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Forbes Energy Services
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-03-04 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-03-04 Other Events
8-K 2019-02-14 Other Events, Exhibits
8-K 2018-11-23 Enter Agreement, M&A, Off-BS Arrangement, Officers, Exhibits
8-K 2018-06-18 Shareholder Vote
8-K 2018-05-14 Other Events, Exhibits
8-K 2018-02-02 Other Events, Exhibits
NWY New York & Company 324
INVU Investview 54
NCRE New Century Resources 9
IORG Intreorg Systems 8
RTE Red Trail Energy 0
RYAA Ryanair Holdings 0
MDEX Madison Technologies 0
APTY APT Systems 0
COTE Coates 0
TDFF Ceres Tactical Systematic 0
FES 2019-09-30
Part I-Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Default Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.15 exhibit1015pikextensionl.htm
EX-31.1 ex311-201910qq3.htm
EX-31.2 ex312-201910qq3.htm
EX-32.1 ex321-201910qq3.htm
EX-32.2 ex322-201910qq3.htm

Forbes Energy Services Earnings 2019-09-30

FES 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a10q2019q3.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________________________
Form 10-Q 
__________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-35281
__________________________________________________________
Forbes Energy Services Ltd.
(Exact name of registrant as specified in its charter)
__________________________________________________________
Delaware
 
98-0581100
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3000 South Business Highway 281
Alice, Texas
 
78332
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(361) 664-0549 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, $0.01 par value
 
FLSS
 
OTCQX Best Market

__________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x
Smaller reporting company
x
 
 
 
 
 
 
Emerging growth company
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    ¨  Yes    x  No
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court (as defined in Exchange Act Rule 12b-2).    x  Yes    ¨  No
The were 5,522,822 shares of the registrant's common stock outstanding as of November 11, 2019.

 
 
 
 
 




FORBES ENERGY SERVICES LTD.
TABLE OF CONTENTS
 


2


FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any oral statements made in connection with it include certain forward-looking statements within the meaning of the federal securities laws. You can generally identify forward-looking statements by the appearance in such a statement of words like “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or “should” or other comparable words or the negative of these words. When you consider our forward-looking statements, you should keep in mind the risk factors we describe and other cautionary statements we make in this Quarterly Report on Form 10-Q. Our forward-looking statements are only predictions based on expectations that we believe are reasonable. Our actual results could differ materially from those anticipated in, or implied by, these forward-looking statements as a result of known risks and uncertainties set forth below and elsewhere in this Quarterly Report on Form 10-Q. These factors include or relate to the following:
the effect of the continuing industry-wide downturn in and the cyclical nature of, energy exploration and development activities;
continuing incurrence of operating losses due to such downturn;
oil and natural gas commodity prices;
market response to global demands to curtail use of oil and natural gas;
capital budgets and spending by the oil and natural gas industry;
the ability or willingness of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels for oil;
oil and natural gas production levels by non-OPEC countries;
supply and demand for oilfield services and industry activity levels;
our ability to maintain stable pricing;
possible impairment of our long-lived assets;
potential for excess capacity;
competition;
substantial capital requirements;
significant operating and financial restrictions under our loan and security agreement which provides for a term loan, or the Term Loan Agreement, excluding paid in kind interest;
technological obsolescence of operating equipment;
dependence on certain key employees;
concentration of customers;
substantial additional costs of compliance with reporting obligations, the Sarbanes-Oxley Act, Term Loan Agreement, Revolving Loan Agreement and the PIK Notes covenants;
seasonality of oilfield services activity;
collection of accounts receivable;
environmental and other governmental regulation;
the potential disruption of business activities caused by the physical effects, if any, of climate change;
risks inherent in our operations;
ability to fully integrate future acquisitions;
variation from projected operating and financial data;
variation from budgeted and projected capital expenditures;
volatility of global financial markets; and
the other factors discussed under “Risk Factors” beginning on page 10 of the Annual Report on Form 10-K for the year ended December 31, 2018.

3


We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. To the extent these risks, uncertainties and assumptions give rise to events that vary from our expectations, the forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.

4


PART I—FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements

Forbes Energy Services Ltd.
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except par value amounts)


September 30, 2019

December 31, 2018
Assets



Current assets



Cash and cash equivalents
$
6,268

 
$
8,083

Cash - restricted
73

 
73

Accounts receivable - trade, net
30,060

 
45,950

Accounts receivable - other
2,337

 
2,228

Prepaid expenses and other current assets
7,631

 
14,691

Total current assets
46,369


71,025

Property and equipment, net
131,209

 
148,608

Operating lease right-of-use assets
6,701

 

Intangible assets, net
12,797

 
13,980

Goodwill

 
19,700

Other assets
1,476

 
3,072

Total assets
$
198,552


$
256,385

 
 
 
 
Liabilities and Stockholders’ Equity



Current liabilities



Accounts payable - trade
$
7,962

 
$
17,841

Accrued interest payable
2,421

 
1,993

Accrued expenses
15,040

 
14,348

Current portion of operating lease liabilities
1,865

 

Current portion of long-term debt
61,679

 
59,321

Total current liabilities
88,967


93,503

Long-term operating lease liabilities, net of current portion
4,836

 

Long-term debt, net of current portion and debt discount
65,662

 
71,095

Deferred tax liability
365

 
357

Total liabilities
159,830


164,955

Commitments and contingencies (Note 7)

 

Stockholders’ equity



Common stock, $0.01 par value, 40,000 shares authorized, 5,523 and 5,439 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
55

 
54

Additional paid-in capital
150,716

 
149,968

Accumulated deficit
(112,049
)
 
(58,592
)
Total stockholders’ equity
38,722


91,430

Total liabilities and stockholders’ equity
$
198,552


$
256,385

The accompanying notes are an integral part of these condensed consolidated financial statements.

5




Forbes Energy Services Ltd.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)

 
Three Months Ended September 30,
 
2019
 
2018
Revenues
 
 
 
Well servicing
$
23,141

 
$
22,551

Coiled tubing
10,398

 
9,624

Fluid logistics
10,655

 
15,437

Total revenues
44,194

 
47,612

 
 
 
 
Expenses

 
 
Well servicing
19,246

 
18,135

Coiled tubing
11,865

 
7,215

Fluid logistics
7,499

 
12,079

Impairment of goodwill
19,222

 

General and administrative
5,242

 
6,545

Depreciation and amortization
6,483

 
7,566

Total expenses
69,557

 
51,540

Operating loss
(25,363
)
 
(3,928
)
 
 
 
 
Other income (expense)

 
 
Interest income
16

 
1

Interest expense
(5,704
)
 
(2,474
)
Pre-tax loss
(31,051
)
 
(6,401
)
Income tax expense
23

 
32

Net loss
$
(31,074
)
 
$
(6,433
)
 


 
 
Loss per share of common stock
 
 
 
Basic and diluted
$
(5.68
)
 
$
(1.20
)
 
 
 
 
Weighted average number of shares of common stock outstanding:
 
 
 
Basic and diluted
5,471

 
5,368

The accompanying notes are an integral part of these condensed consolidated financial statements.


6




Forbes Energy Services Ltd.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)

 
Nine Months Ended September 30,
 
2019
 
2018
Revenues
 
 
 
Well servicing
$
73,653

 
$
60,620

Coiled tubing
43,700

 
21,786

Fluid logistics
36,294

 
42,038

Total revenues
153,647

 
124,444

 
 
 
 
Expenses
 
 
 
Well servicing
57,766

 
50,099

Coiled tubing
43,657

 
17,590

Fluid logistics
26,974

 
33,919

Impairment of goodwill
19,222

 

General and administrative
17,486

 
17,341

Depreciation and amortization
22,935

 
22,381

Total expenses
188,040

 
141,330

Operating loss
(34,393
)
 
(16,886
)
 
 
 
 
Other income (expense)
 
 
 
Interest income
20

 
3

Interest expense
(19,113
)
 
(7,267
)
Pre-tax loss
(53,486
)
 
(24,150
)
Income tax benefit
(27
)
 
(422
)
Net loss
$
(53,459
)
 
$
(23,728
)
 
 
 
 
Loss per share of common stock
 
 
 
Basic and diluted
$
(9.80
)
 
$
(4.44
)
 
 
 
 
Weighted average number of shares of common stock outstanding:
 
 
 
Basic and diluted
5,453

 
5,347

The accompanying notes are an integral part of these condensed consolidated financial statements.


7




Forbes Energy Services Ltd.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)

 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(53,459
)
 
$
(23,728
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
22,935

 
22,381

Share-based compensation
749

 
755

Deferred tax benefit
8

 
(17
)
Impairment of goodwill
19,222

 

Gain on disposal of assets
(4,565
)
 
(427
)
Bad debt expense
3,242

 
89

Amortization of debt discount/deferred financing costs/premium conversion
6,550

 
653

Interest paid in kind
7,372

 
3,027

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
12,539

 
(10,877
)
Prepaid expenses and other assets
2,450

 
602

Accounts payable - trade
(9,879
)
 
4,349

Accounts payable - related parties

 
(11
)
Accrued expenses
654

 
913

Accrued interest payable
428

 
306

Net cash provided by (used in) operating activities
8,246

 
(1,985
)
Cash flows from investing activities:

 

Purchases of property and equipment
(11,640
)
 
(12,769
)
Purchase of Cretic, net of cash acquired
285

 

Proceeds from sale of property and equipment
13,715

 
2,086

Net cash provided by (used in) investing activities
2,360

 
(10,683
)
Cash flows from financing activities:

 

Payments for finance leases
(3,823
)
 
(1,494
)
Proceeds from Revolving Loan Agreement
4,000

 

Payments on Term Loan Agreement
(12,598
)
 

Payments for Bridge Loan
(4,422
)
 

Proceeds from PIK Notes
4,422

 

Net cash used in financing activities
(12,421
)
 
(1,494
)
Net decrease in cash, cash equivalents and cash - restricted
(1,815
)
 
(14,162
)
Cash, cash equivalents and cash - restricted:

 
 
Beginning of period
8,156

 
35,480

End of period
$
6,341

 
$
21,318

The accompanying notes are an integral part of these condensed consolidated financial statements.



8




Forbes Energy Services Ltd.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
(in thousands)
 
For the three and nine months ended September 30, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
 
 
Balance at December 31, 2018
5,439

 
$
54

 
$
149,968

 
$
(58,592
)
 
$
91,430

Share-based compensation
7

 

 
253

 

 
253

Net loss

 

 

 
(11,634
)
 
(11,634
)
Balance at March 31, 2019
5,446

 
54

 
150,221

 
(70,226
)
 
80,049

Share-based compensation

 

 
256

 

 
256

Net loss

 

 

 
(10,749
)
 
(10,749
)
Balance at June 30, 2019
5,446

 
$
54

 
$
150,477

 
$
(80,975
)
 
$
69,556

Share-based compensation
77

 
1

 
239

 

 
240

Net loss

 

 

 
(31,074
)
 
(31,074
)
Balance at September 30, 2019
5,523

 
$
55

 
$
150,716

 
$
(112,049
)
 
$
38,722


For the three and nine months ended September 30, 2018
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
 
 
Balance at December 31, 2017
5,336

 
$
53

 
$
148,866

 
$
(25,985
)
 
$
122,934

Share-based compensation

 

 
251

 

 
251

Net loss

 

 

 
(8,529
)
 
(8,529
)
Balance at March 31, 2018
5,336

 
53

 
149,117

 
(34,514
)
 
114,656

Share-based compensation

 

 
247

 

 
247

Net loss

 

 

 
(8,766
)
 
(8,766
)
Balance at June 30, 2018
5,336

 
$
53

 
$
149,364

 
$
(43,280
)
 
$
106,137

Share-based compensation
86

 
1

 
256

 

 
257

Net loss

 

 

 
(6,433
)
 
(6,433
)
Balance at September 30, 2018
5,422

 
$
54

 
$
149,620

 
$
(49,713
)
 
$
99,961


The accompanying notes are an integral part of these condensed consolidated financial statements.



9




Forbes Energy Services Ltd.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Organization and Nature of Operations
Nature of Operations
Forbes Energy Services Ltd., or FES Ltd., is an independent oilfield services contractor that provides well site services to oil and natural gas drilling and producing companies to help develop and enhance the production of oil and natural gas. These services include fluid hauling, fluid disposal, well maintenance, completion services, workovers and recompletions, plugging and abandonment, and tubing testing. The Company's operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with an additional location in Pennsylvania. The Company believes that its broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of our customers’ wells.
As used in these condensed consolidated financial statements, the “Company”, “we” and “our” mean FES Ltd. and its subsidiaries, except as otherwise indicated.
Estimates, Risks and Uncertainties
As an independent oilfield services contractor that provides a broad range of drilling-related and production-related services to oil and natural gas companies, primarily onshore in Texas, the Company's revenue, profitability, cash flows and future rate of growth are substantially dependent on its ability to (1) maintain adequate equipment utilization, (2) maintain adequate pricing for the services it provides, and (3) maintain a trained workforce. Failure to do so could adversely affect the Company's financial position, results of operations, and cash flows.
Because the Company's revenues are generated primarily from customers who are subject to the same factors as the Company, the Company's operations are also susceptible to market volatility resulting from economic, cyclical, weather, or other factors related to such industry. The Company is subject to changes in the level of operating and capital spending in the industry, decreases in oil and natural gas prices, and/or industry perception about future oil and natural gas prices that may materially decrease demand for the Company's services, or may have an adverse effect on our financial position, results of operations and cash flows.

2. Basis of Presentation

Interim Financial Information
The unaudited condensed consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these condensed consolidated financial statements should be read along with the annual audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments which are of normal recurring natures considered necessary for a fair representation have been made in the accompanying unaudited financial statements.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated balance sheets and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation with no material effect on the unaudited condensed consolidated financial statements.

10


Fair Values of Financial Instruments
Fair value is the price that would be received to sell an asset, or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date.
There is a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
Level 3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
In valuing certain assets and liabilities, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, assets and liabilities are classified in their entirety in the fair value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels.
The carrying amounts of cash and cash equivalents, accounts receivable-trade, accounts receivable-other, accounts payable-trade and insurance notes approximate fair value because of the short maturity of these instruments. The fair values of finance leases approximate their carrying values, based on current market rates at which the Company could borrow funds with similar maturities (Level 2 in the fair value hierarchy). The fair value of the Term Loan is based on quoted prices provided by a third party broker (Level 2 in the fair value hierarchy). The fair values of the Term Loan Agreement and Bridge Loan as of the respective dates are set forth below (in thousands):
 
September 30, 2019
 
December 31, 2018
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Term Loan Agreement
$
55,397

 
$
55,674

 
$
62,335

 
$
65,794

Bridge Loan
$

 
$

 
$
49,568

 
$
50,000


Cash, Cash Equivalents and Cash - Restricted
The following table provides a reconciliation of cash, cash equivalents and cash - restricted reported within the consolidated balance sheets to the same such amounts shown in the consolidated statements of cash flows (in thousands).
 
 
September 30,
 
 
2019
 
2018
Cash and cash equivalents
 
$
6,268

 
$
6,617

Cash - restricted
 
73

 
14,701

Cash and cash equivalents and cash - restricted as shown in the consolidated statement of cash flows
 
$
6,341

 
$
21,318


The Company's restricted cash at September 30, 2018 included $6.0 million related to a prior restriction under the Term Loan Agreement and $8.7 million as collateral for certain outstanding letters of credit and the Company's corporate credit card program under a prior credit facility with Regions.
Revenue Recognition
Revenue is measured as consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by providing service to a customer. Amounts are billed upon completion of service and are generally due within 30 days.

11


The Company has its principal revenue generating activities organized into three service lines, well servicing, coiled tubing and fluid logistics. The Company's well servicing line consists primarily of maintenance, workover, completion, plugging and abandonment, and tubing testing services. The Company's coiled tubing line consists of maintenance, workover and completion services. The Company's fluid logistics line provides supporting services to the well servicing line as well as direct sales to customers for fluid management and movement. The Company generally establishes a master services agreement with each customer and provides associated services on a work order basis in increments of days, by the hour for services performed or on occasion, bid/turnkey pricing. Services provided under the well servicing, coiled tubing and the fluid logistics segments are short in duration and generally completed within 30 days.
The majority of the Company’s contracts with customers in the well servicing, coiled tubing and fluid logistics segments are short-term in nature and are recognized as “over-time” performance obligations as the services are performed. The Company applies the “as-invoiced” practical expedient as the amount of consideration the Company has a right to invoice corresponds directly with the value of the Company’s performance to date. Because of the short-term nature of the Company’s services, which generally last a few hours to multiple days, the Company does not have any contracts with a duration longer than one year that require disclosure. The Company has no material contract assets or liabilities.
The Company does not have any revenue expected to be recognized in the future related to remaining performance obligations or contracts with variable consideration related to undelivered performance obligations. There was no revenue recognized in the current period from performance obligations satisfied in previous periods. The Company's significant judgments made in connection with the adoption of ASC 606 included the determination of when the Company satisfies its performance obligation to customers and the applicability of the as invoiced practical expedient.
Leases
Effective January 1, 2019, the Company adopted an accounting standard update issued by the Financial Accounting Standards Board (FASB) related to accounting for leases, which requires lessees to record assets and liabilities that arise for all leases on their balance sheet and expanded financial statement disclosures for both lessees and lessors. Previously, only capital leases were recorded on the balance sheet. This update requires lessees to recognize a lease liability equal to the present value of its lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities and instead recognize lease expense for such leases generally on a straight-line basis over the lease term. Leases with a term of longer than 12 months will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The Company adopted this standard on a prospective basis using the optional modified retrospective transition method. As such, the comparative financial information has not been restated and continues to be reported under the lease standard in effect during those periods. The Company also elected other practical expedients provided by the new standard, including the package of practical expedients, the hindsight practical expedient and the short-term lease recognition practical expedient in which leases with a term of 12 months or less are not recognized on the balance sheet. The adoption of this standard resulted in the recognition of approximately $6.2 million of operating lease right-of-use assets and operating lease liabilities on the balance sheet as of January 1, 2019. The adoption of this standard did not materially impact the condensed consolidated statements of operations for the three and nine months ended September 30, 2019. See Note 8 for the expanded lease disclosures required by the new standard.

3. Acquisition of Cretic Energy Services, LLC
On November 16, 2018, the Company acquired 100% of the outstanding units of Cretic Energy Services, LLC (Cretic). The acquisition of Cretic was accounted for as a business combination using the acquisition method of accounting. The aggregate purchase price was $69.1 million in cash (net of $2.2 million cash acquired).
The purchase price paid in the acquisition has been allocated to record the acquired assets and assumed liabilities based on their fair value. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that consideration paid exceeded the fair value of the net assets acquired. The goodwill recorded was primarily attributable to synergies related to the Company’s coiled tubing business strategy that are expected to arise from the Cretic acquisition and was attributable to the Company’s coiled tubing segment.

12


Proforma Results from the Cretic Acquisition (unaudited)
The following unaudited consolidated pro forma information is presented as if the Cretic acquisition had occurred on January 1, 2018 (in thousands):
 
 
Pro Forma
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Revenue
 
$
68,408

 
$
175,474

 
 
 
 
 
Net loss
 
$
(5,267
)
 
$
(24,865
)

The unaudited pro forma amounts above have been calculated after applying the Company’s accounting policies and adjusting the Cretic acquisition results to reflect the increase to interest expense and depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied from January 1, 2018 and other related pro forma adjustments. The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the Cretic acquisition, and are presented for illustrative purposes only and are not necessarily indicative of results that would have been achieved if the Cretic acquisition had occurred as of January 1, 2018 or of future operating performance. 

4. Property and Equipment
Property and equipment consisted of the following (in thousands):
 
Estimated
Life in Years
 
September 30, 2019
 
December 31, 2018
Well servicing equipment
9-15 years
 
$
132,630

 
$
128,647

Autos and trucks
5-10 years
 
21,428

 
32,132

Autos and trucks - finance lease
5-10 years
 
22,487

 
20,416

Disposal wells
5-15 years
 
3,862

 
3,977

Building and improvements
5-30 years
 
5,906

 
5,705

Furniture and fixtures
3-15 years
 
3,097

 
2,797

Land
 
 
868

 
868

 
 
 
190,278

 
194,542

Accumulated depreciation (1)
 
 
(59,069
)
 
(45,934
)
 
 
 
$
131,209

 
$
148,608

(1) Includes accumulated depreciation of finance lease assets of $7.0 million and $4.5 million at September 30, 2019 and December 31, 2018, respectively.

Depreciation expense was $6.0 million and $7.3 million for the three months ended September 30, 2019 and 2018, respectively, and $21.7 million and $21.5 million for the nine months ended September 30, 2019 and 2018, respectively. Depreciation of assets held under finance leases was $1.1 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively, and $3.4 million and $2.1 million for the nine months ended September 30, 2019 and 2018, respectively, and is included in depreciation and amortization expense in the accompanying condensed consolidated statements of operations. Gain/(loss) that resulted from the sale of property and equipment was $2.1 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and $4.6 million and $0.4 million for the nine months ended September 30, 2019 and 2018, respectively, which are included as direct operating costs.

5. Goodwill and Other Intangible Assets
Goodwill
Goodwill totaled $0.0 million at September 30, 2019 and $19.7 million at December 31, 2018 related to the acquisition of

13


Cretic, which is attributable to the Company's coiled tubing reporting unit, and is deductible for tax purposes. During the third quarter of 2019, the company recognized a measurement period adjustment of $0.5 million related to the acquisition of Cretic. The measurement period adjustment related to certain finance leases of $1.0 million being assigned back to the seller along with property and equipment of $0.8 million and a cash payment received from the seller of $0.3 million. The measurement period adjustment settled a dispute with the seller over the amount of debt assumed in the purchase of Cretic as of the acquisition date.
During the third quarter ended September 30, 2019, the Company adopted the guidance contained in ASU No. 2017-04, “Intangibles-Goodwill and Other ASC Topic 350: Simplifying the Test for Goodwill Impairment,” which removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Goodwill impairment is the amount by which the Company’s reporting unit carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. To estimate the fair value of the Company’s invested capital, the Company used both a market approach based on the guideline companies’ method (“Market Comparable Approach”), and an income approach based on a discounted cash flow analysis.
The Market Comparable Approach estimates fair value using market multiples calculated from a set of comparable public companies. In performing the valuations, significant assumptions utilized include unobservable Level 3 inputs including cash flows, long-term growth rates reflective of management’s forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. Discount rates are based on the development of a weighted average cost of capital using guideline public company data, factoring in current market data and any Company specific risk factors. The value indicated by both methods was weighted to arrive at a concluded value.
The Company completed a goodwill impairment test as of September 30, 2019. The Company’s forecasted future cash flow declined from prior estimates because the Company experienced challenging sales trends and a downturn in the coiled tubing segment. These declining cash flows in our coiled tubing segment during 2019 and lower than previously forecasted cash flows, resulted in the Company recognizing a goodwill impairment charge of $19.2 million at September 30, 2019.
The following table sets forth the changes in goodwill (in thousands):
 
 
Goodwill
 
 
Balance at December 31, 2018
$
19,700

 
Measurement period adjustment
(478
)
 
Impairment
(19,222
)
 
Balance at September 30, 2019
$


Other Intangible Assets
The following table sets forth the identified other intangible assets by major asset class (in thousands):
 
Useful Life
(years)
 
Gross
Carrying Value
 
Accumulated
Amortization
 
Net Book
Value
September 30, 2019
 
 
 
 
 
 
 
Customer relationships
6-15
 
$
11,378

 
$
(1,566
)
 
$
9,812

Trade names
10-15
 
3,072

 
(664
)
 
2,408

Covenants not to compete
4
 
1,505

 
(928
)
 
577

 
 
 
$
15,955

 
$
(3,158
)
 
$
12,797

December 31, 2018
 
 
 
 
 
 
 
Customer relationships
6-15
 
$
11,378

 
$
(832
)
 
$
10,546

Trade names
10-15
 
3,072

 
(496
)
 
2,576

Covenants not to compete
4
 
1,505

 
(647
)
 
858

 
 
 
$
15,955

 
$
(1,975
)
 
$
13,980


Amortization expense was $0.4 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and $1.2 million and $0.8 million for the nine months ended September 30, 2019 and 2018, respectively.
Future amortization of these intangibles will be as follows:

14


2019
$
421

2020
1,637

2021
1,367

2022
1,261

2023
1,261

Thereafter
6,850

 
$
12,797


6. Long-Term Debt
Long-term debt consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Term Loan Agreement of $47.4 million and $60.0 million, plus $10.7 million and $6.0 million of accrued interest paid in kind and net of debt discount of $2.7 million and $3.6 million as of September 30, 2019 and December 31, 2018, respectively
$
55,397

 
$
62,335

PIK Notes, plus $0.9 million of accrued interest paid in kind, and including $4.2 million accretion of interest and conversion premium
56,818

 

Bridge Loan of $50.0 million, net of debt discount of $0.4 million as of December 31, 2018

 
49,568

Revolving Loan Agreement
4,000

 

Finance leases
11,126

 
13,319

Insurance notes

 
5,194

Total debt
127,341

 
130,416

Less: Current portion
(61,679
)
 
(59,321
)
Total long-term debt
$
65,662

 
$
71,095


Term Loan Agreement
On April 13, 2017, the Company entered into the Term Loan Agreement. FES LLC is the borrower, or the Borrower, under the Term Loan Agreement. The Borrower’s obligations have been guaranteed by FES Ltd. and by TES, CCF and FEI, each direct subsidiaries of the Borrower and indirect subsidiaries of FES Ltd. The Term Loan Agreement, as amended, provided for a term loan of $60.0 million, excluding paid in kind interest. Subject to certain exceptions and permitted encumbrances, the obligations under the Term Loan Agreement are secured by a first priority security interest in substantially all the assets of the Company other than accounts receivable, cash and related assets, which constitute priority collateral under the Revolving Loan Agreement (described below). The Term Loan Agreement has a stated maturity date of April 13, 2021.
Borrowings under the Term Loan Agreement bear interest at a rate equal to five percent (5%) per annum payable quarterly in cash, or the Cash Interest Rate, plus (ii) an initial paid in kind interest rate of seven percent (7%) commencing April 13, 2017 to be capitalized and added to the principal amount of the term loan or, at the election of the Borrower, paid in cash. The paid in kind interest increases by two percent (2%) twelve months after April 13, 2017 and every twelve months thereafter until maturity. Upon and after the occurrence of an event of default, the Cash Interest Rate will increase by two percentage points per annum. During the nine months ended September 30, 2019, $4.7 million of interest was paid in kind. At September 30, 2019, the paid in kind interest rate was 11%.
The Term Loan Agreement includes customary negative covenants for an asset-based term loan, including covenants limiting the ability of the Company to, among other things, (i) effect mergers and consolidations, (ii) sell assets, (iii) create or suffer to exist any lien, (iv) make certain investments, (v) incur debt and (vi) transact with affiliates. In addition, the Term Loan Agreement includes customary affirmative covenants for an asset-based term loan, including covenants regarding the delivery of financial statements, reports and notices to the Agent. The Term Loan Agreement also contains customary representations and warranties and event of default provisions for a secured term loan.

15


Amendment to Term Loan Agreement and Joinder
In connection with the Cretic acquisition, on November 16, 2018, the Company, as a guarantor, FES LLC, as borrower, and certain of their subsidiaries, as guarantors, entered into Amendment No. 1 to Loan and Security Agreement and Pledge and Security Agreement (the “Term Loan Amendment”) with the lenders party thereto and Wilmington Trust, National Association, as agent (the “Term Loan Agent”), pursuant to which the Term Loan Agreement was amended to, among other things, permit (i) debt under the Revolving Loan Agreement (described below) and the liens securing the obligations thereunder, (ii) the incurrence of add-on term loans under the Term Loan Agreement in an aggregate principal amount of $10.0 million and (iii) the incurrence of one-year “last-out” bridge loans under the Term Loan Agreement in an aggregate principal amount of $50.0 million (the “Bridge Loan”).
In addition, on November 16, 2018, Cretic entered into joinder documentation pursuant to which it became a guarantor under the Term Loan Agreement and a pledgor under the Pledge and Security Agreement referred to in the Term Loan Agreement.
Revolving Loan Agreement
In connection with the Cretic Acquisition, on November 16, 2018, the Company and certain of its subsidiaries, as borrowers, entered into a Credit Agreement (the “Revolving Loan Agreement”) with the lenders party thereto and Regions Bank, as administrative agent and collateral agent (the “Revolver Agent”). The Revolving Loan Agreement provides for $35 million of revolving loan commitments, subject to a borrowing base comprised of 85% of eligible accounts receivable, 90% of eligible investment grade accounts receivable and 100% of eligible cash, less reserves. The loans under the Revolving Loan Agreement are due in January 2021, accrue interest at a floating rate of LIBOR plus 2.50% - 3.25%, or a base rate plus 1.50% - 2.25%, with the margin based on the fixed charge coverage ratio from time to time.
The Revolving Loan Agreement is secured on a first lien basis by substantially all assets of the Company and its subsidiaries, subject to an intercreditor agreement between the Revolver Agent and the Term Loan Agent which provides that the priority collateral for the Revolving Loan Agreement consists of accounts receivable, cash and related assets, and that the other assets of the Company and its subsidiaries constitute priority collateral for the Term Loan Agreement. At September 30, 2019 we had $4.0 million borrowings outstanding, $6.1 million in letters of credit outstanding and availability of $6.9 million.
5% Subordinated Convertible PIK Notes
On March 4, 2019, the Company issued $51.8 million aggregate original principal amount of 5.00% Subordinated Convertible PIK Notes due June 30, 2020 (the “PIK Notes”). On March 4, 2019, the Company, as Issuer, and Wilmington Trust, National Association, as Trustee, entered into an Indenture governing the terms of the PIK Notes.
The PIK Notes bear interest at a rate of 5.00% per annum. Interest on the PIK Notes will be capitalized to principal semi-annually in arrears on July 1 and January 1 of each year, commencing on July 1, 2019.
The PIK Notes are the unsecured general subordinated obligations of the Company and are subordinated in right of payment to any existing and future secured or unsecured senior debt of the Company. The payment of the principal of, premium, if any, and interest on the PIK Notes will be subordinated to the prior payment in full of all of the Company’s existing and future senior indebtedness. In the event of a liquidation, dissolution, reorganization or any similar proceeding, obligations on the PIK Notes will be paid only after senior indebtedness has been paid in full. Pursuant to the Indenture, the Company is not permitted to (1) make cash payments to pay principal of, premium, if any, and interest on or any other amounts owing in respect of the PIK Notes, or (2) purchase, redeem or otherwise retire the PIK Notes for cash, if any senior indebtedness is not paid when due or any other default on senior indebtedness occurs and the maturity of such indebtedness is accelerated in accordance with its terms unless, in any case, the default has been cured or waived, and the acceleration has been rescinded or the senior indebtedness has been repaid in full.
The Indenture also provides that upon a default by the Company in the payment when due of principal of, or premium, if any, or interest on, indebtedness in the aggregate principal amount then outstanding of $5.0 million or more, or acceleration of the Company’s indebtedness so that it becomes due and payable before the date on which it would otherwise have become due and payable, and if such default is not cured or waived within 30 days after notice to the Company by the Trustee or by holders of at least 25% in aggregate principal amount of the PIK Notes then outstanding, the principal of, (and premium, if any) and accrued and unpaid interest on, the PIK Notes may be declared immediately due and payable.
The PIK Notes are redeemable in whole or from time to time in part at the Company’s option at a redemption price equal to the sum of (i) 100.0% of the principal amount of the PIK Notes to be redeemed and (ii) accrued and unpaid interest thereon to, but excluding, the redemption date, which amounts may be payable in cash or in shares of the Company’s common stock, (subject to limitations, if any, in the documentation governing the Company’s senior indebtedness). If redeemed for the Company’s common stock the holder will receive a number of shares of the Company’s common stock calculated based on the Fair Market Value of a share of the Company’s common stock at such time, in each case less a 15% discount per share. The 15% discount represents an implied conversion premium at issuance which will be settled in common stock at the date of conversion.  As such, the face value of the PIK Notes will be accreted to the settlement amount at June 30, 2020.  For the three and nine months ended September 30,

16


2019, the Company recorded $1.8 million and $4.2 million, respectively in interest expense related to the accretion of the conversion premium.
The Indenture contains provisions permitting the Company and the trustee in certain circumstances, without the consent of the holders of the PIK Notes, and in certain other circumstances, with the consent of the holders of not less than a majority in aggregate principal amount of the PIK Notes at the time outstanding to execute supplemental indentures modifying the terms of the Indenture and the PIK Notes as described It also provided in the Indenture that, subject to certain exceptions, the holders of a majority in aggregate principal amount of the PIK Notes at the time outstanding may on behalf of the holders of all the PIK Notes waive any past default or event of default under the Indenture and its consequences.
The Indenture provides for mandatory conversion of the PIK Notes at maturity (or such earlier date as the Company shall elect to redeem the PIK Notes), or upon a Marketed Public Offering of the Company’s common stock or a Change of Control, in each case as defined in the Indenture, at a conversion rate per $100 principal amount of PIK Notes into a number of shares of the Company’s common stock calculated based on the Fair Market Value of a share of the Company’s common stock at such time, in each case less a 15% discount per share.
Fair Market Value means fair market value as determined by (A) in the case of a Marketed Public Offering, the offering price per share paid by public investors in the Marketed Public Offering, (B) in the case of a Change of Control, the value of the consideration paid per share by the acquirer in the Change of Control transaction, or (C) in the case of mandatory conversion at the Maturity Date (or such earlier date as the Company shall elect to redeem the PIK Notes), such value as shall be determined by a nationally recognized investment banking firm engaged by the Board of Directors of the Company.
The Company used the gross proceeds of $51.8 million that it received from the issuance of the PIK Notes to repay all of the outstanding principal and accrued and unpaid interest on the Bridge Loan.
Interest on the Bridge Loan prior to its repayment accrued at a rate of 14% (5% cash interest plus 9% PIK interest). The payment obligations of the Borrower under the Bridge Loan have been fully satisfied as of March 4, 2019.
The exchange of the Bridge Loan for the PIK Notes was recognized as a modification of the Term Loan as the amended Term Loan, resulting from the exchange, was not substantially different from the Term Loan. As such, the net carrying value of the Term Loan was not adjusted and a new effective interest that equates the revised cash flows of the modified Term Loan to the existing carrying value of the Term Loan was computed and applied prospectively. Costs incurred with third parties of approximately $1.6 million, related to the issuance of the PIK Notes, were recognized in interest expense for the nine months ended September 30, 2019.
Effective November 14, 2019, each of Ascribe Capital LLC and Solace Capital Partners LP, on behalf of each of their funds that is a holder of PIK Notes issued under the Indenture which in the aggregate hold $48.9 million of face value of the PIK Notes, agreed to extend the maturity date under the Indenture to November 30, 2020 of those  PIK Notes, the Excess PIK Notes, for which there are not at June 30, 2020 sufficient authorized shares of common stock of the Company to effect the mandatory conversion of the Excess PIK Notes, after giving effect to the conversion of PIK Notes held by other holders of PIK Notes who have not agreed to a maturity date extension or conversion deferral.  Each also agreed to defer the mandatory conversion feature under the Indenture for such Excess PIK Notes until after the Company’s stockholders have authorized sufficient additional shares of the Company’s common stock to permit such conversion.
Insurance Notes
The Company entered into insurance promissory notes for the payment of insurance premiums at an interest rate of 4.99% and 3.27% respectively, with an aggregate principal amount outstanding of approximately $0.0 million and $5.2 million as of September 30, 2019 and December 31, 2018, respectively. The amount outstanding could be substantially offset by the cancellation of the related insurance coverage which is classified in prepaid insurance.

7. Commitments and Contingencies
Concentrations of Credit Risk
Financial instruments which subject the Company to credit risk consist primarily of cash balances maintained in excess of federal depository insurance limits and trade receivables. Insurance coverage is currently $250,000 per depositor at each financial institution, and the Company's non-interest bearing cash balances exceeded federally insured limits. The Company restricts investment of temporary cash investments to financial institutions with high credit standings.
The Company’s customer base consists primarily of multi-national and independent oil and natural gas producers. The Company does not require collateral on its trade receivables. For the nine months ended September 30, 2019, the Company's largest customer, five largest customers, and ten largest customers constituted 9.5%, 34.7% and 45.4% of consolidated revenues, respectively. The loss of any one of the Company's top five customers could have a materially adverse effect on the revenues and

17


profits of the Company. Further, the Company's trade accounts receivable are from companies within the oil and natural gas industry and as such the Company is exposed to normal industry credit risks. As of September 30, 2019, the Company's largest customer, five largest customers, and ten largest customers constituted 4.0%, 25.4% and 37.1% of accounts receivable, respectively. The Company continually evaluates its reserves for potential credit losses and establishes reserves for such losses.
Employee Benefit Plan
The Company has a 401(k) retirement plan for substantially all of its employees based on certain eligibility requirements. The Company may provide profit sharing contributions to the plan at the discretion of management. No such discretionary contributions have been made since inception of the plan.
Litigation
The Company is subject to various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that any of the currently existing claims and actions, separately or in the aggregate, will have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows. It is reasonably possible that cases could be resolved and result in liabilities that exceed the amounts currently reserved; however, we cannot reasonably estimate a range of loss based on the status of the cases. If one or more negative outcomes were to occur relative to these matters, the aggregate impact to the Company’s financial condition could be material.
Self-Insurance
The Company is self-insured under its Employee Group Medical Plan for the first $150 thousand per individual. The Company is self-insured with a retention for the first $250 thousand in general liability. The Company has an additional premium payable clause under its lead $10 million limit excess policy that states in the event a loss exceeds $1 million, a loss additional premium of up to 15% to 17% of paid losses in excess of $1 million will be due. The loss additional premium is payable at the time when the loss is paid and will be payable over a period agreed by insurers. The Company has accrued liabilities totaling $6.3 million and $5.2 million as of September 30, 2019 and December 31, 2018, respectively, for the projected additional premium and self-insured portion of these insurance claims as of the financial statement dates. This accrual includes claims made as well as an estimate for claims incurred but not reported by using third party data and claims history as of the financial statement dates.
Other
The Company is currently undergoing sales and use tax audits for multi-year periods. The Company believes the outcome of these audits will not have a material adverse effect on its results of operations or financial position. Because certain of these audits are in a preliminary stage, an estimate of the possible loss or range of loss cannot reasonably be made.

8. Leases

The Company adopted a comprehensive new lease accounting standard effective January 1, 2019. The details of the significant changes to our accounting policies resulting from the adoption of the new standard are set out below. The Company adopted the standard on a prospective basis using the optional modified retrospective transition method; accordingly, the comparative information as of December 31, 2018 and for the three and nine months ended September 30, 2018 has not been adjusted and continues to be reported under the previous lease standard. Under the new lease standard, assets and liabilities that arise from all leases are required to be recognized on the balance sheet for lessees. Previously, only capital leases, which are now referred to as finance leases, were recorded on the balance sheet.
Beginning January 1, 2019, for all leases with a term in excess of 12 months, the Company recognized a lease liability equal to the present value of the lease payments and a right-of-use asset representing our right to use the underlying asset for the lease term. For operating leases, lease expense for lease payments is recognized on a straight-line basis over the lease term, while finance leases include both an operating expense and an interest expense component. For all leases with a term of 12 months or less, the Company elected the practical expedient to not recognize lease assets and liabilities. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. The Company has a significant number of short-term leases including month-to-month agreements that continue in perpetuity until the lessor or the Company terminates the lease agreement.
The Company is a lessee for operating leases, primarily related to real estate, salt water disposal wells and equipment. The vast majority of our operating leases have remaining lease terms of 10 years or less, some of which include options to extend the leases, and some of which include options to terminate the leases. The Company generally does not include renewal or termination options in the assessment of leases unless extension or termination is deemed to be reasonably certain. The accounting for some leases may require significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rates to utilize in the net present value calculation of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination options. Salt water disposal well locations have fixed or both fixed and variable lease amounts where the variable lease payments are based on the volume of fluids injected into

18


to the well and/or sales of products by the Company. The Company also has some lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.
The Company is a lessee for finance leases related to autos and trucks and well servicing equipment. The vast majority of the Company's finance leases have remaining lease terms of three years or less, all of which include options to terminate the leases after one year and do not include options to extend the lease. For all finance leases, the Company is subject to a residual value guarantee established by the lessor and based upon the calculated net book value of the vehicle as of the date of early termination of the lease. The loans are collateralized by equipment purchased with the proceeds of such loans. For finance leases, the Company uses discount rates similar to incremental borrowing rates available for comparable equipment financing in our net present value calculation of lease payments. The Company's vehicle finance lease agreements contain lease and non-lease components, which are accounted for separately.
The following tables illustrate the financial impact of the Company's leases as of and for the three and nine months ended September 30, 2019, along with other supplemental information about the Company's leases (in thousands, except years and percentages):
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
Components of lease expense:
 
 
 
Finance lease cost:
 
 
 
Amortization of right-of-use assets
$
1,098

 
$
3,422

Interest on lease liabilities
148

 
442

Operating lease cost:


 


Lease expense (1)
458

 
1,194

Short-term lease cost
590

 
1,896

Total lease cost
$
2,294

 
$
6,954

(1) Includes variable lease costs of $67 thousand and $217 thousand for the three and nine months ended September 30, 2019, respectively.

 
As of
 
September 30, 2019
Components of balance sheet:
 
Operating leases:
 
Operating lease right-of-use assets (non-current)
$
6,701

Current portion of operating lease liabilities
$
1,865

Long-term operating lease liabilities, net of current portion
$
4,836

Finance leases:
 
Property and equipment, net
$
15,494

Current portion of long-term debt
$
4,861

Long-term debt, net of current portion and debt discount
$
6,265



19


 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
Other supplemental information:
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows for operating leases
$
1,048

 
$
3,087

Operating cash flows for finance leases - interest
$
148

 
$
442

Financing cash flows for finance leases
$
1,436

 
$
3,823

Noncash activities from right-of-use assets obtained in exchange for lease obligations:
 
 
 
Operating leases
$
1,242

 
$
7,390

Finance leases
$
294

 
$
2,620

Weighted-average remaining lease term:
 
 
 
Operating leases


 
7.9 years

Finance leases


 
3.0 years

Weighted-average discount rate:
 
 
 
Operating leases


 
7.00
%
Finance leases


 
5.19
%

The following table summarizes the maturity of the Company's operating and finance leases as of September 30, 2019 (in thousands):
 
Operating Leases - Related Party
 
Operating Leases - Other
 
Finance Leases
2019
$
12

 
$
670

 
$
1,296

2020
27

 
2,037

 
5,177

2021

 
1,042

 
3,840

2022

 
879

 
1,248

2023

 
749

 
143

Thereafter

 
3,426

 

Total minimum lease payments
39

 
8,803

 
11,704

Less imputed interest
(1
)
 
(2,039
)
 
(578
)
Less short-term leases excluded from the balance sheet

 
(101
)
 

Total lease liabilities per balance sheet
$
38

 
$
6,663

 
$
11,126

    
The Company adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption. Future annual minimum lease payments and capital lease commitments as of December 31, 2018 were as follows (in thousands):
    
 
Operating Leases - Related Party
 
Operating Leases - Other
 
Capital Leases
2019
$
30

 
$
2,027

 
$
4,559

2020
30

 
986

 
4,334

2021
8

 
946

 
3,375

2022

 
781

 
1,051

2023

 
386

 

Thereafter

 
1,350

 

Total
$
68

 
$
6,476

 
$
13,319



20



9. Share-Based Compensation
Management Incentive Plan
A summary of the Company's share-based compensation expense during the periods presented are as follows (in thousands):
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
Share based compensation expense recognized
$
240

 
$
749

 
 
 
 
 
 
 
As of
 
 
 
September 30, 2019
Unrecognized compensation cost (in thousands)
 
 
$
1,849

Remaining weighted-average service period (years)
 
 
1.92


During the nine months ended September 30, 2019, the Company granted no restricted stock units to officers and employees subject to the Management Incentive Plan. Below is a summary of the unvested restricted stock units.
 
Number of Shares
 
Weighted Average Fair Value
Unvested as of December 31, 2018
329,240
 
$
9.68

  Granted

 
$

  Vested
(85,534
)
 
$
11.00

  Forfeited
(71,990
)
 
$
5.14

Unvested as of September 30, 2019
171,716

 
$
11.00


10. Related Party Transactions
The Company incurred related party expenses, primarily related to lease rents, of $0.2 million and $0.3 million during the three months ended September 30, 2019 and 2018, respectively, and $0.7 million and $0.6 million for the nine months ended September 30, 2019 and 2018, respectively.
There was no related party revenue for the three months ended September 30, 2019 and 2018 or for the nine months ended September 30, 2019 and 2018.
There were no related party accounts receivable or accounts payable as of September 30, 2019 or December 31, 2018.
In addition to such related party transactions above, Lawrence “Larry” First, a director of FES Ltd., serves as the Chief Investment Officer and Managing Director of Ascribe Capital LLC, or Ascribe, and Brett G. Wyard, also a director of FES Ltd., serves as a Managing Partner of Solace Capital Partners, or Solace. Ascribe and/or one or more of its affiliates own approximately 23% of the outstanding common stock as of September 30, 2019, and is owed approximately $15.8 million of the aggregate principal amount of the Term Loan Agreement and approximately $28.0 million of the aggregate principle amount of the PIK Notes. Solace and/or one of its affiliates own approximately 17% of the outstanding common stock as of September 30, 2019, and is owed approximately $14.6 million of the aggregate principal amount of the term loan covered by the Term Loan Agreement and approximately $20.9 million of the aggregate principal amount of the PIK Notes. Moreover, an affiliate of Solace and affiliates of Ascribe are parties to certain registration rights agreement by and among the Company and certain stockholders of the Company.

11. Earnings per Share
Basic earnings (loss) per share, or EPS, is computed by dividing net income (loss) available to common stockholders by the weighted-average common stock outstanding during the period. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock, such as restricted stock units or the PIK Notes, were exercised and converted into common stock. Potential common stock equivalents relate to outstanding stock options and unvested restricted stock units, which are determined using the treasury stock method, and the PIK Notes, which were determined

21


using the "if-converted" method. In applying the if-converted method, conversion is not assumed for purposes of computing diluted EPS if the effect would be antidilutive.
The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
2019
 
2018
Basic and diluted:
 
 
 
Net loss
$
(31,074
)
 
$
(6,433
)
Weighted-average common shares
5,471

 
5,368

Basic and diluted net loss per share
$
(5.68
)
 
$
(1.20
)

 
Nine Months Ended September 30,
 
2019
 
2018
Basic and diluted:
 
 
 
Net loss
$
(53,459
)
 
$
(23,728
)
Weighted-average common shares
5,453

 
5,347

Basic and diluted net loss per share
$
(9.80
)
 
$
(4.44
)

There were 171,716 and 274,710 unvested restricted stock units that were not included in the calculation of diluted EPS for the three and nine months ended September 30, 2019 and 2018, respectively, and approximately 103.2 million shares based upon the common stock price at September 30, 2019 related to the potential conversion of the PIK Notes at September 30, 2019 because their effect would have been antidilutive.

12. Business Segment Information
The Company has three reportable segments organized based on its products and services—well servicing, coiled tubing and fluid logistics. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Upon the acquisition of Cretic, we evaluated our segment information and determined that coiled tubing represented a separate segment under our current facts. All prior year segment information has been recast to reflect the change in our segment reporting.
Well Servicing
The Company's well servicing segment utilizes a fleet of well servicing rigs, which was comprised of workover rigs and swabbing rigs and other related assets and equipment to provide the following services:(i) well maintenance, including remedial repairs and removal and replacement of downhole production equipment, (ii) well workovers, including significant downhole repairs, re-completions and re-perforations, (iii) completion and swabbing activities, (iv) plugging and abandonment services, and (v) pressure testing of oil and natural gas production tubing and scanning tubing for pitting and wall thickness using tubing testing units.
Coiled Tubing
The coiled tubing segment utilizes our fleet of coiled tubing units to provide a range of services accomplishing a wide variety of goals including horizontal completions, well bore clean-outs and maintenance, nitrogen services, thru-tubing services, formation stimulation using acid and other chemicals, and other pre- and post-hydraulic fracturing well preparation services.
Fluid Logistics
The Company's fluid logistics segment utilizes a fleet of fluid transport trucks and related assets, including specialized vacuum, high-pressure pump and tank trucks, frac tanks, water wells, salt water disposal wells and facilities, and related equipment to provide services such as transportation, storage and disposal of a variety of drilling and produced fluids used in, and generated by, oil and natural gas production. These services are required in most workover and completion projects and are routinely used in the daily operation of producing wells.
The following table sets forth certain financial information with respect to the Company’s reportable segments (in thousands):

22


 
Well Servicing
 
Coiled Tubing
 
Fluid Logistics
 
Total
Three Months Ended September 30, 2019
 
 
 
 
 
 
 
Operating revenues
$
23,141

 
$
10,398

 
$
10,655

 
$
44,194

Direct operating costs
19,246

 
11,865

 
7,499

 
38,610

Segment profits (loss)
$
3,895

 
$
(1,467
)
 
$
3,156

 
$
5,584

Depreciation and amortization
$
1,950

 
$
2,334

 
$
2,199

 
$
6,483

Capital expenditures (1)
$
1,002

 
$
685

 
$
547

 
$
2,234

 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
Operating revenues
$
22,551

 
$
9,624

 
$
15,437

 
$
47,612

Direct operating costs
18,135

 
7,215

 
12,079

 
37,429

Segment profits
$
4,416

 
$
2,409

 
$
3,358

 
$
10,183

Depreciation and amortization
$
2,515

 
$
1,565

 
$
3,486

 
$
7,566

Capital expenditures (1)
$
1,005

 
$
6,573

 
$
914

 
$
8,492

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Capital expenditures listed above include all cash and non-cash additions to property and equipment, including finance leases and fixed assets recorded in accounts payable at year-end.

 
Three Months Ended September 30,
 
2019
 
2018
Reconciliation of Operating Loss As Reported:
 
 
 
Segment profits
$
5,584

 
$
10,183

Less:
 
 
 
Impairment of goodwill
19,222

 

General and administrative expense
5,242

 
6,545

Depreciation and amortization
6,483

 
7,566

Operating loss
(25,363
)
 
(3,928
)
Other income (expenses), net
(5,688
)
 
(2,473
)
Pre-tax loss
$
(31,051
)
 
$
(6,401
)
 
 
 
 


23


 
Well Servicing
 
Coiled Tubing
 
Fluid Logistics
 
Total
Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
Operating revenues
$
73,653

 
$
43,700

 
$
36,294

 
$
153,647

Direct operating costs
57,766

 
43,657

 
26,974

 
128,397

Segment profits
$
15,887

 
$
43

 
$
9,320

 
$
25,250

Depreciation and amortization
$
7,375

 
$
8,403

 
$
7,157

 
$
22,935

Capital expenditures (1)
$
6,169

 
$
5,834

 
$
2,257

 
$
14,260

Total assets
$
72,667

 
$
70,599

 
$
48,742

 
$
192,008

Long lived assets
$
55,300

 
$
59,308

 
$
35,303

 
$
149,911

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
Operating revenues
$
60,620

 
$
21,786

 
$
42,038

 
$
124,444

Direct operating costs
50,099

 
17,590

 
33,919

 
101,608

Segment profits
$
10,521

 
$
4,196

 
$
8,119

 
$
22,836

Depreciation and amortization
$
7,638

 
$
4,360

 
$
10,383

 
$
22,381

Capital expenditures (1)
$
4,184

 
$
12,119

 
$
3,369

 
$
19,672

Total assets
$
74,235

 
$
28,742

 
$
64,565

 
$
167,542

Long lived assets
$
53,018

 
$
21,266

 
$
49,717

 
$
124,001

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Capital expenditures listed above include all cash and non-cash additions to property and equipment, including finance leases and fixed assets recorded in accounts payable at year-end.

 
Nine Months Ended September 30,
 
2019
 
2018
Reconciliation of Operating Loss As Reported:
 
 
 
Segment profits
$
25,250

 
$
22,836

Less:
 
 
 
Impairment of goodwill
19,222

 

General and administrative expense
17,486

 
17,341

Depreciation and amortization
22,935

 
22,381

Operating loss
(34,393
)
 
(16,886
)
Other income (expenses), net
(19,093
)
 
(7,264
)
Pre-tax loss
$
(53,486
)
 
$
(24,150
)
 
 
 
 
 
 
 
 
 
September 30, 2019
 
December 31, 2018
Reconciliation of Total Assets As Reported:
 
 
 
Total reportable segments
$
192,008

 
$
243,199

Parent
6,544

 
13,186

Total assets
$
198,552

 
$
256,385

 
 
 
 



24


13. Revenue

The following tables show revenue disaggregated by primary geographical markets and major service lines (in thousands):
 
 
Three months ended September 30, 2019
 
 
Well Servicing
 
Coiled Tubing
 
Fluid Logistics
 
Total
Primary Geographical Markets
 
 
 
 
 
 
 
 
South Texas
 
$
16,180

 
$
3,845

 
$
5,541

 
$
25,566

East Texas (1)
 
1,237

 

 
287

 
1,524

Central Texas
 

 

 
2,707

 
2,707

West Texas
 
5,724

 
6,553

 
2,120

 
14,397

Total
 
$
23,141

 
$
10,398

 
$
10,655

 
$
44,194

 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2018
 
 
Well Servicing
 
Coiled Tubing
 
Fluid Logistics
 
Total
Primary Geographical Markets
 
 
 
 
 
 
 
 
South Texas
 
$
15,524

 
$
4,736

 
$
7,580

 
$
27,840

East Texas (1)
 
1,630

 

 
835

 
2,465

Central Texas
 

 

 
3,728

 
3,728

West Texas
 
5,397

 
4,888

 
3,294

 
13,579

Total
 
$
22,551

 
$
9,624

 
$
15,437

 
$
47,612

 
 
 
 
 
 
 
 
 
(1) Includes revenues from the Company's operations in Pennsylvania.
 
 
Nine months ended September 30, 2019
 
 
Well Servicing
 
Coiled Tubing
 
Fluid Logistics
 
Total
Primary Geographical Markets
 
 
 
 
 
 
 
 
South Texas
 
$
52,649

 
$
12,846

 
$
17,748

 
$
83,243

East Texas (1)
 
3,988

 

 
1,933

 
5,921

Central Texas
 

 

 
8,779

 
8,779

West Texas
 
17,016

 
30,854

 
7,834

 
55,704

Total
 
$
73,653

 
$
43,700

 
$
36,294

 
$
153,647

 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
 
Well Servicing
 
Coiled Tubing
 
Fluid Logistics
 
Total
Primary Geographical Markets
 
 
 
 
 
 
 
 
South Texas
 
$
39,416

 
$
12,378

 
$
20,878

 
$
72,672

East Texas (1)
 
3,380

 

 
1,989

 
5,369

Central Texas
 

 

 
10,193

 
10,193

West Texas
 
17,824

 
9,408

 
8,978

 
36,210

Total
 
$
60,620

 
$
21,786

 
$
42,038

 
$
124,444

 
 
 
 
 
 
 
 
 
(1) Includes revenues from the Company's operations in Pennsylvania.


25


14. Supplemental Cash Flow Information

 
Nine Months Ended September 30,
 
2019
 
2018
Cash paid for
 
 
 
Interest
$
3,294

 
$
2,486

Income tax
$

 
$

Supplemental schedule of non-cash investing and financing activities
 
 
 
Change in accounts payable related to capital expenditures
$

 
$
3,923

Exchange of Bridge Loan for PIK Notes
$
47,346

 
$

Finance leases on equipment
$
2,620

 
$
2,382


15. Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", or ASU 2016-13, which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for annual periods beginning after December 15, 2018. In May and April 2019, the FASB issued ASU No. 2019-05 and ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" which further clarifies the ASU 2016-13. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment", or ASU 2017-04, which addresses concerns over the cost and complexity of the two-step goodwill impairment test by removing the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 will be effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. During the third quarter of 2019, the Company adopted the guidance contained in ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Goodwill impairment is the amount by which the Company’s single reporting unit carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. To estimate the fair value of the Company’s equity, the Company used both a market approach based on the guideline companies’ method (“Market Comparable Approach”), and an income approach based on a discounted cash flow analysis.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The guidance is effective for all entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.


26


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the audited consolidated financial statements for the year ended December 31, 2018 included in our Annual Report on Form 10-K. Any forward-looking statements made by or on our behalf are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements involve risks and uncertainties in that the actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ include risks set forth in the Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018.
Overview
Forbes Energy Services Ltd., or FES Ltd., is an independent oilfield services contractor that provides well site services to oil and natural gas drilling and producing companies to help develop and enhance the production of oil and natural gas. These services include fluid hauling, fluid disposal, well maintenance, completion services, workovers and recompletions, plugging and abandonment, and tubing testing. Our operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with an additional location in Pennsylvania. We believe that our broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of our customers’ wells. Our headquarters and executive offices are located at 3000 South Business Highway 281, Alice, Texas 78332. We can be reached by phone at (361) 664-0549.
As used in this Quarterly Report on Form 10-Q, the “Company,” “we,” and “our” mean FES Ltd. and its subsidiaries, except as otherwise indicated.
We provide a wide range of services to a diverse group of companies. For the nine months ended September 30, 2019, we provided services to 474 companies. John E. Crisp, Steve Macek and our senior management team have cultivated deep and ongoing relationships with these customers during their combined experience of over 40 years in the oilfield services industry.
We conduct our operations through the following three business segments:
Well Servicing. Our well servicing segment comprised 47.9% of our consolidated revenues for the nine months ended September 30, 2019. Our well servicing segment utilizes our fleet of well servicing rigs, which at September 30, 2019 was comprised of 139 workover rigs and 7 swabbing rigs and other related assets and equipment. These assets are used to provide (i) well maintenance, including remedial repairs and removal and replacement of downhole production equipment, (ii) well workovers, including significant downhole repairs, re-completions and re-perforations, (iii) completion and swabbing activities, (iv) plugging and abandonment services, and (v) pressure testing of oil and natural gas production tubing and scanning tubing for pitting and wall thickness using tubing testing units.
Coiled Tubing. Our coiled tubing segment comprised 28.4% of our consolidated revenues for the nine months ended September 30, 2019.  This segment utilizes our fleet of 14 coiled tubing units, of which 11 are large diameter units (2 3/8” or larger).  These units provide a range of services accomplishing a wide variety of goals including horizontal completions, well bore clean-outs and maintenance, nitrogen services, thru-tubing services, formation stimulation using acid and other chemicals, and other pre- and post-hydraulic fracturing well preparation services. 
Fluid Logistics. Our fluid logistics segment comprised 23.6% of our consolidated revenues for the nine months ended September 30, 2019. Our fluid logistics segment utilizes our fleet of owned or leased fluid transport trucks and related assets, including specialized vacuum, high-pressure pump and tank trucks, hot oil trucks, frac tanks, fluid mixing tanks, salt water disposal wells and facilities, and related equipment. These assets are used to provide, transport, store, and dispose of a variety of drilling and produced fluids used in, and generated by, oil and natural gas production. These services are required in most workover and completion projects and are routinely used in daily operations of producing wells.
We believe that our three business segments are complementary and create synergies in terms of selling opportunities. Our multiple lines of service are designed to capitalize on our existing customer base to grow it within existing markets, generate more business from existing customers, and increase our operating performance. By offering our customers the ability to reduce the number of vendors they use, we believe that we help improve our customers’ efficiency. Further, by having multiple service offerings that span the life cycle of the well, we believe that we have a competitive advantage over smaller competitors offering more limited services.
Cretic Energy Services, LLC Acquisition
On November 16, 2018, we completed our acquisition of Cretic. Cretic provides coiled tubing services to exploration and production companies in the United States, primarily in the Permian Basin in Texas. The total consideration was approximately $69.1 million in cash. We believe the acquisition significantly enhanced our coiled tubing services and our position in the

27


Permian Basin. See Note 3 - Acquisition of Cretic Energy Services, LLC to these unaudited condensed consolidated financial statements for further discussion regarding the acquisition of Cretic.
Going forward, we intend to pursue selective, accretive acquisitions of complementary assets, businesses and technologies, and believe we are well positioned to capture attractive opportunities due to our market position, customer relationships and industry experience and expertise.
Factors Affecting Results of Operations
Market Conditions
Commodity prices improved through April 2019 then declined through September 30, 2019 resulting in quarter-end crude oil prices in the mid-50’s. We expect our customers' capital programs to remain comparatively conservative during the remainder of 2019, as the Exploration and Production sector is under pressure to grow within the limits of operating cash flow. This has delayed the demand for completion driven services, such as those offered specifically by our coiled tubing segment. However, we believe continued aging of horizontal wells through 2019 and future periods, and customers choosing to increase production through accretive regular well maintenance in these horizontal wells, will strengthen demand and pricing for our well maintenance services over the next several years.
Below are three charts that provide total U.S. rig counts, total Texas rig counts and WTI oil price trends for the twelve months ended September 30, 2019 and 2018.

chart-18d3af51f94e563994c.jpg

28



chart-793cff536b505bdd849.jpg

Source: Rig counts are per Baker Hughes, Inc. (www.bakerhughes.com). Rig counts are the averages of the weekly rig count activity.

chart-d3aa92b41cd35121a29.jpg
Impact of the Current Market Environment
With the six-month downward trend in oil prices that began in April 2019, drilling and completion activity experienced a decline, resulting in decreased revenues, earnings and lower EBITDA for the three months ended September 30, 2019.
We continue to focus on meeting our customers' expectations and adjusting our cost structure where possible. We are also maintaining our focus on maximizing use of our active operating assets and maintaining cost controls.
Oil and Natural Gas Prices
Demand for well servicing, coiled tubing services and fluid logistics services is generally a function of the willingness of oil and natural gas companies to make operating and capital expenditures to explore for, develop, and produce oil and natural gas, which in turn is affected by current and anticipated levels of oil and natural gas prices. Exploration and production spending is generally categorized as either operating expenditures or capital expenditures. Activities by oil and natural gas companies designed

29


to add oil and natural gas reserves are classified as capital expenditures, and those associated with maintaining or accelerating production, such as workover and fluid logistics services, are categorized as operating expenditures. Operating expenditures are typically more stable than capital expenditures and may be less sensitive to oil and natural gas price volatility. In contrast, capital expenditures for drilling and completion are more directly influenced by current and expected oil and natural gas prices and generally reflect the volatility of commodity prices.
Seasonality and Cyclical Trends
Our operations are impacted by seasonal factors. Historically, our business has been negatively impacted during the winter months due to inclement weather, fewer daylight hours, and holidays. We typically experience a significant slowdown during the Thanksgiving and Christmas holiday seasons. Our well servicing rigs and coiled tubing units are mobile, and we operate a significant number of oilfield vehicles. During periods of heavy snow, ice or rain, we may not be able to move our equipment between locations, thereby reducing our ability to generate rig, coiled tubing or truck hours. In addition, the majority of our well servicing rigs work only during daylight hours. In the winter months, as daylight time becomes shorter, the amount of time that the well servicing rigs work is shortened, having a negative impact on total hours worked.
In addition, the oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices. Such cyclical trends also include the resultant levels of cash flows generated and allocated by exploration and production companies to their drilling, completion and workover budget.

Results of Operations

Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018

The following tables compare our segment operating results for the three months ended September 30, 2019 and 2018 (in thousands):
Revenues
 
 
 
 
 
Three Months Ended September 30,
 
 
 
 
 
2019
% of
revenue
 
2018
% of
revenue
 
$ change
 
% change
Well Servicing
$
23,141

52.4
 %
 
$
22,551

47.4
%
 
$
590

 
3
 %
Coiled Tubing
10,398

23.5
 %
 
9,624

20.2
%
 
774

 
8
 %
Fluid Logistics
10,655

24.1
 %
 
15,437

32.4
%
 
(4,782
)
 
(31
)%
Total
$
44,194

 
 
$
47,612

 
 
$
(3,418
)
 
(7
)%
 
 
 
 
 
 
 
 
 
 
Direct Operating Expenses(1)
 
 
 
 
 
Three Months Ended September 30,
 
 
 
 
 
2019
% of segment revenue
 
2018
% of segment revenue
 
$ change
 
% change
Well Servicing
$
19,246

83.2
 %
 
$
18,135

80.4
%
 
$
1,111

 
6
 %
Coiled Tubing
11,865

114.1
 %