Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Nature of Operations
Nature of Business
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, plugging and abandonment, and tubing testing. Our operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with 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 these Consolidated Financial Statements, the “Company,” “we,” and “our” mean FES Ltd. and its direct and indirect subsidiaries, except as otherwise indicated.
2. Risk 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, our revenue, profitability, cash flows and future rate of growth are substantially dependent on our ability to (1) maintain adequate equipment utilization, (2) maintain adequate pricing for the services we provide, and (3) maintain a trained work force. Failure to do so could adversely affect our financial position, results of operations, and cash flows.
Because our revenues are generated primarily from customers who are subject to the same factors generally impacting the oil and natural gas industry, our operations are also susceptible to market volatility resulting from economic, cyclical, weather related, or other factors related to such industry. Changes experienced 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 has materially decreased the demand for our services, and has had an adverse effect on our financial position, results of operations and cash flows.
3. Basis of Presentation
Recent Developments
On June 15, 2016, the Company elected not to make the
$12.6 million
semi-annual interest payment due on that date on the
9%
senior notes due 2019, or the 9% Senior Notes. The indenture governing the 9% Senior Notes, or the 9% Senior Indenture provides that the failure to make such interest payment constitutes an event of default after a
30
-day cure period. The Company has not paid the interest payment. Accordingly, an event of default under the 9% Senior Indenture occurred, which gives the trustee or the holders of at least
25%
of principal amount of 9% Senior Notes the option to declare all the 9% Senior Notes due and payable immediately. Additionally, such failure to make the interest payment within the 30-day cure period also constituted an event of default under the Company’s existing loan and security agreement, or the Loan Agreement, with certain lenders and Regions Bank, as agent for the secured parties, or the Agent, which allows the Agent to declare the Company’s obligations under the Loan Agreement immediately due and payable and to exercise the Agent’s and the lenders' other rights under the Loan Agreement.
On July 15, 2016, the Company and its domestic subsidiaries, or the Guarantor Subs, entered into a forbearance agreement with holders of more than a majority of the 9% Senior Notes pursuant to the 9% Senior Indenture. That forbearance agreement has subsequently been joined by other holders of the 9% Senior Notes such that
62.1%
of the holders of the 9% Senior Notes, or the Forbearing Holders, are now parties to the forbearance agreement, or the Indenture Forbearance Agreement. Pursuant to the Indenture Forbearance Agreement, the Forbearing Holders have agreed to forbear, during the Indenture Forbearance Period (as defined below), from exercising default remedies or accelerating any indebtedness under the 9% Senior Indenture resulting from the Company’s failure to make its semi-annual interest payment due on June 15, 2016 on the 9% Senior Notes. The forbearance period, or the Indenture Forbearance Period, under the Indenture Forbearance Agreement will expire on the earlier to occur of (i) 11:59 p.m. prevailing Central Time on September 16, 2016 and (ii) certain other specified events under the terms of the Indenture Forbearance Agreement.
Additionally, on July 15, 2016, FES Ltd. and the Guarantor Subs, entered into a forbearance agreement and an amendment, or the Loan Forbearance Agreement, to the Loan Agreement. Pursuant to the Loan Forbearance Agreement, the Agent and the lenders, or the Loan Forbearing Parties, have agreed to forbear, during the Loan Forbearance Period (as defined below), from exercising default remedies or accelerating any indebtedness under the Loan Agreement resulting from the Company’s failure to make its semi-annual interest payment due on June 15, 2016 on the 9% Senior Notes. The forbearance period, or the Loan Forbearance Period, under the Loan Forbearance Agreement will expire on the earlier to occur of (i) 5:01 p.m. prevailing Dallas, Texas time on October 14, 2016 and (ii) certain other specified events under the terms of the Loan Forbearance Agreement. In connection with the Loan Forbearance Agreement, the Company is required to maintain cash on deposit of no less than
$17.5 million
with Agent, and the lenders under the Loan Agreement are not obligated to make additional advances.
The Company and the Guarantor Subs entered into the Indenture Forbearance Agreement and the Loan Forbearance Agreement, or the Forbearance Agreements, to provide the Company and the Guarantor Subs with time to continue discussions with the Forbearing Holders and the Loan Forbearing Parties with respect to a proposed capital restructuring of the Company. As previously disclosed, the Company has engaged financial and legal advisors to assist it in evaluating potential strategic alternatives.
There can be no assurance that the Company and the Guarantor Subs will reach any agreement with any of the Forbearing Holders and the Loan Forbearing Parties on a capital restructuring of the Company by the end of the Indenture Forbearance Period or Loan Forbearance Period, as applicable, if at all, or that the Forbearance Agreements or the Indenture Forbearance Period or the Loan Forbearance Agreement will be extended. Failure to reach an agreement with the Forbearing Holders and the Loan Forbearing Parties prior to the expiration of the Indenture Forbearance Agreement and the Loan Forbearance Agreement would allow the trustee or the holders of the 9% Senior Notes or the lenders to accelerate the 9% Senior Notes and the loans or seek other remedies, which would jeopardize the Company’s ability to continue its current operations. If the lenders accelerate the maturity of the Company’s debt, the Company will not have sufficient cash on hand or borrowing capacity to satisfy the obligations, and may not be able to pay its debts or refinance it on acceptable terms.
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles accepted in the United States of America which contemplate the continuation of the Company as a going concern. During the six months ended June 30, 2016, the Company incurred a net loss of
$63.2 million
and has a working capital deficit of
$(239.1) million
at June 30, 2016, primarily due to the classification of the 9% Senior Notes as current liabilities resulting from the ability of the holders of such 9% Senior Notes to accelerate any indebtedness under the 9% Senior Indenture. The Company is in discussions to reach an agreement with the Forbearance Holders and the Loan Forbearing Parties with respect to a proposed capital restructuring of the Company. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation with no material effect on the consolidated financial statements.
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, 2015
. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. Interim results for the
three
and
six
months ended
June 30, 2016
may not be indicative of results that will be realized for the full year ending
December 31, 2016
. All significant intercompany accounts and transactions have been eliminated in consolidation.
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. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of the condensed consolidated financial statements.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board issued ASU 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payables in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regard to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company believes the adoption of this new standard will have an immaterial impact on its consolidated financial statements and related disclosures.
Impairment
During the second quarter of 2016, the Company experienced a triggering event resulting from the continuing decline in operating revenues due to an industry-wide slowdown, which began in the second half of 2014. Indicators of impairment were present; therefore, the Company assessed all of its long-lived assets for impairment, which resulted in the carrying amounts of long-lived assets associated with its fluid logistics segment in exceeding the recoverable amounts based upon the undiscounted cash flow analysis. As a result, the Company hired an independent consulting firm to measure the fair values of the long-lived assets associated with its fluid logistics segment. Based on the fair value analysis, the fair values of certain intangible assets were determined to be less than their carrying amounts; therefore, an impairment loss of
$14.5 million
was recorded as a component of operating expenses based on the amount that the carrying value exceeded fair value. Fair value of the intangible assets was determined utilizing a combination of the income, cost and market approaches. Specific intangible assets affected were customer relationships and other intangibles.
4. Intangible Assets
Our major classes of intangible assets consist of our customer relationships, trade names, safety training program and dispatch software. The Company expenses costs associated with extensions or renewals of intangible assets. There were
no
such extensions or renewals in the
six
months ended
June 30, 2016
and
2015
. Amortization expense is calculated using the straight-line method over the period indicated. Amortization expense for each of the
three
months ended
June 30, 2016
and
2015
was
$0.7 million
and for each of the
six
months ended
June 30, 2016
and
2015
was
$1.4 million
.
As noted above, an impairment of
$14.5 million
was recorded during the three months ended June 30, 2016.
Based upon the Company's findings, the recoverable amount of the trade name was in excess of the carrying amount, and no impairment was indicated as of
June 30, 2016
.
The following sets forth the identified intangible assets by major asset class:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
As of December 31, 2015
|
|
Useful
Life
(years)
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net Book
Value
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net Book
Value
|
|
|
|
(in thousands)
|
Customer relationships
|
15
|
|
$
|
31,896
|
|
|
$
|
(18,073
|
)
|
|
$
|
(13,823
|
)
|
|
$
|
—
|
|
|
$
|
31,896
|
|
|
$
|
(17,011
|
)
|
|
$
|
—
|
|
|
$
|
14,885
|
|
Trade names
|
15
|
|
8,050
|
|
|
(4,562
|
)
|
|
—
|
|
|
3,488
|
|
|
8,050
|
|
|
(4,293
|
)
|
|
—
|
|
|
3,757
|
|
Other
|
10-15
|
|
2,375
|
|
|
(1,686
|
)
|
|
(689
|
)
|
|
—
|
|
|
2,375
|
|
|
(1,586
|
)
|
|
—
|
|
|
789
|
|
|
|
|
$
|
42,321
|
|
|
$
|
(24,321
|
)
|
|
$
|
(14,512
|
)
|
|
$
|
3,488
|
|
|
$
|
42,321
|
|
|
$
|
(22,890
|
)
|
|
$
|
—
|
|
|
$
|
19,431
|
|
Estimated amortization expense of the intangible assets remaining for the years 2017 through 2022 is
$0.5 million
per year.
5. Share-Based Compensation
Incentive Compensation Plans
From time to time, the Company grants stock options, restricted stock units, or other awards to its employees, including executive officers and directors. After taking into account the restricted stock units granted through
June 30, 2016
(as discussed in the Restricted Stock Units paragraph below), there were
1,388,685
shares available for future issuance under the 2012 Incentive Compensation Plan. There have been
no
stock option awards issued under the 2012 Plan.
Stock Options
The following table presents a summary of the Company’s stock option activity for the
six
months ended
June 30, 2016
for options granted under the Company's 2008 Incentive Compensation Plan:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
Options outstanding at December 31, 2015
|
614,125
|
|
|
$
|
6.80
|
|
|
4.87 years
|
|
$
|
—
|
|
Granted
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
|
|
|
|
|
|
Forfeited/canceled
|
—
|
|
|
—
|
|
|
|
|
$
|
—
|
|
Options outstanding at June 30, 2016
|
614,125
|
|
|
$
|
6.80
|
|
|
4.37 years
|
|
$
|
—
|
|
Vested and expected to vest at June 30, 2016
|
614,125
|
|
|
$
|
6.80
|
|
|
4.37 years
|
|
$
|
—
|
|
Exercisable at June 30, 2016
|
614,125
|
|
|
$
|
6.80
|
|
|
4.37 years
|
|
$
|
—
|
|
During the
six
months ended
June 30, 2016
and 2015, the Company recorded
no
expenses for share-based compensation related to stock options, as all outstanding options are fully vested. There was
no
share-based compensation expense capitalized for either of the
six
months ended
June 30, 2016
or
2015
. As of
June 30, 2016
, there was
no
unrecognized share-based compensation expense for stock options.
Restricted Stock Units
The following table presents a summary of restricted stock unit grant activity for the
six
month period ended
June 30, 2016
:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Based
|
Liability Based
|
Total Number of Units
|
|
Grant Date Average Fair Value Per Unit
|
Outstanding at December 31, 2015
|
118,779
|
|
1,239,545
|
|
1,358,324
|
|
|
|
$
|
1.70
|
|
|
Granted
|
—
|
|
—
|
|
—
|
|
|
|
|
—
|
|
|
Vested
|
—
|
|
(642,645
|
)
|
(642,645
|
)
|
|
|
|
1.88
|
|
|
Forfeited
|
—
|
|
—
|
|
—
|
|
|
|
|
—
|
|
|
Nonvested at June 30, 2016
|
118,779
|
|
596,900
|
|
715,679
|
|
|
|
$
|
1.53
|
|
|
In the
six
months ended
June 30, 2016
and
2015
, participants utilized a net withholding exercise method, in which restricted stock units were withheld to cover payroll withholding tax. After giving effect to tax withholdings, the cumulative net shares issued to the participants were
4,500
and
259,041
out of
642,645
and
397,875
vested shares of restricted stock units for the
six
months ended
June 30, 2016
and
2015
, respectively. There were
360,658
and
zero
shares settled in cash for the six months ended
June 30, 2016
and
2015
, respectively. There were
277,487
and
138,834
shares surrendered for payroll withholding tax for the
six
months ended
June 30, 2016
and
2015
, respectively. The total pretax cash outflow, as included in withholding tax payments in our condensed consolidated statements of cash flows, for this net withholding exercise for the
six
months ended
June 30, 2016
and
2015
was
$0.1 million
.
Share-based compensation expense for the restricted stock units granted for each of the
six
months ended
June 30, 2016
and
2015
was
$0.1 million
and
$0.6 million
, respectively. The remaining share-based compensation expense of
$0.9 million
related to restricted stock units granted will be recognized over a weighted-average period of
2.17
years.
The following table summarizes the Company's share-based compensation expense for equity awards and liability awards (in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Awards classified as equity:
|
|
|
|
|
|
|
|
Restricted stock unit expense
|
$
|
—
|
|
|
$
|
287
|
|
|
$
|
—
|
|
|
$
|
400
|
|
Stock option expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Awards classified as liability:
|
|
|
|
|
|
|
|
Restricted stock unit expense
|
57
|
|
|
223
|
|
|
127
|
|
|
229
|
|
Total share-based compensation expense
|
$
|
57
|
|
|
$
|
510
|
|
|
$
|
127
|
|
|
$
|
629
|
|
6. Property and Equipment
Property and equipment consisted of the following:
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|
|
|
|
|
|
|
|
|
|
Estimated
Life in Years
|
|
June 30,
2016
|
|
December 31,
2015
|
|
|
|
(in thousands)
|
Well servicing equipment
|
9-15 years
|
|
$
|
410,244
|
|
|
$
|
413,543
|
|
Autos and trucks
|
5-10 years
|
|
130,749
|
|
|
126,994
|
|
Disposal wells
|
5-15 years
|
|
38,416
|
|
|
38,426
|
|
Building and improvements
|
5-30 years
|
|
14,107
|
|
|
14,107
|
|
Furniture and fixtures
|
3-15 years
|
|
6,646
|
|
|
6,573
|
|
Land
|
|
|
1,524
|
|
|
1,524
|
|
|
|
|
601,686
|
|
|
601,167
|
|
Accumulated depreciation
|
|
|
(346,429
|
)
|
|
(324,138
|
)
|
|
|
|
$
|
255,257
|
|
|
$
|
277,029
|
|
Depreciation expense was
$13.0 million
and
$25.8 million
for the
three
and
six
months ended
June 30, 2016
, respectively, and
$13.1 million
and
$26.5 million
for the
three
and
six
months ended
June 30, 2015
, respectively.
7. Long-Term Debt
Long-term debt at
June 30, 2016
and
December 31, 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
(in thousands)
|
9% senior notes, net of deferred financing costs of $2.8 million and $3.3 million as of June 30, 2016 and December 31, 2015 respectively
|
$
|
277,194
|
|
|
$
|
276,727
|
|
Revolving credit facility
|
15,000
|
|
|
15,000
|
|
Third party equipment notes and capital leases
|
5,001
|
|
|
7,133
|
|
Insurance notes
|
1,558
|
|
|
6,181
|
|
|
298,753
|
|
|
305,041
|
|
Less: Current portion
|
(297,491
|
)
|
|
(25,243
|
)
|
|
$
|
1,262
|
|
|
$
|
279,798
|
|
9% Senior Notes
On June 7, 2011, FES Ltd. issued $
280.0 million
in principal amount of 9% senior notes due
2019
, or the 9% Senior Notes. The 9% Senior Notes mature on
June 15, 2019
, and require semi-annual interest payments, in arrears, at an annual rate of
9%
on June 15 and December 15 of each year, until maturity. No principal payments are due until maturity.
The 9% Senior Notes are guaranteed by the domestic subsidiaries, or the Guarantor Subs, of the Company, which include Forbes Energy Services, LLC, or FES LLC, C.C. Forbes, LLC, or CCF, TX Energy Services, LLC, or TES, and Forbes Energy International, LLC, or FEI LLC. All of the Guarantor Subs are
100%
owned and each guarantees the securities on a full and unconditional and joint and several basis, subject to customary release provisions which include: (i) the transfer, sale or other disposition (by merger or otherwise) of all or substantially all of the assets of the applicable Guarantor, or all of its capital stock; (ii) the proper designation of a Guarantor as an "Unrestricted Subsidiary"; (iii) the legal defeasance or satisfaction and discharge of the indenture governing the 9% Senior Notes, or the 9% Senior Indenture; and (iv) as may be provided in any intercreditor agreement entered into in connection with any current and future credit facilities, in each such case specified in clauses (i) through (iii) above in accordance with the requirements therefor set forth in the 9% Senior Indenture. The Company may, at its option, redeem all or part of the 9% Senior Notes from time to time at specified redemption prices and subject to certain conditions required by the 9% Senior Indenture. The Company is required to make an offer to purchase the notes and to repurchase any notes for which the offer is accepted at
101%
of their principal amount, plus accrued and unpaid interest, if there is a change of control. The Company is required to make an offer to repurchase the notes and to repurchase any notes for which the offer is accepted at
100%
of their principal amount, plus accrued and unpaid interest, following certain asset sales.
The Company is permitted under the terms of the 9% Senior Indenture to incur additional indebtedness in the future, provided that certain financial conditions set forth in the 9% Senior Indenture are satisfied. The Company is subject to certain covenants contained in the 9% Senior Indenture, including provisions that limit or restrict the Company's and certain future subsidiaries' abilities to incur additional debt, to create, incur or permit to exist certain liens on assets, to make certain dispositions of assets, to make payments on certain subordinated indebtedness, to pay dividends or certain other payments to FES Ltd.'s equity holders, to engage in mergers, consolidations or other fundamental changes, to change the nature of its business or to engage in transactions with affiliates. Due to cross-default provisions in the 9% Senior Indenture and the loan agreement governing our revolving credit facility, with certain exceptions, a default and acceleration of outstanding debt under one debt agreement would result in the default and possible acceleration of outstanding debt under the other debt agreement. Accordingly, an event of default could result in all or a portion of our outstanding debt under our debt agreements becoming immediately due and payable. If this occurred, we might not be able to obtain waivers or secure alternative financing to satisfy all of our obligations simultaneously, which would adversely affect our business and operations.
As a result of the adoption of ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” on January 1, 2016, the Company recorded debt issuance costs of
$2.8 million
and retroactively recorded debt issuance costs of
$3.3 million
as a reduction in the carrying amount of the related 9% Senior Notes of
$280.0 million
as of
June 30, 2016
and
December 31, 2015
, respectively. On June 15, 2016, the Company elected not to make the
$12.6 million
semi-annual interest payment due on that date on the 9% Senior Notes. On July 15, 2016, the Company and the Guarantor Subs entered into a forbearance agreement with certain holders of the 9% Senior Notes. See further discussion contained herein. As a result of not making the interest payment and the forbearance agreement, the amounts outstanding of the 9% Senior Notes are classified as current in the condensed consolidated balance sheet.
Revolving Credit Facility
On September 9, 2011, the Company entered into the Loan Agreement. The Loan Agreement, as amended, provides for an asset based revolving credit facility with a maximum borrowing credit of
$90.0 million
, subject to borrowing base availability, any reserves established by the Agent in its discretion, compliance with a fixed charge coverage ratio covenant if availability under the facility falls below certain thresholds and, for borrowings above
$75.0 million
, compliance with the debt incurrence covenant in the 9% Senior Indenture that prohibits the incurrence of debt except for certain limited exceptions, including indebtedness incurred under the permitted credit facility debt basket to the greater of
$75.0 million
or
18%
of our Consolidated Tangible Assets (as defined in the 9% Senior Indenture) reported for the last fiscal quarter for which financial statements are available. As of
June 30, 2016
,
18%
of our Consolidated Tangible Assets was approximately
$62.6 million
. Under the Loan Agreement, our borrowing base at any time is equal to (i)
85%
of eligible accounts, which are determined by the Agent in its reasonable discretion, plus (ii) the lesser of
85%
of the appraised value, subject to certain adjustments, of our well servicing equipment that has been properly pledged and appraised, is in good operating condition and is located in the United States, or
100%
of the net book value of such equipment, minus (iii) any reserves established by the Agent in its reasonable discretion.
As amended, the Loan Agreement has a stated maturity of July 26, 2018. In June 2015, FES LLC borrowed
$15.0 million
under the facility. As of
June 30, 2016
, the facility had a revolving loan balance outstanding of
$15.0 million
and
$10.7
million
in letters of credit outstanding against the facility. Absent the effect of the event of default resulting from the non-payment of interest due on June15, 2016 on the 9% Senior Notes and the related Loan Forbearance Agreement, the borrowing availability under the facility would be
$49.3 million
.
Under cross default provisions in the Loan Agreement, an event of default under the 9% Senior Notes constitutes an event of default under the Loan Agreement. As of July 15, 2016, the Company entered into a loan forbearance agreement. See further discussion below. In connection with the Loan Forbearance Agreement discussed below, during the forbearance period the lenders are not obligated to make further advances to the Company under the Loan Agreement. As a result of these matters, amounts outstanding under the Loan Agreement are classified as current in the condensed consolidated balance sheet.
Borrowings bear interest at a rate equal to either (a) the
LIBOR
rate plus an applicable margin of between
2.00%
to
2.50%
based on borrowing availability or (b) a base rate plus an applicable margin of between
1.00%
to
1.50%
based on borrowing availability, where the base rate is equal to the greater of the
prime rate
established by Regions Bank, the
overnight federal funds rate
plus
0.5%
or the
LIBOR rate for a one-month period
plus
1%
. The Company's interest rate as of
June 30, 2016
was
2.5%
.
In addition to paying interest on outstanding principal under the facility, a fee of
0.375%
per annum will accrue on unutilized availability under the credit facility. The Company is required to pay a fee of between
2.25%
to
2.75%
, based on borrowing availability, with respect to the principal amount of any letters of credit outstanding under the facility. The Company is also responsible for certain other administrative fees and expenses.
FES LLC, FEI LLC, TES, and CCF are the named borrowers under the Loan Agreement. Their obligations have been guaranteed by one another and by FES Ltd. Subject to certain exceptions and permitted encumbrances, including the exemption of real property interests from the collateral package, the obligations under this facility are secured by a first priority security interest in all of our assets.
We are able to voluntarily repay outstanding loans at any time without premium or penalty (subject to the fees discussed above). If at any time our outstanding loans under the credit facility exceed the availability under our borrowing base, we may be required to repay the excess. Further, the Company is required to use the net proceeds from certain events, including certain judgments, tax refunds or insurance awards to repay outstanding loans, however, the named borrowers may reborrow following such repayments if the conditions to borrowing are met.
The Loan Agreement contains customary covenants for an asset-based credit facility, which include (i) restrictions on certain mergers, consolidations and sales of assets; (ii) restrictions on the creation or existence of liens; (iii) restrictions on making certain investments; (iv) restrictions on the incurrence or existence of indebtedness; (v) restrictions on transactions with affiliates; (vi) requirements to deliver financial statements, report and notices to the Agent and (vii) a springing requirement to maintain a consolidated Fixed Charge Coverage Ratio (which is defined in the Loan Agreement) of
1.1
:
1.0
in the event that our excess availability under the credit facility falls below the greater of
$11.3 million
or
15.0%
of our maximum credit under the facility for
sixty
consecutive days; provided that, the restrictions described in (i)-(v) above are subject to certain exceptions and permissions limited in scope and dollar value. The Loan Agreement also contains customary representations and warranties and event of default provisions.
Forbearance Agreements
On June 15, 2016, the Company elected not to make the
$12.6 million
semi-annual interest payment due on that date on the
9%
Senior Notes. The 9% Senior Indenture provides that the failure to make such interest payment constitutes an event of default after a
30
-day cure period. The Company has not paid the interest payment. Accordingly, an event of default under the 9% Senior Indenture occurred, which gives the trustee or the holders of at least
25%
of principal amount of 9% Senior Notes the option to declare all the 9% Senior Notes due and payable immediately. Additionally, such failure to make the interest payment within the 30-day cure period also constituted an event of default under the Loan Agreement which allows the Agent to declare the Company’s obligations under the Loan Agreement immediately due and payable and to exercise the Agent’s and the lenders’ other rights under the Loan Agreement.
On July 15, 2016, the Company and Guarantor Subs entered into the Indenture Forbearance Agreement. Pursuant to the Indenture Forbearance Agreement, the Forbearing Holders have agreed to forbear, during the Indenture Forbearance Period, from exercising default remedies or accelerating any indebtedness under the 9% Senior Indenture resulting from the Company’s failure to make its semi-annual interest payment due on June 15, 2016 on the 9% Senior Notes. The Indenture Forbearance Period will expire on the earlier to occur of (i) 11:59 p.m. prevailing Central Time on September 16, 2016 and (ii) certain other specified events under the terms of the Indenture Forbearance Agreement.
Additionally, on July 15, 2016, FES Ltd. and the Guarantor Subs, entered into the Loan Forbearance Agreement. Pursuant to the Loan Forbearance Agreement, the Loan Forbearing Parties have agreed to forbear, during the Loan Forbearance Period, from exercising default remedies or accelerating any indebtedness under the Loan Agreement resulting from the Company’s failure to make its semi-annual interest payment due on June 15, 2016 on the 9% Senior Notes. The Loan Forbearance Period will expire on the earlier to occur of (i) 5:01 p.m. prevailing Dallas, Texas time on October 14, 2016 and (ii) certain other specified events under the terms of the Loan Forbearance Agreement. In connection with the Loan Forbearance Agreement, the Company is required to maintain cash on deposit of no less than
$17.5 million
with Agent, and the lenders under the Loan Agreement are not obligated to make additional advances.
The Company and the Guarantor Subs entered into the Forbearance Agreements, to provide the Company and the Guarantor Subs with time to continue discussions with the Forbearing Holders and the Loan Forbearing Parties with respect to a proposed capital restructuring of the Company. As previously disclosed, the Company has engaged financial and legal advisors to assist it in evaluating potential strategic alternatives.
There can be no assurance that the Company and the Guarantor Subs will reach any agreement with any of the Forbearing Holders and the Loan Forbearing Parties on a capital restructuring of the Company by the end of the Indenture Forbearance Period or Loan Forbearance Period, as applicable, if at all, or that the Forbearance Agreements or the Indenture Forbearance Period or the Loan Forbearance Period will be extended. Failure to reach an agreement with the Forbearing Holders and the Loan Forbearing Parties prior to the expiration of the Indenture Forbearance Agreement and the Loan Forbearance Agreement would allow the trustee or the holders of the 9% Senior Notes or the lenders to accelerate the 9% Senior Notes and the loans or seek other remedies, which would jeopardize the Company’s ability to continue its current operations. If the lenders accelerate the maturity of the Company’s debt, the Company will not have sufficient cash on hand or borrowing capacity to satisfy the obligations, and may not be able to pay its debts or refinance it on acceptable terms.
Third Party Equipment Notes and Capital Leases
The Company financed the purchase of certain vehicles and equipment through commercial loans and capital leases with aggregate principal amounts outstanding as of
June 30, 2016
and
December 31, 2015
of approximately
$5.0 million
and
$7.1 million
, respectively. These loans are repayable in a range of
42
to
60
monthly installments with the maturity dates ranging from
July 2016
to
July 2018
. Interest accrues at rates ranging from
3.1%
to
8.4%
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
$1.1 million
and
$1.4 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
$2.1
and
$2.8
for the
six
months ended
June 30, 2016
and
2015
, respectively.
Following are required principal payments due on notes and capital leases (other than the 9% Senior Notes) existing as of
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July - December 2016
|
|
2017
|
|
2018
|
|
2019
|
2020 and thereafter
|
|
(in thousands)
|
|
Notes and capital lease principal payments
|
$
|
1,935
|
|
|
$
|
2,822
|
|
|
$
|
244
|
|
|
$
|
—
|
|
$
|
—
|
|
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 has reached the end of the lease term. See Note 10 - Commitments and Contingencies.
Insurance Notes
During October of 2015, the Company entered into promissory notes for the payment of insurance premiums at an interest rate of
3.4%
with an aggregate principal amount outstanding as of
June 30, 2016
and
December 31, 2015
of approximately
$1.6 million
and
$6.2 million
, respectively. The amount outstanding could be substantially offset by the cancellation of the related insurance coverage which is classified as prepaid insurance.
8. Fair Value of Financial Instruments
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The carrying amounts of 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
(in thousands)
|
9% Senior Notes
|
$
|
277,194
|
|
|
$
|
116,422
|
|
|
$
|
276,727
|
|
|
$
|
130,062
|
|
The fair value of our
9%
Senior Notes is a Level 1 input within the fair value hierarchy and is based on the dealer quoted market prices at
June 30, 2016
and
December 31, 2015
, respectively.
Fair Value on a Non-Recurring Basis
The Company utilizes fair value, on a non-recurring basis, to perform impairment testing on the Company’s long-lived assets by comparing carrying value to estimated undiscounted future net cash flows. If the carrying value of long-lived assets exceed undiscounted future net cash flows, the measurement of impairment is based on estimated fair value. These estimates are prepared using assumptions and judgments that are classified as Level 3 items within the fair value hierarchy. While management believes the valuation methodologies used are appropriate, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in different estimates of fair value at the reporting date.
9. Related Party Transactions
The Company enters into transactions with related parties in the normal course of conducting business. The following tables represent related party transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
2016
|
|
December 31, 2015
|
|
|
|
(in thousands)
|
|
Related parties cash and cash equivalents balances:
|
|
|
|
|
|
Balance at Texas Champion Bank
(1)
|
|
$
|
1,308
|
|
|
$
|
1,132
|
|
|
Balance at Brush Country Bank
(2)
|
|
429
|
|
|
485
|
|
|
|
|
|
|
|
|
Related parties payable:
|
|
|
|
|
|
Dorsal Services, Inc.
(3)
|
|
2
|
|
|
2
|
|
|
Tasco Tool Service Ltd.
(4)
|
|
—
|
|
|
2
|
|
|
Texas Quality Gate Guard Services, LLC
(5)
|
|
—
|
|
|
4
|
|
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
There were
no
related party receivables as of
June 30, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Related parties capital expenditures:
|
|
|
|
|
|
|
|
|
Alice Environmental Holdings, LLC
(6)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
455
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
455
|
|
Related parties revenue activity:
|
|
|
|
|
|
|
|
|
Dorsal Services, Inc.
(3)
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Tasco Tool Service Ltd.
(4)
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties expense activity:
|
|
|
|
|
|
|
|
|
Alice Environmental Services, LP/Alice Environmental Holdings, LLC
(6)
|
|
$
|
264
|
|
|
$
|
559
|
|
|
$
|
561
|
|
|
$
|
1,135
|
|
Dorsal Services, Inc.
(3)
|
|
8
|
|
|
—
|
|
|
—
|
|
|
19
|
|
Tasco Tool Service Ltd.
(4)
|
|
—
|
|
|
68
|
|
|
15
|
|
|
135
|
|
FCJ Management, LLC
(7)
|
|
—
|
|
|
5
|
|
|
—
|
|
|
14
|
|
Texas Quality Gate Guard Services, LLC
(5)
|
|
19
|
|
|
61
|
|
|
65
|
|
|
114
|
|
Animas Holdings, LLC
(8)
|
|
44
|
|
|
73
|
|
|
84
|
|
|
149
|
|
CJW Group, LLC
(9)
|
|
9
|
|
|
10
|
|
|
19
|
|
|
19
|
|
|
|
$
|
344
|
|
|
$
|
776
|
|
|
$
|
744
|
|
|
$
|
1,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payments to related parties:
|
|
|
|
|
|
|
|
|
SB Factoring, LLC
(10)
|
|
$
|
89
|
|
|
$
|
443
|
|
|
$
|
217
|
|
|
$
|
1,413
|
|
|
|
$
|
89
|
|
|
$
|
443
|
|
|
$
|
217
|
|
|
$
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The Company has a deposit relationship with Texas Champion Bank. Travis Burris, one of the directors of the Company, is the President, Chief Executive Officer, and director of Texas Champion Bank. John E. Crisp, or Mr. Crisp, an executive officer and director of the Company, serves on the board of directors of Texas Champion Bank.
(2)
Mr. Crisp and Charles C. Forbes, Jr., or Mr. Forbes, are directors and shareholders of Brush Country Bank, an institution with which the Company conducts business and has deposits. Mr. Forbes is an executive officer and director of the Company.
(3)
Dorsal Services, Inc., or Dorsal Services, is a trucking service company. Mr. Crisp is a partial owner of Dorsal Services. The Company uses Dorsal Services from time to time.
(4)
Tasco Tool Services, Ltd., or Tasco, is a down-hole tool company that is partially owned and managed by a company that is partially owned by Mr. Forbes. Tasco rents and sells tools to the Company from time to time.
(5)
Texas Quality Gate Guard Services, LLC, or Texas Quality Gate Guard Services, is an entity owned by Messrs. Crisp and Forbes, and a son of Mr. Crisp. Texas Quality Gate Guard Services has provided security services to the Company.
(6)
Messrs. Crisp and Forbes are also owners and managers of Alice Environmental Holdings, LLC, or AEH, and indirect owners and managers of Alice Environmental Services, LP, or AES and Alice Environmental West Texas, LLC, or AEWT. The Company leases or rents land and buildings, and formerly leased aircraft from AES. During January 2015, the Company purchased land from AEWT for an additional operating location. The aircraft leases were terminated during the third quarter of 2015.
(7)
FCJ Management, LLC, or FCJ, is an entity that leases land and facilities to the Company and is partially owned by Messrs. Crisp and Forbes. The lease with FCJ was terminated during the third quarter of 2015.
(8)
Animas Holdings, LLC, or Animas, is owned by the two sons of Mr. Crisp and three children of Mr. Forbes. Animas owns land and property that it leases to the Company.
(9)
CJW Group, LLC is an entity that leases office space to the Company and is partially owned by Messrs. Crisp and Forbes.
(10)
From time to time, vendors of the Company factor their receivables from the Company and direct that the Company make payment of such factored amounts directly to the applicable factor. One such factor to whom payments have been made by the Company is SB Factoring LLC which is owned in part by each of Mr. Crisp and Mr. Forbes. The nature of these transactions does 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.
10. Commitments and Contingencies
Concentrations of Credit Risk
FDIC insurance coverage is currently
$250,000
per depositor at each financial institution, and our non-interest bearing cash balances typically exceed federally insured limits. The Company restricts investment of temporary cash investments to financial institutions with high credit standings.
The Company'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 three months ended June 30, 2016, the Company's largest customer, five largest customers, and ten largest customers constituted
18.1%
,
62.8%
and
76.2%
of consolidated revenues, respectively. For the three months ended June 30, 2016, ConocoPhillips Company, Anadarko Petroleum Corporation, EOG Resources and Chesapeake Energy constituted
18.1%
,
12.8%
,
12.2%
and
11.2%
of consolidated revenues, respectively.
For the
six
months ended
June 30, 2016
, the Company's largest customer, five largest customers, and ten largest customers constituted
21.0%
,
59.8%
and
76.1%
of consolidated revenues, respectively. For the six months ended June 30, 2016, ConocoPhillips Company, EOG Resources and Anadarko Petroleum Corporation constituted
21.0%
,
11.3%
and
10.8%
of consolidated revenues, respectively. The loss of any one of our top five customers would have a materially adverse effect on the revenues and profits of the Company. Further, our 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, 2016
, the Company's largest customer,
five
largest customers, and
ten
largest customers constituted
20.8%
,
64.3%
and
79.5%
of accounts receivable, respectively. As of June 30, 2016, ConocoPhillips, Chesapeake Energy and Anadarko Petroleum constituted
20.8%
,
18.0%
and
10.2%
of accounts receivable, respectively.
Self-Insurance
The Company is self-insured under its Employee Group Medical Plan for the first
$150 thousand
per individual. The Company is also self-insured with a retention or deductible for the first
$1.0 million
in claims under each of its insurance policies as follows: auto liability
$1.0 million
deductible; workers' compensation/employers' liability
$1.0 million
deductible; general liability
$1.0 million
self-insured retention. The Company has an additional premium payable clause under its lead
$10.0 million
limit excess policy that states in the event losses exceed
$0.8 million
, a loss additional premium of up to
25%
of paid losses in excess of
$0.8 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
$8.2 million
and
$7.3 million
as of
June 30, 2016
and
December 31, 2015
, 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 as of the financial statement dates.
Litigation
The Company is subject to various other claims and legal actions that arise in the ordinary course of business. We do not believe that any of these claims and actions, separately or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations, or cash flows, although we cannot guarantee that a material adverse effect will not occur.
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 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. The Company's off-balance sheet arrangements include
$10.7 million
in letters of credit and operating leases for equipment, which are summarized in the table below.
Following are future lease payments on operating leases existing as of
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July - December 2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020 and thereafter
|
|
(in thousands)
|
|
|
Lease payments
|
$
|
2,051
|
|
|
$
|
1,641
|
|
|
$
|
817
|
|
|
$
|
553
|
|
|
$
|
4,140
|
|
11. Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Cash paid for
|
|
|
|
Interest
|
$
|
261
|
|
|
$
|
13,089
|
|
Income tax
|
—
|
|
|
60
|
|
Supplemental schedule of non-cash investing and financing activities
|
|
|
|
Changes in accounts payable related to capital expenditures
|
$
|
(1,450
|
)
|
|
$
|
1,466
|
|
Capital leases on equipment
|
—
|
|
|
562
|
|
Preferred stock dividends and accretion costs
|
21
|
|
|
21
|
|
12. Earnings per Share
Basic earnings (loss) per share, or EPS, is computed by dividing net income (loss) available to common shareholders 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 preferred stock, 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 Series B Senior Convertible Preferred Stock (the "Series B Preferred Stock"), which are 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. As of
June 30, 2016
and
June 30, 2015
, there were
614,125
and
1,148,625
options to purchase common stock outstanding, respectively, and
588,059
Series B Preferred Stock. The Series B Preferred Stock is convertible at a rate of
nine
shares of common stock to
one
share of Series B Preferred Stock, or
5,292,531
shares of common stock.
The shares of Series B Preferred Stock are participating securities as they participate in undistributed earnings with common stock, whether that participation is conditioned upon the occurrence of a specified event or not. A participating security is included in the computation of basic EPS using the two-class method. Under the two-class method, basic EPS for the Company’s common stock is computed by dividing net income applicable to common shares by the weighted-average common stock outstanding during the period. Under the certificate of designation for our Series B Preferred Stock, or the Series B Certificate of Designation, if at any time the Company declares a dividend in cash which is greater in value than
five
percent on a cumulative basis over the previous twelve month period of the then current “Common Stock Fair Market Value,” as that term is defined in the Series B Certificate of Designation, the Series B Preferred Stock will be entitled to receive a dividend payable in cash equal to the amount in excess of five percent of the then Common Stock Fair Market Value per common share they would have received if all outstanding Series B Preferred Stock had been converted into common shares. There were
no
earnings allocated to the Series B Preferred Stock for the quarters ended
June 30, 2016
and
2015
since there was a net loss for those periods and, thus, earnings for the quarter were not in excess of amounts prescribed by the Series B Certificate of Designation for our Series B Preferred Stock. Diluted EPS for the Company’s common stock is computed using the more dilutive of the two-class method or the if-converted method.
The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
(in thousands)
|
Weighted average shares outstanding
|
22,214
|
|
|
21,987
|
|
|
22,213
|
|
|
21,948
|
|
Dilutive effect of stock options and restricted stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive effect of preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
22,214
|
|
|
21,987
|
|
|
22,213
|
|
|
21,948
|
|
There were
614,125
stock options,
715,679
units of unvested restricted stock, and
5,292,531
shares of common stock equivalents underlying the Series B Preferred Stock outstanding as of
June 30, 2016
that were not included in the calculation of diluted EPS for the
six
months ended
June 30, 2016
because their effect would have been antidilutive. There were
1,148,625
stock options,
383,628
units of unvested restricted stock, and
5,292,531
shares of common stock equivalents underlying the Series B Preferred Stock outstanding as of
June 30, 2015
that were not included in the calculation of diluted EPS for the
six
months ending
June 30, 2015
because their effect would have been antidilutive.
The following table sets forth the computation of basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
(in thousands, except per share amounts)
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(38,686
|
)
|
|
$
|
(8,748
|
)
|
|
|
$
|
(63,154
|
)
|
|
$
|
(13,182
|
)
|
Preferred stock dividends and accretion
|
(194
|
)
|
|
(194
|
)
|
|
|
(388
|
)
|
|
(388
|
)
|
Net loss attributable to common shareholders
|
$
|
(38,880
|
)
|
|
$
|
(8,942
|
)
|
|
|
$
|
(63,542
|
)
|
|
$
|
(13,570
|
)
|
Weighted-average common shares
|
22,214
|
|
|
21,987
|
|
|
|
22,213
|
|
|
21,948
|
|
Basic and diluted net loss per share
|
$
|
(1.75
|
)
|
|
$
|
(0.41
|
)
|
|
|
$
|
(2.86
|
)
|
|
$
|
(0.62
|
)
|
13. Income Taxes
The Company’s effective tax rate for the
six
months ended
June 30, 2016
was
(0.06)%
based on pre-tax loss of
$63.1 million
. The Company's effective tax rate for the
six
months ended
June 30, 2015
was
34.5%
based on a pre-tax loss of
$20.1 million
. The difference between the effective rate and
35.0%
statutory rate is mainly due to the application of a valuation allowance in
2016
. With respect to the application of a valuation allowance, the management team considered the likelihood of realizing the future benefits associated with the Company's existing deductible temporary differences and carryforwards. As a result of this analysis, and based on the current year pre-tax loss and a cumulative loss in the prior three fiscal years, management determined that it is not more likely than not that the future benefit associated with all of the Company's existing deductible temporary differences and carryforwards will be realized. As a result, the Company maintained a valuation allowance against all of its net deferred tax assets. Management evaluates the recoverability of the Company's deferred income tax assets by assessing the need for a valuation allowance on a quarterly basis. If the Company determines that it is more likely than not that its deferred tax assets will be recovered, the valuation allowance will be reduced.
14. Business Segment Information
The Company has determined that it has
two
reportable segments organized based on its products and services—well servicing and fluid logistics. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Well Servicing
At
June 30, 2016
, our well servicing segment utilized our fleet of
173
well servicing rigs, which was comprised of
159
workover rigs and
14
swabbing rigs,
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.
Fluid Logistics
The 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, frac tanks, salt water disposal wells and facilities, and related equipment. These assets are used to transport, store and dispose of a variety of drilling and produced fluids used in and generated by oil and natural gas production activities. These services are required in most workover and completion projects and are routinely used in the daily operation of producing wells.
The following tables set forth certain financial information with respect to the Company’s reportable segments for the
three
and
six
months ended
June 30, 2016
and
June 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
Well Servicing
|
|
Fluid Logistics
|
|
Consolidated
|
|
Well Servicing
|
|
Fluid Logistics
|
|
Consolidated
|
2016
|
(in thousands)
|
|
(in thousands)
|
Operating revenues
|
$
|
16,796
|
|
|
$
|
11,615
|
|
|
$
|
28,411
|
|
|
$
|
35,509
|
|
|
$
|
24,833
|
|
|
$
|
60,342
|
|
Direct operating costs
|
15,668
|
|
|
10,931
|
|
|
26,599
|
|
|
32,388
|
|
|
24,092
|
|
|
56,480
|
|
Segment operating profits
|
$
|
1,128
|
|
|
$
|
684
|
|
|
$
|
1,812
|
|
|
$
|
3,121
|
|
|
$
|
741
|
|
|
$
|
3,862
|
|
Depreciation and amortization
|
$
|
6,927
|
|
|
$
|
6,743
|
|
|
$
|
13,670
|
|
|
$
|
13,603
|
|
|
$
|
13,556
|
|
|
$
|
27,159
|
|
Loss on impairment of assets
|
—
|
|
|
14,512
|
|
|
14,512
|
|
|
$
|
—
|
|
|
14,512
|
|
|
14,512
|
|
Capital expenditures
(1)
|
720
|
|
|
2,437
|
|
|
3,157
|
|
|
913
|
|
|
3,874
|
|
|
4,787
|
|
Total assets
|
611,540
|
|
|
444,652
|
|
|
1,056,192
|
|
|
611,540
|
|
|
444,652
|
|
|
1,056,192
|
|
Long-lived assets
|
151,934
|
|
|
103,323
|
|
|
255,257
|
|
|
151,934
|
|
|
103,323
|
|
|
255,257
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
39,030
|
|
|
$
|
23,780
|
|
|
$
|
62,810
|
|
|
$
|
90,216
|
|
|
$
|
56,927
|
|
|
$
|
147,143
|
|
Direct operating costs
|
29,236
|
|
|
17,876
|
|
|
47,112
|
|
|
65,610
|
|
|
42,036
|
|
|
107,646
|
|
Segment operating profits
|
$
|
9,794
|
|
|
$
|
5,904
|
|
|
$
|
15,698
|
|
|
$
|
24,606
|
|
|
$
|
14,891
|
|
|
$
|
39,497
|
|
Depreciation and amortization
|
$
|
6,393
|
|
|
$
|
7,366
|
|
|
$
|
13,759
|
|
|
$
|
12,934
|
|
|
$
|
14,988
|
|
|
$
|
27,922
|
|
Capital expenditures
(1)
|
722
|
|
|
2,715
|
|
|
3,437
|
|
|
4,026
|
|
|
3,404
|
|
|
7,430
|
|
Total assets
|
653,685
|
|
|
478,252
|
|
|
1,131,937
|
|
|
653,685
|
|
|
478,252
|
|
|
1,131,937
|
|
Long-lived assets
|
178,373
|
|
|
123,198
|
|
|
301,571
|
|
|
178,373
|
|
|
123,198
|
|
|
301,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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,
|
|
Six months ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Reconciliation of the Company Operating Loss As Reported:
|
(in thousands)
|
|
(in thousands)
|
Segment operating profits
|
$
|
1,812
|
|
|
$
|
15,698
|
|
|
$
|
3,862
|
|
|
$
|
39,497
|
|
General and administrative expense
|
5,420
|
|
|
8,797
|
|
|
11,476
|
|
|
18,077
|
|
Depreciation and amortization
|
13,670
|
|
|
13,759
|
|
|
27,159
|
|
|
27,922
|
|
Loss on impairment of assets
|
14,512
|
|
|
—
|
|
|
14,512
|
|
|
—
|
|
Operating loss
|
(31,790
|
)
|
|
(6,858
|
)
|
|
(49,285
|
)
|
|
(6,502
|
)
|
Other income and expenses, net
|
(6,905
|
)
|
|
(6,771
|
)
|
|
(13,829
|
)
|
|
(13,636
|
)
|
Pre-tax loss
|
$
|
(38,695
|
)
|
|
$
|
(13,629
|
)
|
|
$
|
(63,114
|
)
|
|
$
|
(20,138
|
)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Reconciliation of the Company Assets As Reported:
|
(in thousands)
|
Total reportable segments
|
$
|
1,056,192
|
|
|
$
|
1,133,607
|
|
Elimination of internal transactions
|
(1,869,305
|
)
|
|
(1,894,434
|
)
|
Parent
|
1,164,319
|
|
|
1,169,981
|
|
Total assets
|
$
|
351,206
|
|
|
$
|
409,154
|
|
15. Equity Securities
Common Stock
Holders of common stock have no pre-emptive, redemption, conversion, or sinking fund rights. Holders of common stock are entitled to
one
vote per share on all matters submitted to a vote of holders of common stock. Unless a different majority is required by law or by the bylaws, resolutions to be approved by holders of common stock require approval by a simple majority of votes cast at a meeting at which a quorum is present. In the event of the liquidation, dissolution, or winding up of the Company, the holders of common stock are entitled to share equally and ratably in the Company's assets, if any, remaining after the payment of all of its debts and liabilities, subject to any liquidation preference on any issued and outstanding preferred stock.
Series B Preferred Stock - Temporary Equity
Under our Series B Certificate of Designation, we are authorized to issue
825,000
shares of Series B Preferred Stock, par value
$0.01
per share. On May 28, 2010, the Company completed a private placement of
580,800
shares of Series B Preferred Stock at a price per share of CAD
$26.37
for an aggregate purchase price in the amount of approximately USD
$14.5 million
based on the exchange rate between U.S. dollars and Canadian dollars then in effect of
$1.00
to CDN
$1.0547
. The Company received net proceeds of USD
$13.8 million
after closing fee paid to investors of USD
$0.3 million
and legal fees and other offering costs of USD
$0.4 million
. This is presented as temporary equity on the balance sheet. On September 1, 2010, the Company paid a dividend in kind by issuing
7,259
shares of Series B Preferred Stock. The common stock into which the Series B Preferred Stock is convertible has certain demand and “piggyback” registration rights.
The value of the Series B Preferred Stock, for accounting purposes, is being accreted up to redemption value from the date of issuance to the earliest redemption date of the instrument using the effective interest rate method. If the Series B Preferred Stock had been redeemed as of
June 30, 2016
and
December 31, 2015
, the redemption amount applicable at each date would have been approximately $
14.7 million
.
Dividends
The Series B Preferred Stock is entitled to receive preferential dividends equal to five percent (
5.0%
) per annum of the original issue price per share, payable quarterly in February, May, August and November of each year. Such dividends may be paid by the Company in cash or in kind (in the form of additional shares of Series B Preferred Stock). As shares of the Series B Preferred Stock are convertible into shares of our common stock, any dividend paid in kind would have a dilutive effect on our shares of common stock.
Preferred stock dividends are recorded at their fair value. If paid in cash, the amount paid represents fair value. If paid in kind, the fair value of the preferred stock dividends would be determined using valuation techniques that include a component representing the intrinsic value of the dividends (which represents the fair value of the common stock into which the preferred stock could be converted) and an option component (which is determined using the Black-Scholes Option Pricing Model). Dividends and accretion for each of the
three
and
six
months ended
June 30, 2016
and
June 30, 2015
was
$0.2 million
in each period. Dividends were paid as required through February 28, 2016. The Company did not make the dividend payment due on May 28, 2016 and does not anticipate making the payment due on August 28, 2016. In the event that we fail to pay dividends, in cash or in-kind, on the Series B Preferred Stock for an aggregate of at least eight quarterly dividend periods (whether or not consecutive), the holders of the Series B Preferred Stock will be entitled to vote at any meeting of the shareholders with the holders of the common shares and to cast the number of votes equal to the number of whole common shares into which the Series B Preferred Stock held by such holders are then convertible.