UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________

Form 10-Q

_____________________________________________

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-08038

_____________________________________________

KEY ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

_____________________________________________

Delaware

    

04-2648081

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

1301 McKinney Street, Suite 1800, Houston, Texas

    

77010

(Address of principal executive offices)

(Zip Code)

(713) 651-4300

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

____________________________________________

Securities registered pursuant to Section 12(b) of the Act: None.

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

    

    

Accelerated filer

    

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes   No  

As of October 30, 2020, the number of outstanding shares of common stock of the registrant was 13,781,347.



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-looking statements. These forward-looking statements are based on our current expectations, estimates and projections and management’s beliefs and assumptions concerning future events and financial trends affecting our financial condition and results of operations. In some cases, you can identify these statements by terminology such as “may,” “will,” “should,” “predicts,” “expects,” “believes,” “anticipates,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statements are subject to substantial risks and uncertainties and are not guarantees of performance. Future actions, events and conditions and future results of operations may differ materially from those expressed in these statements. In evaluating those statements, you should carefully consider the information herein as well as the risks outlined in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”), and in Part II “Item 1A. Risk Factors” our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “Q1 2020 Form 10-Q”) and our information in the reports we file with the Securities and Exchange Commission.

We undertake no obligation to update or withdraw any forward-looking statement to reflect events or circumstances after the date of this report except as required by law. All of our written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements.

Important factors that may affect our expectations, estimates or projections include, but are not limited to, the following:

public health crises, such as the COVID-19 pandemic, including its impact on economic and other conditions globally, demand for oil and natural gas, and any related actions taken by businesses and governments, among others;
adverse conditions in the services and oil and natural gas industries, especially declines or volatility in oil and natural gas prices and capital expenditures by oil and natural gas companies;
our ability to satisfy our cash and liquidity needs, including our ability to generate sufficient liquidity or cash flow from operations or to obtain adequate financing to fund our operations or otherwise meet our obligations as they come due;
our ability to retain employees, customers or suppliers as a result of our financial condition generally or as a result of our recent Restructuring (as defined below);
our inability to achieve the potential benefits of the Restructuring;
our ability to achieve the benefits of cost-cutting initiatives, including our plan to optimize our geographic footprint (including exiting certain locations and reducing our regional and corporate overhead costs);
our ability to implement price increases or maintain pricing on our core services;
risks that we may not be able to reduce, and could even experience increases in, the costs of labor, fuel, equipment and supplies employed in our businesses;
industry capacity;
actions by OPEC and non-OPEC oil producing countries;
asset impairments or other charges;
the low demand for our services and resulting operating losses and negative cash flows;
the highly competitive nature of our industry;

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operating risks, which are primarily self-insured, and the possibility that our insurance may not be adequate to cover all of our losses or liabilities;
significant costs and potential liabilities resulting from compliance with applicable laws, including those resulting from environmental, health and safety laws and regulations, specifically those relating to hydraulic fracturing, as well as climate change legislation or initiatives;
our historically high employee turnover rate and our ability to replace or add workers, including executive officers and skilled workers;
our ability to implement technological developments and enhancements;
severe weather impacts on our business, including from hurricane activity;
our ability to successfully identify, make and integrate acquisitions and our ability to finance future growth of our operations or future acquisitions;
our ability to achieve the benefits expected from business combinations, disposition or acquisition transactions;
the loss of one or more of our larger customers;
the amount of our debt, the limitations imposed by the covenants in the agreements governing our debt, and our ability to comply with covenants under our debt agreements;
an increase in our debt service obligations due to variable rate indebtedness;
our inability to achieve our financial, capital expenditure and operational projections, including quarterly and annual projections of revenue, and/or operating income and the possibility of our inaccurate assessment of future activity levels, customer demand, and pricing stability which may not materialize (whether for Key as a whole or for geographic regions and/or business segments individually);
our ability to respond to changing or declining market conditions;
adverse impact of litigation or disputes; and
other factors affecting our business and financial condition described under “Risk Factors” in the 2019 Form 10-K and in the Q1 2020 Form 10-Q.

The unprecedented nature of the COVID-19 pandemic and recent market decline may make it more difficult to identify potential risks, give rise to risks that are currently unknown, or amplify the impact of known risks.

4


PART I — FINANCIAL INFORMATION

ITEM 1.         FINANCIAL STATEMENTS

Key Energy Services, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

September 30, 

December 31, 

    

2020

    

2019

(unaudited)

ASSETS

  

  

Current assets:

  

  

Cash and cash equivalents

$

4,542

$

14,426

Restricted cash

 

250

 

250

Accounts receivable, net of allowance for doubtful accounts of $420 and $881, respectively

 

26,433

 

51,091

Inventories

 

13,415

 

13,565

Other current assets

 

10,504

 

22,260

Total current assets

 

55,144

 

101,592

Property and equipment

 

381,385

 

432,917

Accumulated depreciation

 

(219,626)

 

(205,352)

Property and equipment, net

 

161,759

 

227,565

Intangible assets, net

 

303

 

347

Other non-current assets

 

39,354

 

18,366

TOTAL ASSETS

$

256,560

$

347,870

LIABILITIES AND EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

8,361

$

8,700

Current portion of long-term debt

 

1,089

 

2,919

Other current liabilities

52,160

90,715

Total current liabilities

 

61,610

 

102,334

Long-term debt

 

55,291

 

240,007

Workers’ compensation, vehicular and health insurance liabilities

 

26,617

 

26,072

Interest payable

14,913

Other non-current liabilities

 

20,436

 

30,710

Commitments and contingencies

 

  

 

  

Equity:

 

  

 

  

Common stock, $0.01 par value; 150,000,000 and 2,000,000 shares authorized, 13,781,347 and 410,990 outstanding

 

340

 

206

Additional paid-in capital

 

308,427

 

265,588

Retained deficit

 

(231,074)

 

(317,047)

Total equity

 

77,693

 

(51,253)

TOTAL LIABILITIES AND EQUITY

$

256,560

$

347,870

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

5


Key Energy Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

REVENUES

$

42,911

$

106,523

$

152,969

$

328,739

COSTS AND EXPENSES:

  

  

Direct operating expenses

33,556

87,956

125,121

266,714

Depreciation and amortization expense

7,107

14,584

25,387

43,142

General and administrative expenses

12,269

21,375

41,159

66,014

Impairment expense

41,242

Operating loss

(10,021)

(17,392)

(79,940)

(47,131)

Gain on debt restructuring

(170,648)

Interest expense, net of amounts capitalized

2,238

8,411

12,525

26,164

Other income, net

(8,362)

(351)

(8,762)

(1,732)

Income (loss) before income taxes

(3,897)

(25,452)

86,945

(71,563)

Income tax benefit (expense)

1

(37)

(972)

4,330

NET INCOME (LOSS)

$

(3,896)

$

(25,489)

$

85,973

$

(67,233)

Income (loss) per share:

  

  

  

  

Basic

$

(0.28)

$

(62.32)

$

8.14

$

(164.79)

Diluted

$

(0.28)

$

(62.32)

$

8.08

$

(164.79)

Weighted average shares outstanding:

  

  

  

  

Basic

13,781

409

10,562

408

Diluted

13,781

409

10,638

408

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

6


Key Energy Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

    

Nine Months Ended

September 30, 

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

  

  

Net income (loss)

$

85,973

$

(67,233)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

  

  

Depreciation and amortization expense

25,387

43,142

Impairment expense

41,242

Bad debt expense

1,156

538

Accretion of asset retirement obligations

128

126

Gain on debt restructuring

(170,648)

Amortization of deferred financing costs

451

346

Gain on disposal of assets, net

(1,280)

(3,785)

Share-based compensation

697

3,499

Changes in working capital:

  

Accounts receivable

23,502

6,469

Other current assets

11,906

5,224

Accounts payable, accrued interest and accrued expenses

(26,417)

(9,077)

Share-based compensation liability awards

1

5

Cash collateral

(22,400)

Other assets and liabilities

(11,364)

3,961

Net cash used in operating activities

(41,666)

(16,785)

CASH FLOWS FROM INVESTING ACTIVITIES:

  

  

Capital expenditures

(1,220)

(16,483)

Proceeds from sale of assets

5,002

8,362

Net cash provided by (used in) investing activities

3,782

(8,121)

CASH FLOWS FROM FINANCING ACTIVITIES:

  

  

Proceeds from long-term debt

30,000

Repayments of long-term debt

(6)

(1,875)

Repayments of finance lease obligations

(601)

(59)

Payment of deferred financing costs

(1,385)

(828)

Repurchases of common stock

(8)

(37)

Net cash provided by (used in) financing activities

28,000

(2,799)

Net decrease in cash, cash equivalents and restricted cash

(9,884)

(27,705)

Cash, cash equivalents, and restricted cash, beginning of period

14,676

50,311

Cash, cash equivalents, and restricted cash, end of period

$

4,792

$

22,606

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

7


Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 1. GENERAL

Key Energy Services, Inc., and its wholly owned subsidiaries (collectively, “Key,” the “Company,” “we,” “us,” “its,” and “our”) provide a full range of well services to major and independent oil and natural gas production companies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services, and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States. An important component of our growth strategy is to make acquisitions that will strengthen our core services or presence in selected markets, and that we also make strategic divestitures from time to time. We expect that the industry in which we operate will experience consolidation, and we expect to explore opportunities and engage in discussions regarding these opportunities, which could include mergers, consolidations or acquisitions or further dispositions or other transactions, although there can be no assurance that any such activities will be consummated.

The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The condensed December 31, 2019 balance sheet was prepared from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). Certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report on Form 10-Q. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2019 Form 10-K.

The unaudited condensed consolidated financial statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented herein. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results expected for the full year or any other interim period, due to fluctuations in demand for our services, timing of maintenance and other expenditures, and other factors.

We have evaluated events occurring after the balance sheet date included in this Quarterly Report on Form 10-Q through the date on which the unaudited condensed consolidated financial statements were issued, for possible disclosure of a subsequent event.

Market Conditions and COVID-19

As a company that provides services to oil and gas exploration and development companies, we are exposed to a number of risks and uncertainties that are inherent to our industry. In addition to such industry-specific risks, the global public health crisis associated with the novel coronavirus (“COVID-19”) has, and is anticipated to continue to have, an adverse effect on global economic activity for the immediate future and has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. The slowdown in global economic activity attributable to COVID-19 has resulted in a dramatic decline in the demand for energy, which directly impacts our industry and the Company. In addition, global crude oil prices experienced a decline in late 2019 and a collapse starting in early March 2020 as a direct result of failed negotiations between the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia regarding reduced supply of oil. As the breadth of the COVID-19 health crisis expanded throughout the month of March 2020 and governmental authorities implemented more restrictive measures to limit person-to-person contact, global economic activity continued to decline commensurately. The associated impact on the energy industry has been adverse and continued to be exacerbated by the unresolved conflict regarding production. In the second week of April, OPEC, Russia and certain other petroleum producing nations (“OPEC+”) reconvened to discuss the matter of production cuts in light of unprecedented disruption and supply and demand imbalances that expanded since the failed negotiations in early March 2020. Agreements were reached to cut production by up to 10 million barrels of oil per day with allocations to be made among the OPEC+ participants. In early June, these agreements were further extended through July 2020. These production cuts, other voluntary production curtailments and reduced drilling have helped to bring demand and supply closer to balance and stabilized commodity prices. However, US and international crude oil stocks remain volatile and relatively high, commodity prices remain depressed relative to 2019 levels, and there remains continued uncertainty around the timing of any recovery in economic activity, the amount of future oil and gas

8


production and the demand for energy.  Additionally, certain communities around the world have recently experienced increases in COVID-19 infection rates, which has resulted in the reinstatement of travel restrictions and business closures to curtail the spread of COVID-19.

Despite a significant decline in drilling by U.S. producers starting in mid-March 2020, domestic supply continued to exceed demand through May 2020, which led to significant operational stress due to capacity limitations associated with storage, pipeline and refining infrastructure, particularly within the Gulf Coast region. While these trends began to reverse in June 2020 due to production curtailments, natural well decline and reduced drilling activity, there remains a historically high amount of crude oil in storage. The combined effect of the aforementioned factors has had an adverse impact on the industry in general and our operations specifically.

These conditions and events have adversely affected the demand for oil and natural gas, as well as for our services. The collapse in the demand for oil caused by this unprecedented global health and economic crisis, coupled with oil oversupply, has had, and is reasonably likely to continue to have, a material adverse impact on the demand for our services and the prices we can charge for our services. The decline in our customers’ demand for our services has had, and is likely to continue to have, a material adverse impact on our financial condition, results of operations and cash flows.

To date, we have enhanced the cost control measures related to operational and general and administrative expenses to optimize cost during this time period with the goal of ensuring that margins are preserved as well as increased efforts on improving working capital until customer spend increases.

Restructuring and Reverse Stock Split

On March 6, 2020, we closed the previously announced restructuring of our capital structure and indebtedness (the “Restructuring”) pursuant to the Restructuring Support Agreement, dated as of January 24, 2020 (the “RSA”), with lenders under our Prior Term Loan Facility (as defined below) collectively holding over 99.5% (the “Supporting Term Lenders”) of the principal amount of the Company’s then outstanding term loans. Pursuant to the RSA and the Restructuring contemplated thereby, among other things, we effected the following transactions and changes to our capital structure and governance:

pursuant to exchange agreements entered into at the closing of the Restructuring, we exchanged approximately $241.9 million aggregate outstanding principal of our term loans (together with accrued interest thereon) held by Supporting Term Lenders under our Prior Term Loan Facility into (i) approximately 13.4 million newly issued shares of common stock representing 97% of the Company’s outstanding shares after giving effect to such issuance (and without giving effect to dilution by the New Warrants and MIP (each as defined below)) and (ii) $20 million of term loans under our new $51.2 million term loan facility (the “New Term Loan Facility”), each on a pro rata basis based on their holdings of term loans under the Prior Term Loan Facility;
completed a 1-for-50 reverse stock split of our outstanding common stock. All pre-Restructuring shares prices, including shares outstanding and earnings per share, have been adjusted to reflect the 1-for-50 reverse stock split;
distributed to our common stockholders of record as of February 18, 2020 two series of warrants (the “New Warrants”);
entered into the $51.2 million New Term Loan Facility, of which (i) $30 million was funded at closing of the Restructuring with new cash proceeds from the Supporting Term Lenders and $20 million was issued in exchange for term loans held by the Supporting Term Lenders under the Prior Term Loan Facility as described above and (ii) an approximate $1.2 million was a senior secured term loan tranche in respect of term loans held by lenders under the Prior Term Loan Facility who were not Supporting Term Lenders;
entered into the New ABL Facility (as defined below);
adopted a new management incentive plan (the “MIP”) representing up to 9% of the Company’s outstanding shares after giving effect to the issuance of shares described above; and
made certain changes to the Company’s governance, including changes to our Board of Directors (the “Board”), amendments to our governing documents and entry into the Stockholders Agreement (as defined below) with the Supporting Term Lenders.

9


In accordance with the RSA at the closing of the Restructuring, the Company amended and restated its certificate of incorporation and entered into a stockholders agreement (the “Stockholders Agreement”) with the Supporting Term Lenders in order to, among other things, provide for a Board of seven members. Pursuant to the Stockholders Agreement, our Board consists of our chief executive officer and six other members appointed by various Supporting Term Lenders. Specifically, pursuant to the Stockholders Agreement, Supporting Term Lenders who hold more than 25% of the Company’s outstanding shares as of the closing of the Restructuring are entitled to nominate two directors and Supporting Term Lenders who hold between 10% and 25% of the Company’s outstanding shares as of the closing of the Restructuring are entitled to nominate one director. All appointees or nominees of Supporting Term Lenders, other than any director appointed or nominated by Soter Capital LLC (“Soter”), must meet the “independent director” requirements set forth in Section 303A of the NYSE Listed Company Manual. In addition, pursuant to the Stockholders Agreement, Supporting Term Lenders are entitled to appoint a non-voting board observer subject to specified ownership thresholds.

In accordance with the RSA and following the closing of the Restructuring, the Company distributed to stockholders of record as of February 18, 2020 the New Warrants. The New Warrants were issued in two series, each with a four-year exercise period. The first series entitles the holders to purchase in the aggregate 1,669,730 newly issued shares of common stock, representing 10% of the Company’s common shares at the closing of the Restructuring on an as-exercised basis (after giving effect to the exercise of all New Warrants, but subject to dilution by issuances under the MIP). The aggregate exercise price of the first series of New Warrants is $19.23 and was determined based on the aggregate outstanding principal amount of term loans under the Prior Term Loan Facility plus accrued interest thereon at the default rate as of the closing of the Restructuring. The second series of New Warrants entitles the holders to purchase in the aggregate 1,252,297 newly issued shares of common stock, representing 7.5% of the Company’s common shares at the closing of the Restructuring on an as-exercised basis (after giving effect to the exercise of all New Warrants, but subject to dilution by issuances under the MIP). The aggregate strike price of the second series of New Warrants is $28.85 and was determined based on the product of (i) the aggregate outstanding principal amount of term loans under the Prior Term Loan Facility plus accrued interest thereon at the default rate as of the closing of the Restructuring, multiplied by (ii) 1.50.

For more information on our New Term Loan Facility and New ABL Facility entered into in connection with the Restructuring, see “Note 7. Debt.”

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

The preparation of these unaudited condensed consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates may also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii) provide allowances for our uncollectible accounts receivable, (viii) value our asset retirement obligations, and (ix) value our equity-based compensation. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improved information not previously available. Because of the limitations inherent in this process, our actual results may differ materially from these estimates. We believe that the estimates used in the preparation of these interim financial statements are reasonable.

There have been no material changes or developments in our evaluation of accounting estimates and underlying assumptions or methodologies that we believe to be a “Critical Accounting Policy or Estimate” as disclosed in our 2019 Form 10-K.

Recent Accounting Developments

ASU 2016-13. In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments that will change how companies measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount. The amendments in this update were effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. We adopted the new standard effective January 1, 2020 and the adoption of this standard did not have a material impact on our consolidated financial statements.

10


ASU 2019-12. In December 2019, the Financial Accounting Standards Board issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes that will simplify accounting for income taxes by eliminating certain exceptions to the guidance for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also simplifies aspects of the accounting for franchise taxes that are partially based on income and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. We adopted the new standard effective April 1, 2020. Most of the changes were not applicable to Key and there was no significant impact to the Company’s financial statements upon adoption of this standard.

Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. It is a large tax-and-spending package intended to provide additional economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant business tax provisions that, among other things, eliminate the taxable income limit for certain net operating losses (NOL) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years; accelerate refunds of previously generated corporate alternative minimum tax (AMT) credits; and generally increased the business interest limitation under section 163(j) from 30 percent to 50 percent. Key has analyzed the income tax provisions under the CARES Act, and concluded that none of the provisions have a significant impact to the Company’s income tax positions. Future regulatory guidance under the CARES Act or additional legislation enacted by Congress in connection with the COVID-19 pandemic could impact our tax provision in future periods. In addition to income tax provisions, the CARES Act also includes tax provisions relating to refundable payroll tax credits and deferment of employer’s social security tax payments. Specifically, the CARES Act permits an employer to defer 50 percent of its 2020 social security tax payments to the end of 2021 and the remaining 50 percent to the end of 2022. Beginning in April of 2020, we began deferring our employer social security payments (“payroll tax”) and approximately $2.4 million of payroll tax has been deferred as of September 30, 2020. Also, the Company qualifies for the refundable payroll tax credits (“employee retention credit”) and has recognized approximately $1.6 million of an employee retention credit for the period ending September 30, 2020.  The Company continues to evaluate the impact of the CARES Act on our financial position, results of operations and cash flows.

NOTE 3. REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenues are recognized when control of the promised goods or services is transferred to our customers, and in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The following table presents our revenues disaggregated by revenue source (in thousands). Sales taxes are excluded from revenues.

Nine Months Ended

September 30, 

    

2020

    

2019

Rig Services

$

98,332

$

197,375

Fishing and Rental Services

 

17,648

 

43,534

Coiled Tubing Services

 

8,418

 

32,134

Fluid Management Services

 

28,571

 

55,696

Total

$

152,969

$

328,739

Disaggregation of Revenue

We have disaggregated our revenues by our reportable segments which include Rig Services, Fishing & Rental Services, Coiled Tubing Services and Fluid Management Services segments.

Rig Services

Our Rig Services segment include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, well maintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gas producers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes and capabilities, allowing us to service all types of oil and gas wells.

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We recognize revenue within the Rig Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue as the services are provided, typically daily, as we have the right to invoice the customer for the services performed. Rig Services are billed monthly, and payment terms are usually 30 days from invoice receipt.

Fishing and Rental Services

We offer a full line of services and rental equipment designed for use in providing drilling and workover services. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, pumps, power swivels, reversing units and foam air units.

We recognize revenue within the Fishing and Rental Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue as the services are provided, typically daily, as we have the right to invoice the customer for the services performed. Fishing and Rental Services are billed and paid monthly. Payment terms for Fishing and Rental Services are usually 30 days from invoice receipt.

Coiled Tubing Services

Coiled Tubing Services involve the use of a continuous metal pipe spooled onto a large reel, which is then deployed into oil and natural gas wells to perform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemical treatments. Coiled tubing is also used for a number of horizontal well applications such as milling temporary isolation plugs that separate frac zones, and various other pre- and post-hydraulic fracturing well preparation services.

We recognize revenue within the Coiled Tubing Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue, typically daily, as the services are provided as we have the right to invoice the customer for the services performed. Coiled Tubing Services are billed and paid monthly. Payment terms for Coiled Tubing Services are usually 30 days from invoice receipt.

Fluid Management Services

We provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover and maintenance activities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site and transported for disposal in saltwater disposal wells owned by us or a third party.

We recognize revenue within the Fluid Management Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue as the services are provided, typically daily, as we have the right to invoice the customer for the services performed. Fluid Management Services are billed and paid monthly. Payment terms for Fluid Management Services are usually 30 days from invoice receipt.

Arrangements with Multiple Performance Obligations

While not typical for our business, our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost-plus margin. For combined products and services within a contract, we account for individual products and services separately if they are distinct –- i.e., if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services within a contract based on the prices at which we separately sell our services. For items that are not sold separately, we estimate the standalone selling prices using the expected cost-plus margin approach.

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Contract Balances

Under our revenue contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our revenue contracts do not give rise to contract assets or liabilities under ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”).

Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within general and administrative expenses.

The majority of our services are short-term in nature, with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

Additionally, our payment terms are short-term in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Further, in many of our service contracts we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided). For those contracts, we have utilized the practical expedient in ASC 606-10-55-18 exempting the Company from disclosure of the recognition of revenue in the amount that the Company has a right to invoice.

Accordingly, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

NOTE 4. EQUITY

A reconciliation of the total carrying amount of our equity accounts for the nine months ended September 30, 2020 is as follows (in thousands):

COMMON STOCKHOLDERS

Common Stock

Additional

Number of

Paid-in

    

Shares

    

Amount at Par

    

Capital

    

Retained Deficit

    

Total

Balance at December 31, 2019

 

411

$

206

$

265,588

$

(317,047)

$

(51,253)

Common stock purchases

 

(1)

 

(1)

 

(7)

 

 

(8)

Share-based compensation

 

3

 

2

 

(75)

 

 

(73)

Issuance of shares pursuant to the Restructuring Support Agreement

 

13,368

 

133

 

41,855

 

 

41,988

Issuance of warrants pursuant to the Restructuring Support Agreement

 

 

 

296

 

 

296

Net income

 

 

 

 

108,994

 

108,994

Balance at March 31, 2020

 

13,781

 

340

307,657

 

(208,053)

 

99,944

Share-based compensation

 

 

 

325

 

 

325

Net loss

 

 

 

 

(19,125)

 

(19,125)

Balance at June 30, 2020

 

13,781

 

340

 

307,982

 

(227,178)

 

81,144

Share-based compensation

 

 

 

445

 

 

445

Net loss

 

 

 

 

(3,896)

 

(3,896)

Balance at September 30, 2020

 

13,781

$

340

$

308,427

$

(231,074)

$

77,693

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A reconciliation of the total carrying amount of our equity accounts for the nine months ended September 30, 2019 is as follows (in thousands):

COMMON STOCKHOLDERS

Common Stock

Additional

Number of

Paid-in

    

Shares

    

Amount at Par

    

Capital

    

Retained Deficit

    

Total

Balance at December 31, 2018

 

407

$

204

$

264,945

$

(219,629)

$

45,520

Share-based compensation

 

 

 

816

 

 

816

Net loss

 

 

 

 

(23,441)

 

(23,441)

Balance at March 31, 2019

 

407

 

204

 

265,761

 

(243,070)

 

22,895

Common stock purchases

 

 

 

(4)

 

 

(4)

Share-based compensation

 

1

 

 

1,414

 

 

1,414

Net loss

 

 

 

 

(18,303)

 

(18,303)

Balance at June 30, 2019

 

408

 

204

 

267,171

(261,373)

 

6,002

Common stock purchases

 

 

 

(33)

 

 

(33)

Share-based compensation

 

2

 

1

 

1,268

 

 

1,269

Net loss

 

 

 

 

(25,489)

 

(25,489)

Balance at September 30, 2019

 

410

$

205

$

268,406

$

(286,862)

$

(18,251)

NOTE 5. OTHER BALANCE SHEET INFORMATION

The table below presents comparative detailed information about other current assets at September 30, 2020 and December 31, 2019 (in thousands):

    

September 30, 2020

    

December 31, 2019

Other current assets:

 

  

 

  

Prepaid current assets

$

3,008

$

13,118

Reinsurance receivable

 

6,442

 

6,475

Operating lease right-of-use assets

 

1,054

 

2,394

Other

 

 

273

Total

$

10,504

$

22,260

The table below presents comparative detailed information about other non-current assets at September 30, 2020 and December 31, 2019 (in thousands):

    

September 30, 2020

    

December 31, 2019

Other non-current assets:

 

  

 

  

Reinsurance receivable

$

6,875

$

6,887

Deposits

 

29,851

 

8,689

Operating lease right-of-use assets

 

2,332

 

2,404

Other

 

296

 

386

Total

$

39,354

$

18,366

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The table below presents comparative detailed information about other current liabilities at September 30, 2020 and December 31, 2019 (in thousands):

    

September 30, 2020

    

December 31, 2019

Other current liabilities:

 

  

 

  

Accrued payroll, taxes and employee benefits

$

7,954

$

14,463

Accrued operating expenditures

 

8,199

 

12,919

Income, sales, use and other taxes

 

6,553

 

5,115

Self-insurance reserve

 

23,503

 

25,366

Accrued interest

 

1,607

 

15,476

Accrued insurance premiums

 

118

 

4,990

Unsettled legal claims

 

2,061

 

7,020

Accrued severance

 

 

2,636

Operating leases

 

2,114

 

2,502

Other

 

51

 

228

Total

$

52,160

$

90,715

The table below presents comparative detailed information about other non-current liabilities at September 30, 2020 and December 31, 2019 (in thousands):

    

September 30, 2020

    

December 31, 2019

Other non-current liabilities:

 

  

 

  

Asset retirement obligations

$

8,842

$

9,035

Environmental liabilities

 

1,820

 

2,047

Accrued sales, use and other taxes

 

5,344

 

17,005

Deferred tax liabilities

468

Operating leases

 

1,540

 

2,590

Federal insurance contributions act tax

2,390

Other

 

32

 

33

Total

$

20,436

$

30,710

NOTE 6. INTANGIBLE ASSETS

The components of our other intangible assets as of September 30, 2020 and December 31, 2019 are as follows (in thousands):

    

September 30, 2020

    

December 31, 2019

Trademark:

Gross carrying value

$

520

$

520

Accumulated amortization

 

(217)

 

(173)

Net carrying value

$

303

$

347

The weighted average remaining amortization periods and expected amortization expense for the next five years for our definite lived intangible assets are as follows:

 

Weighted

 

average remaining

Expected amortization expense (in thousands)

amortization

Remainder of

    

period (years)

    

2020

    

2021

    

2022

    

2023

    

2024

Trademarks

5.3

$

14

$

58

$

58

$

58

$

58

Amortization expense for our intangible assets was less than $0.1 million for the three and nine months ended September 30, 2020 and 2019.

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NOTE 7. DEBT

As of September 30, 2020 and December 31, 2019, the components of our debt were as follows (in thousands):

    

September 30, 2020

    

December 31, 2019

Term Loan Facility due 2025

$

50,000

$

Term Loan Facility due 2021

1,204

243,125

Interest in kind

3,423

Unamortized debt issuance costs

 

(2,732)

 

(1,799)

Finance lease obligation

 

4,485

 

1,600

Total

 

56,380

 

242,926

Less current portion(1)

 

(1,089)

 

(2,919)

Long-term debt

$

55,291

$

240,007


(1) Of the current portion of debt, $1.1 million and $0.4 million is related to finance leases as of September 30, 2020 and December 31, 2019, respectively.

Prior Long-Term Debt Arrangements

Prior to the Restructuring, the Company was party to two credit facilities. The Company and Key Energy Services, LLC, were borrowers (the “ABL Borrowers”) under an ABL Facility with the financial institutions party thereto from time to time as lenders (the “ABL Lenders”), Bank of America, N.A., as administrative agent for the lenders (the “Administrative Agent”) and Bank of America, N.A., as sole collateral agent for the lenders, providing for aggregate commitments from the ABL Lenders of $80 million (the “Prior ABL Facility”). In addition, on December 15, 2016, the Company entered into the term loan facility among the Company, as borrower, certain subsidiaries of the Company named as guarantors therein, the financial institutions party thereto from time to time as Lenders (collectively, the “Term Loan Lenders”) and Cortland Capital Market Services LLC and Cortland Products Corp., as agent for the Lenders (the “Prior Term Loan Facility”).

As previously announced, on October 29, 2019, the Company entered into a forbearance agreement (as amended on December 6, 2019, December 20, 2019, January 10, 2020 and January 31, 2020, the “ABL Forbearance Agreement”) with Bank of America, N.A., as administrative agent (the “Administrative Agent”), and all of the lenders party thereto (the “Lenders”) regarding a cross-default under the Loan and Security Agreement, dated as of December 15, 2016, by and among Key, the Administrative Agent and the Lenders.

On February 28, 2020, the Company and the Lenders party thereto amended the ABL Forbearance Agreement (the “Forbearance Agreement Amendment”). Pursuant to the Forbearance Agreement Amendment, the Lenders party thereto agreed, among other things, to extend the forbearance period until the earliest of (i) March 6, 2020, (ii) the occurrence of certain specified early termination events and (iii) the date on which the previously announced RSA between the Company and certain lenders under the Company’s term loan facility is terminated in accordance with its terms. In connection with the ABL Forbearance Agreement, the Company elected not to make scheduled interest payments due October 18, 2019 and January 20, 2020 under the Prior Term Loan Facility. The Company’s failure to make these interest payments resulted in a default under the Prior Term Loan Facility and a cross-default under the Prior ABL Facility.

Effective March 6, 2020, upon the closing of the Restructuring, we entered into the New Term Loan Facility and the New ABL Facility, which superseded the Prior Term Loan Facility and Prior ABL Facility. A description of each of the new and prior facilities follows.

New ABL Facility

On March 6, 2020, the Company and Key Energy Services, LLC, as borrowers (the “ABL Borrowers”), entered into Amendment No. 3 to the Company’s existing ABL facility, dated as of December 15, 2016 (as amended, the “New ABL Facility”) with the financial institutions party thereto from time to time as lenders (the “ABL Lenders”) and Bank of America, N.A., as administrative agent and collateral agent (the “ABL Agent”) for the ABL Lenders. The New ABL Facility provided for aggregate commitments from the ABL Lenders of $70 million and matures on the earlier of (x) April 5, 2024 and (y) 181 days prior to the scheduled maturity date of

16


the Company’s term loan facility or the scheduled maturity date of the Company’s other material debt in an aggregate principal amount exceeding $15 million.

The New ABL Facility provides the ABL Borrowers with the ability to borrow up to an aggregate principal amount equal to the lesser of (i) the aggregate revolving commitments then in effect and (ii) the sum of (a) 85% of the value of eligible accounts receivable plus (b) 80% of the value of eligible unbilled accounts receivable, subject to a limit equal to the greater of (x) $30 million and (y) 25% of the commitments. The amount that may be borrowed under the New ABL Facility is subject to increase or reduction based on certain segregated cash or reserves provided for by the New ABL Facility. In addition, the percentages of accounts receivable and unbilled accounts receivable included in the calculation described above is subject to reduction to the extent of certain bad debt write-downs and other dilutive items provided in the New ABL Facility.

Borrowings under the New ABL Facility bear interest, at the ABL Borrowers’ option, at a per annum rate equal to (i) LIBOR for 30, 60, 90, 180, or, with the consent of the ABL Lenders, 360 days, plus an applicable margin that varies from 2.75% to 3.25% depending on the ABL Borrowers’ fixed charge coverage ratio at such time or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the federal funds rate, plus 0.50% or (z) 30-day LIBOR plus 1.0% plus (b) an applicable margin that varies from 1.75% to 2.25% depending on the ABL Borrowers’ fixed charge coverage ratio at such time. The New ABL Facility provides that, in the event LIBOR becomes unascertainable for the requested interest period or otherwise becomes unavailable or replaced by other benchmark interest rates, then the Company and the ABL Agent may amend the New ABL Facility for the purpose of replacing LIBOR with one or more SOFR-based rates or another alternate benchmark rate giving consideration to the general practice in similar U.S. dollar denominated syndicated credit facilities.

In addition, the New ABL Facility provides for unused line fees of 0.5% to 0.375% per year, depending on utilization, letter of credit fees and certain other factors. The New ABL Facility may in the future be guaranteed by certain of the Company’s existing and future subsidiaries (the “ABL Guarantors,” and together with the ABL Borrowers, the “ABL Loan Parties”). To secure their obligations under the New ABL Facility, each of the ABL Loan Parties has granted or will grant, as applicable, to the ABL Agent a first-priority security interest for the benefit of the ABL Lenders in its present and future accounts receivable, inventory and related assets and proceeds of the foregoing (the “ABL Priority Collateral”). In addition, the obligations of the ABL Loan Parties under the ABL Facility are secured by second-priority liens on the Term Priority Collateral (as described below under “New Term Loan Facility”).

The revolving loans under the New ABL Facility may be voluntarily prepaid, in whole or in part, without premium or penalty, subject to breakage or similar costs.

The New ABL Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the ABL Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The New ABL Facility also contains a requirement that the ABL Borrowers comply, during certain periods, with a fixed charge coverage ratio of at least 1.00 to 1.00.

On May 20, 2020, the ABL Borrowers, the ABL Lenders and Administrative Agent, entered into Amendment No. 4 to the New ABL Facility. Pursuant to the Fourth Amendment, the parties agreed, among other things, to (i) reduce the Lenders’ aggregate commitments to make revolving loans to $50 million, (ii) increase the applicable interest rate margin by 100 basis points to 375-425 basis points for LIBOR borrowings (with a 1.00% LIBOR floor) and 275-325 basis points for base rate borrowings (with a 2.00% base rate floor), in each case depending on the fixed charge coverage ratio at the time of determination, (iii) lower the availability thresholds for triggering certain covenants and (iv) add certain reporting requirements.

On August 28, 2020, the ABL Borrowers, the ABL Lenders and the Administrative Agent, entered into Amendment No. 5 to the New ABL Facility to, among other things, permit the ABL Borrowers to undertake sale and leaseback transactions with an aggregate fair market value of up to $5.0 million during the term of the New ABL Agreement.

As of September 30, 2020, we had no borrowings outstanding, $36.3 million of letters of credit, $27.4 million posted as additional collateral recorded in deposits on our balance sheet and $8.7 million of borrowing capacity available under our New ABL Facility. The letters of credit are related to our workers’ compensation and auto insurance costs. The additional collateral is required to collateralize our outstanding letters of credit and maintain compliance with the current minimum borrowing capacity availability requirement of $7.5 million under our New ABL Facility.

17


As of September 30, 2020, we were in compliance with all covenants under our New ABL Facility.

New Term Loan Facility

On March 6, 2020, the Company entered into an amendment and restatement agreement with the Supporting Term Lenders and Cortland Capital Market Services LLC and Cortland Products Corp., as agent (the “Term Agent”), which amended and restated the Prior Term Loan Facility, among the Company, as borrower, certain subsidiaries of the Company named as guarantors therein, the financial institutions party thereto from time to time as lenders and the Term Agent (as amended and restated by the amendment and restatement agreement, the “New Term Loan Facility”). Prior to the closing of the Restructuring, there was approximately $243.1 million aggregate principal amount of term loans outstanding under the Prior Term Loan Facility. Following the closing of the Restructuring, the New Term Loan Facility is comprised of (i) $30 million new money term loans funded by the Supporting Term Lenders and $20 million new term loans excluding new money issued in exchange for existing term loans held by the Supporting Term Lenders (collectively, the “New Term Loans”) and (ii) an approximate $1.2 million senior secured term loan tranche in respect of the existing term loans held by lenders who are not Supporting Term Lenders (the “Continuing Term Loans”). As of September 30, 2020, there was $54.6 million outstanding under the New Term Loan Facility including interest in kind.

For the $20 million new term loans excluding new money which were accounted for as a troubled debt restructuring with a modification of terms in accordance with ASC 470-60, “Troubled Debt Restructurings by Debtors”, which addresses certain aspects of the accounting for debt, a total of $16.3 million of estimated future undiscounted interest payments ($14.9 million at September 30, 2020) has been accrued per ASC 470-60 and presented as Interest Payable in the accompanying balance sheet. Interest payments made in the future associated with the modified $20 million new term loans will be a reduction to interest payable, which is recorded as a long-term liability on our consolidated balance sheet, and not to interest expense. Fluctuations in the effective interest rate used to estimate future cash flows will be accounted for as changes in estimates for the period in which the change occurred. However, the carrying amount of the restructured payable will remain unchanged, and future cash payments will reduce the carrying amount until the time that any gain recognized cannot be offset by future cash payments.

The New Term Loan Facility will mature on August 28, 2025, with respect to the New Term Loans, and on December 15, 2021 with respect to the Continuing Term Loans. Such maturity date may, at the Company’s request, be extended by one or more of the term loan lenders pursuant to the terms of the New Term Loan Facility. The New Term Loans will bear interest at a per annum rate equal to LIBOR for six months, plus 10.25%. The Company has the option to pay interest in kind at an annual rate of LIBOR plus 12.25% on the outstanding principal amount of the New Term Loans for the first two years following the closing of the Restructuring. The Continuing Term Loans will bear interest at a per annum rate equal to LIBOR for one, two, three, six or, with the consent of all term loan lenders, up to 12 months, and the Company has the option to pay interest in kind of up to 100 basis points of the per annum interest due on the Continuing Term Loans.

The New Term Loan Facility is guaranteed by certain of the Company’s existing and future subsidiaries (the “Term Loan Guarantors,” and together with the Company, the “Term Loan Parties”). To ensure their obligations under the New Term Loan Facility, each of the Term Loan Parties has granted to the Term Agent a first-priority security interest for the benefit of the Term Loan Lenders in substantially all of each Term Loan Party’s assets other than certain excluded assets and the ABL Priority Collateral (the “Term Priority Collateral”). In addition, the obligations of the Term Loan Parties under the New Term Loan Facility are secured by second-priority liens on the ABL Priority Collateral (as described above under “ABL Facility”).

The New Term Loans may be prepaid at the Company’s option, subject to the payment of a prepayment premium (which may be waived by lenders holding New Term Loans under the New Term Loan Facility representing at least two-thirds of the aggregate outstanding principal amount of the New Term Loans) in certain circumstances as provided in the New Term Loan Facility. If a prepayment is made prior to the first anniversary of the closing of the Restructuring, such prepayment premium is equal to 3% of the principal amount of the New Term Loans prepaid; if a prepayment is made from the first anniversary to the second anniversary of the closing of the Restructuring, the prepayment premium is equal to 2% of the principal amount of the New Term Loans prepaid; if a prepayment is made from the second anniversary to the third anniversary of the closing of the Restructuring, the prepayment premium is equal to 1% of the principal amount of the New Term Loans prepaid; and there is no prepayment premium thereafter. The Company is required to make principal payments in respect of the Continuing Term Loans in the amount of $3,125 per quarter commencing with the quarter ended March 31, 2020 and is required to pay $1,190,625 on the maturity date of the Continuing Term Loans.

18


In addition, pursuant to the New Term Loan Facility, the Company must prepay or offer to prepay, as applicable, term loans with the net cash proceeds of certain debt incurrences and asset sales, excess cash flow, receipt of extraordinary cash proceeds (e.g., tax and insurance) and upon certain change of control transactions, subject in each case to certain exceptions.

The New Term Loan Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the Term Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The New Term Loan Facility also contains a financial covenant requiring that the Company maintain Liquidity (as defined in the New Term Loan Facility) of not less than $10 million as of the last day of any fiscal quarter, subject to certain exceptions and cure rights.

On August 26, 2020, the Company as borrower, Key Energy LLC, certain lenders party thereto and the Term Agent entered into Amendment No. 1 to the New Term Loan Facility to, among other things, permit the Company and Key Energy LLC to undertake sale and leaseback transactions with an aggregate fair market value of up to $5 million during the term of the New Term Loan Facility.

As of September 30, 2020, we were in compliance with all covenants under our New Term Loan Facility.

The weighted average interest rate on the outstanding borrowings under the New Term Loan Facility for the three month period ended September 30, 2020 and from March 6, 2020, the beginning of the New Term Loan Facility, to September 30, 2020 was 13.17%.

Prior ABL Facility

As described above, the Company and Key Energy Services, LLC were borrowers under the Prior ABL Facility that provided for aggregate commitments from the ABL Lenders of $80 million.

On April 5, 2019, the ABL Borrowers, as borrowers, the financial institutions party thereto as lenders and Bank of America, N.A. (the “ABL Agent”), as administrative agent for the lenders, entered into Amendment No. 1 (“Amendment No. 1”) to the Prior ABL Facility, among the ABL Borrowers, the financial institutions party thereto from time to time as lenders, the ABL Agent and the co-collateral agents for the lenders, Bank of America, N.A. and Wells Fargo Bank, National Association. The amendment, among other things, lowered the applicable margin for borrowings to (i) from between 2.50% and 4.50% to between 2.00% and 2.50% for LIBOR borrowings and (ii) from 1.50% and 3.50% to between 1.00% and 1.50% for base rate borrowings. On December 20, 2019, the Company and the Lenders amended the ABL Forbearance Agreement and the Loan Agreement to, among other things, (i) reduce the minimum availability Key is required to maintain under the ABL Forbearance Agreement from $12.5 million to $10 million and (ii) reduce the aggregate revolving commitments under the Loan Agreement from $100 million to $80 million.

The Prior ABL Facility provided the ABL Borrowers with the ability to borrow up to an aggregate principal amount equal to the lesser of (i) the aggregate revolving commitments then in effect and (ii) the sum of (a) 85% of the value of eligible accounts receivable plus (b) 80% of the value of eligible unbilled accounts receivable, subject to a limit equal to the greater of (x) $35 million and (y) 25% of the Commitments.

The contractual interest rates under the Prior ABL Facility  were, at the ABL Borrowers’ option, at a per annum rate equal to (i) LIBOR for 30, 60, 90, 180, or, with the consent of the ABL Lenders, 360 days, plus an applicable margin that varies from 2.50% to 4.50% depending on the ABL Borrowers’ fixed charge coverage ratio at such time or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the federal funds rate, plus 0.50% or (z) 30-day LIBOR, plus 1.0% plus (b) an applicable margin that varied from 1.50% to 3.50% depending on the ABL Borrowers’ fixed charge coverage ratio at such time. In addition, the Prior ABL Facility provided for unused line fees of 1.0% to 1.25% per year, depending on utilization, letter of credit fees and certain other factors.

Prior Term Loan Facility

As described above, the Company and certain subsidiaries were parties to the Prior Term Loan Facility, which had an initial outstanding principal amount of $250 million.

Borrowings under the Prior Term Loan Facility bore interest, at the Company’s option, at a per annum rate equal to (i) LIBOR for one, two, three, six, or, with the consent of the Term Loan Lenders, 12 months, plus 10.25% or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the Federal Funds rate, plus 0.50% and (z) 30-day LIBOR, plus 1.0% plus (b) 9.25%.

19


The weighted average interest rate on the outstanding borrowings under the Prior Term Loan Facility in 2020, prior to the Restructuring, was 15.45%.

NOTE 8. OTHER INCOME

The table below presents comparative detailed information about our other income and expense, shown on the condensed consolidated statements of operations as “other income, net” for the periods indicated (in thousands):

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

Interest income

$

(2)

$

(122)

$

(84)

$

(639)

Gain on settlement of a legal matter

(8,005)

(8,005)

Other

 

(355)

 

(229)

 

(673)

 

(1,093)

Total

$

(8,362)

$

(351)

$

(8,762)

$

(1,732)

NOTE 9. INCOME TAXES

We are subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. Our effective tax rates for the three months ended September 30, 2020 and 2019 were 0.02% and (0.1)%, respectively, and 1.1% and 6.1% for the nine months ended September 30, 2020 and 2019, respectively. The variance between our effective rate and the U.S. statutory rate is due to the impact of permanent differences and other tax adjustments, such as valuation allowances against deferred tax assets and a true-up adjustment to income tax receivable.

We continued recording income taxes using a year-to-date effective tax rate method for the three and nine months ended September 30, 2020 and 2019. The use of this method was based on our expectations that a small change in our estimated ordinary income could result in a large change in the estimated annual effective tax rate. We will re-evaluate our use of this method each quarter until such time as a return to the annualized effective tax rate method is deemed appropriate.

The Company assesses the realizability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. Due to the history of losses in recent years and the continued challenges affecting the oil and gas industry and global economy, management continues to believe it is more likely than not that we will not be able to realize our net deferred tax assets. No release of our deferred tax asset valuation allowance was made during the nine months ended September 30, 2020.

The Company did not recognize any unrecognized tax benefits during three or nine months ended September 30, 2020. As of September 30, 2020, we had no unrecognized tax benefits.

Cancellation of Indebtedness Income (“CODI”)

Under the RSA, a substantial portion of the Company’s term loans were exchanged for newly issued shares and new term loans of the Company. Absent an exception, a debtor recognizes CODI upon discharge of its outstanding indebtedness for an amount of consideration that is less than the adjusted issue price. The Internal Revenue Code of 1986, as amended (“IRC”), provides that an insolvent debtor may exclude CODI from taxable income up to the amount of insolvency but must reduce certain of its tax attributes by the amount of any CODI excluded pursuant to the insolvency exception. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. Based on the market value of the Company’s equity, and the adjusted issue price of the term loans issued in the exchange, the estimated amount of U.S. CODI is approximately $206.0 million, $197.8 million of which is excluded pursuant to the insolvency exception and $8.2 million of which will be included in taxable income. Due to the application of the insolvency exception, the Company will reduce the value of its U.S. net operating losses that had a value of $476.8 million as of September 30, 2020. The actual reduction in tax attributes does not occur until the first day of the Company’s tax year subsequent to the date of the restructuring, or January 1, 2021. Further, any remaining net operating losses, tax credits, and certain built-in-losses or deductions existing as of the date of the ownership change will be limited under IRC Section 382 due to the change in control resulting from the restructuring.

20


The CARES Act

As noted above in Note 2 under the heading—Significant Accounting Policies Coronavirus Aid, Relief and Economic Security Act, the CARES Act includes several significant business tax provisions that, among other things, eliminate the taxable income limit for certain net operating losses (NOL) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years; accelerate refunds of previously generated corporate alternative minimum tax (AMT) credits; and generally increased the business interest limitation under section 163(j) from 30 percent to 50 percent. Key has analyzed the income tax provisions under the CARES Act, and concluded that none of the provisions have a significant impact to the Company’s income tax positions. Future regulatory guidance under the CARES Act or additional legislation enacted by Congress in connection with the COVID-19 pandemic could impact our tax provision in future periods. In addition to income tax provisions, the CARES Act also includes tax provisions relating to refundable payroll tax credits and deferment of employer’s social security tax payments. Specifically, the CARES Act permits an employer to defer 50 percent of its 2020 social security tax payments to the end of 2021 and the remaining 50 percent to the end of 2022. Beginning in April of 2020, we began deferring our employer social security payments (“payroll tax”) and approximately $2.4 million of payroll tax has been deferred as of September 30, 2020. Also, the Company qualifies for the refundable payroll tax credits (“employee retention credit”) and has recognized approximately $1.6 million of an employee retention credit for the period ending September 30, 2020.  The Company continues to evaluate the impact of the CARES Act on our financial position, results of operations and cash flows.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Litigation

Various suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental United States and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items, if any. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. We have $2.1 million of other liabilities related to litigation that is deemed probable and reasonably estimable as of September 30, 2020. We do not believe that the disposition of any of these matters will result in an additional loss materially in excess of amounts that have been recorded.

Self-Insurance Reserves

We maintain reserves for workers’ compensation and vehicle liability on our balance sheet based on our judgment and estimates using an actuarial method based on claims incurred. We estimate general liability claims on a case-by-case basis. We maintain insurance policies for workers’ compensation, vehicle liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. The retention limits or deductibles are accounted for in our accrual process for all workers’ compensation, vehicular liability and general liability claims. The deductibles have a $5 million maximum per vehicular liability claim, and a $2 million maximum per general liability claim and a $1 million maximum per workers’ compensation claim. As of September 30, 2020 and December 31, 2019, we have recorded $50.1 million and $51.4 million, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had $13.3 million and $13.4 million of insurance receivables as of September 30, 2020 and December 31, 2019, respectively. We believe that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued for existing claims.

Environmental Remediation Liabilities

For environmental reserve matters, including remediation efforts for current locations and those relating to previously disposed properties, we record liabilities when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. As of each of September 30, 2020 and December 31, 2019, we have recorded $1.8 million and $2.0 million, respectively, for our environmental remediation liabilities. We believe that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued.

21


NOTE 11. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is determined by dividing net loss attributable to Key by the weighted average number of common shares actually outstanding during the period. Diluted earnings (loss) per common share is based on the increased number of shares that would be outstanding assuming conversion of potentially dilutive outstanding securities using the treasury stock and “as if converted” methods.

The components of our income (loss) per share are as follows (in thousands, except per share amounts):

    

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

2020

2019

2020

2019

Basic EPS Calculation:

Numerator

Net income (loss)

$

(3,896)

$

(25,489)

$

85,973

$

(67,233)

Denominator

 

  

 

  

 

  

 

  

Weighted average shares outstanding

 

13,781

 

409

 

10,562

 

408

Basic earnings (loss) per share

$

(0.28)

$

(62.32)

$

8.14

$

(164.79)

Diluted EPS Calculation:

Numerator

Net income (loss)

$

(3,896)

$

(25,489)

$

85,973

$

(67,233)

Denominator

Weighted average shares outstanding

13,781

409

10,562

408

RSUs

76

Total

13,781

409

10,638

408

Diluted earnings (loss) per share

$

(0.28)

$

(62.32)

$

8.08

$

(164.79)

Restricted stock units (“RSUs”), stock options, and warrants are included in the computation of diluted earnings per share using the treasury stock method. Restricted stock awards are legally considered issued and outstanding when granted and are included in basic weighted average shares outstanding.

The Company has issued potentially dilutive instruments such as RSUs, stock options and warrants. However, the Company did not include these instruments in its calculation of diluted loss per share during the periods presented, because to include them would be anti-dilutive. The following table shows potentially dilutive instruments (in thousands):

    

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

2020

2019

2020

2019

RSUs

529

38

171

40

Stock options

1

1

1

1

Warrants

 

2,924

 

37

 

2,230

 

37

Total

 

3,454

 

76

 

2,402

 

78

No events occurred after September 30, 2020 that would materially affect the number of weighted average shares outstanding.

NOTE 12. SHARE-BASED COMPENSATION

Common Stock Awards

Our employee share-based awards, including common stock awards, stock option awards and phantom shares, vest in equal installments over a three-year period or vest in a 40%-60% split respectively over a two-year period. We calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of forfeitures. The grant-date fair value of our time-based restricted stock units and restricted stock awards is determined using our stock price on the grant date. The grant-date fair value of our performance-based restricted stock units is determined using our stock price on

22


the grant date assuming a 1.0x payout target, however, a maximum 2.0x payout could be achieved if certain EBITDA-based performance measures are met.

Fair value of performance-based restricted stock units is estimated in the same manner as our time-based awards and assumes that performance goals will be achieved and the awards will vest. If the performance based awards do not vest, any previously recognized compensation costs will be reversed. We record share-based compensation as a component of general and administrative or direct operating expense based on the role of the applicable individual.

We recognized employee share-based compensation expense of $0.1 million and $1.2 million during the three months ended September 30, 2020 and 2019, respectively. We recognized employee share-based compensation expense of $0.4 million and $3.3 million during the nine months ended September 30, 2020 and 2019, respectively. Additionally, we recognized share-based compensation expense related to our outside directors of $0.3 million and $0.1 million during the three months ended September 30, 2020 and 2019, respectively. We recognized share-based compensation expense related to our outside directors of $0.3 million and $0.2 million during the nine months ended September 30, 2020 and 2019, respectively. The unrecognized compensation cost related to our unvested share-based awards as of September 30, 2020 is estimated to be $2.8 million and is expected to be recognized over a weighted-average period of 1.0 years.

Stock Option Awards

As of September 30, 2020, all outstanding stock options are vested and there are no unrecognized costs related to our stock options.

Phantom Share Plan

We recognized compensation expense related to our phantom shares of less than negative $0.1 million and less than negative $0.1 million during the three months ended September 30, 2020 and 2019, respectively. We recognized compensation expense related to our phantom shares of less than $0.1 million and less than $0.1 million during the nine months ended September 30, 2020 and 2019, respectively. The unrecognized compensation cost related to our unvested phantom shares as of September 30, 2020 is estimated to be less than $0.1 million and is expected to be recognized over a weighted-average period of 0.3 years.

NOTE 13. TRANSACTIONS WITH RELATED PARTIES

The Company previously had a corporate advisory services agreement with Platinum Equity Advisors, LLC (“Platinum”), an affiliate of Soter, pursuant to which Platinum provided certain business advisory services to the Company. The dollar amounts related to these related party activities were material to the Company’s condensed consolidated financial statements.

In March 2020, the Company and Platinum, entered into a letter agreement (the “CASA Letter Agreement”) regarding outstanding payments owed to Platinum by the Company under the Corporate Advisory Services Agreement, dated as of December 15, 2016 (the “Advisory Agreement”). Pursuant to the CASA Letter Agreement, Platinum agreed to release the Company from its outstanding payment obligations under the Advisory Agreement in exchange for the right to a potential payment of $4.0 million upon the occurrence of certain reorganization events involving the Company and ceased providing any business advisory services to the Company.

NOTE 14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities. These carrying amounts approximate fair value because of the short maturity of the instruments or because the carrying value is equal to the fair value of these instruments.

New Term Loan Facility. Because of the variable interest rates feature and recent initiation of these loans, we believe the carrying value approximates the fair value of the loans borrowed under this facility.

NOTE 15. LEASES

We have operating leases for certain corporate offices and operating locations and finance leases for certain vehicles. We determine if a contract is a lease or contains an embedded lease at the inception of the contract. Operating lease right-of-use (“ROU”) assets are included in other current and other non-current assets, and operating lease liabilities are included in other current and other

23


non-current liabilities in our consolidated balance sheets. Finance lease ROU assets are included in property and equipment, net, and finance lease liabilities are included in our current portion of long-term debt and long-term debt on our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our risk adjusted incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease. Our leases have remaining lease terms of less than one year to five years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. Lease expense for lease payments is recognized on a straight-line basis over the non-cancelable term of the lease.

We recognized $0.8 million and $0.8 million of costs related to our operating leases during the three months ended September 30, 2020 and September 30, 2019, respectively. We recognized $2.2 million and $2.2 million of costs related to our operating leases during the nine months ended September 30, 2020 and September 30, 2019, respectively. As of September 30, 2020, our operating leases have a weighted average remaining lease term of 2.3 years and a weighted average discount rate of 5.57%.

We recognized $0.4 million and less than $0.1 million of costs related to our finance leases during the three months ended September 30, 2020 and September 30, 2019, respectively. We recognized $0.8 million and less than $0.1 million of costs related to our finance leases during the nine months ended September 30, 2020 and September 30, 2019, respectively. As of September 30, 2020, our finance leases have a weighted average remaining lease term of 4.1 years and a weighted average discount rate of 5.12%.

Supplemental balance sheet information related to leases as of September 30, 2020 and December 31, 2019 are as follows (in thousands):

    

September 30, 2020

    

December 31, 2019

Right-of-use assets under operating leases

Operating lease right-of-use assets, current portion

$

1,054

$

2,394

Operating lease right-of-use assets, non-current portion

 

2,332

 

2,404

Total operating lease assets

$

3,386

$

4,798

Operating lease liabilities, current portion

$

2,114

$

2,502

Operating lease liabilities, non-current portion

 

1,540

 

2,590

Total operating lease liabilities

$

3,654

$

5,092

Right-of-use assets under finance leases

 

  

 

  

Property and equipment, at cost

$

5,246

$

1,760

Less accumulated depreciation

 

838

 

183

Property and equipment, net

$

4,408

$

1,577

Current portion of long-term debt

$

1,076

$

419

Long-term debt

 

3,409

 

1,181

Total finance lease liabilities

$

4,485

$

1,600

24


The maturities of our operating and finance lease liabilities as of September 30, 2020 are as follows (in thousands):

September 30, 2020

    

Operating Leases

    

Finance Leases

Remainder of 2020

$

705

$

319

2021

 

1,752

1,277

2022

 

705

1,277

2023

 

528

1,075

2024

 

189

792

Thereafter

224

Total lease payments

 

3,879

 

4,964

Less imputed interest

 

(225)

(479)

Total

$

3,654

$

4,485

NOTE 16. SEGMENT INFORMATION

Our reportable business segments are Rig Services, Fishing and Rental Services, Coiled Tubing Services and Fluid Management Services. We also have a “Functional Support” segment associated with overhead and other costs in support of our reportable segments. We evaluate the performance of our segments based on gross margin measures. All inter-segment sales pricing is based on current market conditions.

Rig Services

Our Rig Services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, well maintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gas producers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes and capabilities, allowing us to service all types of wells. Many of our rigs are outfitted with our proprietary KeyView® technology, which captures and reports well site operating data and provides safety control systems. We believe that this technology allows our customers and our crews to better monitor well site operations, improves efficiency and safety, and adds value to the services that we offer.

The completion and recompletion services provided by our rigs prepare wells for production, whether newly drilled, or recently extended through a workover operation. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing these zones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in the completion process. Completion services vary by well and our work may take a few days to several weeks to perform, depending on the nature of the completion.

The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and time consuming than normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover.

Maintenance services provided with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of these maintenance services include routine mechanical repairs to pumps, tubing and other equipment, removing debris and formation material from wellbores, and pulling rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services are generally less complicated than completion and workover related services and require less time to perform.

Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. These plugging and abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services is not significantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are no longer productive.

25


Fishing and Rental Services

We offer a full line of fishing services and rental equipment designed for use in providing drilling and workover services. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, pumps, power swivels, reversing units and foam air units.

Demand for our fishing and rental services is closely related to capital spending by oil and natural gas producers, which is generally a function of oil and natural gas prices.

Coiled Tubing Services

Coiled Tubing Services involve the use of a continuous metal pipe spooled onto a large reel which is then deployed into oil and natural gas wells to perform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemical treatments. Coiled tubing is also used for a number of horizontal well applications such as milling temporary isolation plugs that separate frac zones, and various other pre- and post-hydraulic fracturing well preparation services.

Fluid Management Services

We provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover and maintenance activities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site and transported for disposal in saltwater disposal wells owned by us or a third party. In addition, we operate a fleet of hot oilers capable of pumping heated fluids used to clear soluble restrictions in a wellbore. Demand and pricing for these services generally correspond to demand for our well service rigs.

Functional Support

Our Functional Support segment includes unallocated overhead costs associated with administrative support for our reporting segments.

Financial Summary

The following tables set forth our unaudited segment information as of and for the three and nine months ended September 30, 2020 and 2019 (in thousands):

As of and for the three months ended September 30, 2020

    

    

Fishing and

    

Coiled

    

Fluid

    

    

    

Rental

Tubing

Management

Functional

Reconciling

Rig Services

Services

Services

 Services

 

Support

 

Eliminations

Total

Revenues from external customers

$

29,598

$

4,085

$

1,714

$

7,514

$

$

$

42,911

Intersegment revenues

 

25

 

220

 

 

59

 

 

(304)

 

Depreciation and amortization

 

4,108

 

843

 

1,008

 

470

 

678

 

 

7,107

Other operating expenses

 

23,578

 

3,675

 

2,023

 

7,046

 

9,503

 

 

45,825

Operating income (loss)

 

1,912

 

(433)

 

(1,317)

 

(2)

 

(10,181)

 

 

(10,021)

Interest expense, net of amounts capitalized

 

70

 

5

 

12

 

10

 

2,141

 

 

2,238

Income (loss) before income taxes

 

1,845

 

(438)

 

(1,325)

 

(12)

 

(3,967)

 

 

(3,897)

Long-lived assets(1)

 

110,750

 

15,868

 

12,126

 

14,829

 

47,843

 

 

201,416

Total assets

 

136,289

 

22,043

 

15,536

 

19,818

 

55,106

 

7,768

 

256,560

Capital expenditures

 

207

 

 

18

 

 

16

 

 

241

26


As of and for the three months ended September 30, 2019

    

    

Fishing and

    

Coiled

    

Fluid

    

    

    

Rental

Tubing

Management

Functional

Reconciling

Rig Services

Services

Services

 Services

 

Support

 

Eliminations

Total

Revenues from external customers

$

64,465

$

14,135

$

9,714

$

18,209

$

$

$

106,523

Intersegment revenues

 

87

 

241

 

 

58

 

 

(386)

 

Depreciation and amortization

 

6,289

 

4,139

 

1,397

 

2,294

 

465

 

 

14,584

Other operating expenses

 

55,424

 

11,713

 

9,862

 

16,338

 

15,994

 

 

109,331

Operating income (loss)

 

2,752

 

(1,717)

 

(1,545)

 

(423)

 

(16,459)

 

 

(17,392)

Interest expense, net of amounts capitalized

 

33

 

7

 

13

 

12

 

8,346

 

 

8,411

Income (loss) before income taxes

 

2,734

 

(1,724)

 

(1,558)

 

(424)

 

(24,480)

 

 

(25,452)

Long-lived assets(1)

 

124,078

 

41,897

 

17,165

 

47,980

 

24,464

 

 

255,584

Total assets

 

173,079

 

55,625

 

26,174

 

59,827

 

50,000

 

9,441

 

374,146

Capital expenditures

 

932

 

418

 

1,246

 

33

 

1,492

 

 

4,121

As of and for the nine months ended September 30, 2020

    

    

Fishing and

    

Coiled

    

Fluid

    

    

    

Rental

Tubing

Management

Functional

Reconciling