
| April 1, 2017 through April 12, 2017 | | | January 1, 2017 through April 12, 2017 |
| (in thousands) | | | (in thousands) |
| Well Servicing | | Fluid Logistics | | Total | | | Well Servicing | | Fluid Logistics | | Total |
Operating revenues | $ | 2,449 |
| | $ | 1,269 |
| | $ | 3,718 |
| | | $ | 19,554 |
| | $ | 11,211 |
| | $ | 30,765 |
|
Direct operating costs | 1,813 |
| | 1,260 |
| | 3,073 |
| | | 15,952 |
| | 11,207 |
| | 27,159 |
|
Segment operating profit | $ | 636 |
| | $ | 9 |
| | $ | 645 |
| | | $ | 3,602 |
| | $ | 4 |
| | $ | 3,606 |
|
Depreciation and amortization | $ | 782 |
| | $ | 751 |
| | $ | 1,533 |
| | | $ | 6,927 |
| | $ | 6,674 |
| | $ | 13,601 |
|
Capital expenditures (1) | $ | 12 |
| | 11 |
| | $ | 23 |
| | | $ | 286 |
| | $ | 114 |
| | $ | 400 |
|
Total assets | $ | 607,638 |
| | $ | 434,371 |
| | $ | 1,042,009 |
| | | $ | 607,638 |
| | $ | 434,371 |
| | $ | 1,042,009 |
|
Long-lived assets | $ | 135,942 |
| | $ | 84,384 |
| | $ | 220,326 |
| | | $ | 135,942 |
| | $ | 84,384 |
| | $ | 220,326 |
|
| | | | | | | | | | | | |
(1) Capital expenditures listed above include all cash and non-cash additions to property and equipment, including capital leases and fixed assets recorded in accounts payable at period end. |
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Reconciliation of Operating Loss As Reported: | | | |
Segment profits | $ | 7,417 |
| | $ | 6,766 |
|
Less: | | | |
General and administrative expense | 5,417 |
| | 5,908 |
|
Depreciation and amortization | 7,013 |
| | 7,652 |
|
Operating loss | (5,013 | ) | | (6,794 | ) |
Other income (expenses), net | (5,722 | ) | | (2,426 | ) |
Pre-tax loss | $ | (10,735 | ) | | $ | (9,220 | ) |
| | | |
|
| | | | | | | | |
| Successor |
| Three months ended June 30, 2018 | | | Six months ended in June 30, 2018 |
Reconciliation of the Company's Operating Loss As Reported: | (in thousands) | | | (in thousands) |
Segment operating profits | $ | 6,766 |
| | | $ | 12,653 |
|
General and administrative expense | 5,908 |
| | | 10,796 |
|
Depreciation and amortization | 7,652 |
| | | 14,815 |
|
Operating loss | (6,794 | ) | | | (12,958 | ) |
Other expense, net | (2,426 | ) | | | (4,791 | ) |
Pre-tax loss | $ | (9,220 | ) | | | $ | (17,749 | ) |
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
| April 13 through June 30, 2017 | | | April 1 through April 12, 2017 | | January 1 through April 12, 2017 |
Reconciliation of the Company's Operating Loss As Reported: | (in thousands) | | | (in thousands) |
Segment operating profits | $ | 4,983 |
| | | $ | 645 |
| | $ | 3,606 |
|
General and administrative expense | 3,130 |
| | | 500 |
| | 5,012 |
|
Depreciation and amortization | 5,681 |
| | | 1,533 |
| | 13,601 |
|
Operating loss | (3,828 | ) | | | (1,388 | ) | | (15,007 | ) |
Other expense, net | (1,891 | ) | | | (40 | ) | | (2,241 | ) |
Gain (loss) on reorganization items, net | (1,299 | ) | | | 51,090 |
| | 44,503 |
|
Pre-tax income (loss) | $ | (7,018 | ) | | | $ | 49,662 |
| | $ | 27,255 |
|
|
| | | | | | | | | | | | | | | |
| Well Servicing | | Coiled Tubing | | Fluid Logistics | | Total |
Six Months Ended June 30, 2019 | | | | | | | |
Operating revenues | $ | 50,512 |
| | $ | 33,302 |
| | $ | 25,639 |
| | $ | 109,453 |
|
Direct operating costs | 38,520 |
| | 31,792 |
| | 19,475 |
| | 89,787 |
|
Segment profits | $ | 11,992 |
| | $ | 1,510 |
| | $ | 6,164 |
| | $ | 19,666 |
|
Depreciation and amortization | $ | 4,959 |
| | $ | 6,069 |
| | $ | 5,424 |
| | $ | 16,452 |
|
Capital expenditures (1) | $ | 5,167 |
| | $ | 5,149 |
| | $ | 1,710 |
| | $ | 12,026 |
|
Total assets | $ | 75,829 |
| | $ | 102,190 |
| | $ | 50,909 |
| | $ | 228,928 |
|
Long lived assets | $ | 57,078 |
| | $ | 80,320 |
| | $ | 39,292 |
| | $ | 176,690 |
|
| | | | | | | |
Six Months Ended June 30, 2018 | | | | | | | |
Operating revenues | $ | 38,069 |
| | $ | 12,162 |
| | $ | 26,601 |
| | $ | 76,832 |
|
Direct operating costs | 31,968 |
| | 10,371 |
| | 21,840 |
| | 64,179 |
|
Segment profits | $ | 6,101 |
| | $ | 1,791 |
| | $ | 4,761 |
| | $ | 12,653 |
|
Depreciation and amortization | $ | 5,124 |
| | $ | 2,794 |
| | $ | 6,897 |
| | $ | 14,815 |
|
Capital expenditures (1) | $ | 2,945 |
| | $ | 5,518 |
| | $ | 2,494 |
| | $ | 10,957 |
|
Total assets | $ | 134,527 |
| | $ | 22,848 |
| | $ | 30,354 |
| | $ | 187,729 |
|
Long lived assets | $ | 65,920 |
| | $ | 17,228 |
| | $ | 41,618 |
| | $ | 124,766 |
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Capital expenditures listed above include all cash and non-cash additions to property and equipment, including finance leases and fixed assets recorded in accounts payable at year-end. |
|
| | | | | | | | |
| Successor |
| June 30, 2018 | | | December 31, 2017 |
Reconciliation of the Company's Assets As Reported: | (in thousands) |
Total reportable segments | $ | 262,752 |
| | | $ | 215,134 |
|
Elimination of internal transactions | (415,281 | ) | | | (311,147 | ) |
Parent | 340,258 |
| | | 297,770 |
|
Total assets | $ | 187,729 |
| | | $ | 201,757 |
|
13. Supplemental Cash Flow Information |
| | | | | | | | | | | | |
| |
| Successor | | | Predecessor |
| Six months ended June 30, 2018 | | April 13 through June 30, 2017 | | | January 1 through April 12, 2017 |
Cash paid for | (in thousands) | | | (in thousands) |
Interest | $ | 136 |
| | $ | 657 |
| | | $ | 453 |
|
Supplemental schedule of non-cash investing and financing activities | | | | | | |
Changes in accounts payable related to capital expenditures | $ | 2,201 |
| | $ | — |
| | | $ | — |
|
Capital leases on equipment | $ | 1,712 |
| | $ | 344 |
| | | $ | — |
|
Preferred stock dividends and accretion costs | $ | — |
| | $ | — |
| | | $ | 10 |
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Reconciliation of Operating Loss As Reported: | | | |
Segment profits | $ | 19,666 |
| | $ | 12,653 |
|
Less: | | | |
General and administrative expense | 12,242 |
| | 10,796 |
|
Depreciation and amortization | 16,452 |
| | 14,815 |
|
Operating loss | (9,028 | ) | | (12,958 | ) |
Other income (expenses), net | (13,405 | ) | | (4,791 | ) |
Pre-tax loss | $ | (22,433 | ) | | $ | (17,749 | ) |
| | | |
| | | |
| June 30, 2019 | | December 31, 2018 |
Reconciliation of Total Assets As Reported: | | | |
Total reportable segments | $ | 228,928 |
| | $ | 243,199 |
|
Parent | 7,191 |
| | 13,186 |
|
Total assets | $ | 236,119 |
| | $ | 256,385 |
|
| | | |
14. Recent Accounting Pronouncements13. Revenue
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230), Restricted Cash," or ASU 2016-18. ASU 2016-18 provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. On January 1, 2018 the Company adopted the provisions of ASU 2016-18 on a retrospective basis. The 2017 statement of cash flows has been restated to conform to the requirements of ASU 2016-18 and the 2018 presentation.
The following table provides a reconciliation of cashtables show revenue disaggregated by primary geographical markets and cash equivalents and restricted cash reported within the consolidated balance sheets to the same such amounts shown in the consolidated statements of cash flows.major service lines (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | Successor | | Successor | | | Predecessor | | Predecessor |
| | June 30, 2018 | | December 31, 2017 | | | June 30, 2017 | | December 31, 2016 |
| | (in thousands) | | | (in thousands) |
Cash and cash equivalents | | $ | 5,383 |
| | $ | 5,465 |
| | | $ | 16,139 |
| | $ | 20,437 |
|
Restricted cash | | 19,701 |
| | 30,015 |
| | | 33,979 |
| | 27,563 |
|
Cash and cash equivalents and restricted cash as shown in the consolidated statement of cash flows | | $ | 25,084 |
| | $ | 35,480 |
| | | $ | 50,118 |
| | $ | 48,000 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 |
| | Well Servicing | | Coiled Tubing | | Fluid Logistics | | Total |
Primary Geographical Markets | | | | | | | | |
South Texas | | $ | 18,292 |
| | $ | 4,300 |
| | $ | 6,035 |
| | $ | 28,627 |
|
East Texas (1) | | 1,897 |
| | — |
| | 811 |
| | 2,708 |
|
Central Texas | | — |
| | — |
| | 2,976 |
| | 2,976 |
|
West Texas | | 5,573 |
| | 8,992 |
| | 2,189 |
| | 16,754 |
|
Total | | $ | 25,762 |
| | $ | 13,292 |
| | $ | 12,011 |
| | $ | 51,065 |
|
| | | | | | | | |
| | Three months ended June 30, 2018 |
| | Well Servicing | | Coiled Tubing | | Fluid Logistics | | Total |
Primary Geographical Markets | | | | | | | | |
South Texas | | $ | 11,081 |
| | $ | 3,799 |
| | $ | 6,669 |
| | $ | 21,549 |
|
East Texas (1) | | 1,097 |
| | — |
| | 577 |
| | 1,674 |
|
Central Texas | | — |
| | — |
| | 3,461 |
| | 3,461 |
|
West Texas | | 8,237 |
| | 3,161 |
| | 3,159 |
| | 14,557 |
|
Total | | $ | 20,415 |
| | $ | 6,960 |
| | $ | 13,866 |
| | $ | 41,241 |
|
| | | | | | | | |
(1) Includes revenues from the Company's operations in Pennsylvania. |
|
| | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2019 |
| | Well Servicing | | Coiled Tubing | | Fluid Logistics | | Total |
Primary Geographical Markets | | | | | | | | |
South Texas | | $ | 36,469 |
| | $ | 9,001 |
| | $ | 12,207 |
| | $ | 57,677 |
|
East Texas (1) | | 2,751 |
| | — |
| | 1,646 |
| | 4,397 |
|
Central Texas | | — |
| | — |
| | 6,072 |
| | 6,072 |
|
West Texas | | 11,292 |
| | 24,301 |
| | 5,714 |
| | 41,307 |
|
Total | | $ | 50,512 |
| | $ | 33,302 |
| | $ | 25,639 |
| | $ | 109,453 |
|
| | | | | | | | |
| | Six months ended June 30, 2018 |
| | Well Servicing | | Coiled Tubing | | Fluid Logistics | | Total |
Primary Geographical Markets | | | | | | | | |
South Texas | | $ | 23,893 |
| | $ | 7,642 |
| | $ | 13,297 |
| | $ | 44,832 |
|
East Texas (1) | | 1,749 |
| | — |
| | 1,155 |
| | 2,904 |
|
Central Texas | | — |
| | — |
| | 6,465 |
| | 6,465 |
|
West Texas | | 12,427 |
| | 4,520 |
| | 5,684 |
| | 22,631 |
|
Total | | $ | 38,069 |
| | $ | 12,162 |
| | $ | 26,601 |
| | $ | 76,832 |
|
| | | | | | | | |
(1) Includes revenues from the Company's operations in Pennsylvania. |
14. Supplemental Cash Flow Information
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Cash paid for | | | |
Interest | $ | 2,197 |
| | $ | 136 |
|
Income tax | $ | — |
| | $ | — |
|
Supplemental schedule of non-cash investing and financing activities | | | |
Change in accounts payable related to capital expenditures | $ | — |
| | $ | 2,201 |
|
Exchange of Bridge Loan for PIK Notes | $ | 47,346 |
| | $ | — |
|
Finance leases on equipment | $ | 2,326 |
| | $ | 1,712 |
|
15. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", or ASU 2016-13, which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for annual periods beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
In February 2016,January 2017, the FASB issued ASU No. 2016-02, "Leases2017-04, "Intangibles—Goodwill and Other (Topic 842)350): Simplifying the Test for Goodwill Impairment"," or ASU 2016-02,2017-04, which increasesaddresses concerns over the transparencycost and comparability about leases among entities.complexity of the two-step goodwill impairment test by removing the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance requires lessees to recognize a lease liability and a corresponding lease asset for operating leases with lease terms greater than 12 months. It also requires additional disclosures about leasing arrangements to help usersdoes not amend the optional qualitative assessment of financial statements better understand the amount, timing, and uncertainty of cash flows arising from leases.goodwill impairment. ASU 2016-02 becomes2017-04 will be effective for interim and annual periodsfiscal years beginning after December 15, 20182019, and requires a modified retrospective approach to adoption.interim periods within those fiscal years. The Company has engaged a third party to assistis currently in the process of evaluating the impact of this new standardadoption on its consolidated financial statements and related disclosures. As of June 30,statements.
In August 2018, the Company has identified approximately 400 leases,FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" which includes capital leases on equipment, property leases, salt water disposal wells,eliminates, adds and various other leases.modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The guidance is effective for all entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The Company expects to recognize additional lease assets and liabilities related to operating leases with terms longer than one year.is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the audited consolidated financial statements for the year ended December 31, 20172018 included in our Annual Report on Form 10-K, as amended.10-K. Any forward-looking statements made by or on our behalf are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements involve risks and uncertainties in that the actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ include risks set forth in the Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Overview
Forbes Energy Services Ltd., or FES Ltd., is an independent oilfield services contractor that provides a wide range of well site services to oil and natural gas drilling and producing companies to help develop and enhance the production of oil and natural gas. These services include fluid hauling, fluid disposal, well maintenance, completion services, workovers and re-completions,recompletions, plugging and abandonment, and tubing testing. Our operations are concentrated in the major onshore oil and natural gas producing regions of Texas, plus onewith an additional location in Pennsylvania. We believe that our broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of our customers’ wells. Our headquarters and executive offices are located at 3000 South Business Highway 281, Alice, Texas 78332. We can be reached by phone at (361) 664-0549.
As used in this Quarterly Report on Form 10-Q, the “Company,” “we,” and “our” mean FES Ltd. and its subsidiaries, except as otherwise indicated.
As discussed in Note 2 to the consolidated financial statements in Item 1, we applied fresh start accounting upon emergence from bankruptcy on the Effective Date which resulted in the Company becoming a new entity for financial reporting purposes. The effects of the Plan and the application of fresh start accounting are reflected in our condensed consolidated financial statements from and after April 13, 2017 (Successor). References to the "Successor" pertain to the Company from and after the Effective Date. References to "Predecessor" pertain to the Company prior to the Effective Date.
We provide a wide range of services to a diverse group of companies. During the three months ended June 30, 2018, we provided services to approximately 337 companies. DuringFor the six months ended June 30, 2018 (Successor),2019, we generated consolidated revenuesprovided services to 406 companies. John E. Crisp, Steve Macek and our senior management team have cultivated deep and ongoing relationships with these customers during their combined experience of approximately $76.8 million.over 40 years in the oilfield services industry.
We conduct our operations through the following twothree business segments:
Well ServicingServicing.. Our well servicing segment comprised 65.4%46.2% of our consolidated revenues for the six months ended June 30, 2018. At June 30, 2018, our2019. Our well servicing segment utilizedutilizes our fleet of 168 well servicing rigs, which at June 30, 2019 was comprised of 154139 workover rigs and 147 swabbing rigs as well as six coiled tubing spreads and other related assets and equipment. These assets are used to provide (i) well maintenance, including remedial repairs and removal and replacement of downhole production equipment, (ii) well workovers, including significant downhole repairs, re-completions and re-perforations, (iii) completion and swabbing activities, (iv) plugging and abandonment services, and (v) pressure testing of oil and natural gas production tubing and scanning tubing for pitting and wall thickness using tubing testing units.
Coiled Tubing. Our coiled tubing segment comprised 30.4% of our consolidated revenues for the six months ended June 30, 2019. This segment utilizes our fleet of 14 coiled tubing units, of which 11 are large diameter units (2 3/8” or larger). These units provide a range of services accomplishing a wide variety of goals including horizontal completions, well bore clean-outs and maintenance, nitrogen services, thru-tubing services, formation stimulation using acid and other chemicals, and other pre- and post-hydraulic fracturing well preparation services.
Fluid Logistics. Our fluid logistics segment comprised 34.6%23.4% of our consolidated revenues for the six months ended June 30, 2018.2019. Our fluid logistics segment utilizedutilizes our fleet of owned or leased fluid transport trucks and related assets, including specialized vacuum, high-pressure pump and tank trucks, hot oil trucks, frac tanks, fluid mixing tanks, salt water disposal wells and facilities, and related equipment. These assets are used to provide, transport, store, and dispose of a variety of drilling and produced fluids used in, and generated by, oil and natural gas production. These services are required in most workover and completion projects and are routinely used in daily operations of producing wells.
We believe that our twothree business segments are complementary and create synergies in terms of selling opportunities. Our multiple lines of service are designed to capitalize on our existing customer base to grow it within existing markets, generate more business from existing customers, and increase our operating performance. By offering our customers the ability to reduce the number of vendors they use, we believe that we help improve our customers’ efficiency. This is demonstrated by the fact that 58.9% of revenues for the six months ended June 30, 2018, were from customers that utilized services of both of our
business segments. Further, by having multiple service offerings that span the life cycle of the well, we believe that we have a competitive advantage over smaller competitors offering more limited services.
Cretic Energy Services, LLC Acquisition
On November 16, 2018, we completed our acquisition of Cretic. Cretic provides coiled tubing services to E&P companies in the United States, primarily in the Permian Basin in Texas . The total consideration was approximately $69.4 million in cash. We believe the acquisition significantly enhanced our coiled tubing services and our position in the Permian Basin. See Note 3
Fresh Start Accounting
Upon our emergence from bankruptcy, we adopted fresh start accounting in accordance with the provisions- Acquisition of Accounting Standards Codification 852, “Reorganizations,” or ASC 852, as (i) the holders of Old Common Stock received none of the New Common Stock issued upon the Debtors' emergence from bankruptcy and (ii) the reorganization value of our assets immediately priorCretic Energy Services, LLC to confirmation of the Plan was less than the post-petition liabilities and allowed claims. We applied fresh start accounting from and after the Effective Date. Fresh start accounting required us to present our assets, liabilities and equity as if we were a new entity upon emergence from bankruptcy, with no beginning retained earnings or deficit as of the fresh start reporting date. The cancellation of the Old Common Stock and the issuance of the New Common Stock on the Effective Date caused a change of control under ASC 852. As a result of the adoption of fresh start accounting, ourthese unaudited condensed consolidated financial statements fromfor further discussion regarding the acquisition of Cretic.
Going forward, we intend to pursue selective, accretive acquisitions of complementary assets, businesses and after April 13, 2017 will not be comparabletechnologies, and believe we are well positioned to capture attractive opportunities due to our financial statements prior to such date.
market position, customer relationships and industry experience and expertise.
Factors Affecting Results of Operations
Market Conditions
The oil and natural gas industry experienced a significant declineCommodity prices improved in oil exploration and production activity that began in the fourth quarter of 2014 and continued into the first half of 2017. The price2019 then moderated through April resulting in quarter end and July 2019 ending crude oil prices in the mid-50’s. This has delayed the demand for completion driven services, such as those offered specifically by our coiled tubing segment. However, we believe continued aging of West Texas Intermediate (“WTI”) oil fell from a price of $104 per barrel as ofhorizontal wells through 2019 and future periods, and customers choosing to increase production through accretive regular well maintenance in these horizontal wells, will strengthen demand and pricing for our well maintenance services over the next several years. On June 30, 2014 to a low of $30 per barrel in February of 2016. Oil prices traded in a range of approximately $45 to $55 in the last half of 2016 and through most of 2017. During the last half of 2017 oil prices trended upward in response to market conditions, and as of June 30, 2018,2019, the price of WTI was approximately $74$54.66 per barrel. As oil prices began to rise, U.S. drilling rig count increased from in 404 rigs in May 2016 to 1,047967 rigs in June 2018,30, 2019, an increase of 643,563, with the count stabilizing in the last half of 2017 then experiencing a modest increase in the first half of 2018. During this same time period Texas drilling rig count increased from 173 rigs to 530464 rigs, an increase of 357, similar to the U.S. count increases.291. The two basins in which we primarily operate, the Eagle Ford and Permian, had rig count increasesdecreases of 849 and 262, respectively,38 from 48 and 120. Of note, while we are actively pursuing additional business in the Permian, currently 62.6% of our revenues are generated in the Eagle Ford where the rig count increased by 84.
June 30, 2018 to June 30, 2019, respectively.
Below are three charts that provide total U.S. rig counts, total Texas rig counts and WTI oil price trends for the twelve months ended June 30, 20182019 and 2017.2018.
Source: Rig counts are per Baker Hughes, Inc. (www.bakerhughes.com). Rig counts are the averages of the weekly rig count activity.
Impact of the Current Market Environment
The declines in oil and natural gas prices and exploration activities that began in 2014 and continued through 2016 and into the first few monthshalf of 2017 created a more challenging market for the provision of our services. In response to thesethe market conditions in 2015 and 2016, we implemented cost reduction measures and continuedcontinue to analyze cost reduction opportunities today while ensuring that appropriate functions and capacity wereare preserved allowingto allow us to be opportunistic asin the current environment. During the second half of 2017, and through June 2019, market conditions improved and stabilized for our well servicing and fluid logistics segments. Our coiled tubing segment experienced stable operations through the middle of the fourth quarter of 2018, then due to a change in completion activity, which is the focus of our coil operations, we experienced lower utilization that has continued through the second quarter of 2017. Through2019.
Although market conditions are improving, we continue to focus on meeting our customers' expectations and adjusting our cost structure where possible. We are also maintaining our focus on maximizing use of our active operating assets and maintaining cost controls that were established in the first half of 2017, capital spending was largely limited to capital commitments incurred before the market downturn, purchases of certain, limited pieces of equipment with greater operating efficiencies to improve margins, and the purchase of certain equipment under operating leases at the end of their term. In the last part of 2017 and the first half of 2018, we began maintenance capital spending in response to increased demand for our services.
The second key metric, other than volume of work, that impacts profitability is pricing. In 2015 and 2016, price concessions were granted to customers in recognition of the oil and natural gas pricing declines. Since the oil and natural gas price environment began to improve, price increases have been requested and received from customers in certain operating areas.prior twenty-four months.
Oil and Natural Gas Prices
Demand for well servicing and fluid logistics services is generally a function of the willingness of oil and natural gas companies to make operating and capital expenditures to explore for, develop, and produce oil and natural gas, which in turn is affected by current and anticipated levels of oil and natural gas prices. Exploration and production spending is generally categorized as either operating expenditures or capital expenditures. Activities by oil and natural gas companies designed to add oil and natural gas reserves are classified as capital expenditures, and those associated with maintaining or accelerating production, such as workover and fluid logistics services, are categorized as operating expenditures. Operating expenditures are typically more stable than capital expenditures and aremay be less sensitive to oil and natural gas price volatility. However, during the bottom of the downturn our customers were even limiting these expenditures. In contrast, capital expenditures by oil and natural gas companies for drilling are more directly influenced by current and expected oil and natural gas prices and generally reflect the volatility of commodity prices includingprices.
Seasonality and Cyclical Trends
Our operations are impacted by seasonal factors. Historically, our business has been negatively impacted during the precipitous decline inwinter months due to inclement weather, fewer daylight hours, and holidays. We typically experience a significant slowdown during the Thanksgiving and Christmas holiday seasons. Our well servicing rigs and coiled tubing units are mobile, and we operate a significant number of oilfield vehicles. During periods of heavy snow, ice or rain, we may not be able to move our equipment between locations, thereby reducing our ability to generate rig, coiled tubing or truck hours. In addition, the majority of our well servicing rigs work only during daylight hours. In the winter months, as daylight time becomes shorter, the amount of time that the well servicing rigs work is shortened, having a negative impact on total hours worked.
In addition, the oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices that began in late 2014 with only a recent modest increase in the price of oil.
Workover Rig Rates
Our well servicing segment revenues are dependent on the prevailing market rates for workover rigs. Utilizationoil and average rates increased through the first six months of 2018 (Successor), compared to the periods of April 13 through June 30, 2017 (Successor) and April 1 through April 12, 2017 (Predecessor).
Fluid Logistics Rates
Our fluid logistics segment revenues are dependent on the prevailing market rates for fluid transport trucksnatural gas and the related assets, including specialized vacuum, high-pressure pumpperceived stability and tank trucks, hot oil trucks, frac tanks, fluid mixing tanks and salt water disposal wells. Pricing and utilization decreased through 2016 and continued throughsustainability of those prices. Such cyclical trends also include the first quarterresultant levels of 2017. During the later part of the second quarter of 2017 we began to see improvements in both utilization and pricing. These improvements have continued through the first six months of 2018.
Operating Expenses
During the second quarter of 2018 (Successor), consolidated operating expenses increased when compared to the periods of April 13 through June 30, 2017 (Successor) and April 1 through April 12, 2017 (Predecessor) were consistent with our increased activity. Future earnings and cash flows will be dependent on our abilitygenerated and allocated by exploration and production companies to manage our overall cost structure as well as continued efforts to maintain or increase rates to customers.
Capital Expenditures
During the second quarter of 2018, capital expenditures consisted of purchases of equipmenttheir drilling, completion and vehicles whose operating leases had reached the end of their term, new well servicing equipment, major equipment overhauls and replacements of heavy trucks.workover budget.
Results of Operations
Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018 (Successor) Compared to the Periods of April 13 through June 30, 2017 (Successor) and April 1 through April 12, 2017 (Predecessor)
The following tables compare our segment operating results for the three months ended June 30, 2019 and 2018 (Successor) and the periods of April 13 through June 30, 2017 (Successor) and April 1 through April 12, 2017 (Predecessor). Operating expenses exclude general and administrative expenses, depreciation, and amortization.(in thousands):
|
| | | | | | | | | | | | | | | | | | |
Revenues | | | | |
| Three Months Ended June 30, | | | | |
| 2019 | % of revenue | | 2018 | % of revenue | | $ change | | % change |
Well Servicing | $ | 25,762 |
| 50.5 | % | | $ | 20,415 |
| 49.4 | % | | $ | 5,347 |
| | 26 | % |
Coiled Tubing | 13,292 |
| 26.0 | % | | 6,960 |
| 16.9 | % | | 6,332 |
| | 91 | % |
Fluid Logistics | 12,011 |
| 23.5 | % | | 13,866 |
| 33.7 | % | | (1,855 | ) | | (13 | )% |
Total | $ | 51,065 |
| | | $ | 41,241 |
| | | $ | 9,824 |
| | 24 | % |
| | | | | | | | | |
Direct Operating Expenses(1) | | | | |
| Three Months Ended June 30, | | | | |
| 2019 | % of segment revenue | | 2018 | % of segment revenue | | $ change | | % change |
Well Servicing | $ | 20,971 |
| 81.4 | % | | $ | 17,116 |
| 83.8 | % | | $ | 3,855 |
| | 23 | % |
Coiled Tubing | 13,854 |
| 104.2 | % | | 6,208 |
| 89.2 | % | | 7,646 |
| | 123 | % |
Fluid Logistics | 8,823 |
| 73.5 | % | | 11,151 |
| 80.4 | % | | (2,328 | ) | | (21 | )% |
Total | $ | 43,648 |
| | | $ | 34,475 |
| | | $ | 9,173 |
| | 27 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | Revenues | |
| Successor | | | Predecessor | |
Segment Profit (1) | | Segment Profit (1) | | | | |
| Three months ended June 30, 2018 | % of total revenue | | April 13 through June 30, 2017 | % of total revenue | | | April 1 through April 12, 2017 | % of total revenue | Three Months Ended June 30, | | | | |
| (in thousands, except percentages) | | | (in thousands, except percentages) | 2019 | Segment profit % | | 2018 | Segment profit % | | $ change | | % change |
Well Servicing | $ | 27,375 |
| 66.4 | % | | $ | 18,139 |
| 65.1 | % | | | $ | 2,449 |
| 65.9 | % | $ | 4,791 |
| 18.6 | % | | $ | 3,299 |
| 16.2 | % | | $ | 1,492 |
| | 45 | % |
Coiled Tubing | | (562 | ) | (4.2 | )% | | 752 |
| 10.8 | % | | (1,314 | ) | | (175 | )% |
Fluid Logistics | 13,866 |
| 33.6 | % | | $ | 9,711 |
| 34.9 | % | | | 1,269 |
| 34.1 | % | 3,188 |
| 26.5 | % | | 2,715 |
| 19.6 | % | | 473 |
| | 17 | % |
Total | $ | 41,241 |
| | | $ | 27,850 |
| | | | $ | 3,718 |
| | $ | 7,417 |
| 14.5 | % | | $ | 6,766 |
| 16.4 | % | | $ | 651 |
| | 10 | % |
| | | | | | | | | | | | | | | | | |
Operating Expenses | |
| Successor | | | Predecessor | |
| Three months ended June 30, 2018 | % of segment revenue | | April 13 through June 30, 2017 | % of segment revenue | | | April 1 through April 12, 2017 | % of segment revenue | |
| (in thousands, except percentages) | | | (in thousands, except percentages) | |
Well Servicing | $ | 23,324 |
| 85.2 | % | | $ | 13,814 |
| 76.2 | % | | | $ | 1,813 |
| 74.0 | % | |
Fluid Logistics | 11,151 |
| 80.4 | % | | $ | 9,053 |
| 93.2 | % | | | 1,260 |
| 99.3 | % | |
Total | $ | 34,475 |
| | | $ | 22,867 |
| | | | $ | 3,073 |
| | |
(1) Excluding general and administrative expenses and depreciation and amortization. | | (1) Excluding general and administrative expenses and depreciation and amortization. |
|
| | | | | | | | | | | | | | | | | | |
Segment Profit (1) |
| Successor | | | Predecessor |
| Three months ended June 30, 2018 | Gross margin % | | April 13 through June 30, 2017 | Gross margin % | | | April 1 through April 12, 2017 | Gross margin % |
| (in thousands, except percentages) | | | (in thousands, except percentages) |
Well Servicing | $ | 4,051 |
| 14.8 | % | | $ | 4,325 |
| 23.8 | % | | | $ | 636 |
| 26.0 | % |
Fluid Logistics | 2,715 |
| 19.6 | % | | $ | 658 |
| 6.8 | % | | | 9 |
| 0.7 | % |
Total | $ | 6,766 |
| 16.4 | % | | $ | 4,983 |
| 17.9 | % | | | $ | 645 |
| 17.3 | % |
(1) Excluding general and administrative expenses, and depreciation and amortization.
Revenues
Consolidated Revenues. Consolidated revenues during the three months ended June 30, 2018 (Successor)2019 increased as compared to the period of April 13 throughthree months ended June 30, 2017 (Successor) and the2018 as a direct result of increased spending by our customers during this period of April 1 through April 12, 2017 (Predecessor) due to increased activity from bothand our well servicing and fluid logistics customers as they increased activityacquisition of Cretic in response to rising oil prices.November 2018.
Well Servicing. The revenuesRevenues from theour well servicing segment during the three months ended June 30, 2018 (Successor)2019 increased as compared to the period of April 13 throughthree months ended June 30, 2017 (Successor) and the period of April 1 through April 12, 2017 (Predecessor)2018 due to a 9.6%increased rig hours.
Coiled Tubing. Revenues from our coiled tubing segment during the three months ended June 30, 2019 increased as compared to the three months ended June 30, 2018 due to an increase in rates and a 21.3%coiled tubing unit hours. The increase in hours worked.resulted from the addition of two large diameter coiled tubing units in 2018 and the acquisition of Cretic in November of 2018.
Fluid Logistics.Our revenues Revenues from theour fluid logistics segment during the three months ended June 30, 2019 decreased as compared to the three months ended June 30, 2018 (Successor)due to a reduction in trucking hours that followed the sale of certain trucking assets in under performing yards in West Texas. The decrease in trucking revenue was offset by an increase in frac tank revenue.
Segment Profit
Well Servicing. Segment profit from our well servicing segment during the three months ended June 30, 2019 increased as compared to the period of April 13 throughthree months ended June 30, 2017 (Successor) and the period of April 1 through April 12, 2017 (Predecessor)2018 due to an increase in average hourly trucking rates and an increaserevenues offset by a decrease in trucking hours driven by tank rental and skim oil sales. Our principal fluid logistics assetsexpenses as a percentage of revenues due to more efficient use of personnel at higher operating levels.
Coiled Tubing. Segment profit from our coiled tubing segment during the three months ended June 30, 2019 decreased as compared to the three months ended June 30, 2018, due in large part to the Cretic acquisition. During the second quarter of 2019 we continued to see a decline in revenues as compared to the first quarter of 2019 in our coiled tubing segment. We believe the decline is a result of a slight downturn in the market for coiled tubing services and 2017 were as follows:certain quality issues experienced in the integration of the Cretic acquisition. As a result of the declining revenues we have made certain reductions in personnel and other cost reduction initiatives in our coiled tubing segment in June, July and August 2019 to properly align our costs with our new forecasted revenues. We expect revenues to remain constant in the third quarter of 2019 and increase slightly through the fourth quarter of 2019 and into 2020. Based on the cost cutting initiatives discussed above we expect our operating costs to be lower resulting in improved segment performance for the remainder of 2019 and 2020.
|
| | | | | | |
| Successor | | | Predecessor |
| June 30, 2018 | | | June 30, 2017 |
Fluid Logistics segment: | | | | |
Vacuum trucks | 264 |
| | | 293 |
|
Other heavy trucks | 108 |
| | | 106 |
|
Frac tanks | 2,874 |
| | | 2,876 |
|
Salt water disposal wells (1) | 15 |
| | | 19 |
|
(1)Fluid Logistics. AtSegment profit from our fluid logistics segment during the three months ended June 30, 2019 increased as compared to the three months ended June 30, 2018 10 salt waterdue to a decrease in direct operating cost as a percentage of revenue and a $1.7 million gain on disposal wells, includedon certain assets sold in the above well count, were subject to ground leases or othersecond quarter of 2019.
Operating Expenses
The following tables compares our operating arrangements with third parties.
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
| Three months ended June 30, 2018 | | April 13 through June 30, 2017 | | | April 1 through April 12, 2017 |
| (in thousands) | | | (in thousands) |
Well servicing | $ | 23,324 |
| | $ | 13,814 |
| | | $ | 1,813 |
|
Fluid logistics | 11,151 |
| | 9,053 |
| | | 1,260 |
|
General and administrative | 5,908 |
| | 3,130 |
| | | 500 |
|
Depreciation and amortization | 7,652 |
| | 5,681 |
| | | 1,533 |
|
Total expenses | $ | 48,035 |
| | $ | 31,678 |
| | | $ | 5,106 |
|
Consolidated Operating Expenses. Direct operating costsexpenses for the three months ended June 30, 2019 and 2018 (Successor) increased as compared to the period of April 13 through June 30, 2017 (Successor) and the period of April 1 through April 12, 2017 (Predecessor), consistent with our increased activity.(in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2019 | | 2018 | | $ change | | % change |
Well servicing direct operating expenses | $ | 20,971 |
| | $ | 17,116 |
| | $ | 3,855 |
| | 23 | % |
Coiled tubing direct operating expenses | 13,854 |
| | 6,208 |
| | 7,646 |
| | 123 | % |
Fluid logistics direct operating expenses | 8,823 |
| | 11,151 |
| | (2,328 | ) | | (21 | )% |
General and administrative | 5,417 |
| | 5,908 |
| | (491 | ) | | (8 | )% |
Depreciation and amortization | 7,013 |
| | 7,652 |
| | (639 | ) | | (8 | )% |
Total expenses | $ | 56,078 |
| | $ | 48,035 |
| | $ | 8,043 |
| | 17 | % |
Well Servicing.Servicing Direct Operating Expenses. Direct operating costsexpenses for our well servicing segment for the three months ended June 30, 2018 (Successor)2019 increased as compared to the period of April 13 throughthree months ended June 30, 2017 (Successor)2018 due to increases in wages, repairs and the period of April 1 through April 12, 2017 (Predecessor). This increase was primarily attributable to higher labor,maintenance, supplies and parts, fuel costs and equipment rental costs resulting from the coiled tubing divisionout of our well servicing segment preparing to deploy additional equipment. Other costs weretown travel, consistent with the increase in revenues.
Coiled Tubing Direct Operating Expenses. Direct operating expenses for our coiled tubing segment for the three months ended June 30, 2019 increased as compared to three months ended June 30, 2018 due to an increase in activity experienced duringand as a percentage of revenues. The higher costs were mainly associated with wages (including severance payments), equipment rental, supplies and parts and travel, primarily driven by the period.Cretic acquisition.
Fluid Logistics.Logistics Direct Operating Expenses. Direct operating costsexpenses for our fluid logistics segment for the three months ended June 30, 2018 (Successor) increased2019 decreased as compared to the period of April 13 through June 30, 2017 (Successor) and the period of April 1 through April 12, 2017 (Predecessor), consistent with increased activity. Fluid logistics costs as a percentage of fluid logistics revenue were 80.4% for the three months ended June 30, 2018 (Successor) compared to 93.2% for the period of April 13 through June 30, 2017 (Successor) and 99.3% for the period of April 1 through April 12, 2017 (Predecessor). This percentage decrease was primarily a result of reduced labor costs as a percentage of revenuemainly due to higher composite customer rates, increased rentals, increased skim oil sales, and improved utilization and efficiencies of our work force with additional activity. Additionally, repairs and maintenance expense and property tax expense declined anda gain on disposalthe sale of assets increased as we disposed of older or non-productive assets.certain fluid logistics equipment, along with a decrease in wages and increase in settlement and litigation expenses.
General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2018 (Successor) increased2019 decreased as compared to the period of April 13 through June 30, 2017 (Successor) and the period of April 1 through April 12, 2017 (Predecessor). General and administrative expenses as a percentage of revenues were 14.3%, 11.2% and 13.4%% for the three months ended June 30, 2018 (Successor) and the period of April 13 through June 30, 2017 (Successor) and the period of April 1 through April 12, 2017 (Predecessor), respectively. This increase as a percentage of revenue is primarily due to increaseda decrease in professional fees labor costs, and share-based compensation costs.related to the acquisition of Cretic, offset in part by an increase in wages.
Depreciation and Amortization. Depreciation and amortization expenses for the three months ended June 30, 2018 (Successor) increased2019 decreased as compared to the period of April 13 throughthree months ended June 30, 2017 (Successor) and the period of April 1 through April 12, 2017 (Predecessor)2018 due to approximately $19.5 million of depreciable assets becoming fully depreciated in April 2019, offset in part by depreciation and amortization on the addition of new capitaladditional assets placed into serviceacquired in the current quarter.Cretic acquisition in November 2018.
Other Income (Expense)
The following tables compares our other income (expense) for the three months ended June 30, 2019 and 2018 (in thousands): | | | Successor | | | Predecessor | | | | | | | | | |
| Three months ended June 30, 2018 | | April 13 through June 30, 2017 | | | April 1 through April 12, 2017 | Three Months Ended June 30, | | | | |
| (in thousands) | | | (in thousands) | 2019 | | 2018 | | $ change | | % change |
Interest income | $ | — |
| | $ | 6 |
| | | $ | — |
| $ | 1 |
| | $ | — |
| | $ | 1 |
| | 100 | % |
Interest expense | (2,426 | ) | | (1,897 | ) | | | (40 | ) | (5,723 | ) | | (2,426 | ) | | (3,297 | ) | | 136 | % |
Gain (loss) on reorganization items, net | — |
| | (1,299 | ) | | | 51,090 |
| |
Other income (expense), net | $ | (2,426 | ) | | $ | (3,190 | ) | | | $ | 51,050 |
| $ | (5,722 | ) | | $ | (2,426 | ) | | $ | (3,296 | ) | | 136 | % |
| | | | | | | | | | | | | |
Income tax benefit | $ | (454 | ) | | $ | (17 | ) | | | $ | (4 | ) | |
Income tax expense (benefit) | | $ | 14 |
| | $ | (454 | ) | | $ | 468 |
| | (103 | )% |
Interest Expense. Interest expense for the three months ended June 30, 2018 (Successor)2019 increased whenas compared to the period of April 13 throughthree months ended June 30, 2017 (Successor)2018 due to the additional debt outstanding under the Revolving Loan Agreement and Term Loan Agreement, plus associated amortization of debt discount and deferred financing costs. In addition, the Company incurred significant debt with the acquisition of Cretic, including third party equipment finance leases and the periodinterest and accretion of April 1 through April 12, 2017 (Predecessor). Interestthe new issued PIK Notes for its conversion feature at a 15% premium.
Income Taxes. We recognized income tax expense of $14 thousand for the three months ended June 30, 2019, compared to $454 thousand of income tax expense for the three months ended June 30, 2018 primarily related to interest on our New Loan Agreement which is subject to higher interest rates than than our Prior Senior Notes.
Gain (Loss) on Reorganization Items, Net. There were no reorganization costs for the three months ended2018. At June 30, 2018 (Successor). Gain (loss) on reorganization costs, net for the period2019, we estimate our gross NOL carryforwards are approximately $85.7 million (representing $16.2 million of April 13 through June 30, 2017 (Successor) and the periodgross deferred tax asset), $34.9 million of April 1 through April 12, 2017 (Predecessor) was $(1.3)which ($8.3 million and $51.1 million, respectively. These costs were related to bankruptcy activities during the Predecessor period. The $51.1 million gain was generated by the settlement of liabilities subject to compromise of $140.4 million offset by fresh start and reorganization adjustments of $87.1 million and $2.2 million in professional and legal fees.tax effected) represent unrecognized tax benefits.
Income Taxes. We recognized income tax benefit of $0.5 million for the three months endedSix Months Ended June 30, 2018 (Successor). We recognized income tax expense of less than$0.1 million for the periods of April 13 through June 30, 2017 (Successor) and April 1 through April 12, 2017 (Predecessor). Our effective tax rate was (4.9)% for the three months ended June 30, 2018 (Successor) due to increased benefit resulting from the expiration of foreign income tax liability. Our effective tax rate was 0.2% and (0.01)% for the periods of April 13 through June 30, 2017 (Successor) and April 1 through April 12, 2017 (Predecessor), respectively, due2019 Compared to the fact that the Company has recorded a full valuation allowance against its net deferred assets. At June 30, 2018 (Successor), we estimate our NOL carryforwards were approximately $52.0 million. On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changed U.S. tax law by, among other things, lowering the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the decrease in the corporate income tax rate, we revalued our ending net deferred tax assets at December 31, 2017, but did not recognize any income tax impact in 2017 due to the offsetting change in the valuation allowance.
Six Months Ended June 30, 2018 Compared to the Periods of April 13, 2017 through June 30, 2017 (Successor) and January 1 through April 12, 2017 (Predecessor)
The following tables compare theour segment operating results of our segments for the six months ended June 30, 2019 and 2018 and the periods of April 13, 2017 through June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) (in thousands, except percentages). Operating expenses exclude general and administrative expenses, depreciation and amortization and impairment.
thousands):
| | Revenues | Revenues | Revenues | | | | |
| Successor | | | Predecessor | Six Months Ended June 30, | | | | |
| Six months ended June 30, 2018 | % of revenue | | April 13 through June 30, 2017 | % of revenue | | | January 1 through April 12, 2017 | % of revenue | 2019 | % of revenue | | 2018 | % of revenue | | $ change | | % change |
Well Servicing | $ | 50,231 |
| 65.4 | % | | $ | 18,139 |
| 65.1 | % | | | $ | 19,554 |
| 63.6 | % | $ | 50,512 |
| 46.2 | % | | $ | 38,069 |
| 49.5 | % | | $ | 12,443 |
| | 33 | % |
Coiled Tubing | | 33,302 |
| 30.4 | % | | 12,162 |
| 15.8 | % | | 21,140 |
| | 174 | % |
Fluid Logistics | | 25,639 |
| 23.4 | % | | 26,601 |
| 34.7 | % | | (962 | ) | | (4 | )% |
Total | | $ | 109,453 |
| | | $ | 76,832 |
| | | $ | 32,621 |
| | 42 | % |
| | | | | | | | | | |
Direct Operating Expenses(1) | | Direct Operating Expenses(1) | | | | |
| | Six Months Ended June 30, | | | | |
| | 2019 | % of segment revenue | | 2018 | % of segment revenue | | $ change | | % change |
Well Servicing | | $ | 38,520 |
| 76.3 | % | | $ | 31,968 |
| 84.0 | % | | $ | 6,552 |
| | 20 | % |
Coiled Tubing | | 31,792 |
| 95.5 | % | | 10,371 |
| 85.3 | % | | 21,421 |
| | 207 | % |
Fluid Logistics | 26,601 |
| 34.6 | % | | 9,711 |
| 34.9 | % | | | 11,211 |
| 36.4 | % | 19,475 |
| 76.0 | % | | 21,840 |
| 82.1 | % | | (2,365 | ) | | (11 | )% |
Total | $ | 76,832 |
| | | $ | 27,850 |
| | | | $ | 30,765 |
| | $ | 89,787 |
| | | $ | 64,179 |
| | | $ | 25,608 |
| | 40 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Operating Expenses (1) | |
| | | | | | | | | | |
Segment Profit (1) | | Segment Profit (1) | | | | |
| Successor | | | Predecessor | Six Months Ended June 30, | | | | |
| Six months ended June 30, 2018 | % of segment revenue | | April 13 through June 30, 2017 | % of segment revenue | | | January 1 through April 12, 2017 | % of segment revenue | 2019 | Segment profit % | | 2018 | Segment profit % | | $ change | | % change |
Well Servicing | $ | 42,339 |
| 84.3 | % | | $ | 13,814 |
| 76.2 | % | | | $ | 15,952 |
| 81.6 | % | $ | 11,992 |
| 23.7 | % | | $ | 6,101 |
| 16.0 | % | | $ | 5,891 |
| | 97 | % |
Coiled Tubing | | 1,510 |
| 4.5 | % | | 1,791 |
| 14.7 | % | | (281 | ) | | (16 | )% |
Fluid Logistics | 21,840 |
| 82.1 | % | | 9,053 |
| 93.2 | % | | | 11,207 |
| 100.0 | % | 6,164 |
| 24.0 | % | | 4,761 |
| 17.9 | % | | 1,403 |
| | 29 | % |
Total | $ | 64,179 |
| | | $ | 22,867 |
| | | | $ | 27,159 |
| | $ | 19,666 |
| 18.0 | % | | $ | 12,653 |
| 16.5 | % | | $ | 7,013 |
| | 55 | % |
| | | | | | | | | | |
(1) Excluding general and administrative expenses and depreciation and amortization. | | (1) Excluding general and administrative expenses and depreciation and amortization. |
|
| | | | | | | | | | | | | | | | | | |
Segment Profit (1) |
| Successor | | | | | | Predecessor |
| Six months ended June 30, 2018 | Gross margin % | | | April 13 through June 30, 2017 | Gross margin % | | January 1 through April 12, 2017 | Gross margin % |
Well Servicing | $ | 7,892 |
| 15.7 | % | | | $ | 4,325 |
| 23.8 | % | | 3,602 |
| 18.4 | % |
Fluid Logistics | 4,761 |
| 17.9 | % | | | 658 |
| 6.8 | % | | 4 |
| — | % |
Total | $ | 12,653 |
| 16.6 | % | | | $ | 4,983 |
| 17.9 | % | | $ | 3,606 |
| 11.7 | % |
(1) Excluding general and administrative expenses, depreciation and amortization, and impairment of assets.
Revenues
Consolidated Revenues. Consolidated revenues during the six months ended June 30, 20182019 increased as compared to the periods of April 13, 2017 throughsix months ended June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) primarily2018 as a direct result of increased spending by our customers during this period due to increased activity from bothand our well servicing and fluid logistics customers as they increased utilizationacquisition of Cretic in response to rising oil prices.November 2018.
Well Servicing. Revenues from our well servicing segment during the six months ended June 30, 20182019 increased as compared to the periods of April 13, 2017 throughsix months ended June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor)2018 due to a 19.5%increased rig hours.
Coiled Tubing. Revenues from our coiled tubing segment during the six months ended June 30, 2019 increased as compared to the six months ended June 30, 2018 due to an increase in coiled tubing unit hours. The increase in hours resulted from the addition of two large diameter coiled tubing units in 2018 and a 9.7% increasethe acquisition of Cretic in rates.November of 2018.
Fluid Logistics. Revenues from our fluid logistics segment during the six months ended June 30, 2018 increased2019 decreased as compared to the periods of April 13, 2017 through June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) driven by an increase in average hourly trucking rates, skim oil revenues, rental income and a 7.3% increase in hours.
Operating Expenses
|
| | | | | | | | | | | | |
| Successor | | | | | Predecessor |
| Six months ended June 30, 2018 | | April 13 through June 30, 2017 | | | January 1 through April 12, 2017 |
Well servicing | $ | 42,339 |
| | $ | 13,814 |
| | | $ | 15,952 |
|
Fluid logistics | 21,840 |
| | 9,053 |
| | | 11,207 |
|
General and administrative | 10,796 |
| | 3,130 |
| | | 5,012 |
|
Depreciation and amortization | 14,815 |
| | 5,681 |
| | | 13,601 |
|
Total expenses | $ | 89,790 |
| | $ | 31,678 |
| | | $ | 45,772 |
|
Consolidated Operating Expenses. Direct operating expenses during the six months ended June 30, 2018 increased as compareddue to the periods of April 13, 2017 through June 30, 2017 (Successor)a decrease in our trucking hours and January 1, 2017 through April 12, 2017 (Predecessor) consistent with increased activitiesan increase in bothfrac tank rentals, offset by a decrease in our well servicing and fluid logistics segments.disposal operations.
Segment Profit
Well Servicing.Direct operating costs for Segment profit from our well servicing segment during the six months ended June 30, 20182019 increased as compared to the periods of April 13, 2017 throughsix months ended June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor)2018 due to an increase in revenues offset by a decrease in expenses as a percentage of revenues due to more efficient use of personnel at higher operating levels.
Coiled Tubing. This increase was primarily attributable to higher labor, insurance costs and fuel costs resultingSegment profit from theour coiled tubing division of our well servicing segment preparing to deploy additional equipment. Other costs were consistent with the increased activity experienced during the period.six months ended June 30, 2019 decreased as compared to the six months ended June 30, 2018, due in large part to the Cretic acquisition. During the second quarter of 2019 we continued to see a decline in revenues as compared to the first quarter of 2019 in our coiled tubing segment. We believe the decline is a result of a slight downturn in the market for coiled tubing services and certain quality issues experienced in the integration of the Cretic acquisition. As a result of the declining revenues we have made certain reductions in personnel and other cost reduction initiatives in our coiled tubing segment in June, July and August 2019 to properly align our costs with our new forecasted revenues. We expect revenues to remain constant in the third quarter of 2019 and increase slightly through the fourth quarter of 2019 and into 2020. Based on the cost cutting initiatives discussed above we expect our operating costs to be lower resulting in improved segment performance for the remainder of 2019 and 2020.
Fluid Logistics.Direct operating costs for Segment profit from our fluid logistics segment during the six months ended June 30, 20182019 increased as compared to the periods of April 13, 2017 throughsix months ended June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor)2018 due to higher gain on sales of assetsan increase in the Predecessor periodrevenue and increasesa decrease in fuel costs. Fluid logistics costsdirect operating cost as a percentage of fluid logistics revenue were 82.1%, 93.2% and 100.0%a $2.6 million gain on disposal of certain assets sold in 2019.
Operating Expenses
The following tables compares our operating expenses for the six months ended June 30, 2019 and 2018 and(in thousands):
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2019 | | 2018 | | $ change | | % change |
Well servicing direct operating expenses | $ | 38,520 |
| | $ | 31,968 |
| | $ | 6,552 |
| | 20 | % |
Coiled tubing direct operating expenses | 31,792 |
| | 10,371 |
| | 21,421 |
| | 207 | % |
Fluid logistics direct operating expenses | 19,475 |
| | 21,840 |
| | (2,365 | ) | | (11 | )% |
General and administrative | 12,242 |
| | 10,796 |
| | 1,446 |
| | 13 | % |
Depreciation and amortization | 16,452 |
| | 14,815 |
| | 1,637 |
| | 11 | % |
Total expenses | $ | 118,481 |
| | $ | 89,790 |
| | $ | 28,691 |
| | 32 | % |
Well Servicing Direct Operating Expenses. Direct operating expenses for our well servicing segment for the periods of April 13 throughsix months ended June 30, 2017 (Successor) and January 1 through April 12, 2017 (Predecessor), respectively. This percentage decrease was primarily a result of reduced labor costs2019 increased as a percentage of revenuecompared to the six months ended June 30, 2018 due to increases in repairs and maintenance, supplies and parts, fuel costs and out of town travel, consistent with the increase in revenues.
Coiled Tubing Direct Operating Expenses. Direct operating expenses for our coiled tubing segment for the six months ended June 30, 2019 increased as compared to six months ended June 30, 2018 due to an increase in activity. The higher composite customer ratescosts were mainly associated with wages, equipment rental, supplies and improved utilizationparts and efficienciestravel, primarily driven by the Cretic acquisition.
Fluid Logistics Direct Operating Expenses. Direct operating expenses for our fluid logistics segment for the six months ended June 30, 2019 decreased as compared to the six months ended June 30, 2018 mainly due to a gain on the sale of our work forcecertain fluid logistics equipment, along with additional activity.a decrease in wages and increase in settlement and litigation expenses.
General and Administrative Expenses. General and administrative expenses as a percentage of revenues were 14.1%, 11.2% and 16.3% duringfor the six months ended June 30, 2018 and for the periods of April 13, 2017 through June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. General and administrative expenses during the2019 increased as compared to six months ended June 30, 2018 increased as compareddue to an increase in wages and professional fees related to the periodsacquisition of April 13, 2017 through June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor). This increase as a percentage of revenue is primarily due to increased professional fees, labor costs, and share-based compensation costs.Cretic.
Depreciation and Amortization. Depreciation and amortization expenses duringfor the six months ended June 30, 2019 increased as compared to six months ended June 30, 2018 due to the acquisition of Cretic in November 2018.
Other Income (Expense)
The following tables compares our other income (expense) for the six months ended June 30, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2019 | | 2018 | | $ change | | % change |
Interest income | $ | 4 |
| | $ | 2 |
| | $ | 2 |
| | 100 | % |
Interest expense | (13,409 | ) | | (4,793 | ) | | (8,616 | ) | | 180 | % |
Other income (expense), net | $ | (13,405 | ) | | $ | (4,791 | ) | | $ | (8,614 | ) | | 180 | % |
| | | | | | | |
Income tax benefit | $ | (50 | ) | | $ | (454 | ) | | $ | 404 |
| | (89 | )% |
Interest Expense. Interest expense for the six months ended June 30, 2019 increased as compared to the six months ended June 30, 2018 decreased as compareddue to the periods of April 13, 2017 through June 30, 2017 (Successor) and of January 1, 2017 through April 12, 2017 (Predecessor) due to a decrease inadditional debt outstanding under the depreciable value of property and equipment as a result of fresh start accounting.
Other Income (Expense)
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
| Six months ended June 30, 2018 | | | April 13 through June 30, 2017 | | January 1 through April 12, 2017 |
Interest income | $ | 2 |
| | | $ | 6 |
| | $ | 13 |
|
Interest expense | (4,793 | ) | | | (1,897 | ) | | (2,254 | ) |
Gain (loss) on reorganization items, net | — |
| | | (1,299 | ) | | 44,503 |
|
Other income (expense), net | $ | (4,791 | ) | | | $ | (3,190 | ) | | $ | 42,262 |
|
| | | | | | |
Income tax expense (benefit) | $ | (454 | ) | | | $ | (17 | ) | | $ | 27 |
|
Interest Expense. Interest expense during the six months ended June 30, 2018 increased as compared to the periods of April 13, 2017 through June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) due to higher
interest rates on the NewRevolving Loan Agreement and Term Loan Agreement, plus associated amortization of debt discount and deferred financing costs. In addition, the Company incurred additional debt with the acquisition of Cretic, including third party equipment finance leases, write-off of certain debt costs with the modification accounting related to the PIK Notes and the accretion of the PIK Notes for its conversion feature at a reduction in interest expense on the Prior Senior Notes during the first quarter of 2017, because such interest was no longer incurred after the date of Bankruptcy Petitions discharged in the chapter 11 cases.
Gain (Loss) on Reorganization Items, Net.15% premium. Gain (loss) on reorganization items, net was $(1.3) million and $44.5 million for the periods of April 13, 2017 through June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. There were no reorganization costs for the same period in the current year. For the Predecessor period, the $44.5 million gain was generated by the settlement of liabilities subject to compromise of $140.4 million offset by the fresh start and reorganization adjustments of $87.1 million and legal, professional fess and loan costs of $8.8 million.
Income Taxes. We recognized an income tax benefit of $0.5 million and less than $0.1 million during$50 thousand for the six months ended June 30, 2018, and during the period April 13, 2017 through June 30, 2017 (Successor), respectively, and2019, compared to $454 thousand of income tax expense of less than $0.1 millionbenefit for the period of January 1, 2017 through April 12, 2017 (Predecessor). Our effective tax rate was (2.6)% during the six months ended June 30, 2018 due to increased benefit resulting from the expiration of foreign income tax liability. Our effective tax rate was (0.2)% and 0.1% for the periods of April 13, 2017 through2018. At June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changed U.S. tax law by, among other things, lowering the U.S. corporate income tax rate from a maximum2019, we estimate our gross NOL carryforwards are approximately $85.7 million (representing $16.2 million of 35% to a flat 21% rate, effective January 1, 2018. As a result of the decrease in the corporate income tax rate, we revalued our ending netgross deferred tax assets at December 31, 2017, but did not recognize any incomeasset), $34.9 million of which ($8.3 million tax impact in 2017 due to the offsetting change in the valuation allowance.effected) represent unrecognized tax benefits.
Adjusted EBITDA
“Adjusted EBITDA” is defined as income (loss) from continuing operations before interest, taxes, depreciation, amortization, gain or loss(loss) on early extinguishment of debt and non-cash stock based compensation, excluding non-recurring items. Management does not include gain (loss) on extinguishment of debt, non-cash stock based compensation or other nonrecurring items in its calculations of Adjusted EBITDA because it believes that such amounts are not representative of our core operations. Further, management believes that most investors exclude gain (loss) on extinguishment of debt, stock based compensation recorded under FASB ASC Topic 718 and other nonrecurring items from customary EBITDA calculations as those items are often viewed as either non-recurring and not reflective of ongoing financial performance or have no cash impact on operations.
Adjusted EBITDA is a non-GAAP financial measure that is used as a supplemental financial measure by our management and directors and by our investors to assess the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; the ability of our assets to generate cash sufficient to pay interest on our indebtedness; and our operating performance and return on invested capital as compared to those of other companies in the well services industry, without regard to financing methods and capital structure. We use adjusted EBITDA in other filings with the Commission.
Adjusted EBITDA has limitations as an analytical tool and should not be considered an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income and operating income and these measures may vary among other companies. Limitations to using Adjusted EBITDA as an analytical tool include:
Adjusted EBITDA does not reflect our current or future requirements for capital expenditures or capital commitments; |
| |
| |
• | Adjusted EBITDA does not reflect our current or future requirements for capital expenditures or capital commitments; |
| |
• | Adjusted EBITDA does not reflect changes in, or cash requirements necessary to service interest or principal payments on our debt; |
| |
• | Adjusted EBITDA does not reflect income taxes; |
| |
• | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and |
| |
• | Adjusted EBITDA does not reflect changes in, or cash requirements necessary to service interest or principal payments on our debt; Adjusted EBITDA does not reflect income taxes; Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
| | Reconciliation of Adjusted EBITDA to Net Loss | |
Reconciliation of Net Income (Loss) to Adjusted EBITDA | | Reconciliation of Net Income (Loss) to Adjusted EBITDA |
(Unaudited) | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | Three Months Ended June 30, | | Six Months Ended June 30, |
| | Six months ended June 30, 2018 | | April 13 through June 30, 2017 | | | January 1 through April 12, 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| | (in thousands) | | | | | (in thousands) | (in thousands) | | (in thousands) |
Net income (loss) | | $ | (17,295 | ) | | $ | (7,001 | ) | | | $ | 27,228 |
| |
Net loss | | $ | (10,749 | ) | | $ | (8,766 | ) | | $ | (22,383 | ) | | $ | (17,295 | ) |
Interest income | | (2 | ) | | (6 | ) | | | (13 | ) | (1 | ) | | — |
| | (4 | ) | | (2 | ) |
Interest expense | | 4,793 |
| | 1,897 |
| | | 2,254 |
| 5,723 |
| | 2,426 |
| | 13,409 |
| | 4,793 |
|
Income tax (benefit) expense | | (454 | ) | | (17 | ) | | | 27 |
| 14 |
| | (454 | ) | | (50 | ) | | (454 | ) |
Depreciation and amortization | | 14,815 |
| | 5,681 |
| | | 13,601 |
| 7,013 |
| | 7,652 |
| | 16,452 |
| | 14,815 |
|
Share-based compensation | | 498 |
| | — |
| | | — |
| 256 |
| | 247 |
| | 509 |
| | 498 |
|
Non-recurring professional fees | | 1,073 |
| | — |
| | | — |
| |
Acquisition related costs | | 34 |
| | 881 |
| | 1,094 |
| | 1,073 |
|
Restructuring expenses | | 190 |
| | — |
| | | — |
| — |
| | 2 |
| | — |
| | 190 |
|
(Gain) loss on reorganization items, net | | — |
| | 1,299 |
| | | (44,503 | ) | |
Gain on disposal of assets | | (1,320 | ) | | (47 | ) | | (2,437 | ) | | (67 | ) |
Adjusted EBITDA | | $ | 3,618 |
| | $ | 1,853 |
| | | $ | (1,406 | ) | $ | 969 |
| | $ | 1,941 |
| | $ | 6,590 |
| | $ | 3,551 |
|
Settlement expenses related to litigation was $2.0 million and $0.9 million for the three months ended June 30, 2019 and 2018, respectively and $2.3 million and $1.0 million for the six months ended June 30, 2019 and 2018, repectively. We have not included expenses related to settlement of litigation in our Adjusted EBITDA as they are not considered non-recurring.
Liquidity and Capital Resources
Our current and future liquidity is greatly dependent upon our operating results. Our ability to continue to meet our liquidity needs is subject to and will be affected by cash utilized in operations, the economic or business environment in which we operate, weakness in oil and natural gas industry conditions, the financial condition of our customers and vendors, and other factors. Furthermore, as a result of the challenging market conditions we continue to face, for the short term, we anticipate continuedcontinuing to use net cash used in operating activities due to working capital needs in connection with increasing activity.activities. We believe that our current reserves of cash and cash equivalents and availability of $9.9 million under the Newour Revolving Loan Agreement are sufficient to finance our cash requirements for current and future operations, budgeted capital expenditures, debt service and other obligations for at least the next twelve months; nevertheless, it is possible that our cash on hand will not be sufficient to cover such expenses. In such event, we would be required to seek additional liquidity, and, prior to any such insufficiency, the Company would take steps to secure such additional liquidity from existing or additional financing sources. There can be no assurance that such financing could be obtained on attractive terms or at all.
months.
Historically, we have funded our operations, including capital expenditures, through ourthe credit facilities, vendor financings, and cash flow from operations, the revolving credit facility under the Prior Loan Agreement, vendor financings, the issuance of senior notes and the proceeds from our public and private equity offerings.
More recently, since our emergence from chapter 11 reorganization, we have funded our operations through our Term Loan Agreement, Bridge Loan, PIK Notes, Revolving Loan Agreement and other financing activities.
As of June 30, 2018 (Successor),2019, we had $5.4$1.0 million in unrestricted cash and cash equivalents and $58.0$135.2 million in contractual debt.
Restricted cash at June 30, 2018 (Successor) was $19.7 million. The components of restricted cash at June 30, 2018 included $11.0 million related to the New Loan Agreement which is subject to satisfaction of certain release restrictions and $8.7 million in a cash collateral account related to letters of credit and our corporate credit card program under the New Regions Letter of Credit Facility. The release conditions set forth in the New Loan Agreement include, among other things, (i) no default or event of default under the New Loan Agreement having occurred or being continuing as of the date of the requested release of proceeds of the New Loan Agreement, or that would exist after giving effect to the release requested to be made on such date, and (ii) our unrestricted cash and cash equivalents being less than $7.0 million after giving pro forma effect to the requested release.
The $58.0$135.2 million in contractual debt was comprised of $50.6$60.9 million forunder the NewTerm Loan Agreement, net of debt issuance costs, $0.8$54.1 million under the PIK Notes, $6.0 million under the Revolving Loan Agreement, $13.3 million in finance leases and $1.0 million in insurance notes related to our general liability, workers compensation and $6.5 million in equipment notes.other insurance. Of our total debt, $2.8$60.3 million was short-term debt outstanding on theclassified as current portion of long-term debt, and $55.2$74.9 million of the outstanding contractual debt was classified as long-term debt.long-term.
NewTerm Loan Agreement
Forbes Energy ServicesOn April 13, 2017, the Company entered into the Term Loan Agreement. FES LLC is the borrower, or the Borrower, is the borrower under the NewTerm Loan Agreement. The Borrower’s obligations have been guaranteed by FES Ltd. and by Texas Energy Services, LLC, C.C. Forbes, LLCTES, CCF and Forbes Energy International, LLC,FEI, each direct subsidiaries of the Borrower and indirect subsidiaries of FES Ltd. The NewTerm Loan Agreement provides for a term loan of $50.0$60.0 million, which was fully funded on the Effective Date.excluding accrued PIK interest at June 30, 2019. Subject to certain exceptions and permitted encumbrances, the obligations under this loanthe Term Loan Agreement are secured by a first priority security interest in substantially all the assets of the Company other than accounts receivable, cash collateralizingand related assets, which constitute priority collateral under the New Regions Letters of Credit Facility. Such term loanRevolving Loan Agreement (described below). The Term Loan Agreement has a stated maturity date of April 13, 2021. The proceeds of such term loan are only permitted to be used for (i) the payment on account of the Prior Senior Notes in an amount equal to $20.0 million; (ii) the payment of costs, expenses and fees incurred on or prior to the Effective Date in connection with the preparation, negotiation, execution and delivery of the New Loan Agreement and documents related thereto; and (iii) subject to satisfaction of certain release conditions set forth in the New Loan Agreement, for general operating, working capital and other general corporate purposes of the Borrower not otherwise prohibited by the terms of the New Loan Agreement. The release conditions set forth in the New Loan Agreement include, among other things, (i) no default or event of default under the New Loan Agreement having occurred or being continuing as of the date of the requested release of proceeds of the New Loan Agreement, or that would exist after giving effect to the release requested to be made on such date, and (ii) the Company’s unrestricted cash and cash equivalents being less than $7.0 million after giving pro forma effect to the requested release. At June 30, 2018, $11.0 million included in restricted cash was subject to these release restrictions.
Borrowings under this term loanthe Term Loan Agreement bear interest at a rate equal to five percent (5%) per annum payable quarterly in cash, or the Cash Interest Rate, plus (ii) an initial rate for paid in kind interest rate of seven percent (7%) commencing April 13, 2017 to be capitalized and added to the principal amount of the term loan on the first day of each quarter, or, at the election of the Borrower, paid in cash. The paid in kind interest increases by two percent (2%) twelve months after the Effective DateApril 13, 2017 and every twelve months thereafter until maturity. Upon and after the occurrence of an event of default, the Cash Interest Rate will increase by two percentage points per annum.
During the six months ended June 30, 2019, $2.9 million of interest was paid in kind. At June 30, 2019 and December 31, 2018, the applicablepaid in kind interest rate was 14% per annum.
11%.
The NewTerm Loan Agreement includes customary negative covenants for an asset-based term loan, including covenants limiting ourthe ability of the Company to, among other things, (i) effect mergers and consolidations, (ii) sell assets, (iii) create or suffer to exist any lien, (iv) make certain investments, (v) incur debt and (vi) transact with affiliates. In addition, the NewTerm Loan Agreement includes customary affirmative covenants for an asset-based term loan, including covenants regarding the delivery of financial statements, reports and notices to the Agent. The NewTerm Loan Agreement also contains customary representations and warranties and event of default provisions for a secured term loan.
Amendment to Term Loan Agreement and Joinder
In connection with the Cretic Acquisition, on November 16, 2018, the Company, as a guarantor, FES LLC, as borrower, and certain of their subsidiaries, as guarantors, entered into Amendment No. 1 to Loan and Security Agreement and Pledge and Security Agreement (the “Term Loan Amendment”) with the lenders party thereto and Wilmington Trust, National Association, as agent (the “Term Loan Agent”), pursuant to which the Term Loan Agreement, was amended to, among other things, permit (i) debt under the Revolving Loan Agreement (described below) and the liens securing the obligations thereunder, (ii) the incurrence of add-on term loans under the Term Loan Agreement in an aggregate principal amount of $10.0 million and (iii) the incurrence of one-year “last-out” bridge loans under the Term Loan Agreement in an aggregate principal amount of $50.0 million (the “Bridge Loan”).
In addition, on November 16, 2018, Cretic entered into joinder documentation pursuant to which it became a guarantor under the Term Loan Agreement and a pledgor under the Pledge and Security Agreement referred to in the Term Loan Agreement.
Revolving Loan Agreement
In connection with the Cretic Acquisition, on November 16, 2018, the Company and certain of its subsidiaries, as borrowers, entered into a Credit Agreement (the “Revolving Loan Agreement”) with the lenders party thereto and Regions Bank, as administrative agent and collateral agent (the “Revolver Agent”). The Revolving Loan Agreement provides for $35 million of revolving loan commitments, subject to a borrowing base comprised of 85% of eligible accounts receivable, 90% of eligible investment grade accounts receivable and 100% of eligible cash, less reserves. The loans under the Revolving Loan Agreement accrue interest at a floating rate of LIBOR plus 2.50% - 3.25%, or a base rate plus 1.50% - 2.25%, with the margin based on the fixed charge coverage ratio from time to time.
The Revolving Loan Agreement is secured on a first lien basis by substantially all assets of the Company and its subsidiaries, subject to an intercreditor agreement between the Revolver Agent and the Term Loan Agent which provides that the priority collateral for the Revolving Loan Agreement consists of accounts receivable, cash and related assets, and that the other assets of the Company and its subsidiaries constitute priority collateral for the Term Loan Agreement. At June 30, 2018,2019 we werehad six million borrowings outstanding, $6.1 million in compliance with our New Loan Agreement.
New Regions Letters of Credit Facility
On the Effective Date, we repaid the outstanding principal balance of $15.0 million plus outstanding interest and fees under the Prior Loan Agreement, and entered into the New Regions Letters of Credit Facility pursuant to which Regions may issue, upon request by the Company, letters of credit outstanding and continue to provide charge cards for use byavailability of $9.9 million.
5% Subordinated Convertible PIK Notes
On March 4, 2019, the Company. Amounts available underCompany issued $51.8 million aggregate original principal amount of 5.00% Subordinated Convertible PIK Notes due June 30, 2020 (the “PIK Notes”). On March 4, 2019, the New Regions Letters of Credit Facility are subject to customary feesCompany, as Issuer, and are secured by a first-priority lien on, and security interest in, a cash collateral account with Regions containing cash equal to at least (i) 105%Wilmington Trust, National Association, as Trustee, entered into an Indenture governing the terms of the sumPIK Notes.
The PIK Notes bear interest at a rate of (a) all amounts owing for any drawings under letters5.00% per annum. Interest on the PIK Notes will be capitalized to principal semi-annually in arrears on July 1 and January 1 of credit, including any reimbursement obligations, (b)each year, commencing on July 1, 2019.
The PIK Notes are the aggregate undrawn amount of all outstanding letters of credit, (c) all sums owing to Regions or any affiliate pursuant to any letter of credit document and (d) allunsecured general subordinated obligations of the Company arising thereunder, includingand are subordinated in right of payment to any indemnitiesexisting and obligations for reimbursementfuture secured or unsecured senior debt of expenses and (ii) 120% of the aggregate line of credit for charge cards issued by Regions to the Company. The feespayment of the principal of, premium, if any, and interest on the PIK Notes will be subordinated to the prior payment in full of all of the Company’s existing and future senior indebtedness. In the event of a liquidation, dissolution, reorganization or any similar proceeding, obligations on the PIK Notes will be paid only after senior indebtedness has been paid in full. Pursuant to the Indenture, the Company is not permitted to (1) make cash payments to pay principal of, premium, if any, and interest on or any other amounts owing in respect of the PIK Notes, or (2) purchase, redeem or otherwise retire the PIK Notes for each lettercash, if any senior indebtedness is not paid when due or any other default on senior indebtedness occurs and the maturity of credit forsuch indebtedness is accelerated in accordance with its terms unless, in any case, the period fromdefault has been cured or waived, and excludingthe acceleration has been rescinded or the senior indebtedness has been repaid in full.
The Indenture also provides that upon a default by the Company in the payment when due of principal of, or premium, if any, or interest on, indebtedness in the aggregate principal amount then outstanding of $5.0 million or more, or acceleration of the Company’s indebtedness so that it becomes due and payable before the date on which it would otherwise have become due and payable, and if such default is not cured or waived within 30 days after notice to the Company by the Trustee or by holders of issuance of such letter of credit to and including the date of expiration or termination, are equal to (x) the average daily faceat least 25% in aggregate principal amount of eachthe PIK Notes then outstanding, letterthe principal of, credit multiplied by (y) a per annum rate determined by Regions(and premium, if any) and accrued and unpaid interest on, the PIK Notes may be declared immediately due and payable.
The PIK Notes are redeemable in whole or from time to time in its discretion based upon such factors as Regions shall determine, including, without limitation,part at the credit quality and financial performanceCompany’s option at a redemption price equal to the sum of (i) 100.0% of the Company.principal amount of the PIK Notes to be redeemed and (ii) accrued and unpaid interest thereon to, but excluding, the redemption date, which amounts may be payable in cash or in shares of the Company’s common stock, (subject to limitations, if any, in the documentation governing the Company’s senior indebtedness). If redeemed for the Company’s common stock the holder will receive a number of shares of the Company’s common stock calculated based on the fair market value of a share of the Company’s common stock at such time, in each case less a 15% discount per share. The 15% discount represents an implied conversion premium at issuance which will be settled in common stock at the date of conversion. As such, the face value of the PIK Notes will be accreted to the settlement amount at June 30, 2018,2020. For the three and six months ended June 30, 2019, the Company recorded $1.8 million and $2.4 million, respectively in interest expense related to the accretion of the conversion premium.
The Indenture contains provisions permitting the Company and the trustee in certain circumstances, without the consent of the holders of the PIK Notes, and in certain other circumstances, with the consent of the holders of not less than a majority in aggregate principal amount of the PIK Notes at the time outstanding to execute supplemental indentures modifying the terms of the Indenture and the PIK Notes as described It also provided in the Indenture that, subject to certain exceptions, the holders of a majority in aggregate principal amount of the PIK Notes at the time outstanding may on behalf of the holders of all the PIK Notes waive any past default or event of default under the Indenture and its consequences.
The Indenture provides for mandatory conversion of the PIK Notes at maturity (or such earlier date as the Company shall elect to redeem the PIK Notes), or upon a Marketed Public Offering of the Company’s common stock or a Change of Control, in each case as defined in the Indenture, at a conversion rate was 3.00%. Inper $100 principal amount of PIK Notes into a number of shares of the event we are unableCompany’s common stock calculated based on the Fair Market Value of a share of the Company’s common stock at such time, in each case less a 15% discount per share.
Fair Market Value means fair market value as determined by (A) in the case of a Marketed Public Offering, the offering price per share paid by public investors in the Marketed Public Offering, (B) in the case of a Change of Control, the value of the consideration paid per share by the acquirer in the Change of Control transaction, or (C) in the case of mandatory conversion at the Maturity Date (or such earlier date as the Company shall elect to redeem the PIK Notes), such value as shall be determined by a nationally recognized investment banking firm engaged by the Board of Directors of the Company.
The Company used the gross proceeds of $51.8 million that it received from the issuance of the PIK Notes to repay amounts dueall of the outstanding principal and accrued and unpaid interest on the Bridge Loan.
Interest on the Bridge Loan prior to its repayment accrued at a rate of 14% (5% cash interest plus 9% PIK interest). The payment obligations of the Borrower under the New Regions LettersBridge Loan have been fully satisfied as of Credit Facility, Regions could proceed against such cash collateral account. Regions has no commitment under the New Regions Letters of Credit Facility to issue letters of credit. At June 30, 2018, the facility had $8.6 million in letters of credit outstanding.
March 4, 2019.
Cash Flows
Our cash flows depend, to a large degree, on the level of spending by oil and gas companies' development and production activities. The sustained decreases inAlthough the priceprices of oil and natural gas have had a material impact on theserecovered somewhat since the decline that began in 2014 and continued into 2016, completion activity again slowed for our customer base in the fourth quarter of 2018 and has continued into the first quarter of 2019. These lower levels of activities and couldwill likely also materially affect our future cash flows. Certain sources and uses of cash, such as the level of discretionary capital expenditures and issuances and repurchases of debt and our common stock are within our control and are adjusted as necessary based on market conditions.
Cash Flows from Operating Activities |
| | | | | | | |
| Six months ended June 30, |
| 2019 | | 2018 |
Net cash used in operating activities | $ | (4,617 | ) | | $ | (2,875 | ) |
Net cash used in investing activities | (1,049 | ) | | (6,534 | ) |
Net cash used in financing activities | (1,387 | ) | | (987 | ) |
Net decrease in cash, cash equivalents and cash - restricted | (7,053 | ) | | (10,396 | ) |
Cash, cash equivalents and cash - restricted | | | |
Beginning of period | 8,156 |
| | 35,480 |
|
End of period | $ | 1,103 |
| | $ | 25,084 |
|
Cash flows fromused in operating activities for the six months ended June 30, 2019 decreased as compared to the six months ended June 30, 2018. The decrease resulted from working capital needs related to accounts receivable, accounts payable and accrued liabilities.
Cash flows used in investing activities for the six months ended June 30, 2019 decreased as compared to the six months ended June 30, 2018. The decrease is related to proceeds from the sale of certain assets and insurance proceeds from assets for which there was a casualty loss.
Cash flows from financing activities were $(2.9) million, $(3.3)$1.4 million and $(4.3)$1.0 million for the six months ended June 30, 2019 and 2018, (Successor) andrespectively. During the periods of April 13, 2017 throughsix months ended June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. The change in cash used in operating activities was primarily related2019 we borrowed on the Revolving Loan Agreement to changes in working capitalmake a $5.0 million principal payment on our Term Loan Agreement.
Capital Expenditures
Capital expenditures, including increases in accounts receivable offset by increases accounts payable and accrued liabilities.
Cash Flows from Investing Activities
Cash flows from investing activities were $(6.5) million, $(0.2) million and $0.5 millionassets acquired with finance leases, for the six months ended June 30, 2019 and 2018 (Successor)were additions of $12.0 million and the periods of April 13, 2017 through June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor),$11.0 million, respectively. The change wasAdditions to our fluid logistics segment were primarily due to increased purchases of propertyvacuum trucks and equipment for our coiled tubing division oflight trucks. Additions to our well servicing segment were for the six months ended June 30, 2018 (Successor).well service equipment and light trucks. Additions to our coiled tubing segment were for light trucks and pumping and support.
Cash Flows from Financing Activities
Cash flows from financing activities were $(1.0) million, $(0.3) million and $9.6 million for the six months ended June 30, 2018 (Successor) andthe periods of April 13, 2017 through June 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. The amounts in the current period related to debt payments on our equipment loans. The cash provided by financing activities for the period January 1, 2017 through April 12, 2017 (Predecessor), which included the impact of cash transactions occuring upon emergence from bankruptcy, was due to net proceeds from the New Loan Agreement, offset in part by repayment of the Prior Loan Agreement, repayment of the Prior Senior Notes, and payment of debt issuance costs related to the New Loan Agreement.
Off-Balance Sheet Arrangements
We are often party to certain transactions that require off-balance sheet arrangements such as performance bonds, guarantees, operating leases for equipment, and bank guarantees that are not reflected in our condensed consolidated balance sheets. These arrangements are made in our normal course of business and they are not reasonably likely to have a current or future material adverse effect on our financial condition, results of operations, liquidity, or cash flows. See Note 87 - CommitmentCommitments and Contingencies.
Seasonality and Cyclical Trends
The oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices. Such cyclical trends also include the resultant levels of cash flows generated and allocated by exploration and production companies to their drilling, completion and workover budget. The volatility of the oil and natural gas industry and the decline in oil and natural gas prices have negatively impacted the level of exploration and production activity and capital expenditures by our customers. This has adversely affected, and continues to adversely affect, the demand for our services, which has had, and if it continues, will continue to have, a material adverse effect on our business, financial condition, results of operations, and cash flows.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the applicable reporting periods. On an ongoing basis, management reviews its estimates, particularly those related to depreciation and amortization methods and useful lives and impairment of long-lived assets, and asset retirement obligations, using currently available information. Changes in facts and circumstances may result in revised estimates, and actual results could differ from those estimates. There have been no material changes to the critical accounting policies and estimates set forth in Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, except for the application of ASU No. 2014-092016-02 which created FASB ASC Topic 606 “Revenue from Contracts with Customers”842, "Leases" to our accounting and financial reporting activities.
See Note 8 - Leases.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the market risk disclosures set forth in Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018.2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Security and Exchange Commission, or the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2018,2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures over financial reporting were effective.
Changes in Internal Control over Financial Reporting
On January 1, 2018,2019, we adopted ASC 606, Revenue from Contracts with Customers.842, Leases. Although the new revenue recognitionlease standard did not have a material impact on our revenue recognition,condensed consolidated financial statements, we nevertheless implemented changes to our processes related to revenue recognitionleases and the control activities within them.
There was no change in our internal control over financial reporting (as defined in Rules 13-a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 20182019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
There are no pending material legal proceedings, and the Company is not aware of any material threatened legal proceedings, to which the Company is a party or to which its property is subject that would have a material adverse effect on the Company's financial statements as of June 30, 2018.2019.
A description of our risk factors can be found in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None.
| |
Item 3. | Default Upon Senior Securities |
Item 3.Default Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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Number | | | Description of Exhibits |
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2.1 |
| — |
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3.1 |
| — |
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10.1 |
| — |
| | Indenture, dated as of March 4, 2019 between Forbes Energy Services Ltd. and Wilmington Trust, National Association, as trustee (including form of Note) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed March 4, 2018).
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| — | | Registration Rights Agreement by and among Forbes Energy Services Ltd. and certain holders identified therein dated as of April 13, 2017 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form 8-A filed April 18, 2017).
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| — |
| | Loan and Security Agreement, dated as of April 13, 2017, by and among Forbes Energy Services LLC, as borrower, Forbes Energy International, LLC, TX Energy Services, LLC, C.C. Forbes, LLC and Forbes Energy Services Ltd., as guarantors, Wilmington Trust, N.A., as agent, and certain lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 18, 2017).
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31.1* |
| — |
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| | | Merger Agreement, dated as of November 16, 2018, by and among Forbes Energy Services LLC, as buyer, Cobra Transitory Sub LLC, as Merger Sub, Cretic Energy Services, LLC, as the Company and Catapult Energy Services Group, LLC, as the Holders Representative and Paying Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 23, 2018).
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| | | Revolving Loan Agreement, dated November 16, 2018, by and among the Company and certain of its subsidiaries, as borrowers, the lenders party thereto and Regions Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed November 23, 2018).
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| | | Amendment No. 1 to Loan and Security Agreement and Pledge and Security Agreement, dated as of November 16, 2018, by and among Forbes Energy Services LLC, as borrower, Forbes Energy International, LLC, TX Energy Services, LLC, C.C. Forbes, LLC and Forbes Energy Services Ltd., as guarantors, Wilmington Trust, N.A., as agent, and certain lenders party thereto (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed November 23, 2018).
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| | | Employment Agreement, effective November 16, 2018, by and between Joe Michetti and Forbes Energy Services LLC (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed November 23, 2018).
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| — | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
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31.2* |
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32.1* |
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32.2* |
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99.1 |
| — |
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101* |
| — |
| | Interactive Data Files
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_________________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | | |
| | FORBES ENERGY SERVICES LTD. |
| | | |
August 14, 201813, 2019 | | By: | | /s/ JOHN E. CRISP |
| | | | John E. Crisp Chairman, Chief Executive Officer and President (Principal Executive Officer) |
| | | | |
| | | |
August 14, 201813, 2019 | | By: | | /S/ L. MELVIN COOPER |
| | | | L. Melvin Cooper Senior Vice President, Chief Financial Officer and Assistant Secretary (Principal Financial and Accounting Officer) |
EXHIBIT INDEX
|
| | | | | |
Number | | | Description of Exhibits |
2.1 |
| — |
| | Debtors’ Prepackaged Joint Plan of Reorganization, dated December 21, 2016 (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 23, 2016). |
3.1 |
| — |
| | Certificate of Incorporation of Forbes Energy Services Ltd. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 8-A filed April 18, 2017). |
3.2 |
| — |
| | Second Amended and Restated Bylaws of Forbes Energy Services Ltd. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A filed April 18, 2017). |
4.1 |
| — |
| | Specimen Certificate for the Company’s common stock, $0.01 par value (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed April 18, 2017). |
10.1 |
| — |
| | Registration Rights Agreement by and among Forbes Energy Services Ltd. and certain holders identified therein dated as of April 13, 2017 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form 8-A filed April 18, 2017). |
10.2 |
| — |
| | Loan and Security Agreement, dated as of April 13, 2017, by and among Forbes Energy Services LLC, as borrower, Forbes Energy International, LLC, TX Energy Services, LLC, C.C. Forbes, LLC and Forbes Energy Services Ltd., as guarantors, Wilmington Trust, N.A., as agent, and certain lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 18, 2017). |
10.3 |
| — |
| | Agreement regarding Cash Collateral and Letters of Credit dated as of April 13, 2017 by and among Forbes Energy Services LLC, Forbes Energy International, LLC, TX Energy Services, LLC, C.C. Forbes, LLC, Forbes Energy Services Ltd. and Regions Bank (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 18, 2017). |
10.4 |
| — |
| | Forbes Energy Services Ltd. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed April 18, 2017). |
10.5 |
| — |
| | Amended and Restated Employment Agreement effective April 13, 2017, by and between John E. Crisp and Forbes Energy Services LLC (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed April 18, 2017). |
10.6 |
| — |
| | Amended and Restated Employment Agreement effective April 13, 2017, by and between L. Melvin Cooper and Forbes Energy Services LLC (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed April 18, 2017). |
10.7 |
| — |
| | Employment Agreement effective April 13, 2017, by and between Steve Macek and Forbes Energy Services LLC (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed April 18, 2017). |
10.8 |
| — |
| | Form of Time-Based Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed May 15, 2017). |
10.9 |
| — |
| | Form of Exit Financing Time-Based Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q filed May 15, 2017). |
10.10 |
| — |
| | Form of Performance-Based Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q filed May 15, 2017). |
31.1* |
| — |
| | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
31.2* |
| — |
| | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
32.1* |
| — |
| | Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2* |
| — |
| | Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
99.1 |
| — |
| | Order Approving the Debtors’ Disclosure Statement For, and Confirming, the Debtors’ Prepackaged Joint Plan of Reorganization, as entered by the Bankruptcy Court on March 29, 2017 (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed March 31, 2017). |
101* |
| — |
| | Interactive Data Files |
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