Notes to Consolidated Financial Statements
December 31, 2019 and 2018
1. Basis of Presentation and Nature of Operations
Basic Energy Services, Inc. (“Basic” or the “Company”) provides a wide range of wellsite services to oil and natural gas drilling and producing companies, including well servicing, water logistics and completion and remedial services. These services are primarily provided by Basic’s fleet of equipment. Basic’s operations are concentrated in major United States onshore oil and natural gas producing regions located in Texas, New Mexico, Oklahoma, Kansas, Arkansas, Louisiana, Wyoming, North Dakota, Colorado, Utah, Montana, and California. Basic’s reportable business segments are Well Servicing, Water Logistics, and Completion & Remedial Services. These segments are based on management’s resource allocation and performance assessment in making decisions regarding the Company.
2. Discontinued Operations
On December 12, 2019, based on the Company's evaluation of the demand for pressure pumping and contract drilling services, the Company's management decided to divest all of Basic's contract drilling rigs, and a majority of pressure pumping equipment and related ancillary equipment, with a net book value of $91.8 million. The Company believes this major strategic shift away from completions and pumping services will allow the Company to strengthen the core businesses of well servicing and water logistics, by reinvesting in those segments. As a result of this strategic shift, the Company recorded a non-cash impairment charge of $32.6 million in 2019 to write down the value of the assets. While pumping and related assets have been transferred to Assets Held for Sale on our Consolidated Balance Sheet, some real estate and equipment has been sold in the fourth quarter of 2019, with additional transactions to occur in the first half of 2020. In addition, the Company's contract drilling assets were divested through auctions in the third quarter of 2019, and an impairment of $3.2 million was recorded related to these transactions.
Assets and liabilities related to the divested operations have been reclassified in the Consolidated Balance Sheet for the years ended December 31, 2019, and 2018 are detailed in the table below (in thousands):
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December 31, 2019
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December 31, 2018
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|
|
|
|
|
|
|
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Assets-held-for-sale
|
|
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Inventories
|
|
$
|
2,069
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|
|
|
$
|
6,498
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|
Prepaid Expenses
|
|
|
—
|
|
|
|
8,489
|
|
Right of use assets
|
|
1,659
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|
|
|
—
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|
Property, plant and equipment, net
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|
50,496
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|
|
|
—
|
|
Total assets-held-for-sale discontinued operations
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|
$
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54,224
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|
|
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$
|
14,987
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Assets-held-for-sale-future-use
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|
|
|
|
|
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Property, plant and equipment, net
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$
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—
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|
|
|
$
|
139,631
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Liabilities related to Assets-held-for-sale
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|
|
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|
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Right of use liabilities
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1,659
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—
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Capital leases
|
|
3,589
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|
|
|
10,983
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Total Liabilities related to Assets-held-for-sale discontinued operations
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|
$
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5,248
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$
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10,983
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|
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The operating results of the divested pressure pumping operations and contract drilling operations, which have historically been included in the Completions & Remedial Services and Other Services segments, have been reclassified as discontinued operations in the Consolidated Statement of Operations for the years ended December 31, 2019, and 2018, as detailed in the table below:
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Consolidated Statement of Operations
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(Dollars in thousands, except per share amounts)
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December 31, 2019
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December 31, 2018
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Continuing Operations
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Discontinued Operations
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Total
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Continuing Operations
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Discontinued Operations
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Total
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Revenues:
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Well Servicing
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$
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226,966
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$
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—
|
|
$
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226,966
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|
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$
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250,982
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$
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9
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$
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250,991
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Water Logistics
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199,816
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—
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199,816
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231,283
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—
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231,283
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Completion & Remedial Services
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140,468
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134,474
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274,942
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171,300
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298,156
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469,456
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Other Services
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—
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8,411
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8,411
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|
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—
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12,990
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12,990
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Total revenues
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567,250
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142,885
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710,135
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653,565
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|
311,155
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|
964,720
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Expenses:
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Well Servicing
|
186,782
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(92)
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186,690
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203,785
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(200)
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203,585
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Water Logistics
|
141,379
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—
|
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141,379
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|
|
166,907
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|
19
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166,926
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Completion & Remedial Services
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98,654
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127,950
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226,604
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|
|
109,713
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|
256,062
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365,775
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Other Services
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—
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|
6,920
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6,920
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—
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|
10,130
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|
10,130
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General and administrative
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118,460
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15,208
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133,668
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145,725
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21,790
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|
167,515
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Depreciation and amortization
|
69,489
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|
45,168
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114,657
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78,173
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|
48,244
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|
126,417
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Asset impairment
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—
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35,801
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35,801
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—
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—
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—
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Loss (gain) on disposal of assets
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2,135
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|
1,878
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4,013
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(4,918)
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|
2,320
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(2,598)
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Total expenses
|
616,899
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|
232,833
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|
849,732
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699,385
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338,365
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1,037,750
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Operating loss
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(49,649)
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(89,948)
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(139,597)
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(45,820)
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(27,210)
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(73,030)
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Other income (expense):
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Loss on extinguishment of debt
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—
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—
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—
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(26,429)
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—
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(26,429)
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Interest expense
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(42,887)
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(583)
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(43,470)
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(45,161)
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(692)
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(45,853)
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Interest income
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509
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|
—
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|
509
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|
|
364
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—
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|
364
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Other income
|
647
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|
34
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|
681
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|
|
537
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|
41
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|
578
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Loss before income taxes
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(91,380)
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(90,497)
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(181,877)
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(116,509)
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(27,861)
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(144,370)
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Income tax expense
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(21)
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—
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(21)
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(227)
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—
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(227)
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Loss from operations
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$
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(91,401)
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$
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(90,497)
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$
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(181,898)
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$
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(116,736)
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$
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(27,861)
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$
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(144,597)
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Net loss per share of common stock, basic and diluted
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$
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(3.50)
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$
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(3.46)
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$
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(6.96)
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$
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(4.41)
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$
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(1.05)
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$
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(5.46)
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Interest expense in discontinued operations related to interest expense on capital lease assets that operated in the discontinued Completions & Remedial Services and Other Services segments.
Applicable Consolidated Statements of Cash Flow information related to the divested operations for the years ended December 31, 2019 and 2018 are detailed in the table below (in thousands):
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December 31, 2019
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December 31, 2018
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Cash Flows from Discontinued Operations
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Net cash provided (used) by operating activities
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$
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2,120
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$
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37,691
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Net cash provided (used) in investing activities
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$
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133
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$
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(23,074)
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Reconciling items for cash flows:
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December 31, 2019
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Continuing operations
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Discontinued operations
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Cash flows
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Operating activities :
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Inventory and other write-downs
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$
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5,266
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|
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$
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5,341
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$
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10,607
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Loss on disposal of assets
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$
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2,135
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$
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1,878
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|
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$
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4,013
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Investing activities:
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Purchase of Property plant and equipment
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$
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(44,794)
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$
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(10,559)
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$
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(55,353)
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Proceeds from sales of assets
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$
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6,605
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$
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10,692
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|
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$
|
17,297
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|
|
|
|
|
|
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|
|
Reconciling items for cash flows:
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December 31, 2018
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|
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Continuing operations
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|
Discontinued operations
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Cash flows
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Operating activities :
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(Gain) Loss on disposal of assets
|
$
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(4,918)
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|
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$
|
2,320
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$
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(2,598)
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|
|
|
|
|
|
|
Investing activities:
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|
|
|
|
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Purchase of Property plant and equipment
|
$
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(43,063)
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|
|
$
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(25,646)
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|
|
$
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(68,709)
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Proceeds from sales of assets
|
$
|
15,213
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|
|
$
|
2,572
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|
|
$
|
17,785
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3. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Basic, for which we hold a majority voting interest. All intercompany transactions and balances have been eliminated.
Other Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period presentation. A majority of the reclassifications were related to the discontinued operations. These reclassifications do not impact net income (loss) and do not reflect a material change to the information previously presented in our consolidated financial statements.
Estimates, Risks and Uncertainties
Preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management uses historical and other pertinent information to determine these estimates. Actual results could differ from those estimates. Areas where critical accounting estimates are made by management include litigation and self-insured risk reserves.
Litigation and Self-Insured Risk Reserves
Basic estimates its reserves related to litigation and self-insured risks based on the facts and circumstances specific to the litigation and self-insured claims and its past experience with similar claims. Basic maintains accruals in the consolidated balance sheets to cover self-insurance retentions. Please see Note 9. Commitments and Contingencies for further discussion.
Revenue Recognition
Basic accounts for revenues under Accounting Standards Codification (ASC) Topic - 606 - Revenue from Contracts with Customers, the core principle of which is that a company should recognize revenue to match the delivery of goods or services to customers to the consideration the company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of revenue and cash flows arising from contracts with customers. We adopted the standard effective January 1, 2018, using the modified retrospective method. Other than additional required disclosures, adoption of the new standard did not have a significant impact on our consolidated financial statements.
Our revenues are generated by services, which are consumed as provided by our customers on their sites. As a decentralized organization, contracts for our services are negotiated on a regional level and are on a per job basis, with jobs being completed in a short period of time, usually one day or up to a week. Revenue is recognized as performance obligations have been completed on a daily basis either as Accounts Receivable or Work-in-Process ("WIP"), when all of the proper approvals are obtained. A small percentage of our jobs may require performance obligations which extend over a longer period of time and are not invoiced until all performances obligations in the contract are complete, such as, drilling or plugging a well, fishing services, and pad site preparation jobs. Because these jobs are performed on the customer's job site, and we are contractually entitled to bill for our services performed to date, revenues for these service lines are recognized on a daily basis as services are performed and recorded as Contract Assets rather than WIP or Accounts Receivable. Contract Assets are typically invoiced within 30 to 60 days of recognizing revenue. Basic does not have any long-term service contracts; nor do we have revenue expected to be recognized in any future year related to remaining performance obligations or contracts with variable consideration related to undelivered performance obligations.
Inventories
For rental and fishing tools, inventories consisting mainly of grapples, controls and drill bits are stated at lower of cost or net realizable value. Other inventories, consisting mainly of manufacturing raw materials, rig components, repair parts, drilling and completion materials and gravel, are held for use in the operations of Basic and are stated at lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method.
Accounts Receivable
Basic estimates its allowance for losses on accounts receivable based on past collections and expectations for future collections. Basic regularly reviews accounts for collectability. After all collection efforts are exhausted, if the balance is still determined to be uncollectable, the balance is written off. Expense related to the write off of uncollected accounts is recorded in general and administrative expense.
Concentrations of Credit Risk
Financial instruments, which potentially subject Basic to concentration of credit risk, consist primarily of temporary cash investments and trade receivables. Basic restricts investment of temporary cash investments to financial institutions with high credit standing. Basic’s customer base consists primarily of multi-national and independent oil and natural gas producers. It performs ongoing credit evaluations of its customers but generally does not require collateral on its trade receivables. Credit risk is considered by management to be limited due to the large number of customers comprising its customer base. Basic maintains an allowance for potential credit losses on its trade receivables. For the twelve months ended December 31, 2019, one customer represented 12% of consolidated revenue.
Leases
Basic determines if an arrangement is a lease at inception of the arrangement. To the extent that we determine an arrangement represents a lease, we classify that lease as an operating lease or a finance lease. We capitalize operating leases on our consolidated balance sheets through a right-of-use (“ROU”) asset and a corresponding lease liability. 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 leases are included in operating lease ROU assets, current operating lease liabilities, and long-term operating lease liabilities in our consolidated balance sheets. Operating lease ROU assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Basic adopted this standard on January 1, 2019.
Property and Equipment
Property and equipment are stated at cost or at estimated fair value at acquisition date if acquired in a business combination or remeasured as a result of fresh start accounting. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of the assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation and amortization are removed from the related accounts and any gain or loss is reflected in operations. All property and equipment are depreciated or amortized (to the extent of estimated salvage values) on the straight-line method and the estimated useful lives of the assets are as follows:
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|
|
|
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Asset Type:
|
Useful Life
|
Buildings and improvements
|
20-30 years
|
Well service units and equipment
|
3-15 years
|
Fluid services equipment
|
5-10 years
|
Brine and fresh water stations
|
15 years
|
Fracturing/test tanks
|
10 years
|
|
|
Disposal facilities
|
10-15 years
|
Vehicles
|
3-7 years
|
Rental equipment
|
2-15 years
|
|
|
Software and computers
|
3 years
|
The components of a well servicing rig generally require replacement or refurbishment during the well servicing rig’s life and are depreciated over their estimated useful lives, which ranges from 3 to 15 years. The costs of the original components of a purchased or acquired well servicing rig are not maintained separately from the base rig.
Impairments
We perform a review of our asset groups for impairment when, in management’s judgment, events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recovered over its remaining service life. Impairment is indicated when the sum of the estimated future cash flows, on an undiscounted basis, is less than the asset groups carrying amount. When impairment is identified and fair value is less than carrying value, an impairment charge is recorded to income based on an estimated fair value generally determined based on an estimate of future cash flows on a discounted basis. See Note 4. Property and Equipment for disclosures related to our tangible and intangible property impairments in 2019 and 2018.
Intangible Assets
Basic’s intangible assets subject to amortization were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
3,230
|
|
|
|
$
|
3,410
|
|
Other intangible assets
|
|
48
|
|
|
|
48
|
|
Sub-total
|
|
3,278
|
|
|
|
3,458
|
|
Less accumulated amortization
|
|
675
|
|
|
|
474
|
|
Intangible assets subject to amortization, net
|
|
$
|
2,603
|
|
|
|
$
|
2,984
|
|
Amortization expense for each of the years ended December 31, 2019 and 2018 was approximately $0.2 million. Basic evaluates intangible assets for impairment annually. In 2019, the Company wrote off $0.2 million of net trade names related to the discontinued pumping services line of business.
Amortization expense for the next five succeeding years is expected to be as follows (in thousands):
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|
|
|
|
|
|
Amortization
|
|
Expense
|
2020
|
$
|
225
|
|
2021
|
225
|
|
2022
|
215
|
|
2023
|
215
|
|
2024
|
215
|
|
Thereafter
|
1,508
|
|
Total
|
$
|
2,603
|
|
Developed technology are amortized over a 5-year life. Trade names are amortized over a 15-year life.
Debt Issuance Costs
Basic capitalizes certain third-party fees directly related to the issuance of debt and amortizes these costs over the life of the debt using the effective interest method. Debt issuance costs related to our ABL Facility are presented net of amortization as a non-current asset. Debt issuance costs related to our Senior Secured Notes and Term Loan are presented net of amortization as an offset to the liability. Amortized debt issuance costs are included in interest expense and totaled $2.3 million in 2019, and $1.1 million in 2018.
Stock-Based Compensation
Basic has historically compensated our directors, executives and employees using a combination of performance and time-based stock option, restricted share, and restricted share unit awards. Basic accounts for share-based payment awards under Accounting Codification Standard 718 - Compensation - Stock Compensation (ASC 718), which requires that the value of the awards is established at the date of the grant and is expensed over the vesting period of the grant. The method of determining the fair value of share-based payments depends on the type of award. Share-based awards that vest over a certain service period with no market conditions are valued at the closing market price on the grant date. Share-based awards that are dependent upon certain market performance and service conditions being met are valued using a Monte Carlo simulation model with model inputs that are determined on the date of the grant. Option grants are valued using the Black-Scholes-Merton model using model inputs that are determined on the date of the grant. Once the per-share fair value on the grant date is established, the aggregate expense of the grant is recognized on a straight-line basis over the vesting period of the grant.
Asset Retirement Obligations
Basic is required to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset depreciating it over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each quarter to reflect the passage of time, changes in the estimated future cash flows underlying the obligation, acquisition or construction of assets, and settlements of obligations. Basic has asset retirement obligations related to our saltwater disposal facilities, brine and freshwater wells.
Environmental
Basic is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require Basic to remove or mitigate the adverse environmental effects of disposal or release of petroleum, chemical and other substances at various sites. Environmental expenditures are expensed or capitalized depending on the future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated.
Income Taxes
The provision for income taxes is determined using the asset and liability method of accounting for income taxes based on the authoritative accounting guidance. Deferred tax assets and liabilities are recorded based upon differences between the tax basis of assets and liabilities and their carrying values for financial reporting purposes, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record net deferred tax assets to the extent we believe these assets will more likely than not be
realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
Recent Accounting Pronouncements
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was adopted effective January 1, 2019. See Note 6. Leases for further discussion.
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, "Financial Instruments–Credit Losses," and subsequent amendment to the initial guidance, ASU 2018-19 (collectively, Topic 326). ASU 2016-13 amends current measurement techniques used to estimate credit losses for financial assets. The amendments in ASU 2016-13 are effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Basic adopted this standard on January 1, 2020, and the adoption did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The standard can be adopted either using the prospective or retrospective transition approach. Basic adopted this standard on September 30, 2019, and the adoption did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 intends to simplify various aspects related to accounting for income taxes and removes certain exceptions to the general principles in the standard. Additionally, the ASU clarifies and amends existing guidance to improve consistent application of its requirements. The amendments of the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. Basic is currently evaluating the impact of this pronouncement on its consolidated financial statements.
4. Property and Equipment
The following table summarizes the components of property and equipment for the years ended December 31, 2019, and 2018. Prior year amounts are adjusted for the discontinued pumping services and contract drilling operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Property and Equipment:
|
|
2019
|
|
|
2018
|
Land
|
|
$
|
15,682
|
|
|
|
$
|
14,601
|
|
Buildings and improvements
|
|
30,902
|
|
|
|
30,108
|
|
Well service units and equipment
|
|
130,318
|
|
|
|
122,236
|
|
Disposal facilities
|
|
87,763
|
|
|
|
63,229
|
|
Fluid services equipment
|
|
79,024
|
|
|
|
78,501
|
|
Rental equipment
|
|
60,886
|
|
|
|
48,319
|
|
Pumping equipment
|
|
47,083
|
|
|
|
49,265
|
|
Light vehicles
|
|
26,630
|
|
|
|
23,063
|
|
Fracturing/test tanks
|
|
6,153
|
|
|
|
6,001
|
|
Brine and fresh water stations
|
|
4,340
|
|
|
|
3,295
|
|
Other
|
|
3,948
|
|
|
|
3,984
|
|
Software
|
|
896
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
493,625
|
|
|
|
443,459
|
|
Less accumulated depreciation and amortization
|
|
(196,512)
|
|
|
|
(134,289)
|
|
Property and equipment, net
|
|
$
|
297,113
|
|
|
|
$
|
309,170
|
|
Basic is obligated under various capital leases for certain vehicles and equipment that expire at various dates during the next five years. The table below summarizes the gross amount of property and equipment and related accumulated amortization recorded under capital leases and included above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Property and Equipment:
|
|
2019
|
|
2018
|
Fluid services equipment
|
|
$
|
34,499
|
|
|
$
|
35,034
|
|
Light vehicles
|
|
19,563
|
|
|
15,631
|
|
Pumping equipment
|
|
16,576
|
|
|
16,920
|
|
|
|
|
|
|
|
|
|
|
|
Rental equipment
|
|
1,130
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
71,768
|
|
|
67,585
|
|
Less accumulated amortization
|
|
(27,727)
|
|
|
(16,634)
|
|
Property and equipment, net
|
|
$
|
44,041
|
|
|
$
|
50,951
|
|
During the period ended December 31, 2019, based on the Company's evaluation of the demand for pressure pumping and contract drilling services, the Company's management decided to divest all of Basic's contract drilling rigs, a majority of pressure pumping equipment and related ancillary equipment, with a net book value of $91.8 million. The Company determined that the carrying value of these assets may not be fully recoverable upon liquidation. The fair value of assets was determined after considering offers to purchase assets in an orderly transaction, third-party estimates, and management's estimates based on comparable sales. As a result of the Company's evaluation of the fair value of assets, an impairment of $35.8 million was recognized within discontinued operations on the consolidated statement of operations during the year ended December 31, 2019, with the remaining net book value transferred to assets held for sale. Basic's estimate of expected cash flows which may result from the sale of equipment may differ from actual cash received due to excess capacity in the industry.
5. Asset Retirement Obligations
The Company has the obligation to plug and remediate its saltwater disposal wellsites when the assets are to be retired. This asset retirement obligation ("ARO") includes plugging inactive assets, removal of surface equipment, and remediation of soil contamination. The Company records a liability for the fair value of ARO that we can reasonably estimate, on a discounted basis, in the period in which the asset is acquired. The fair value of the
liability is calculated using discounted cash flow techniques and based on internal estimates and assumptions related to (i) future retirement costs, (ii) expected remaining lives of the assets, (iii) future inflation rates, and (iv) credit adjusted risk-free interest rates. Significant increases or decreases in these assumptions could result in a significant change to the fair value measurement.
During 2019, the Company increased its estimated ARO liability by $7.2 million. The additional operational and accounting information provided by the creation of our water midstream entity allowed management to determine which wellsites were candidates for further capital investment, and which were candidates for plugging and abandonment (“P&A” or plug & abandon). The first nine months of plugging and abandonment activity in 2019 provided additional information to revise our initial P&A estimates made when each disposal well was an extension of a trucking yard. As an extension of a trucking yard, a well may be plugged, but not abandoned since the trucking yard would still be operational. As a stand-alone water midstream entity, if ALM were to plug a well, it would likely also remediate and abandon the wellsite at the same time. The data gathered from the creation of the entity allowed us to make the upward revision of our estimate in the third quarter of 2019.
The following table presents activity in our ARO (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance as of January 1, 2019
|
$
|
2,587
|
|
|
$
|
2,507
|
|
Additions
|
281
|
|
|
16
|
|
Revision in estimate
|
7,205
|
|
|
—
|
|
Disposals
|
(124)
|
|
|
(148)
|
|
Expenditures
|
(671)
|
|
|
—
|
|
Accretion of discount
|
1,051
|
|
|
212
|
|
Balance as of December 31, 2019
|
$
|
10,329
|
|
|
$
|
2,587
|
|
The following table outlines our contractual obligations as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
Retirement obligation
|
2020
|
$
|
1,285
|
|
2021
|
172
|
|
2022
|
146
|
|
2023
|
341
|
|
Thereafter
|
8,385
|
|
Total asset retirement obligations
|
$
|
10,329
|
|
6. Leases
Basic adopted ASU No. 2016-02, Topic 842 - Leases, effective January 1, 2019. This ASU requires lessees to recognize an operating lease right-of-use ("ROU") asset and liability on the balance sheet for all operating leases with an initial lease term greater than twelve months.
ASU 2018-11 Leases – Targeted Improvements, allows for a practical expedient wherein all periods previously reported under ASC 840 will continue to be reported under ASC 840, and periods beginning January 1, 2019 and after are reported under ASC 842. Basic elected to adopt this practical expedient along with the package of practical expedients, which allows Basic to combine lease and non-lease costs, and not to assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 are or contain a lease under this Topic.
Under this transition option, Basic will continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented and will make only annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Prior period amounts have not been adjusted and continue to be reflected in accordance with Basic’s historical accounting. The adoption of this standard resulted in the recording of ROU assets and lease liabilities of approximately of $20.8 million as of January 1, 2019, with no related impact on Basic’s Consolidated Statement of Shareholders' Equity or Consolidated Statement of Operations.
As a lessee, Basic leases its corporate office headquarters in Fort Worth, Texas, and conducts its business operations through various regional offices located throughout the United States. These operating locations typically
include regional offices, storage and maintenance yards, disposal facilities and employee housing sufficient to support its operations in the area. Basic leases most of these properties under either non-cancelable term leases many of which contain renewal options that can extend the lease term from one to five years and some of which contain escalation clauses, or month-to-month operating leases. Options to renew these leases are generally not considered reasonably certain to be exercised. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease. Basic also leases supplemental equipment, typically under cancellable short-term or contracts which are less than 30 days. Due to the nature of the Company's business, any option to renew these short-term leases is generally not considered reasonably certain to be exercised. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease, and the lease payments during these periods are similarly excluded from the calculation of operating lease asset and lease liability balances.
Operating lease expense consists of rent expense related to leases that were included in ROU assets under Topic 842. Basic recognizes operating lease expense on a straight-line basis, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable operating lease payments typically include charges for property taxes and insurance, and some leases contain variable payments related to non-lease components, including common area maintenance and usage of facilities or office equipment (for example, copiers), which totaled approximately $1.1 million during the twelve months ended December 31, 2019. Prepaid rent totaled $0.1 million at December 31, 2019.
The following table summarizes the components of the Company's lease expense recognized for the twelve months ended December 31, 2019, excluding variable lease and prepaid rent costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Operating lease expense:
|
|
|
|
|
|
|
Short-term operating lease
|
|
$
|
5,691
|
|
|
|
|
|
Long-term operating lease
|
|
8,681
|
|
|
|
|
|
Total operating lease expense
|
|
$
|
14,372
|
|
|
|
|
|
Finance lease expense:
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
19,171
|
|
|
|
|
|
Interest on lease liabilities
|
|
5,005
|
|
|
|
|
|
Total finance lease expense
|
|
$
|
24,176
|
|
|
|
|
|
Supplemental information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Operating leases
|
|
|
Weighted average remaining lease term
|
|
3.1 years
|
Weighted average discount rate
|
|
14.8%
|
|
|
|
|
Finance leases
|
|
|
Weighted average remaining lease term
|
|
2.1 years
|
Weighted average discount rate
|
|
8.2%
|
|
Supplemental cash flow information related to leases was as follows for the year ended December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
14,372
|
|
Operating cash outflows from finance leases
|
|
5,005
|
|
Financing cash outflows from finance leases
|
|
29,364
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
|
2,477
|
|
Finance leases
|
|
7,941
|
|
Supplemental balance sheet information related to leases was as follows as of December 31, 2019, and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Right-of-Use Assets under Operating Leases
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
14,540
|
|
|
$
|
20,819
|
|
Operating lease right-of-use liabilities, current portion
|
|
4,906
|
|
|
5,649
|
|
Operating lease right-of-use liabilities, long-term portion
|
|
9,634
|
|
|
15,170
|
|
Total operating lease liabilities
|
|
$
|
14,540
|
|
|
$
|
20,819
|
|
|
|
|
|
|
Right-of-Use Assets under Finance Leases
|
|
|
|
|
|
Property and equipment, at cost
|
|
$
|
71,768
|
|
|
$
|
67,585
|
|
Less accumulated depreciation
|
|
(27,727)
|
|
|
(16,634)
|
|
Property and equipment, net
|
|
$
|
44,041
|
|
|
$
|
50,951
|
|
|
|
|
|
|
|
Current portion of finance leases
|
|
$
|
18,738
|
|
|
$
|
20,061
|
|
Long-term finance leases
|
|
17,160
|
|
|
29,865
|
|
Total finance lease liabilities
|
|
$
|
35,898
|
|
|
$
|
49,926
|
|
Future annual minimum operating lease payments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
2020
|
|
$
|
6,618
|
|
|
|
2021
|
|
5,227
|
|
|
|
2022
|
|
4,393
|
|
|
|
2023
|
|
942
|
|
|
|
2024
|
|
721
|
|
|
|
Thereafter
|
|
325
|
|
|
|
Total lease payments
|
|
$
|
18,226
|
|
|
|
Impact of discounting
|
|
(3,686)
|
|
|
|
Discounted value of operating lease obligation
|
|
$
|
14,540
|
|
|
|
7. Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
10.75% Senior Notes due 2023
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases and other notes
|
|
35,898
|
|
|
49,926
|
|
Unamortized discount and deferred debt costs
|
|
(8,795)
|
|
|
(11,169)
|
|
Total long-term debt
|
|
327,103
|
|
|
338,757
|
|
Less current portion
|
|
18,738
|
|
|
19,582
|
|
Total non-current portion of long-term debt
|
|
$
|
308,365
|
|
|
$
|
319,175
|
|
Debt Discounts
The following discounts on debt represent the unamortized discount to fair value of prior Amended and Restated Term Loan Agreement and the short-term and long-term portions of the fair value discount of capital leases (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Unamortized discount on Senior Notes
|
|
$
|
2,156
|
|
|
$
|
2,731
|
|
Unamortized discount on Capital Leases - short-term
|
|
—
|
|
|
479
|
|
|
|
|
|
|
Unamortized deferred debt issuance costs
|
|
6,639
|
|
|
7,959
|
|
Total
|
|
$
|
8,795
|
|
|
$
|
11,169
|
|
Senior Secured Notes
On October 2, 2018, the Company issued $300 million aggregate principal amount of 10.75% senior secured notes due 2023 (the “Senior Notes”) in an offering exempt from registration under the Securities Act. The Senior Notes were issued at a price of 99.042% of par to yield 11.0%. The Senior Notes are secured by a first-priority lien on substantially all of the assets of the Company and the subsidiary guarantors other than accounts receivable, inventory and certain related assets. Net proceeds from the offering of approximately $290.0 million were used to repay the Company’s existing indebtedness under the Amended and Restated Term Loan Agreement, to repay the Company’s outstanding borrowings under its previous credit facility (the "Prior ABL Facility"), and for general corporate purposes.
Indenture
The Company’s Senior Notes were issued under and are governed by an indenture, dated as of October 2, 2018 (the “Indenture”), by and among the Company, the guarantors named therein (the “Guarantors”), and UMB Bank, N.A. as Trustee and Collateral Agent (the “Trustee”). The Senior Notes are jointly and severally, fully and unconditionally guaranteed (the “Guarantees”) on a senior secured basis by the Guarantors and are secured by first priority liens on substantially all of the Company’s and the Guarantors’ assets, other than accounts receivable, inventory and certain related assets.
The Indenture contains covenants that limit the ability of the Company and certain subsidiaries to:
•incur additional indebtedness or issue preferred stock;
•pay dividends or make other distributions to its stockholders;
•repurchase or redeem capital stock or subordinated indebtedness and certain refinancings thereof;
•make certain investments;
•incur liens;
•enter into certain types of transactions with affiliates;
•limit dividends or other payments by restricted subsidiaries to the Company; and
•sell assets or consolidate or merge with or into other companies.
These limitations are subject to a number of important qualifications and exceptions.
Upon an Event of Default (as defined in the Indenture), the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Senior Notes may declare the entire principal of, premium, if any, and accrued and unpaid interest, if any, on all the Senior Notes to be due and payable immediately.
At any time on or prior to October 15, 2020, the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes at a redemption price equal to 110.75% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, with an amount of cash not greater than the net proceeds from certain equity offerings. At any time prior to October 15, 2020, the Company may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Senior Notes plus a “make-whole” premium plus accrued and unpaid interest, if any, to the redemption date. The Company may also redeem all or a part of the Senior Notes at any time on or after October 15, 2020, at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to the redemption date.
The Company may redeem all, but not less than all, of the Senior Notes in connection with a company sale transaction, at a redemption price of 105.375% of principal for a company sale that occurs on or after April 15, 2019 and on or before October 15, 2019, or 108.063% of principal amount for a company sale that occurs after October 15, 2019 and before October 15, 2020, in each case plus accrued and unpaid interest, if any, to the redemption date. If the transactions contemplated by the Exchange Agreement are followed by a downgrade in the Company's rating by either S&P Global Ratings or Moody’s Investors Service within 90 days, a “Change of Control” as defined in our Senior Notes will be deemed to have occurred. If the Company experiences such a Change of Control, the Company may be required to offer to purchase the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any, to the purchase date.
The Senior Notes and the Guarantees rank equally in right of payment with all of the Company’s and the Guarantors’ existing and future unsubordinated indebtedness, effectively senior to all of the Company’s and the Guarantors’ existing and future indebtedness to the extent of the value of the collateral securing the Senior Notes but junior to other indebtedness that is secured by liens on assets other than collateral for the Senior Notes to the extent of the value of such assets, and senior to all of the Company’s and the Guarantors’ future subordinated indebtedness.
Pursuant to a collateral rights agreement, the Senior Notes and Guarantees are secured by first priority liens, subject to limited exceptions, on the collateral securing the Senior Notes, consisting of substantially all of the property and assets now owned or hereafter acquired by the Company and the Guarantors, except for certain excluded property described in the Indenture.
ABL Facility
On October 2, 2018, the Company terminated the Prior ABL Facility and Amended and Restated Term Loan Agreement and entered into an ABL Credit Agreement (the “ABL Credit Agreement”) among the Company, as borrower (in such capacity, the “Borrower”), Bank of America, N.A., as administrative agent (the “Administrative Agent”), swing line lender and letter of credit issuer, UBS Securities LLC, as syndication agent, PNC Bank National Association, as documentation agent and letter of credit issuer, and the other lenders from time to time party thereto (collectively, the “ABL Lenders”). Pursuant to the ABL Credit Agreement, the ABL Lenders have extended to the Borrower a revolving credit facility in the maximum aggregate principal amount of $150 million, subject to borrowing base capacity (the “ABL Facility”). The ABL Facility includes a sublimit for letters of credit of up to $50 million in the aggregate, and for borrowings on same-day notice under swingline loans subject to a sublimit of the lesser of (a) $15 million and (b) the aggregate commitments of the ABL Lenders. The ABL Facility also provides capacity for base rate protective advances up to $10 million at the discretion of the Administrative Agent and provisions relating to overadvances. The ABL Facility contains no restricted cash requirements.
Borrowings under the ABL Facility bear interest at a rate per annum equal to an applicable rate, plus, at Borrower’s option, either (a) a base rate or (b) a LIBO rate. The applicable rate is fixed from the closing date to April 1, 2019. After April 1, 2019, the applicable rate is determined by reference to the average daily availability as a percentage of the borrowing base during the fiscal quarter immediately preceding such applicable quarter. The applicable rate has remained unchanged since inception of the ABL Facility.
Principal amounts outstanding under the ABL Facility will be due and payable in full on the maturity date, which is five years from the closing of the facility; provided that if the Senior Notes have not been redeemed by July 3, 2023, then the maturity date shall be July 3, 2023.
Substantially all of the domestic subsidiaries of the Company guarantee the borrowings under the ABL Facility, and Borrower guarantees the payment and performance by each specified loan party of its obligations under its
guaranty with respect to swap obligations. All obligations under the ABL Facility and the related guarantees are secured by a perfected first-priority security interest in substantially all accounts receivable, inventory, and certain other assets, not including equity interests. As of December 31, 2019, Basic had no borrowings and $34.2 million of letters of credit outstanding under the ABL Facility.
Prior ABL Facility
On September 29, 2017, Basic entered into a credit facility (the "Prior ABL Facility") pursuant to (i) a Receivables Transfer Agreement (the “Transfer Agreement”) entered into by and among Basic Energy Services, L.P. (“BES LP”), as the initial originator and Basic Energy Receivables, LLC (the “SPE”), as the transferee and (ii) the Credit Agreement.
Under the Transfer Agreement, BES LP was required to sell or contribute, on an ongoing basis, its accounts receivable and related security and interests in the proceeds thereof (the “Transferred Receivables”) to the SPE. The SPE financed a portion of its purchase of the accounts receivable through borrowings, on a revolving basis, of up to $100 million (with the ability to request an increase in the size of the Prior ABL Facility by $50 million) under the Credit Agreement, and such borrowings were secured by the accounts receivable. The SPE financed its purchase of the remaining portion of the accounts receivable by issuing subordinated promissory notes to BES LP and/or by contributing the remaining portion of the accounts receivables in exchange for equity in the SPE in the amount of the purchase price of the receivable not paid in cash. BES LP was responsible for the servicing, administration and collection of the accounts receivable, with all collections going into lockbox accounts. The Company provided a customary guaranty of performance to the administrative agent with respect to certain obligations of BES LP and any successor servicer under the Prior ABL Facility. In connection with entering into the Prior ABL Facility, on September 29, 2017, the Company amended the Amended and Restated Term Loan Agreement to permit, among other things, (i) the acquisition of the Transferred Receivables by the SPE pursuant to the Transfer Agreement, free and clear of the liens under the Amended and Restated Term Loan Agreement and (ii) the transactions contemplated under each of the Transfer Agreement and Credit Agreement. The Company consolidated the SPE, which the Company determined to be a variable interest entity ("VIE"), and all intercompany activity was eliminated upon consolidation. In concluding the SPE was a VIE, the Company determined it is the primary beneficiary of the SPE, as all activities of SPE are for the benefit of the Company. The accounts receivable held at the SPE are used solely to settle the debt obligations of the SPE.
Loans under our Prior ABL Facility bore interest at a fluctuating rate equal to (a) the Alternate Base Rate plus 2.25% with respect to ABR Loans or (b) the Adjusted LIBO rate plus 3.25% with respect to Eurodollar Loans (each as defined in the Credit Agreement). A commitment fee equal to 0.375% per annum was payable on the unused commitments under the Credit Agreement. The loans made pursuant to the Credit Agreement had a maturity date of September 29, 2021.
In connection with the closing of its Senior Notes offering, the Company repaid the balances outstanding under the Prior ABL Facility in its entirety and terminated the Prior ABL Facility.
Amended and Restated Term Loan Agreement
On December 23, 2016, the Company entered into an Amended and Restated Term Loan Credit Agreement (the “Amended and Restated Term Loan Agreement”) with a syndicate of lenders and U.S. Bank National Association, as administrative agent for the lenders. On October 2, 2018, in connection with the closing of its Senior Note offering, the Company repaid its outstanding debt (including accrued interest) under the Amended and Restated Term Loan Agreement and terminated the Amended and Restated Term Loan Agreement. The Amended and Restated Term Loan Agreement repayment was made prior to the maturity date defined in the Amended and Restated Term Loan Agreement, and the Company incurred repayment penalties of approximately $17.6 million associated with the repayment.
Other Debt
Basic has a variety of other capital leases outstanding, which are generally customary in Basic’s business.
As of December 31, 2019, the aggregate maturities of debt, including capital leases, for the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period:
|
|
Debt
|
|
Capital Leases
|
2020
|
|
$
|
—
|
|
|
$
|
18,738
|
|
2021
|
|
—
|
|
|
11,485
|
|
2022
|
|
—
|
|
|
4,835
|
|
2023
|
|
300,000
|
|
|
785
|
|
Thereafter
|
|
—
|
|
|
55
|
|
Total
|
|
$
|
300,000
|
|
|
$
|
35,898
|
|
Basic’s interest expense consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
Interest expense:
|
|
2019
|
|
|
2018
|
|
|
|
Cash payments for interest
|
|
$
|
39,248
|
|
|
|
$
|
34,396
|
|
|
|
|
Commitment and other fees paid
|
|
48
|
|
|
|
2,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of discounts
|
|
1,054
|
|
|
|
3,424
|
|
|
|
|
Amortization of deferred debt costs
|
|
2,338
|
|
|
|
1,050
|
|
|
|
|
Change in accrued interest
|
|
86
|
|
|
|
3,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
113
|
|
|
|
162
|
|
|
|
|
Interest expense - continuing operations
|
|
$
|
42,887
|
|
|
|
$
|
45,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Fair Value Measurements
Fair value is the price that would be received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. Fair value is a market based measurement considered from the perspective of a market participant. The Company uses market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation. There is a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 — Inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and other current liabilities approximate fair value due to the short maturities of these instruments. The carrying amount of our Credit Facility in Long-term debt also approximates fair value due to its variable-rate characteristics.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
|
Hierarchy
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Level
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
10.75 % Senior Notes due 2023
|
1
|
|
$
|
297,844
|
|
|
$
|
213,246
|
|
|
$
|
297,269
|
|
|
$
|
257,806
|
|
|
|
|
|
|
|
|
|
|
|
Basic did not have any assets or liabilities that were measured at fair value on a recurring basis at December 31, 2018, and 2019.
9. Commitments and Contingencies
Environmental
Basic is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. Basic cannot predict the future impact of such standards and requirements which are subject to change and can have retroactive effectiveness. Basic continues to monitor the status of these laws and regulations.
Currently, Basic has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of its business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of Basic’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification.
Litigation
From time to time, Basic is a party to litigation, or other legal proceedings that Basic considers to be a part of the ordinary course of business. Basic is not currently involved in any legal proceedings that it considers probable or reasonably possible, individually or in the aggregate, to result in a material adverse effect on its financial condition, results of operations or liquidity.
Sales and Use Tax Audit
In 2018, the Texas State Comptroller’s office issued a preliminary report on the sales and use tax audit for the period from 2010 through 2013. Basic appealed the preliminary report through the redetermination process. Based on our analysis, the potential liability associated with this audit ranges from $6.0 million to $24.0 million. This range could potentially change in future periods as the appeals and redetermination process progresses. Basic recorded an accrual of $6.0 million in the second quarter of 2018. After making monthly payments of $100,000, a net estimated liability of $4.2 million, and an additional amount of $1.9 million of related interest are included in accrued liabilities for the twelve months ended December 31, 2019.
On August 15, 2019, the Company was notified by the Oklahoma Tax Commission (the "OTC") that the tax court had issued findings, conclusions, and recommendations in an on-going tax case related to tax years 2006 through 2008. Based on the ruling and the advice of our Oklahoma tax counsel, the Company decided to negotiate a settlement with the OTC. The Company's analysis is that the potential liability associated with the settlement may range from $2.3 million to $3.5 million. The Company recorded $2.3 million of income tax and interest payable, which are included as accrued expenses on our consolidated balance sheets, and the related expense during the year ended December 31, 2019.
Employment Agreements
Pursuant to the Employment Agreement with Keith Schilling, the President and Chief Executive Officer of the Company, effective through December 31, 2021, and set to automatically renew for subsequent one-year periods unless notice of termination is properly given by the Company or Mr. Schilling, Mr. Schilling is entitled to a base salary of $650,000 per year. Mr. Schilling will also receive an annual performance bonus, with a target bonus equal to 90% of his base salary, if certain performance criteria are met. Under the Employment Agreement, Mr. Schilling is also eligible from time to time to receive awards of long-term equity incentive compensation under the Company’s equity compensation plans. In addition to his one-time signing bonus of $150,000, he will receive one-time payments to compensate him for the loss of equity issued from his previous employment in the following amounts: (i) $50,000 on May 15, 2020, (ii) $100,000 on May 15, 2021, and (iii) $100,000 on May 15, 2022, in each case conditioned on his continued employment through the applicable payment date.
If Mr. Schilling’s employment is terminated for certain reasons, he would also be entitled to a lump sum severance payment equal to 1.5 times the sum of his annual base salary plus his current annual incentive target bonus for the full year in which the termination of employment occurred. Additionally, if Mr. Schilling’s employment is terminated for certain reasons within the six months preceding or the twelve months following a change of control of the Company, he would be entitled to a lump sum severance payment equal to two times the sum of his annual base salary plus the higher of (i) his current annual incentive target bonus for the full year in which the termination of employment occurred or (ii) the highest annual incentive bonus received by him for any of the last three completed fiscal years. In the event that within the six months preceding or the twelve months following a change of control of the Company, Mr. Schilling’s Employment Agreement is not renewed by the Company and a new employment
agreement has not been entered into, Mr. Schilling will be entitled to the same severance benefits described above, subject to certain conditions.
Basic also has entered into employment agreements with various other executive officers. Under these agreements, if the officer’s employment is terminated for certain reasons, he would be entitled to a lump sum severance payment equal to either 0.75 times to 1.5 times the sum of his annual base salary plus his current annual incentive target bonus for the full year in which the termination occurred. If employment is terminated for certain reasons within the six months preceding or the twelve months following the change of control of the Company, he would be entitled to a lump sum severance payment equal to either 1.0 or 2.0 times the sum of his annual base salary plus the higher of (i) his current incentive target bonus for the full year in which the termination of employment occurred or (ii) the highest annual incentive bonus received by him for any of the last three fiscal years.
Self-Insured Risk Accruals
Basic is self-insured up to retention limits as it relates to workers’ compensation, general liability claims, and medical and dental coverage of its employees. Basic generally maintains no physical property damage coverage on its rig fleet, with the exception of certain of its 24-hour workover rigs, newly manufactured rigs and pumping services equipment. Basic has deductibles per occurrence for workers’ compensation, general liability claims, and medical and dental coverage of $2.0 million, $1.0 million and $0.4 million, respectively. Basic has a $1.0 million deductible per occurrence for automobile liability. Basic maintains accruals in the accompanying consolidated balance sheets related to self-insurance retentions by using third-party data and claims history.
10. Accrued Expenses
Accrued expenses included in current liabilities on our Consolidated Balance Sheet are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
Employee compensation
|
|
$
|
17,527
|
|
|
$
|
20,680
|
|
Retained losses on insurance obligations
|
|
9,801
|
|
|
6,566
|
|
Accrued interest
|
|
8,997
|
|
|
10,068
|
|
Property tax payable
|
|
4,672
|
|
|
1,617
|
|
Federal and state tax payable
|
|
2,375
|
|
|
—
|
|
Short-term sales tax payable
|
|
2,114
|
|
|
2,336
|
|
Professional fees
|
|
1,260
|
|
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
1,370
|
|
|
2,050
|
|
Total
|
|
$
|
48,116
|
|
|
$
|
44,955
|
|
11. Stockholders' Equity
Common Stock
Basic had 80,000,000 shares of Basic’s common stock, par value $0.01 per share authorized, 27,912,059 shares issued and 24,904,485 shares outstanding at December 31, 2019.
Treasury Stock
Basic acquired treasury shares through net share settlements for payment of payroll taxes upon the vesting of restricted stock unit awards, forfeitures of restricted share awards, and through the publicly announced repurchase program. Basic issued and repurchased a net total of 2,692,116 and 160,026 common shares for the years ended December 31, 2019 and 2018 respectively.
Preferred Stock
At December 31, 2019, Basic had 5,000,000 shares of preferred stock, par value $0.01 per share, authorized, of which none was designated, issued or outstanding.
12. Incentive Plan
Management Incentive Plan
On May 14, 2019, the stockholders of the Company approved the Basic Energy Services, Inc. 2019 Long Term Incentive Plan (the “LTIP”) to succeed the Basic Energy Services, Inc. Management Incentive Plan (the “MIP”). The LTIP became effective on May 14, 2019, and replaced the MIP. A total of 2,481,657 shares of the Company’s common stock are reserved for issuance pursuant to the LTIP. No further awards will be granted under the MIP.
During the years ended December 31, 2019 and 2018, compensation expense related to share-based arrangements under the MIP and the LTIP, including restricted stock, restricted stock units and stock option awards, was approximately $8.7 million and $27.3 million respectively. For compensation expense recognized during the year ended December 31, 2019 and 2018, Basic did not recognize a tax benefit.
At December 31, 2019, there was $3.1 million unrecognized compensation related to non-vested share-based compensation arrangements granted under the MIP and the LTIP. That cost is expected to be recognized over a weighted average period of 1.85 years. Expenses described below are for employee awards granted under the MIP or the LTIP, as applicable.
Stock Option Awards
Total expense related to stock options was approximately $1.9 million in 2019 and $4.2 million in 2018. Future expense for all options is expected to be approximately $0.1 million in the first quarter of 2020.
Options granted under the MIP expire 10 years from the date they are granted, and generally vest over a period of three years.
The following table reflects the summary of stock options outstanding at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options Granted
|
|
Weighted Average Exercise Price ($)
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value (000's)
|
Non-statutory stock options:
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
595,736
|
|
|
39.23
|
|
|
|
|
|
Options granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Options forfeited
|
|
(77,702)
|
|
|
39.30
|
|
|
|
|
|
Options exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Options expired
|
|
(211,528)
|
|
|
39.25
|
|
|
|
|
|
Outstanding, end of period
|
|
306,506
|
|
|
39.23
|
|
|
7.08
|
|
—
|
|
Exercisable, end of period
|
|
256,867
|
|
|
38.71
|
|
|
7.07
|
|
—
|
|
Vested or expected to vest, end of period
|
|
49,639
|
|
|
41.90
|
|
|
7.17
|
|
—
|
|
Restricted Stock Unit Awards
Time-based
A summary of the status of Basic’s non-vested RSU grants at December 31, 2019 and changes during the year ended December 31, 2019 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Units
|
|
Weighted Average Grant Date Fair Value Per Unit
|
Non-vested at beginning of period
|
|
191,302
|
|
|
$
|
16.58
|
|
Granted during period
|
|
653,160
|
|
|
2.53
|
|
Vested during period
|
|
(73,976)
|
|
|
16.17
|
|
Forfeited during period
|
|
(197,420)
|
|
|
5.43
|
|
Non-vested at end of period
|
|
573,066
|
|
|
$
|
4.46
|
|
Valuation of time vesting restricted stock units for all periods presented is equal to the quoted market price for the shares on the date of the grant. The total fair value of time-vesting restricted stock units vested in fiscal 2019 and 2018 was $0.3 million and $1.4 million, respectively and is measured as the quoted market price of the Company’s common stock on the vesting date for the number of shares vested.
Performance-based
A summary of the status of Basic’s non-vested performance-based grants at December 31, 2019 and changes during the year ended December 31, 2019 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Performance Stock Units
|
|
Weighted Average Grant Date Fair Value Per Unit
|
Non-vested at beginning of period
|
|
682,985
|
|
|
$
|
27.27
|
|
Granted during period
|
|
—
|
|
|
—
|
|
Vested during period
|
|
(218,541)
|
|
|
36.33
|
|
Forfeited during period
|
|
(152,206)
|
|
|
28.13
|
|
Non-vested at end of period
|
|
312,238
|
|
|
$
|
20.52
|
|
During fiscal 2018, the Company granted performance-based restricted stock units covering 284,625 shares of common stock having a fair value at the date of grant of $3.3 million, determined using a Monte Carlo simulation model. The performance-based restricted stock units vest subject to attainment of performance criteria established by the Compensation Committee and continuous employment through the vesting date. The 284,625 units may vest in a number of shares from zero to 150% of the award, based on the total shareholder return of Basic’s common stock compared to total shareholder return of a group of peer companies (“TSR”) established by the Compensation Committee for the period from January 1, 2018 to December 31, 2019. The grant will then vest in two equal tranches.
The total fair value of performance-based restricted stock units vested in 2019 and 2018 was $1.0 million and $5.5 million, respectively and is measured as the quoted market price of the Company’s common stock on the vesting date for the number of shares vested.
Restricted Stock Awards
On May 15, 2019, the Board made grants of time-based restricted stock awards representing an aggregate 120,000 shares of common stock of the Company to non-employee members of the Board. These grants are subject to vesting fully on the first anniversary of the grant date and are subject to accelerated vesting under certain circumstances.
In the second quarter of 2019, the Board also made grants of time-based restricted stock awards representing an aggregate 533,160 shares of common stock of the Company to certain members of management. These grants are subject to vesting over a three-year period and are subject to accelerated vesting under certain circumstances.
On May 21, 2018, the Board approved grants of restricted stock awards to non-employee members of the Board. The number of restricted shares granted was 48,400. These grants are subject to vesting over a period of ten months and are subject to accelerated vesting under certain circumstances.
The total fair value of restricted stock awards vested during the twelve months ended December 31, 2019, and 2018 was $33,000 and $77,000, respectively, and was measured as the quoted market price of the Company’s common stock on the vesting date for the number of shares vested.
Phantom Stock Awards
On March 21, 2019, the Compensation Committee of the Board approved grants of phantom restricted stock awards to certain key employees. Phantom shares are recorded as a liability at their current market value and are included in other current liabilities. The aggregate number of phantom shares issued on March 22, 2019, was 370,350. These grants remain subject to vesting annually in one-third increments over a three-year period, with the first portion vesting on March 22, 2020, and are subject to accelerated vesting in certain circumstances. Total expense related to phantom stock granted to key employees for the years ended December 31, 2019 and 2018, was approximately $0.1 million and $0.7 million, respectively.
On May 15, 2019, the Compensation Committee of the Board made grants of phantom restricted stock to certain members of management. The aggregate number of phantom shares issued on May 15, 2019 to certain members of management was 524,160. These grants remain subject to vesting annually in one-third increments over a three-year period, with the first portion vesting on May 15, 2020, and are subject to accelerated vesting in certain circumstances. Total expense related to this grant for the year ended December 31, 2019, was approximately $0.1 million.
On May 15, 2019, the Compensation Committee of the Board made grants of phantom restricted stock to non-employee members of the Board. The number of phantom shares issued on May 15, 2019 to non-employee members of the Board was 54,000. These grants remain subject to vesting fully on the first anniversary of the grant date, and are subject to accelerated vesting in certain circumstances. Total expense related to this grant for the year ended December 31, 2019, was approximately $31,000.
In the second quarter of 2019, the Compensation Committee of the Board approved grants of phantom performance-based restricted stock to certain members of management. The performance-based phantom stock awards are tied to Basic’s achievement of total stockholder return (“TSR”) relative to the TSR of a peer group of energy services companies over the performance period. The number of phantom shares to be issued will range from 0% to 150% of the 1,069,320 target number of phantom shares. Any phantom shares earned at the end of the performance period will then remain subject to vesting in one-half increments on May 15, 2021, and 2022 (subject to accelerated vesting in certain circumstances). Phantom shares are recorded as a liability at fair value calculated using a Monte Carlo valuation and are included in other current liabilities. Total expense related to performance-based phantom stock for the year ended December 31, 2019, was approximately $0.2 million.
On February 8, 2018, the Compensation Committee approved grants of phantom restricted stock awards to certain key employees. Phantom shares are recorded as a liability at their current market value and are included in other current liabilities. The number of phantom shares issued on February 8, 2018 was 82,350. These grants remain subject to vesting annually in one-third increments over a three-year period, the first portion vested on March 15, 2019, and are subject to accelerated vesting in certain circumstances.
Warrant Agreement
On December 23, 2016, the Company entered into a warrant agreement (the “Warrant Agreement”) with American Stock Transfer & Trust Company, LLC, as warrant agent. The Company issued warrants (the “Warrants,” and holders thereof “Warrantholders”), which in the aggregate, are exercisable to purchase up to approximately 2,066,627 shares of common stock. As of December 31, 2019 there were 2,066,576 warrants outstanding, exercisable until December 23, 2023, to purchase at an initial exercise price of $55.25 per share, subject to adjustment as provided in the Warrant Agreement. At issuance, the warrants were recorded at fair value, which was determined using the Black-Scholes option pricing model. The warrants are equity classified and, at issuance, were recorded as an increase to additional paid-in capital in the amount of $8.4 million. All unexercised Warrants will expire, and the rights of the Warrantholder to purchase common stock will terminate on December 23, 2023.
13. Net Loss Per Share
Basic loss per common share are determined by dividing net loss applicable to common stock by the weighted average number of common shares actually outstanding during the year. Diluted loss per common share is based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding securities using the “as if converted” method. The following table sets forth the computation of basic and diluted loss per share (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Numerator (both basic and diluted):
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(91,401)
|
|
|
$
|
(116,736)
|
|
|
|
Loss from discontinued operations, net of tax
|
|
(90,497)
|
|
|
(27,861)
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(181,898)
|
|
|
$
|
(144,597)
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Denominator for basic and diluted earnings per share
|
|
26,141,414
|
|
|
26,467,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share from continuing operations:
|
|
$
|
(3.50)
|
|
|
$
|
(4.41)
|
|
|
|
Basic and diluted loss per common share from discontinued operations:
|
|
(3.46)
|
|
|
(1.05)
|
|
|
|
Basic and diluted loss per common share available to stockholders:
|
|
$
|
(6.96)
|
|
|
$
|
(5.46)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has issued potentially dilutive instruments such as unvested restricted stock and common stock options. 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 shows potentially dilutive instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
Warrants
|
|
2,066,576
|
|
|
|
2,066,576
|
|
|
|
|
Unvested restricted stock units
|
|
373,754
|
|
|
|
29,806
|
|
|
|
|
Stock options
|
|
306,506
|
|
|
|
595,736
|
|
|
|
|
Total
|
|
2,746,836
|
|
|
2,692,118
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Business Segment Information
Basic’s reportable business segments are Well Servicing, Water Logistics, and Completion & Remedial Services. These segments have been selected based on changes in management’s resource allocation and performance assessment in making decisions regarding the Company. Prior to December 2019, the Company operated an Other Services segment, which was comprised of contract drilling services and manufacturing and rig servicing. Contract drilling was discontinued as a service in the third quarter of 2019, and manufacturing rig servicing was realigned with Well Servicing. Our Pumping Services Division, which was included in the Completion & Remedial Services segment was discontinued in the fourth quarter of 2019. The following is a description of our business segments included in continuing operations:
Well Servicing: This segment encompasses a full range of services performed with a mobile well servicing rig, including the installation and removal of downhole equipment and elimination of obstructions in the well bore to facilitate the flow of oil and natural gas. These services are performed to establish, maintain and improve production throughout the productive life of an oil and natural gas well and to plug and abandon a well at the end of its productive life. Basic’s well servicing equipment and capabilities also facilitate most other services performed on a well. This segment also includes the manufacture and servicing of mobile well servicing rigs.
Water Logistics: This segment utilizes a fleet of trucks and related assets, including specialized tank trucks, storage tanks, water wells, disposal facilities water treatment and related equipment. Basic employs these assets to provide, transport, store and dispose of a variety of fluids. These services are required in most workover, completion and remedial projects as well as part of daily producing well operations. Also included in this segment are our construction services which provide services for the construction and maintenance of oil and natural gas production infrastructures.
Completion & Remedial Services: This segment utilizes coiled tubing services, air compressor packages specially configured for underbalanced drilling operations, an array of specialized rental equipment and fishing tools, thru-tubing and snubbing units.
Basic’s management evaluates the performance of its operating segments based on operating revenues and segment profits. Corporate expenses include general corporate expenses associated with managing all reportable operating segments. Corporate assets consist principally of working capital and debt financing costs.
The following table sets forth certain financial information with respect to Basic’s reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well Servicing
|
|
Water Logistics
|
|
Completion & Remedial Services
|
|
Corporate and Other
|
|
Continuing Operations Total
|
|
Discontinued Operations
|
Year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
226,966
|
|
|
$
|
199,816
|
|
|
$
|
140,468
|
|
|
$
|
—
|
|
|
$
|
567,250
|
|
|
$
|
142,885
|
|
Direct operating costs
|
|
(186,782)
|
|
|
(141,379)
|
|
|
(98,654)
|
|
|
—
|
|
|
(426,815)
|
|
|
(134,778)
|
|
Segment profits
|
|
40,184
|
|
|
58,437
|
|
|
41,814
|
|
|
—
|
|
|
140,435
|
|
|
8,107
|
|
Depreciation and amortization
|
|
18,766
|
|
|
26,143
|
|
|
19,964
|
|
|
4,616
|
|
|
69,489
|
|
|
45,168
|
|
Capital expenditures
|
|
14,525
|
|
|
26,209
|
|
|
7,033
|
|
|
654
|
|
|
48,421
|
|
|
12,067
|
|
Identifiable assets
|
|
$
|
78,686
|
|
|
$
|
118,960
|
|
|
$
|
42,560
|
|
|
$
|
256,044
|
|
|
$
|
496,250
|
|
|
$
|
54,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
250,982
|
|
|
$
|
231,283
|
|
|
$
|
171,300
|
|
|
$
|
—
|
|
|
$
|
653,565
|
|
|
$
|
311,154
|
|
Direct operating costs
|
|
(203,785)
|
|
|
(166,907)
|
|
|
(109,713)
|
|
|
—
|
|
|
(480,405)
|
|
|
(266,011)
|
|
Segment profits
|
|
47,197
|
|
|
64,376
|
|
|
61,587
|
|
|
—
|
|
|
173,160
|
|
|
45,143
|
|
Depreciation and amortization
|
|
18,470
|
|
|
25,250
|
|
|
27,903
|
|
|
6,550
|
|
|
78,173
|
|
|
48,244
|
|
Capital expenditures
|
|
22,212
|
|
|
24,737
|
|
|
10,128
|
|
|
1,396
|
|
|
58,473
|
|
|
29,970
|
|
Identifiable assets
|
|
$
|
89,813
|
|
|
$
|
98,717
|
|
|
$
|
125,123
|
|
|
$
|
293,506
|
|
|
$
|
607,159
|
|
|
$
|
154,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the segment profits reported above to the operating income as reported in the consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
Segment profits
|
|
$
|
140,435
|
|
|
$
|
173,160
|
|
|
|
|
General and administrative expenses
|
|
(118,460)
|
|
|
(145,725)
|
|
|
|
|
Depreciation and amortization
|
|
(69,489)
|
|
|
(78,173)
|
|
|
|
|
Gain (Loss) on disposal of assets
|
|
(2,135)
|
|
|
4,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(49,649)
|
|
|
$
|
(45,820)
|
|
|
|
|
15. Revenues
Our revenues are generated by services, which are consumed as provided by our customers on their sites. As a decentralized organization, contracts for our services are negotiated on a regional level and are on a per job basis, with jobs being completed in a short period of time, usually one day or up to a week. Revenue is recognized as performance obligations have been completed on a daily basis either as Accounts Receivable or Work-in-Process ("WIP"), when all of the proper approvals are obtained.
As of December 31, 2019, accounts receivable related to products and services were $99.6 million. At December 31, 2019, the Company had $1.0 million of contract assets and $0.9 million of contract liabilities on our consolidated balance sheet. At December 31, 2018, the Company had $1.1 million of contract assets and $0.9 million contract liabilities recorded on our consolidated balance sheet.
Basic does not have any long-term service contracts; nor do we have revenue expected to be recognized in any future year related to remaining performance obligations or contracts with variable consideration related to undelivered performance obligations.
The following table summarizes our disaggregated revenues by geographical markets and major service lines for the years ended December 31, 2019, and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well Servicing
|
|
Water Logistics
|
|
Completion & Remedial Services
|
|
Discontinued Operations
|
|
Total
|
Twelve Months Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
Permian Basin
|
$
|
115,803
|
|
|
$
|
106,306
|
|
|
$
|
62,919
|
|
|
$
|
23,697
|
|
|
$
|
308,725
|
|
ArkLaTex & Mid-Continent
|
49,122
|
|
|
43,915
|
|
|
14,466
|
|
|
108,396
|
|
|
215,899
|
|
Rocky Mountain
|
24,069
|
|
|
22,310
|
|
|
69,526
|
|
|
3,507
|
|
|
119,412
|
|
Texas Gulf Coast
|
28,308
|
|
|
38,068
|
|
|
—
|
|
|
7,285
|
|
|
73,661
|
|
West Coast
|
21,727
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,727
|
|
Corporate (Intercompany)
|
(12,063)
|
|
|
(10,783)
|
|
|
(6,443)
|
|
|
—
|
|
|
(29,289)
|
|
Total
|
$
|
226,966
|
|
|
$
|
199,816
|
|
|
$
|
140,468
|
|
|
$
|
142,885
|
|
|
$
|
710,135
|
|
|
|
|
|
|
|
|
|
|
|
Major Service Lines
|
|
|
|
|
|
|
|
|
|
Well Servicing
|
$
|
187,693
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
187,693
|
|
Plugging
|
26,050
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,050
|
|
Transport/Vacuum
|
—
|
|
|
122,008
|
|
|
—
|
|
|
—
|
|
|
122,008
|
|
Production and Disposal Facilities
|
—
|
|
|
20,519
|
|
|
—
|
|
|
—
|
|
|
20,519
|
|
Hot Oiler
|
—
|
|
|
20,709
|
|
|
—
|
|
|
—
|
|
|
20,709
|
|
RAFT
|
—
|
|
|
—
|
|
|
73,978
|
|
|
—
|
|
|
73,978
|
|
Coiled Tubing
|
—
|
|
|
—
|
|
|
54,428
|
|
|
—
|
|
|
54,428
|
|
Snubbing
|
—
|
|
|
—
|
|
|
3,709
|
|
|
—
|
|
|
3,709
|
|
Taylor Industries - Manufacturing (Intercompany)
|
3,931
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,931
|
|
Discontinued Operations
|
—
|
|
|
—
|
|
|
—
|
|
|
142,885
|
|
|
142,885
|
|
Other
|
9,292
|
|
|
36,580
|
|
|
8,353
|
|
|
—
|
|
|
54,225
|
|
Total
|
$
|
226,966
|
|
|
$
|
199,816
|
|
|
$
|
140,468
|
|
|
$
|
142,885
|
|
|
$
|
710,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well Servicing
|
|
Water Logistics
|
|
Completion & Remedial Services
|
|
Discontinued Operations
|
|
Total
|
Twelve Months Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
Permian Basin
|
$
|
118,631
|
|
|
$
|
125,528
|
|
|
$
|
77,419
|
|
|
$
|
72,832
|
|
|
$
|
394,410
|
|
Texas Gulf Coast
|
28,313
|
|
|
35,074
|
|
|
1,030
|
|
|
13,660
|
|
|
78,077
|
|
ArkLaTex & Mid-Continent
|
52,511
|
|
|
44,492
|
|
|
26,641
|
|
|
208,353
|
|
|
331,997
|
|
West Coast
|
30,342
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,342
|
|
Rocky Mountain
|
27,067
|
|
|
31,908
|
|
|
84,291
|
|
|
16,310
|
|
|
159,576
|
|
Eastern USA
|
5,560
|
|
|
—
|
|
|
3,609
|
|
|
—
|
|
|
9,169
|
|
Corporate (Intercompany)
|
(11,442)
|
|
|
(5,719)
|
|
|
(21,690)
|
|
|
—
|
|
|
(38,851)
|
|
Total
|
$
|
250,982
|
|
|
$
|
231,283
|
|
|
$
|
171,300
|
|
|
$
|
311,155
|
|
|
$
|
964,720
|
|
|
|
|
|
|
|
|
|
|
|
Major Service Lines
|
|
|
|
|
|
|
|
|
|
Well Servicing
|
$
|
208,307
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
208,307
|
|
Plugging
|
25,165
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,165
|
|
Transport/Vacuum
|
—
|
|
|
142,222
|
|
|
—
|
|
|
—
|
|
|
142,222
|
|
Production and Disposal Facilities
|
—
|
|
|
24,204
|
|
|
—
|
|
|
—
|
|
|
24,204
|
|
Hot Oiler
|
—
|
|
|
20,613
|
|
|
—
|
|
|
—
|
|
|
20,613
|
|
RAFT
|
—
|
|
|
—
|
|
|
88,527
|
|
|
—
|
|
|
88,527
|
|
Coiled Tubing
|
—
|
|
|
—
|
|
|
68,935
|
|
|
—
|
|
|
68,935
|
|
Snubbing
|
—
|
|
|
—
|
|
|
10,972
|
|
|
—
|
|
|
10,972
|
|
Taylor Industries - Manufacturing (Intercompany)
|
7,660
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,660
|
|
Discontinued Operations
|
—
|
|
|
—
|
|
|
—
|
|
|
311,155
|
|
|
311,155
|
|
Other
|
9,850
|
|
|
44,244
|
|
|
2,866
|
|
|
—
|
|
|
56,960
|
|
Total
|
$
|
250,982
|
|
|
$
|
231,283
|
|
|
$
|
171,300
|
|
|
$
|
311,155
|
|
|
$
|
964,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Income Taxes
On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changes U.S. tax law by, among other things, lowering the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
Income tax expense consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,900)
|
|
|
|
$
|
—
|
|
State
|
|
1,921
|
|
|
305
|
|
Total
|
|
$
|
21
|
|
|
$
|
305
|
|
Deferred:
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(74)
|
|
State
|
|
—
|
|
|
(4)
|
|
Total
|
|
—
|
|
|
(78)
|
|
Total income tax expense
|
|
$
|
21
|
|
|
$
|
227
|
|
Basic paid no federal income taxes during the years 2019 and 2018. Basic received a federal income tax refund of $2.8 million as of the year ended December 31, 2019 as a result of a tax year 2017 election to monetize the remaining alternative minimum tax credit carryforward in lieu of accelerated tax depreciation, and as a result of amending our 2007 federal tax return under section 172(f) of the Internal Revenue Code of 186, which allowed us to carry-back and recover workers' compensation expenses in the years we had "NOL" for 10 years.
Reconciliation between the amount determined by applying the U.S. Federal corporate rate of 21% to income before income taxes (benefit) for the years ended December 31, 2019 and 2018 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2019
|
|
2018
|
Income tax benefit at federal statutory rate
|
|
$
|
(19,190)
|
|
|
|
$
|
(30,318)
|
|
Meals and entertainment
|
|
674
|
|
|
|
707
|
|
State taxes, net of federal benefit
|
|
580
|
|
|
|
(2,250)
|
|
Changes in Valuation Allowance
|
|
15,824
|
|
|
|
28,167
|
|
|
|
|
|
|
Equity Compensation Shortfall
|
|
2,601
|
|
|
|
2,644
|
|
Tax Basis Adjustments
|
|
—
|
|
|
|
41
|
|
|
|
|
|
|
Change in Estimates & Other
|
|
(468)
|
|
|
|
1,236
|
|
Total
|
|
$
|
21
|
|
|
|
$
|
227
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
Operating loss carryforward
|
|
$
|
205,367
|
|
|
$
|
178,657
|
|
Goodwill and intangibles
|
|
19,350
|
|
|
23,088
|
|
Interest Expense Limitation
|
|
16,721
|
|
|
10,722
|
|
Accrued liabilities
|
|
11,139
|
|
|
11,804
|
|
Operating Lease - Lease Liability
|
|
3,299
|
|
|
—
|
|
Deferred compensation
|
|
2,889
|
|
|
4,028
|
|
Asset retirement obligation
|
|
2,344
|
|
|
589
|
|
Inventory
|
|
972
|
|
|
265
|
|
Deferred Debt Costs
|
|
902
|
|
|
1,680
|
|
Receivables allowance
|
|
500
|
|
|
418
|
|
Valuation Allowances
|
|
(210,808)
|
|
|
(174,497)
|
|
Total deferred tax assets
|
|
$
|
52,675
|
|
|
$
|
56,754
|
|
Deferred tax liabilities:
|
|
|
|
|
Property and equipment
|
|
$
|
(48,980)
|
|
|
$
|
(55,901)
|
|
Operating Lease - ROU Asset
|
|
(3,299)
|
|
|
—
|
|
Prepaid expenses
|
|
(396)
|
|
|
(853)
|
|
Total deferred tax liabilities
|
|
$
|
(52,675)
|
|
|
$
|
(56,754)
|
|
Net deferred tax liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRC Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to utilize its tax attributes against future U.S. taxable income in the event of a change in ownership. We believe Basic's emergence from Chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of IRC Section 382. The limitation under the IRC is based on the value of the corporation as of the emergence date. The ownership changes, and resulting annual limitation, is not expected to result in the expiration of any net operating losses generated prior to the emergence date.
Basic provides a valuation allowance when it is more likely than not that some portion of the deferred tax assets will not be realized. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Based on this evaluation, as of December 31, 2019, a valuation allowance of approximately $210.8 million has been recorded on the net deferred tax assets for all federal and state tax jurisdictions in order to measure only the portion of the deferred tax asset that more likely than not will be realized. As of December 31, 2018, a valuation allowance of $174.5 million was recorded against the net deferred tax assets not expected to be realized.
Interest is recorded in interest expense and penalties are recorded in income tax expense. Basic had no interest or penalties related to an uncertain tax positions during 2019. Basic files federal income tax returns and state income tax returns in Texas and other state tax jurisdictions.
As of December 31, 2019, Basic had approximately $900.7 million of net operating loss carryforwards ("NOL"), for federal income tax purposes, which begin to expire in 2032 and $341.4 million of net operating loss carryforwards for state income tax purposes which begin to expire in 2020.
On March 9, 2020, the C&J Transaction resulted in an ownership change under section 382 of the Internal Revenue Code, and will limit the Company’s usage of certain of its net operating losses and interest expense disallowance carryforwards in the future.
17. Quarterly Financial Data (Unaudited)
The following table summarizes results for each of the four quarters in the years ended December 31, 2019, and 2018 (in thousands, except earnings per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Year
|
Year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
153,190
|
|
|
$
|
147,975
|
|
|
$
|
144,163
|
|
|
$
|
121,922
|
|
|
$
|
567,250
|
|
Segment profits
|
|
42,067
|
|
|
38,915
|
|
|
35,584
|
|
|
23,869
|
|
|
140,435
|
|
Net loss on continuing operations
|
|
(14,786)
|
|
|
(19,315)
|
|
|
(24,778)
|
|
|
(32,522)
|
|
|
(91,401)
|
|
Net loss on discontinued operations
|
|
$
|
(12,690)
|
|
|
$
|
(8,462)
|
|
|
$
|
(14,100)
|
|
|
$
|
(55,245)
|
|
|
$
|
(90,497)
|
|
Loss per share of common stock (a):
|
|
|
|
|
|
|
|
|
|
|
Continuing operations, basic and diluted
|
|
$
|
(0.55)
|
|
|
$
|
(0.71)
|
|
|
$
|
(0.97)
|
|
|
$
|
(1.30)
|
|
|
$
|
(3.50)
|
|
Discontinued operations, basic and diluted
|
|
$
|
(0.47)
|
|
|
$
|
(0.31)
|
|
|
$
|
(0.55)
|
|
|
$
|
(2.22)
|
|
|
$
|
(3.46)
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
26,850
|
|
|
27,204
|
|
|
25,606
|
|
|
24,924
|
|
|
26,141
|
|
Diluted
|
|
26,850
|
|
|
27,204
|
|
|
25,606
|
|
|
24,924
|
|
|
26,141
|
|
Year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
158,997
|
|
|
$
|
165,558
|
|
|
$
|
171,144
|
|
|
$
|
157,866
|
|
|
$
|
653,565
|
|
Segment profits
|
|
42,948
|
|
|
45,245
|
|
|
44,716
|
|
|
40,251
|
|
|
173,160
|
|
Net loss on continuing operations
|
|
(23,650)
|
|
|
(30,990)
|
|
|
(20,354)
|
|
|
(41,742)
|
|
|
(116,736)
|
|
Net loss on discontinued operations
|
|
$
|
(6,881)
|
|
|
$
|
(9,064)
|
|
|
$
|
(6,981)
|
|
|
$
|
(4,935)
|
|
|
$
|
(27,861)
|
|
Loss per share of common stock (a):
|
|
|
|
|
|
|
|
|
|
|
Continuing operations, basic and diluted
|
|
$
|
(0.89)
|
|
|
$
|
(1.18)
|
|
|
$
|
(0.77)
|
|
|
$
|
(1.57)
|
|
|
$
|
(4.41)
|
|
Discontinued operations, basic and diluted
|
|
$
|
(0.26)
|
|
|
$
|
(0.34)
|
|
|
$
|
(0.26)
|
|
|
$
|
(0.19)
|
|
|
$
|
(1.05)
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
26,336
|
|
|
26,444
|
|
|
26,510
|
|
|
26,570
|
|
|
26,467
|
|
Diluted
|
|
26,336
|
|
|
26,444
|
|
|
26,510
|
|
|
26,570
|
|
|
26,467
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The sum of individual quarterly net loss per share may not agree to the total for the year due to each period's computation being based on the weighted average number of common shares outstanding during such period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18. Subsequent Events
On March 9, 2020, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with Ascribe Investments III LLC, a Delaware limited liability company (“Ascribe”), NexTier Holding Co., a Delaware corporation (“Seller”) and C&J Well Services, Inc., a Delaware corporation, and wholly owned subsidiary of Seller (“CJWS”).
Pursuant to the Purchase Agreement, among other things, (i) Seller transferred and delivered to the Company and the Company purchased and acquired from Seller, all of the issued and outstanding shares of capital stock of CJWS held by Seller (the “Stock Purchase”), such that CJWS became a wholly-owned subsidiary of the Company; (ii) as a portion of the consideration for the Stock Purchase, Ascribe, on behalf of the Company, conveyed to Seller certain 10.75% senior secured notes due October 2023 issued by the Company to Ascribe in an aggregate amount equal to $34.4 million (the “Ascribe Senior Notes”); (iii) Ascribe entered into an Exchange Agreement, dated March 9, 2020, with the Company (the “Exchange Agreement”) pursuant to which, among other things, Ascribe exchanged the Ascribe Senior Notes for (a) 118,805 shares of newly issued common stock equivalent preferred stock, designated as “Series A Participating Preferred Stock,” par value $0.01 per share, of the Company (the “Series A Preferred Stock”) and (b) an amount in cash approximately equal to $1.5 million (the “Exchange Transaction” and, together with the Stock Purchase and the other transactions contemplated by the Purchase Agreement, the “C&J Transaction”), and (iv) the Company agreed to hire Jack Renshaw as a Senior Vice President, Western Region, upon consummation of the C&J Transaction.
The Purchase Agreement
Pursuant to the Purchase Agreement, Seller received consideration in the aggregate amount of $93.7 million comprised of (a) cash consideration equal to $59.4 million (subject to customary reductions for indebtedness and transaction expenses, as well as post-closing working capital adjustments) and (b) the Ascribe Senior Notes transferred to Seller by Ascribe (on behalf of the Company) as described above. In connection with the Transaction, pursuant to the Purchase Agreement, Ascribe has certain contingent obligations to the Seller to make Seller whole on the par value of the Ascribe Senior Notes as of the earlier of the first anniversary of the closing of the Stock Purchase, a bankruptcy of the Company or a change of control of the Company (the “Make-Whole Payment”).
The Exchange Agreement
Pursuant to the Exchange Agreement, as partial consideration for the Exchange Transaction, the Company issued to Ascribe 118,805 shares of newly issued Series A Preferred Stock of the Company, which constitutes 85.06% of the equity interest in the Company. Upon consummation of the Exchange Transaction, the Company’s public shareholders owned approximately 14.94% of the equity interests in the Company.
The Company has issued and outstanding $300 million principal amount of the 10.75% Senior Secured Notes due 2023 (the “Notes”), issued pursuant to that certain Indenture, dated as of October 2, 2018 (the “Base Indenture”) by and among the Company, the guarantors party thereto and UMB Bank, National Association, as trustee and collateral agent (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of August 22, 2019, by and among the Company, the guarantors party thereto and the Trustee (the “First Supplemental Indenture” and, together with the Base Indenture, the “Indenture”). Under the Exchange Agreement, as partial consideration for the Exchange Transaction, the Company paid to Ascribe an amount in cash equal to, $1.5 million, representing the accrued (but unpaid) interest, from and including the most recent date to which interest has been paid pursuant to the terms of the Notes and the Indenture but excluding the date of the closing of the C&J Transaction, on the aggregate principal amount of the Ascribe Senior Notes.
If Ascribe is required to pay the Make-Whole Payment to Seller pursuant to the Purchase Agreement, the Company will be required to reimburse to Ascribe the amount of such Make-Whole Payment (such amount, the “Make-Whole Reimbursement Amount”) either (i) in cash (a) to the extent the Company has available cash (as determined by an independent committee of the Company’s board of directors) and (b) subject to satisfaction of certain “Payment Conditions” set forth in the Credit Agreement (as defined below) or (ii) if the Company is unable to pay the full Make-Whole Reimbursement Amount in cash pursuant to clause “(i)” of this paragraph, in additional Notes as permitted under the Indenture. In consideration of providing the Make-Whole Payment to Seller, the Company paid Ascribe $1 million in cash at the closing of the C&J Transaction.
Stockholders Agreement & Governance
In connection with the Exchange Agreement, the Company and Ascribe entered into a Stockholders Agreement. As contemplated by the Stockholders Agreement, simultaneously with the closing of the transactions contemplated by the Exchange Agreement, the board of directors was reconstituted from six directors to seven directors, comprised of (i) three Class I directors with terms to expire in 2020 (the “Class I Directors”), (ii) two Class II directors with terms to expire in 2021 (the “Class II Directors”) and (iii) two Class III directors with terms to expire in 2022 (the “Class III Directors”). Additionally, effective as of the closing of the C&J Transaction, each of Messrs. Timothy H. Day and Samuel E. Langford resigned from the Board and (a) Lawrence First was appointed as a Class I Director, (c) Derek Jeong was appointed as a Class II Director and (b) Ross Solomon was appointed as a Class III Director. Pursuant to the terms of the Stockholders Agreement, following the closing of the C&J Transaction and until the Board Rights Termination Date (as defined below), Ascribe is entitled to designate for nomination for election to the board of directors all members of the board of directors, provided that such designations must be made in a manner to ensure that at all times the board of directors is comprised of at least two independent directors. The subsidiaries require approval of a special committee of the board of directors comprised solely of at least two independent directors. The “Board Rights Termination Date” means the earlier to occur of (A) the date on which Ascribe Affiliated Entities (as defined below), collectively, no longer beneficially own 25% of the fully-diluted common equity of the Company (including the Series A Preferred Stock) and (B) the date on which Ascribe and its affiliates, collectively, no longer constitute the largest holder of fully-diluted common equity of the Company (including the Series A Preferred Stock). The “Ascribe Affiliated Entities” will be comprised of (x) Ascribe and each investment fund which Ascribe or its affiliates controls or for which Ascribe or its affiliates act as a manager or investment advisor and (y) each other person (including portfolio companies) in which person(s) described in clause (x) of this sentence holds a majority of the outstanding equity or voting securities.
The Senior Secured Promissory Note
Pursuant to the Exchange Agreement, the Company issued a Senior Secured Promissory Note on March 9, 2020 in favor of Ascribe in an aggregate principal amount equal to $15 million (the “Senior Secured Promissory Note”). The Senior Secured Promissory Note is secured by a lien upon certain of the Company’s existing and after-acquired property which are also secured by the Company’s existing senior secured notes. The proceeds of the Senior Secured Promissory Note were used to finance a portion of the purchase price consideration paid in connection with the Stock Purchase.
The Limited Consent and First Amendment to ABL Agreement
The Company is party to that certain ABL Credit Agreement, dated October 2, 2018 (as amended, restated, amended and restated, supplemented or modified from time to time, the “Credit Agreement”), with the guarantors party thereto, the financial institutions party thereto and Bank of America, N.A., a national banking association (“Bank of America”), as administrative agent. In connection with the C&J Transaction, on March 9, 2020, the Company entered into that certain Limited Consent and First Amendment to ABL Credit Agreement by and among the Company, as borrower, the guarantors party thereto, the financial institutions party thereto and Bank of America, as administrative agent (the “ABL Amendment”), pursuant to which, among other things, the Company reduced the Aggregate Commitments (as defined in the Credit Agreement) from $150 million to $120 million.
Net Operating Losses
The C&J Transaction resulted in an ownership change under section 382 of the Internal Revenue Code and will limit the Company’s usage of certain of its net operating losses, realized built in losses if applicable and interest expense disallowance carryforwards in the future.
Economic Developments
On March 9, 2020, as a result of multiple significant factors impacting supply and demand in the global oil and natural gas markets, including a global outbreak of corona virus, the announced price reductions and possible production increases by members of Organization of the Petroleum Exporting Countries and other oil exporting nations, the posted price for West Texas Intermediate oil declined sharply and may continue to decline. Oil and natural gas commodity prices are expected to continue to be volatile. We cannot predict the duration or effects of this sudden decrease, but if the prices of oil and natural gas continues to decline or remain depressed for a lengthy period, our business, financial condition, results of operations, cash flows, and prospects may be materially and adversely affected.
As a result of continued weak energy sector conditions and lower demand for our products and services, our operational results, working capital and cash flows have been negatively impacted. Based on our current operating and commodity price forecasts and capital structure, we believe that if certain financial ratios or covenants were to come into effect under our debt instruments, we may have difficulty complying with certain of such obligations. Certain covenants, such as consolidated fixed charge coverage ratio and cash dominion provisions in the ABL Facility spring into effect under certain triggers defined in the ABL Facility for so long as such applicable trigger period is in effect. Additionally, certain triggers in the ABL Facility increase certain financial and borrowing base reporting for so long as such applicable trigger period is in effect. Failure to comply, for example, with a “springing” consolidated fixed charge coverage ratio requirement under the ABL Facility would result in an event of default under the ABL Facility, which would result in a cross-default under the Senior Notes. If an event of default were to occur, our lenders could, in addition to other remedies such as charging default interest, accelerate the maturity of the outstanding indebtedness, making it immediately due and payable, and we may not have sufficient liquidity to repay those amounts. Management has plans to generate additional liquidity, including through our proposed strategic acquisitions and divestitures and reducing costs in our continuing business operations. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. This assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business.