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 endedDecember 31, 2019 included in our Annual Report on Form 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 endedDecember 31, 2019 . OverviewForbes Energy Services Ltd. , orFES 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 well maintenance, completion services, workovers and recompletions, plugging and abandonment, tubing testing, fluid hauling and fluid disposal. Our operations are concentrated in the major onshore oil and natural gas producing regions ofTexas , with an additional location inPennsylvania . 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 at3000 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" meanFES Ltd. and its subsidiaries, except as otherwise indicated. We provide a wide range of services to a diverse group of companies. For the three months endedMarch 31, 2020 , we provided services to 209 companies.John E. Crisp ,Steve Macek and our senior management team have cultivated deep and ongoing relationships with these customers during their average experience of over 35 years in the oilfield services industry. We conduct our operations through the following three business segments: • Well Servicing. Our well servicing segment comprised 49.5% of our
consolidated revenues for the three months ended
servicing segment utilizes our fleet of well servicing rigs, which at
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 27.0% of our consolidated revenues for the three months endedMarch 31, 2020 . 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 23.5% of our consolidated revenues for the three months endedMarch 31, 2020 . Our fluid logistics segment utilizes 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 three 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. 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. Recent Developments OnMay 15, 2020 ,FES LLC obtained an unsecured$10 million loan (the "PPP Loan") under the Paycheck Protection Program fromTexas Champion Bank . The Paycheck Protection Program was established under the recently congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by theU.S. Small Business 26
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Administration. In accordance with the requirements of the CARES Act, the Company intends to use the proceeds of the PPP Loan for payroll costs, rent or utility costs. The PPP Loan has a two year maturity and accrues interest at a rate of 1% per annum. Payments under the PPP Loan are deferred for the first six months of its term. Under the terms of the CARES Act, loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the Paycheck Protection Program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage, rent and utility costs. No assurance is provided that the Company will apply for and obtain forgiveness of the PPP Loan in whole or in part. OnMay 15, 2020 , the Company,FES LLC and certain of its subsidiaries entered into the Fourth Amendment to Credit Agreement, with the Revolver Agent and the lenders party thereto, which amended the Revolving Loan Agreement in order to permit the incurrence of the PPP Loan, and to effect the other matters set forth therein. OnMay 15, 2020 , the Company,FES LLC and certain of its subsidiaries entered into Amendment No. 4 to Loan and Security Agreement, with the Term Loan Agent and the lenders party thereto, which amended the Term Loan Agreement in order to permit the incurrence of the PPP Loan, and to effect the other matters set forth therein. OnJune 26, 2020 , the Company,FES LLC and certain of its subsidiaries, as borrowers, entered into the Fifth Amendment and Waiver to Credit Agreement with the lenders party thereto and the Revolver Agent as further described in Note 17 - Subsequent Events. OnJune 29, 2020 , the Company,FES LLC , as borrower, and certain of its subsidiaries entered into Amendment No. 5 and Waiver to Loan and Security Agreement, with the Term Loan Agent and the lenders party thereto, as further described in Note 17 - Subsequent Events. OnJune 29, 2020 , the Company notified the PIK Note holders of a possible default due to property tax penalties that have been accrued and are outstanding, as further described in Note 17 - Subsequent Events. Superior Energy Services, Inc. Merger OnDecember 23, 2019 , we announced that we had entered into an Agreement and Plan of Merger dated as ofDecember 18, 2019 (as amended, supplemented, and modified from time to time, the "Merger Agreement") with Superior Energy Services, Inc., aDelaware corporation ("Superior"),New NAM, Inc. , aDelaware corporation and a newly formed, wholly owned subsidiary of Superior which, prior to the completion of the Mergers (as defined below), would hold the Superior's North American Business and its associated assets and liabilities ("NAM"),Arita Energy, Inc. (formerly known asSpieth Newco, Inc. ), aDelaware corporation and newly formed, wholly owned subsidiary of the Company ("Arita"),Spieth Merger Sub, Inc. , aDelaware corporation and newly formed, wholly owned subsidiary of Arita ("NAM Merger Sub"), andFowler Merger Sub, Inc. , aDelaware corporation and newly formed, wholly owned subsidiary of Arita ("Forbes Merger Sub"), pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, NAM Merger Sub would merge with and into NAM (the "NAM Merger") and Forbes Merger Sub would merge with and into the Company (the "Forbes Merger ," and together with the NAM Merger, the "Mergers"), with each of NAM and the Company continuing as surviving entities and wholly owned subsidiaries of Arita. The Merger Agreement, and the transactions contemplated thereby, were approved by the Company's board of directors, the special committee of the Company's board of directors, and the Superior board of directors. Arita filed a preliminary proxy statement/prospectus onFebruary 13, 2020 , as well as amendments thereto onMarch 27, 2020 andApril 13, 2020 . In connection with the Merger Agreement, certain stockholders of the Company, includingAscribe Capital LLC and its affiliates (collectively, "Ascribe") andSolace Capital Partners, L.P. ("Solace"), entered into voting and support agreements committing to vote the shares of the Company's common stock they beneficially own in favor of the adoption of the Merger Agreement and any other matters necessary for the consummation of the transaction contemplated by the Merger Agreement. Effective immediately prior to the record date for the special meeting of the Company's stockholders, Ascribe and Solace exchanged a portion of the PIK Notes, including all accrued interest thereon, then held by them in exchange for shares of the Company's common stock (the "Forbes PIK Exchange"). Following the Forbes PIK Exchange, Ascribe and Solace beneficially own approximately 51% of the outstanding common stock of the Company as of the record date for the special meeting of the Company's stockholders and therefore had the ability to approve the Merger Agreement without the vote of any other stockholder. Termination of the Mergers OnJune 1, 2020 , the Company received a written notice of termination from Superior and NAM. As a result, the Merger Agreement has been terminated effective as ofJune 1, 2020 . Neither the Company, Superior nor NAM is obligated to pay a termination fee in connection with the termination of the Merger Agreement. Factors Affecting Results of Operations 27
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Market Conditions The oil and natural gas industry experienced a significant decline in oil exploration and production activity that began in the fourth quarter of 2014 and has resulted in continued volatility since that time. WTI prices fluctuated between$51 and$64 per barrel during 2019. During the three months endedMarch 31, 2020 oil prices experienced significant declines with WTI prices declining from$59.88 atDecember 31, 2019 to$20.48 atMarch 31, 2020 . Oil prices further declined inApril 2020 to$18.84 per barrel onApril 30, 2020 with a rebound inMay 2020 to$35.49 per barrel onMay 29, 2020 , andJune 2020 to$38.72 per barrel onJune 25, 2020 . The volatility and uncertainty of future oil and gas prices have discouraged significant capital and production investment from oil and gas companies, which have chosen instead to focus investment on sustaining ongoing production sources. During the first quarter of 2020, driven by COVID-19 and an oil price war triggered byRussia andSaudi Arabia , the price of WTI dropped precipitously to pricing in the lowertwenty dollar per barrel range, with prices remaining low and volatile during April andMay 2020 . As a result, the trends are viewed as triggering events that required a test of the Company's long-lived asset values which indicated the need to record impairment adjustment of$43.9 million on our long lived assets during the three months endedMarch 31, 2020 which had a material adverse impact on the Company's financial position and results of operations. See Note 4 - Impairment of Long-Lived Assets of our Notes to Condensed Consolidated Financial Statements. Although global outputs generally can be adjusted to support commodity pricing levels and previous epidemic or pandemic diseases have not resulted in sustained industry harm, we expect these factors to contribute to continued activity and price volatility. We believe COVID-19 will negatively impact oilfield activity for the majority of 2020 and possibly into 2021. Similarly, the oil price decline, and continued uncertainty regarding its duration or repetition, will continue to have a negative impact on oil and gas activities, generally. OnDecember 31, 2019 , the price of WTI was approximately$59.88 per barrel and during the three months endedMarch 31, 2020 experienced a precipitated decline to approximately$20.48 . In line with the declines in oil and gas prices theU.S. drilling rig count decreased from 805 rigs atDecember 31, 2019 to 728 rigs as ofMarch 31, 2020 . During this same time period theTexas drilling rig count decreased from 404 rigs as ofDecember 31, 2019 to 368 rigs as ofMarch 31, 2020 .U.S Rig counts continued to decline in April, May, andJune 2020 to 465 rigs, 301 rigs, and 266 rigs onApril 29, 2020 ,May 29, 2020 , andJune 19, 2020 , respectively. InTexas a similar continued decline was noted in April, May, andJune 2020 to 231 rigs, 127 rigs, and 111 rigs onApril 29, 2020 ,May 29, 2020 , andJune 19, 2020 , respectively. The Company continues to actively pursue additional business in the two basins where we primarily operate, the Eagle Ford and Permian, to provide the variety of services needed to oil and gas companies in support of their ongoing reaction to price volatility; however the Company expects significantly reduced activity due to current market conditions. Below are three charts that provide totalU.S. rig counts, totalTexas rig counts and WTI oil price trends for the twelve months endedMarch 31, 2020 and 2019. [[Image Removed: chart-dc24c7fecce05771a3c.jpg]] 28
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Source: Rig counts are per
[[Image Removed: chart-0b18630db9295953a0a.jpg]] Impact of the Current Environment With the downward trend in oil prices that began inApril 2019 and continued steeply into 2020, drilling and completion activity experienced a decline, resulting in continued downward pressure on revenues limiting further growth which resulted in decreased earnings and lower EBITDA. 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. Oil and Natural Gas Prices Demand for well servicing, coiled tubing services 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 29
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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 may be less sensitive to oil and natural gas price volatility. In contrast, capital expenditures for drilling and completion are more directly influenced by current and expected oil and natural gas prices and generally reflect the volatility of commodity prices. Seasonality and Cyclical Trends Our operations are impacted by seasonal factors. Historically, our business has been negatively impacted during the winter months due to inclement weather, fewer daylight hours, and holidays. We typically experience a significant slowdown during theThanksgiving 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 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.
Three Months Ended
The following tables compare the operating results of our segments for the three months endedMarch 31, 2020 and 2019 (in thousands, except percentages). Segment profit excludes general and administrative expenses, impairment of property and equipment and intangible assets, and depreciation and amortization. Revenues Three Months Ended March 31, % of % of 2020 revenue 2019 revenue $ change % change Well Servicing$ 15,089 49.5 %$ 24,750 42.4 %$ (9,661 ) (39.0 )% Coiled Tubing 8,222 27.0 % 20,010 34.3 % (11,788 ) (58.9 )% Fluid Logistics 7,152 23.5 % 13,628 23.3 % (6,476 ) (47.5 )% Total$ 30,463 $ 58,388
Direct Operating Expenses(1) Three Months Ended March 31, % of segment % of segment 2020 revenue 2019 revenue $ change % change Well Servicing$ 13,354 88.5 %$ 17,549 70.9 %$ (4,195 ) (23.9 )% Coiled Tubing 8,303 101.0 % 17,938 89.6 % (9,635 ) (53.7 )% Fluid Logistics 7,029 98.3 % 10,652 78.2 % (3,623 ) (34.0 )% Total$ 28,686 $ 46,139 $ (17,453 ) (37.8 )% 30
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Table of Contents Segment Profit (1) Three Months Ended March 31, Segment Segment 2020 profit % 2019 profit % $ change % change Well Servicing $ 1,735 11.5 % $ 7,201 29.1 %$ (5,466 ) (75.9 )% Coiled Tubing (81 ) (1.0 )% 2,072 10.4 % (2,153 ) (103.9 )% Fluid Logistics 123 1.7 % 2,976 21.8 % (2,853 ) (95.9 )% Total $ 1,777 5.8 %$ 12,249 21.0 %$ (10,472 ) (85.5 )%
(1) Excluding general and administrative expenses, depreciation and amortization and impairment.
Revenues
Consolidated Revenues. Consolidated revenues decreased$27.9 million during the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 . This decrease was the result of lower demand levels in the market related to the effects of market uncertainty with the ongoing pandemic and sharp declines in commodity prices. Well Servicing. Revenues from our well servicing segment decreased$9.7 million during the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , due to a decrease in well service rig hours related to the aforementioned market demand declines. Coiled Tubing. Revenues from our coiled tubing segment decreased$11.8 million during the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , due to a decrease in coiled tubing unit hours related to the aforementioned market demand declines. Fluid Logistics. Revenues from our fluid logistics segment decreased$6.5 million during the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , due to a decrease in our trucking hours related to the aforementioned market demand declines. Segment Profit Well Servicing. Segment profit from our well servicing segment decreased$5.5 million during the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , due to a decrease in revenues, offset by decreased costs, as the Company works to appropriately size the operations to expected market demand. Coiled Tubing. Segment profit from our coiled tubing segment decreased$2.2 million during the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , due to a decrease in revenues, offset by decreased costs, as the Company works to appropriately size the operations to expected market demand. Fluid Logistics. Segment profit from our fluid logistics segment decreased$2.9 million during the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , due to a decrease in revenues, offset by decreased costs, as the Company works to appropriately size the operations to expected market demand. Operating Expenses The following tables compares our operating expenses for the three months endedMarch 31, 2020 and 2019 (in thousands): Three Months Ended March 31, 2020 2019 $ change % change Well servicing direct operating expenses$ 13,354 $ 17,549 $ (4,195 ) (23.9 )% Coiled tubing direct operating expenses 8,303 17,938 (9,635 ) (53.7 )% Fluid logistics direct operating expenses 7,029 10,652 (3,623 ) (34.0 )% General and administrative 5,911 6,825 (914 ) (13.4 )% Impairment of property and equipment 40,030 - 40,030 100.0 % Impairment of intangible assets 3,887 - 3,887 100.0 % Depreciation and amortization 6,119 9,439 (3,320 ) (35.2 )% Total expenses$ 84,633 $ 62,403 $ 22,230 35.6 % 31
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Well Servicing Direct Operating Expenses. Direct operating expenses for our well servicing segment decreased$4.2 million during the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , due to decreases in wages from headcount reductions, supplies and parts, fuel costs and out of town travel, consistent with the trend of decreased revenues. Coiled Tubing Direct Operating Expenses. Direct operating expenses for our coiled tubing segment decreased$9.6 million during the three months endedMarch 31, 2020 , as compared to three months endedMarch 31, 2019 , due to decreases in wages from headcount reductions, lower contractor expenses, supplies and parts, fuel costs and out of town travel, consistent with the trend of decreased revenues. Fluid Logistics Direct Operating Expenses. Direct operating expenses for our fluid logistics segment decreased$3.6 million during the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , due to decreases in wages from headcount reductions, lower fuel costs, product costs, repairs and maintenance, and travel, consistent with the trend of decreased revenues. General and Administrative Expenses. General and administrative expenses decreased$0.9 million during the three months endedMarch 31, 2020 , as compared to three months endedMarch 31, 2019 , due to decreases in wages from headcount reductions, professional fees from reduced use of specialized accounting contractors, less general office expenses in line with lower headcount and operating activity, offset by an increase in merger costs. Impairment of property and equipment and impairment of intangible assets. As a result of triggering events that occurred in the three months endedMarch 31, 2020 the Company tested long-lived assets for recoverability. The carrying values were in excess of fair values and impairment charges of$40.0 million and$3.9 million were recorded on property and equipment and intangible assets, respectively, during the quarter endedMarch 31, 2020 . The resulting fair value calculations determined impairment of tangible and intangible assets was necessary. Depreciation and Amortization. Depreciation and amortization expenses decreased$3.3 million during the three months endedMarch 31, 2020 , as compared to three months endedMarch 31, 2019 , due to a significant number of assets becoming fully depreciated in 2020 coupled with the disposition of certain equipment associated with fleet management. Other Income (Expense) The following table compares our other income (expense) for the three months endedMarch 31, 2020 and 2019 (in thousands): Three Months Ended March 31, 2020 2019 $ change % change Interest income $ 5 $ 3$ 2 66.7 % Interest expense (5,753 ) (7,686 ) (1,933 ) 25.1 % Other income (expense), net$ (5,748 ) $ (7,683 ) $ (1,935 ) 25.2 % Income tax benefit$ (102 ) $ (64 )$ (38 ) 59.4 % Interest Expense. Interest expense decreased$1.9 million during the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , due to reduced financing leases and lower interest rates on outstanding debt in 2020 and the write off of certain debt issuance costs in 2019. Income Taxes. We recognized an income tax benefit of$102 thousand for the three months endedMarch 31, 2020 , compared to$64 thousand of income tax benefit for the three months endedMarch 31, 2019 . Our effective tax benefit rate was 0.2% and 0.5% for the three months endedMarch 31, 2020 and 2019, respectively. The income tax benefit for 2020 is the effect of impairments taken on long-lived assets resulting in changes to the timing of deferred taxes. AtMarch 31, 2020 , we estimate our gross NOL carryforwards are approximately$160.6 million (representing$33.7 million of gross deferred tax asset and fully included in our valuation allowance for deferred tax assets). Adjusted EBITDA "Adjusted EBITDA" is defined as income (loss) before interest, taxes, depreciation, amortization, gain (loss) on early extinguishment of debt and non-cash stock based compensation, excluding non-recurring items and items not reflective of ongoing operations. Management does not include gain (loss) on extinguishment of debt, non-cash stock based compensation, impairment of long-lived assets such as goodwill, other intangibles and property, plant and equipment, or other nonrecurring items in its calculations of Adjusted EBITDA because it believes that such amounts are not representative of our core operations. Further, 32
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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 Adjusted EBITDA calculations as those items are often viewed as either non-recurring or 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. 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 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 have to be replaced in the future.
Adjusted EBITDA does not reflect 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 Net Income (Loss) to Adjusted EBITDA (Unaudited) Three months ended March 31, 2020 2019 (in thousands) Net loss$ (59,816 ) $ (11,634 ) Interest income (5 ) (3 ) Interest expense 5,753 7,686 Income tax (benefit) expense (102 ) (64 ) Impairment of property and equipment 40,030 - Impairment of intangible assets 3,887 - Depreciation and amortization 6,119 9,439 Share-based compensation 230 253 Acquisition/merger related costs 1,318 1,060 Gain on disposal of assets (297 ) (1,117 ) Adjusted EBITDA$ (2,883 ) $ 5,620 Liquidity and Capital Resources Historically, we have funded our operations, including capital expenditures, through the credit facilities, vendor financings, and cash flow from operations, the issuance of senior notes and the proceeds from our public and private equity offerings. More recently, we have funded our operations through our Term Loan Agreement, PIK Notes, Revolving Loan Agreement and other financing activities. As ofMarch 31, 2020 , we had$8.1 million in cash and cash equivalents and$137.9 million in contractual debt, net of debt discount. 33
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The$137.9 million in contractual debt was comprised of$59.6 million under the Term Loan Agreement,$61.8 million under the PIK Notes,$4.0 million under the Revolving Loan Agreement,$9.6 million in finance leases and$2.8 million in insurance notes related to our general liability, workers compensation and other insurance. Of our total debt,$73.7 million was classified as current, and$64.1 million was classified as long-term. Going Concern The Company is required to evaluate whether there is a substantial doubt about its ability to continue as a going concern each reporting period. In evaluating the Company's ability to continue as a going concern, management has considered conditions and events that could raise substantial doubt about the Company's ability to continue as a going concern for one year following the date the Company's financial statements are issued. These conditions and evaluations included the Company's current financial condition and liquidity sources, including current cash and cash equivalents balances, forecasted cash flows, the Company's obligations due within twelve months of the date these financial statements were issued, including the Company's obligations described in Note 7 - Long-Term Debt, and the other conditions and events described below. The Company has incurred substantial net losses and losses from operations for the quarter endedMarch 31, 2020 and for the year endedDecember 31, 2019 . As ofMarch 31, 2020 , the Company had cash and cash equivalents of approximately$8.1 million . The Company has access to a working capital facility under the Revolving Loan Agreement (as described below) that is based on the Company's accounts receivable; however, as ofMarch 31, 2020 , the Company did not have funds available to borrow under the Revolving Loan Agreement. Loans under the Revolving Loan Agreement mature inJanuary 2021 and loans under the Term Loan Agreement mature inApril 2021 , in each case within the 12-month going concern evaluation period. InMarch 2020 , a limited waiver was obtained under the Revolving Loan Agreement, providing relief extending throughJune 30, 2020 , from the requirement to provide an unqualified opinion on the Company's consolidated financial statements for the fiscal year endedDecember 31, 2019 . There can be no assurance that the Company will be able to negotiate an extension of the Revolving Loan, obtain future waivers, or have sufficient funds to repay its obligations under the Revolving Loan Agreement when they come due. As ofMarch 31, 2020 , the Company had$4.0 million of loans outstanding under the Revolving Loan Agreement, which is recorded as a current liability. In addition, the PIK Notes became mandatorily convertible into common stock upon maturity onJune 30, 2020 , provided, however, each ofAscribe Capital LLC andSolace Capital Partners LP , on behalf of each of their funds that is a holder of PIK Notes issued under the Indenture which in the aggregate hold$48.9 million of face value of the PIK Notes, agreed to extend the maturity date under the Indenture toNovember 30, 2020 of the Excess PIK Notes (as defined below). The Company does not currently have sufficient authorized common shares to fully convert, nor the liquidity to repay, the$61.8 million accrued amount of PIK Notes upon their maturity, requiring shareholder approval to authorize additional shares, which has not occurred as of the date of these financial statements. There is also uncertainty as to whether the Company will have sufficient liquidity to repay the loans under the Term Loan Agreement totaling$59.6 million when they mature onApril 13, 2021 . In addition, the Company may not have access to other sources of external capital on reasonable terms, or at all. The Company also expects to continue to experience volatility in market demand, which creates normal oil and gas price fluctuations, as well as external market pressures due to effects of global health concerns, such as COVID-19, and the oil price war triggered byRussia andSaudi Arabia that are not within our control. Management's plans to alleviate this substantial doubt include: (i) continuing to discuss amendments with the Company's lenders in order to extend the term of the Revolving Loan Agreement and the Term Loan Agreement; (ii) negotiate with the holders of the mandatorily convertible PIK Notes as to the terms of the conversion and/or complete a shareholder vote to authorize more common shares available for issuance;(iii) continuing to manage operating costs by actively pursuing cost cutting measures to maximize liquidity in line with current industry economic expectations; and/or (iv) pursuing additional financings with existing and new lenders. Based on the uncertainty of achieving these goals and the significance of the factors described, there is substantial doubt as to the Company's ability to continue as a going concern for a period of one year after the date these financial statements are issued. Impairment of Long-Lived Assets The oil and gas industry experienced a significant disruption during the first quarter of 2020 as a result of the oil price war initiated bySaudi Arabia andRussia inFebruary 2020 and the substantial decline in global demand for oil caused by the COVID-19 pandemic. These events resulted in a steep decline in prices, with physical markets showing signs of distress as spot prices were also negatively impacted by the lack of available storage capacity. Demand for our services declined in the face of depressed crude oil pricing. These market conditions have significantly impacted the Company's business and outlook with material adverse impacts to operations anticipated to continue in the near-term. Customers continue to revise their capital budgets in order to adjust spending levels in response to the lower commodity prices, and the Company has experienced, and continues to experience, significant customer activity reductions and pricing pressure for products and services. The Company has determined these recent events constituted a triggering event that required a review of the recoverability of long-lived assets and performed an interim impairment assessment of property and equipment and intangibles as ofMarch 31, 2020 . 34
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The fair value of long-lived assets was determined based on a discounted cash flow analysis. These analyses included significant judgment, including management's short-term and long-term forecast of operating performance, discount rates based on weighted average cost of capital, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the assets. These impairment assessments incorporate inherent uncertainties, including projected commodity pricing, supply and demand for services and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in forecasts. Based upon the Company's impairment assessments, it was determined the carrying amount of certain of the Company's long-lived assets exceeded their respective fair values. Therefore, impairments to property and equipment and intangible assets totaled$43.9 million during the three months endedMarch 31, 2020 as described in Note 4. The Company will continue to evaluate its long-lived assets in future quarters and could be required to record additional impairments in future reporting periods in the event market conditions continue to deteriorate. Term Loan Agreement OnApril 13, 2017 ,FES LLC , as borrower, and the Company and certain of its subsidiaries, as guarantors, entered into the Loan and Security Agreement (the "Term Loan Agreement") with the lenders party thereto andWilmington Trust, National Association , as agent (the "Term Loan Agent"). The Term Loan Agreement, as amended, provided for a term loan of$60.0 million , excluding paid-in-kind interest. Subject to certain exceptions and permitted encumbrances, the obligations under the Term Loan Agreement are secured by a first priority security interest in substantially all the assets of the Company other than accounts receivable, cash and related assets, which constitute priority collateral under the Revolving Loan Agreement (described below). The Term Loan Agreement has a stated maturity date ofApril 13, 2021 . Borrowings under the 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 paid-in-kind interest rate of seven percent (7%) commencingApril 13, 2017 to be capitalized and added to the principal amount of the term loan or, at the election of the Borrower, paid in cash. The paid-in-kind interest increases by two percent (2%) twelve months afterApril 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 three months endedMarch 31, 2020 ,$1.7 million of interest was paid-in-kind. AtMarch 31, 2020 , the paid-in-kind interest rate was 11%. The Company is permitted under the Term Loan Agreement to voluntarily repay the outstanding term loans at any time without premium or penalty. The Company is required to use the net proceeds from certain events, including but not limited to, the disposition of assets, certain judgments, indemnity payments, tax refunds, pension plan refunds, insurance awards and certain incurrences of indebtedness to repay outstanding loans under the Term Loan Agreement. The Company may also be required to use cash in excess of$20.0 million to repay outstanding loans under the Term Loan Agreement. The Term 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 Term 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 Term Loan Agreement also contains customary representations and warranties and event of default provisions for a secured term loan. OnMay 15, 2020 , the Company entered into a further amendment to the Term Loan Agreement, as described below in Item 5 of Part II - Other Information. Revolving Loan Agreement OnNovember 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 andRegions Bank , as administrative agent and collateral agent (the "Revolver Agent"). The Revolving Loan Agreement, as amended, provides for$9.0 million of letter of credit commitments, subject to a borrowing base comprised of 85% of eligible accounts receivable, 90% of eligible investment grade accounts receivable (in each case, less allowance for doubtful accounts) and 100% of eligible cash, less reserves. The letter of credit commitments under the Revolving Loan Agreement expire inDecember 2020 , and letters of credit issued under the Revolving Loan Agreement accrue fees at 4.25%, per annum. 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. AtMarch 31, 2020 , the Company had$4.0 million of borrowings outstanding and$6.9 million in letters of credit outstanding. AtJune 30, 2020 , the Company had 35
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no revolving loans outstanding or available borrowings and$6.9 million in letters of credit outstanding, with$2.1 million in available commitments. Amendments and Waivers to Revolving Loan Agreement and Term Loan Agreement OnFebruary 3, 2020 the Company and certain of its subsidiaries, as borrowers, entered into Second Amendment to Credit Agreement, effectiveDecember 31, 2019 , (the "February 2020 Revolving Loan Amendment"), with the lenders party thereto and the Revolver Agent. Among other things, theFebruary 2020 Revolving Loan Amendment reinstated a minimum excess line availability covenant for the monthly periods fromDecember 2019 throughJuly 2020 and removed the requirement to test for the purpose of a financial covenant, the fixed charge coverage ratio for the monthly periods fromDecember 2019 throughJune 2020 . OnMarch 20, 2020 , the Company and certain of its subsidiaries, as borrowers, entered into the Third Amendment and Temporary Limited Waiver to Credit Agreement (the "March 2020 Revolving Loan Amendment") with the lenders party thereto and the Revolver Agent. Pursuant to theMarch 2020 Revolving Loan Amendment, the requirement for the Company to deliver an unqualified audit opinion for the fiscal year endedDecember 31, 2019 was waived untilJune 30, 2020 (the "Revolving Loan Agreement Temporary Waiver"). In addition, the commitments under the Revolving Loan Agreement were reduced from$35.0 million to$27.5 million , and interest under the Revolving Loan Agreement was increased from a range of LIBOR plus 2.50% to 3.25% or base rate plus 1.50% to 2.25% based on the fixed charge coverage ratio from time to time, to LIBOR plus 4.25% or base rate plus 3.25%. OnMarch 20, 2020 , the Company, as a guarantor,FES LLC , as borrower, and certain of their subsidiaries, as guarantors, obtained a corresponding waiver under the Term Loan Agreement for the requirement to deliver an unqualified audit opinion for the fiscal year endedDecember 31, 2019 . OnMarch 23, 2020 , the Company, as a guarantor,FES LLC , as borrower, and certain of their subsidiaries, as guarantors, entered into Amendment No. 3 to Loan and Security Agreement (the "March 2020 Term Loan Amendment") with the lenders party thereto and the Term Loan Agent. Pursuant to theMarch 2020 Term Loan Amendment, there will be no cross-default to the Revolving Loan Agreement resulting from the expiration of the Revolving Loan Agreement Temporary Waiver. OnMay 15, 2020 , the Company entered into further amendments to the Revolving Loan Agreement and the Term Loan Agreement, as described above in Note 17 - Subsequent Events. OnJune 26, 2020 , the Company entered into further amendments to the Revolving Loan Agreement, as described above in Note 17 - Subsequent Events. OnJune 29, 2020 , the Company entered into further amendments to the Term Loan Agreement, as described above in Note 17 - Subsequent Events. 5% Subordinated Convertible PIK Notes OnMarch 4, 2019 , the Company issued$51.8 million aggregate original principal amount of 5.00% Subordinated Convertible PIK Notes dueJune 30, 2020 (the "PIK Notes"). OnMarch 4, 2019 , the Company, as Issuer, andWilmington Trust, National Association , as Trustee, entered into an Indenture governing the terms of the PIK Notes. The PIK Notes bear interest at a rate of 5.00% per annum. Interest on the PIK Notes will be accrued and payable, or capitalized to principal if not permitted to be paid in cash, semi-annually in arrears onJune 30 andDecember 31 of each year, commencing onJune 30, 2019 . The Company capitalized PIK Note interest totaling$0.09 million onJuly 1, 2019 and$1.3 million onJanuary 1, 2020 , which corresponds to the date the interest was determined to be paid. The PIK Notes are the unsecured general subordinated obligations of the Company and are subordinated in right of payment to any existing and future secured or unsecured senior debt of the Company, including debt incurred under the Term Loan Agreement and the Revolving Loan Agreement. The payment 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, including debt incurred under the Term Loan Agreement and the Revolving Loan Agreement. 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 cash, if any senior indebtedness is not paid when due or any other default on senior indebtedness occurs and the maturity of such indebtedness is accelerated in accordance with its terms unless, in any case, the default has been cured or waived, and the 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 at 36
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least 25% in aggregate principal amount of the PIK Notes then outstanding, the principal of, (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 part at the Company's option at a redemption price equal to the sum of (i) 100.0% of the 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 atJune 30, 2020 . For the three months endedMarch 31, 2020 and 2019, the Company recorded$1.8 million and$0.6 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 is 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 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 such 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. EffectiveNovember 14, 2019 , each ofAscribe Capital LLC andSolace Capital Partners LP , on behalf of each of their funds that is a holder of PIK Notes issued under the Indenture which in the aggregate hold$48.9 million of face value of the PIK Notes, agreed to extend the maturity date under the Indenture toNovember 30, 2020 of those PIK Notes (the "Excess PIK Notes"), for which there are not atJune 30, 2020 sufficient authorized shares of common stock of the Company to effect the mandatory conversion of the Excess PIK Notes, after giving effect to the conversion of PIK Notes held by other holders of PIK Notes who have not agreed to a maturity date extension or conversion deferral. Each also agreed to defer the mandatory conversion feature under the Indenture for such Excess PIK Notes until after the Company's stockholders have authorized sufficient additional shares of the Company's common stock to permit such conversion. OnApril 16, 2020 , the Company, Ascribe, and Solace consummated the Forbes PIK Exchange, pursuant to which Ascribe exchanged approximately$0.13 million aggregate principal amount of PIK Notes in exchange for 963,116 shares of the Company's common stock, and Solace exchanged approximately$0.09 million aggregate principal amount of PIK Notes in exchange for 709,253 shares of the Company's common stock. Following the Forbes PIK Exchange, Ascribe and its affiliates and Solace and its affiliates collectively beneficially own an aggregate amount of the Company's common stock representing 51% of the voting power of the outstanding shares of the Company's common stock. OnJune 29 the Company notified the PIK Note holders of a possible default due to property tax penalties that have been accrued and are outstanding, as further described in Note 17 - Subsequent Events. 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 prices of oil and natural gas have declined significantly during the last half of 2019 and the first quarter of 2020 due to demand/supply imbalances, COVID-19 and the oil price war triggered byRussia andSaudi Arabia . These lower levels of activities will materially affect our future cash flows. 37
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Table of Contents Three months ended March 31, 2020 2019 Net cash provided by (used in) operating activities $ 4,613 $ (4,341 ) Net cash used in investing activities (471 ) (373 ) Net cash used in financing activities (1,246 ) (1,168 ) Net increase (decrease) in cash, cash equivalents and cash - restricted 2,896 (5,882 ) Cash, cash equivalents and cash - restricted Beginning of period 5,297 8,156 End of period $ 8,193 $ 2,274 Cash flows from operating activities for the three months endedMarch 31, 2020 increased as compared to the three months endedMarch 31, 2019 . The increase resulted from working capital changes related to accounts receivable, prepaids, accounts payable and accrued liabilities. Cash flows used in investing activities for the three months endedMarch 31, 2020 increased as compared to the three months endedMarch 31, 2019 . The increase is related to less in proceeds from sale of equipment, offset by fewer purchases of property and equipment. Cash flows used in financing activities were$1.2 million for each of the three months endedMarch 31, 2020 and 2019. During the three months endedMarch 31, 2020 we made$1.2 million in principal payments on our finance leases. 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 continuing to use net cash in operating activities. Capital Expenditures Capital expenditures for the three months endedMarch 31, 2020 and 2019 were additions of$1.8 million and$5.1 million , respectively. Additions to our fluid logistics segment were primarily purchases of vacuum trucks and light trucks, offset by the sale of certain unused equipment. Additions to our well servicing segment were for well service equipment and light trucks. Additions to our coiled tubing segment were for light trucks, and pumping and support equipment. 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 8 - Commitments and Contingencies. 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, 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 endedDecember 31, 2019 .
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