Company Quick10K Filing
Quick10K
Key Energy Services
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$3.07 20 $63
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 2019-06-25 Exhibits
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-05-01 Officers, Shareholder Vote, Exhibits
8-K 2019-04-26 Officers
8-K 2019-04-05 Enter Agreement, Exhibits
8-K 2019-02-11 Earnings, Regulation FD, Exhibits
8-K 2019-02-04 Officers, Exhibits
8-K 2019-01-24 Officers
8-K 2019-01-24 Officers
8-K 2018-11-07 Earnings, Exhibits
8-K 2018-10-03 Officers
8-K 2018-10-01 Earnings, Regulation FD, Exhibits
8-K 2018-09-20 Other Events, Exhibits
8-K 2018-09-12 Officers
8-K 2018-08-17 Officers, Regulation FD, Exhibits
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-06-22 Officers, Exhibits
8-K 2018-05-29 Officers
8-K 2018-05-10 Officers, Exhibits
8-K 2018-03-26 Regulation FD, Exhibits
8-K 2018-02-27 Earnings, Exhibits
8-K 2018-02-12 Regulation FD, Exhibits
8-K 2017-12-31 Officers
AME Ametek 19,470
AVT Avnet 4,810
EXPO Exponent 2,890
BV Brightview Holdings 1,760
TRNS Transcat 174
SEAC SeaChange 47
WSCI WSI Industries 0
TIK Tel Instrument Electronics 0
GTHP Guided Therapeutics 0
FXB Invesco Currencyshares British Pound Sterling Trust 0
KEG 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Note 1. General
Note 2. Significant Accounting Policies and Estimates
Note 3. Revenue From Contracts with Customers
Note 4. Equity
Note 5. Other Balance Sheet Information
Note 6. Intangible Assets
Note 7. Debt
Note 8. Other Income
Note 9. Income Taxes
Note 10. Commitments and Contingencies
Note 11. Loss per Share
Note 12. Share-Based Compensation
Note 13. Transactions with Related Parties
Note 14. Estimated Fair Value of Financial Instruments
Note 15. Leases
Note 16. Segment Information
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. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.6 kegex1063312019.htm
EX-10.7 kegex1073312019.htm
EX-31.1 kegex3113312019.htm
EX-31.2 kegex3123312019.htm
EX-32 kegex323312019.htm

Key Energy Services Earnings 2019-03-31

KEG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 keg10-q3312019.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________
Form 10-Q
 _____________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2019
or
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-08038
  _____________________________________________
KEY ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
  _____________________________________________
Delaware
 
04-2648081
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1301 McKinney Street, Suite 1800, Houston, Texas
 
77010
(Address of principal executive offices)
 
(Zip Code)
(713) 651-4300
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
  ____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨  
Indicate by check mark whether the registrant has submitted electronically 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).    Yes  ý    No  ¨   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
ý
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨ No  ý
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No ¨  
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value
 
KEG
 
New York Stock Exchange
(Title of each class)
 
(Trading symbol)
 
(Name of each exchange on which registered)
As of May 6, 2019, the number of outstanding shares of common stock of the registrant was 20,395,310.
 



KEY ENERGY SERVICES, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2019
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-looking statements. These forward-looking statements are based on our current expectations, estimates and projections and management’s beliefs and assumptions concerning future events and financial trends affecting our financial condition and results of operations. In some cases, you can identify these statements by terminology such as “may,” “will,” “should,” “predicts,” “expects,” “believes,” “anticipates,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statements are only predictions and are subject to substantial risks and uncertainties and are not guarantees of performance. Future actions, events and conditions and future results of operations may differ materially from those expressed in these statements. In evaluating those statements, you should carefully consider the information above as well as the risks outlined in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and in the other reports we file with the Securities and Exchange Commission.
We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this report except as required by law. All of our written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements.
Important factors that may affect our expectations, estimates or projections include, but are not limited to, the following:
conditions in the oil and natural gas industry, especially oil and natural gas prices and capital expenditures by oil and natural gas companies;
volatility in oil and natural gas prices;
our ability to implement price increases or maintain pricing on our core services;
risks that we may not be able to reduce, and could even experience increases in, the costs of labor, fuel, equipment and supplies employed in our businesses;
industry capacity;
asset impairments or other charges;
the periodic low demand for our services and resulting operating losses and negative cash flows;
our highly competitive industry as well as operating risks, which are primarily self-insured, and the possibility that our insurance may not be adequate to cover all of our losses or liabilities;
significant costs and potential liabilities resulting from compliance with applicable laws, including those resulting from environmental, health and safety laws and regulations, specifically those relating to hydraulic fracturing, as well as climate change legislation or initiatives;

2


our historically high employee turnover rate and our ability to replace or add workers, including executive officers and skilled workers;
our ability to incur debt or long-term lease obligations;
our ability to implement technological developments and enhancements;
severe weather impacts on our business, including from hurricane activity;
our ability to successfully identify, make and integrate acquisitions and our ability to finance future growth of our operations or future acquisitions;
our ability to achieve the benefits expected from disposition transactions;
the loss of one or more of our larger customers;
our ability to generate sufficient cash flow to meet debt service obligations;
the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt, including our ability to comply with covenants under our debt agreements;
an increase in our debt service obligations due to variable rate indebtedness;
our inability to achieve our financial, capital expenditure and operational projections, including quarterly and annual projections of revenue, operating income and/or loss margin and the possibility of our inaccurate assessment of future activity levels, customer demand, and pricing stability which may not materialize (whether for Key as a whole or for geographic regions and/or business segments individually);
our ability to respond to changing or declining market conditions including our ability to reduce the costs of labor, fuel, equipment and supplies employed and used in our business;
our ability to maintain sufficient liquidity;
adverse impact of litigation; and
other factors affecting our business described in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and in the other reports we file with the Securities and Exchange Commission.

3


PART I — FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
 
March 31,
2019
 
December 31,
2018
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
35,693

 
$
50,311

Accounts receivable, net of allowance for doubtful accounts of $1,019 and $1,056, respectively
69,842

 
74,253

Inventories
15,309

 
15,861

Other current assets
18,117

 
18,073

Total current assets
138,961

 
158,498

Property and equipment
439,682

 
439,043

Accumulated depreciation
(176,387
)
 
(163,333
)
Property and equipment, net
263,295

 
275,710

Intangible assets, net
390

 
404

Other non-current assets
10,106

 
8,562

TOTAL ASSETS
$
412,752

 
$
443,174

LIABILITIES AND EQUITY

 

Current liabilities:

 

Accounts payable
$
11,856

 
$
13,587

Current portion of long-term debt
2,500

 
2,500

Other current liabilities
79,495

 
87,377

Total current liabilities
93,851

 
103,464

Long-term debt
240,573

 
241,079

Workers’ compensation, vehicular and health insurance liabilities
25,436

 
24,775

Other non-current liabilities
29,997

 
28,336

Commitments and contingencies

 

Equity:

 

Preferred stock, $0.01 par value; 10,000,000 authorized and one share issued and outstanding

 

Common stock, $0.01 par value; 100,000,000 shares authorized, 20,395,310 and 20,363,198 outstanding
204

 
204

Additional paid-in capital
265,761

 
264,945

Retained deficit
(243,070
)
 
(219,629
)
Total equity
22,895

 
45,520

TOTAL LIABILITIES AND EQUITY
$
412,752

 
$
443,174

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

4


Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
 
 
 
 
Three Months Ended
 
March 31,
 
2019
 
2018
REVENUES
$
109,273

 
$
125,316

COSTS AND EXPENSES:
 
 
 
Direct operating expenses
88,194

 
98,211

Depreciation and amortization expense
14,296

 
20,356

General and administrative expenses
22,095

 
24,574

Operating loss
(15,312
)
 
(17,825
)
Interest expense, net of amounts capitalized
9,233

 
8,144

Other income, net
(1,142
)
 
(1,007
)
Loss before income taxes
(23,403
)
 
(24,962
)
Income tax expense
(38
)
 
(1
)
NET LOSS
$
(23,441
)
 
$
(24,963
)
Loss per share:
 
 
 
Basic and diluted
$
(1.15
)
 
$
(1.23
)
Weighted average shares outstanding:
 
 
 
Basic and diluted
20,369

 
20,218

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

5


Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
 
 
 
Three Months Ended
 
March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(23,441
)
 
$
(24,963
)
Adjustments to reconcile net loss to net cash used in operating activities:

 

Depreciation and amortization expense
14,296

 
20,356

Bad debt expense
506

 
467

Accretion of asset retirement obligations
40

 
39

Amortization of deferred financing costs
119

 
119

Loss (gain) on disposal of assets, net
363

 
(4,737
)
Share-based compensation
816

 
2,400

Changes in working capital:

 

Accounts receivable
3,905

 
(13,335
)
Other current assets
507

 
485

Accounts payable, accrued interest and accrued expenses
(9,714
)
 
(5,675
)
Share-based compensation liability awards
99

 
336

Other assets and liabilities
1,162

 
1,084

Net cash used in operating activities
(11,342
)
 
(23,424
)
CASH FLOWS FROM INVESTING ACTIVITIES:

 

Capital expenditures
(5,040
)
 
(9,444
)
Proceeds from sale of assets
2,389

 
6,943

Net cash used in investing activities
(2,651
)
 
(2,501
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments of long-term debt
(625
)
 
(625
)
Proceeds from exercise of warrants

 
1

Net cash used in financing activities
(625
)
 
(624
)
Net decrease in cash, cash equivalents and restricted cash
(14,618
)
 
(26,549
)
Cash, cash equivalents, and restricted cash, beginning of period
50,311

 
77,065

Cash, cash equivalents, and restricted cash, end of period
$
35,693

 
$
50,516

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

6


Key Energy Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1. GENERAL
Key Energy Services, Inc., and its wholly owned subsidiaries (collectively, “Key,” the “Company,” “we,” “us,” “its,” and “our”) provide a full range of well services to major oil companies and independent oil and natural gas production companies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services, and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States. An important component of the Company’s growth strategy is to make acquisitions that will strengthen its core services or presence in selected markets, and the Company also makes strategic divestitures from time to time. The Company expects that the industry in which it operates will experience consolidation, and the Company expects to explore opportunities and engage in discussions regarding these opportunities, which could include mergers, consolidations or acquisitions or further dispositions or other transactions, although there can be no assurance that any such activities will be consummated.
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The condensed December 31, 2018 balance sheet was prepared from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”). Certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report on Form 10-Q. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2018 Form 10-K.
The unaudited condensed consolidated financial statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented herein. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results expected for the full year or any other interim period, due to fluctuations in demand for our services, timing of maintenance and other expenditures, and other factors.
We have evaluated events occurring after the balance sheet date included in this Quarterly Report on Form 10-Q and through the date on which the unaudited condensed consolidated financial statements were issued, for possible disclosure of a subsequent event.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The preparation of these unaudited condensed consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates may also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii) provide allowances for our uncollectible accounts receivable, (viii) value our asset retirement obligations, and (ix) value our equity-based compensation. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improved information not previously available. Because of the limitations inherent in this process, our actual results may differ materially from these estimates. We believe that the estimates used in the preparation of these interim financial statements are reasonable.
There have been no material changes or developments in our evaluation of accounting estimates and underlying assumptions or methodologies that we believe to be a “Critical Accounting Policy or Estimate” as disclosed in our 2018 Form 10-K.
Recent Accounting Developments
ASU 2016-13. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments that will change how companies measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount. The amendments in this update will be effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early

7


adoption is permitted for annual periods beginning after December 15, 2018. The Company is evaluating the effect of this standard on our consolidated financial statements.
ASU 2016-02. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which replaced the existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Additional disclosure requirements include qualitative disclosures along with specific quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for the Company for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. As part of our assessment we have created additional internal controls over financial reporting and made changes in business practices and processes related to the ASU. Key has elected the new prospective “Comparatives Under 840” transition method as defined in ASU 2018-11 and adopted the new standard as of January 1, 2019. As part of the adoption, the Company elected several practical expedients which, for contracts that existed at the time of the adoption, allowed the Company to not reassess whether existing contracts are or contained leases, classification of a lease (i.e., operating leases will remain operating leases), initial direct costs and land easement arrangements. As part of the adoption, the Company also made several accounting policy elections which allow the Company to not apply the standard to short term leases as well as to choose not to separate non-lease components from lease components and instead account for all components as a single lease component. The adoption of this standard did not have an impact on our consolidated statement of operations or consolidated statement of cash flows and had an immaterial impact on our consolidated balance sheet. Right of use assets obtained in exchange for operating leases liabilities was $4.1 million at the time of the adoption of the standard.
NOTE 3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The following table presents our revenues disaggregated by revenue source (in thousands). Sales taxes are excluded from revenues.
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Rig Services
 
$
65,026

 
$
70,304

Fishing and Rental Services
 
14,587

 
13,835

Coiled Tubing Services
 
10,673

 
18,423

Fluid Management Services
 
18,987

 
22,754

Total
 
$
109,273

 
$
125,316

Disaggregation of Revenue
We have disaggregated our revenues by our reportable segments including Rig Services, Fishing & Rental Services, Coiled Tubing Services and Fluid Management Services.
Rig Services
Our Rig Services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, well maintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gas producers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes and capabilities, allowing us to service all types of oil and gas wells.
We recognize revenue within the Rig Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue as the services are provided, typically daily, as we have the right to invoice the customer for the services performed. Rig Services are billed monthly and payment terms are usually 30 days from invoice receipt.
Fishing and Rental Services
We offer a full line of services and rental equipment designed for use in providing drilling and workover services. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, pumps, power swivels, reversing units, foam air units.

8


We recognize revenue within the Fishing and Rental Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue as the services are provided, typically daily, as we have the right to invoice the customer for the services performed. Fishing and Rental Services are billed and paid monthly. Payment terms for Fishing and Rental Services are usually 30 days from invoice receipt.
Coiled Tubing Services
Coiled Tubing Services involve the use of a continuous metal pipe spooled onto a large reel, which is then deployed into oil and natural gas wells to perform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemical treatments. Coiled tubing is also used for a number of horizontal well applications such as milling temporary isolation plugs that separate frac zones, and various other pre- and post-hydraulic fracturing well preparation services.
We recognize revenue within the Coiled Tubing Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue, typically daily, as the services are provided as we have the right to invoice the customer for the services performed. Coiled Tubing Services are billed and paid monthly. Payment terms for Coiled Tubing Services are usually 30 days from invoice receipt.
Fluid Management Services
We provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover and maintenance activities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site and transported for disposal in saltwater disposal wells owned by us or a third party.
We recognize revenue within the Fluid Management Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue as the services are provided, typically daily, as we have the right to invoice the customer for the services performed. Fluid Management Services are billed and paid monthly. Payment terms for Fluid Management Services are usually 30 days from invoice receipt.
Arrangements with Multiple Performance Obligations
While not typical for our business, our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost-plus margin. For combined products and services within a contract, we account for individual products and services separately if they are distinct- i.e. if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services within a contract based on the prices at which we separately sell our services. For items that are not sold separately, we estimate the standalone selling prices using the expected cost-plus margin approach.
Contract Balances
Under our revenue contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our revenue contracts do not give rise to contract assets or liabilities under ASC 606.

9


NOTE 4. EQUITY
A reconciliation of the total carrying amount of our equity accounts for the three months ended March 31, 2019 is as follows (in thousands):
 
COMMON STOCKHOLDERS
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Retained Deficit
 
Total
 
Number of Shares
 
Amount at Par
 
 
Balance at December 31, 2018
20,363

 
$
204

 
$
264,945

 
$
(219,629
)
 
$
45,520

Share-based compensation
11

 

 
816

 

 
816

Net loss

 

 

 
(23,441
)
 
(23,441
)
Balance at March 31, 2019
20,374

 
$
204

 
$
265,761

 
$
(243,070
)
 
$
22,895

NOTE 5. OTHER BALANCE SHEET INFORMATION
The table below presents comparative detailed information about other current assets at March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
 
 
March 31, 2019
 
December 31, 2018
Other current assets:
 
 
 
Prepaid current assets
$
8,776

 
$
11,207

Reinsurance receivable
6,716

 
6,365

Operating lease right-of-use assets
2,003

 

Other
622

 
501

Total
$
18,117

 
$
18,073

The table below presents comparative detailed information about other non-current assets at March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
 
 
March 31, 2019
 
December 31, 2018
Other non-current assets:
 
 
 
 Reinsurance receivable
$
7,100

 
$
6,743

 Deposits
1,109

 
1,309

Operating lease right-of-use assets
1,510

 

 Other
387

 
510

Total
$
10,106

 
$
8,562


10


The table below presents comparative detailed information about other current liabilities at March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
 
 
March 31, 2019
 
December 31, 2018
Other current liabilities:
 
 
 
Accrued payroll, taxes and employee benefits
$
14,645

 
$
19,346

Accrued operating expenditures
14,901

 
15,861

Income, sales, use and other taxes
6,868

 
8,911

Self-insurance reserve
26,284

 
25,358

Accrued interest
7,066

 
7,105

Accrued insurance premiums
3,578

 
5,651

Unsettled legal claims
3,895

 
4,356

Accrued severance

 
83

Operating leases
2,004

 

Other
254

 
706

Total
$
79,495

 
$
87,377

The table below presents comparative detailed information about other non-current liabilities at March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
 
 
March 31, 2019
 
December 31, 2018
Other non-current liabilities:
 
 
 
Asset retirement obligations
$
9,058

 
$
9,018

Environmental liabilities
2,307

 
2,227

Accrued sales, use and other taxes
17,005

 
17,024

Operating leases
1,523

 

Other
104

 
67

Total
$
29,997

 
$
28,336

NOTE 6. INTANGIBLE ASSETS
The components of our other intangible assets as of March 31, 2019 and December 31, 2018 are as follows (in thousands):
 
 
 
 
 
March 31, 2019
 
December 31, 2018
Trademark:
 
 
 
Gross carrying value
$
520

 
$
520

Accumulated amortization
(130
)
 
(116
)
Net carrying value
$
390

 
$
404

The weighted average remaining amortization periods and expected amortization expense for the next five years for our definite lived intangible assets are as follows:
 
Weighted
average
remaining
amortization
period (years)
 
Expected amortization expense (in thousands)
 
Remainder
of 2019
 
2020
 
2021
 
2022
 
2023
Trademarks
6.8
 
$
43

 
$
58

 
$
58

 
$
58

 
$
58

Amortization expense for our intangible assets was less than $0.1 million for the three months ended March 31, 2019 and 2018.

11


NOTE 7. DEBT
As of March 31, 2019 and December 31, 2018, the components of our debt were as follows (in thousands):
 
 
 
 
 
March 31, 2019
 
December 31, 2018
Term Loan Facility due 2021
$
244,375

 
$
245,000

Unamortized debt issuance costs
(1,302
)
 
(1,421
)
Total
243,073

 
243,579

Less current portion
(2,500
)
 
(2,500
)
Long-term debt
$
240,573

 
$
241,079

ABL Facility
The Company and Key Energy Services, LLC, are borrowers (the “ABL Borrowers”) under an ABL Facility with the financial institutions party thereto from time to time as lenders (the “ABL Lenders”), Bank of America, N.A., as administrative agent for the lenders (the “Administrative Agent”) and Bank of America, N.A. and Wells Fargo Bank, National Association, as co-collateral agents for the lenders. The ABL Facility provides for aggregate commitments from the ABL Lenders of $100 million, and matures on June 15, 2021.
The ABL Facility provides the ABL Borrowers with the ability to borrow up to an aggregate principal amount equal to the lesser of (i) the aggregate revolving commitments then in effect and (ii) the sum of (a) 85% of the value of eligible accounts receivable plus (b) 80% of the value of eligible unbilled accounts receivable, subject to a limit equal to the greater of (x) $35 million and (y) 25% of the commitments. The amount that may be borrowed under the ABL Facility is subject to increase or reduction based on certain segregated cash or reserves provided for by the ABL Facility. In addition, the percentages of accounts receivable and unbilled accounts receivable included in the calculation described above is subject to reduction to the extent of certain bad debt write-downs and other dilutive items provided in the ABL Facility.
Borrowings under the ABL Facility will bear interest, at the ABL Borrowers’ option, at a per annum rate equal to (i) LIBOR for 30, 60, 90, 180, or, with the consent of the ABL Lenders, 360 days, plus an applicable margin that varies from 2.5% to 4.5% depending on the Borrowers’ fixed charge coverage ratio at such time or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the federal funds rate, plus 0.50% or (z) 30-day LIBOR, plus 1.0% plus (b) an applicable margin that varies from 1.50% to 3.50% depending on the Borrowers’ fixed charge coverage ratio at such time. In addition, the ABL Facility provides for unused line fees of 1.00% to 1.25% per year, depending on utilization, letter of credit fees and certain other factors.
The ABL Facility may in the future be guaranteed by certain of the Company’s existing and future subsidiaries (the “ABL Guarantors,” and together with the ABL Borrowers, the “ABL Loan Parties”). To secure their obligations under the ABL Facility, each of the ABL Loan Parties has granted or will grant, as applicable, to the Administrative Agent a first-priority security interest for the benefit of the ABL Lenders in its present and future accounts receivable, inventory and related assets and proceeds of the foregoing (the “ABL Priority Collateral”). In addition, the obligations of the ABL Loan Parties under the ABL Facility are secured by second-priority liens on the Term Priority Collateral (as described below under “Term Loan Facility”).
The revolving loans under the ABL Facility may be voluntarily prepaid, in whole or in part, without premium or penalty, subject to breakage or similar costs.
The ABL Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the ABL Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The ABL Facility also contains a requirement that the ABL Borrowers comply, during certain periods, with a fixed charge coverage ratio of 1.00 to 1.00.
As of March 31, 2019, we have no borrowings outstanding and $34.6 million of letters of credit outstanding with borrowing capacity of $21.6 million available subject to covenant constraints under our ABL Facility.
On April 5, 2019, the ABL Borrowers, as borrowers, the financial institutions party thereto as lenders and Bank of America, N.A. (the “ABL Agent”), as administrative agent for the lenders, entered into Amendment No. 1 (“Amendment No. 1”) to the ABL Facility, among the ABL Borrowers, the financial institutions party thereto from time to time as lenders, the ABL Agent and the co-collateral agents for the lenders, Bank of America, N.A. and Wells Fargo Bank, National Association. The amendment makes changes to, among other things, lower (i) the applicable margin for borrowings to (x) from between 2.50% and 4.50% to between 2.00% and 2.50% for LIBOR borrowings and (y) from 1.50% and 3.50% to between 1.00% and 1.50% for base rate borrowings, in each case depending on the ABL Borrowers’ fixed charge coverage ratio at such time, (ii) appoint the Bank of America, N.A. as sole collateral agent under the ABL Facility, (iii) extend the maturity of the credit facility from June 15, 2021 to the earlier of (x) April 5, 2024 and (y) 6 months prior to the maturity date of the ABL Borrowers’ term loan credit agreement and other material

12


debts, as identified under the ABL Facility, (iv) increase the maximum amount of revolving loan commitment increases from $30 million to $50 million and (v) revise certain triggers applicable to the covenants under the ABL Facility.
Term Loan Facility
The Company is a party to a Term Loan Facility among the Company, as borrower, certain subsidiaries of the Company named as guarantors therein, the financial institutions party thereto from time to time as Lenders (collectively, the “Term Loan Lenders”) and Cortland Capital Market Services LLC and Cortland Products Corp., as agent for the Lenders. The Term Loan Facility had an initial outstanding principal amount of $250 million as of December 15, 2016.
The Term Loan Facility will mature on December 15, 2021, although such maturity date may, at the Company’s request, be extended by one or more of the Term Loan Lenders pursuant to the terms of the Term Loan Facility. Borrowings under the Term Loan Facility will bear interest, at the Company’s option, at a per annum rate equal to (i) LIBOR for one, two, three, six, or, with the consent of the Term Loan Lenders, 12 months, plus 10.25% or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the Federal Funds rate, plus 0.50% and (z) 30-day LIBOR, plus 1.0% plus (b) 9.25%.
The Term Loan Facility is guaranteed by certain of the Company’s existing and future subsidiaries (the “Term Loan Guarantors,” and together with the Company, the “Term Loan Parties”). To secure their obligations under the Term Loan Facility, each of the Term Loan Parties has granted or will grant, as applicable, to the agent a first-priority security interest for the benefit of the Term Loan Lenders in substantially all of each Term Loan Party’s assets other than certain excluded assets and the ABL Priority Collateral (the “Term Priority Collateral”). In addition, the obligations of the Term Loan Parties under the Term Loan Facility are secured by second-priority liens on the ABL Priority Collateral (as described above under “ABL Facility”).
The loans under the Term Loan Facility may be prepaid at the Company’s option, subject to the payment of a prepayment premium in certain circumstances as provided in the Term Loan Facility. A prepayment prior to the first anniversary of the loan would have been required to have been made with a make-whole amount with the calculation of the make-whole amount as specified in the Term Loan Facility. If a prepayment is made after the first anniversary of the loan but prior to the second anniversary, such prepayment must be made at 106% of the principle amount, if a prepayment is made after the second anniversary but prior to the third anniversary, such prepayment must be made at 103% of the principle amount. After the third anniversary, if a prepayment is made, no prepayment premium is due. The Company is required to make principal payments in the amount of $625,000 per quarter. In addition, pursuant to the Term Loan Facility, the Company must prepay or offer to prepay, as applicable, term loans with the net cash proceeds of certain debt incurrences and asset sales, excess cash flow, and upon certain change of control transactions, subject in each case to certain exceptions.
The Term Loan Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the Term Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The Term Loan Facility also contains financial covenants requiring that the Company maintain an asset coverage ratio of at least 1.35 to 1.0 and that Liquidity (as defined in the Term Loan Facility) must not be less than $37.5 million (of which at least $20.0 million must be in cash or cash equivalents held in deposit accounts) as of the last day of any fiscal quarter, subject to certain exceptions and cure rights.
The weighted average interest rate on the outstanding borrowings under the Term Loan Facility for three months ended March 31, 2019 was as follows:
 
 
Three Months Ended
 
 
March 31, 2019
Term Loan Facility
 
12.98
%
Debt Compliance
At March 31, 2019, we were in compliance with all the financial covenants under our ABL Facility and the Term Loan Facility. Based on management’s current projections, we expect to be in compliance with all the covenants under our ABL Facility and Term Loan Facility for the next twelve months. A breach of any of these covenants, ratios or tests could result in a default under our indebtedness.

13


NOTE 8. OTHER INCOME
The table below presents comparative detailed information about our other income and expense, shown on the condensed consolidated statements of operations as “other income, net” for the periods indicated (in thousands):
 
 
 
 
 
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Interest income
 
$
(323
)
 
$
(184
)
Other
 
(819
)
 
(823
)
Total
 
$
(1,142
)
 
$
(1,007
)
NOTE 9. INCOME TAXES
The U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted on December 22, 2017. The 2017 Tax Act is comprehensive tax reform legislation that contains significant changes to corporate taxation. Provisions on the enacted law include a permanent reduction of the corporate income tax rate from 35% to 21%, imposing a mandatory one-time tax on un-repatriated accumulated earnings of foreign subsidiaries, a partial limitation on the deductibility of business interest expense, a limitation on net operating losses to 80% of taxable income each year, a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a partial territorial system (along with rules that create a new U.S. minimum tax on earnings of foreign subsidiaries), and other related provisions to maintain the U.S. tax base.
We recognized the income tax effects of the 2017 Tax Act in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) during 2017. SAB 118 provided SEC staff guidance for the application of ASC Topic 740, Income Taxes, and allowed for a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts. As such, our 2017 financial results reflected the provisional income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 was incomplete but a reasonable estimate could be determined. We did not identify any items for which the income tax effects of the 2017 Tax Act could not be reasonably estimated as of December 31, 2017. Additional clarifying guidance and law corrections were issued by the U.S. government during 2018 related to the 2017 Tax Act, which provided further insight into properly accounting for the impacts of U.S. tax reform. During 2018, we finalized our accounting for this matter and concluded that no adjustments were required from our provisionally recorded amounts from 2017. We no longer have any provisionally recorded items related to the enactment of the 2017 Tax Act as of December 31, 2018. In addition, there were no material 2017 Tax Act changes or clarifications that affected our accounting for the period ended March 31, 2019.
We are subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. Our effective tax rates for the three months ended March 31, 2019 and 2018 were (0.2%) and 0.0%, respectively. The variance between our effective rate and the U.S. statutory rate is due to the mix of pre-tax profit between the U.S. and international taxing jurisdictions with varying statutory rates, the impact of permanent differences, and other tax adjustments, such as valuation allowances against deferred tax assets, and tax expense or benefit recognized for uncertain tax positions.    
We continued recording income taxes using a year-to-date effective tax rate method for the three months ended March 31, 2019 and 2018. The use of this method was based on our expectations that a small change in our estimated ordinary income could result in a large change in the estimated annual effective tax rate. We will re-evaluate our use of this method each quarter until such time as a return to the annualized effective tax rate method is deemed appropriate.
The Company assesses the realizability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. Due to the history of losses in recent years and the continued challenges affecting the oil and gas industry, management continues to believe it is more likely than not that we will not be able to realize our net deferred tax assets. No release of our deferred tax asset valuation allowance was made during the three months ended March 31, 2019.
As of March 31, 2019 and 2018, we have unrecognized tax benefits, net of federal tax benefit, of zero and $0.1 million, respectively. These amounts, if recognized, would impact our effective tax rate. We record interest and penalties related to unrecognized tax benefits as income tax expense. We have accrued a liability of zero and less than $0.1 million for the payment of interest and penalties as of March 31, 2019 and 2018, respectively. All remaining unrecognized tax positions were recognized as of December 31, 2018 as a result of the statute of limitations lapse, and there are no unrecognized tax positions as of March 31, 2019.

14


NOTE 10. COMMITMENTS AND CONTINGENCIES
Litigation
Various suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental United States and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items, if any. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. We have $3.9 million of other liabilities related to litigation that is deemed probable and reasonably estimable as of March 31, 2019. We do not believe that the disposition of any of these matters will result in an additional loss materially in excess of amounts that have been recorded.
Self-Insurance Reserves
We maintain reserves for workers’ compensation and vehicle liability on our balance sheet based on our judgment and estimates using an actuarial method based on claims incurred. We estimate general liability claims on a case-by-case basis. We maintain insurance policies for workers’ compensation, vehicle liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. The retention limits or deductibles are accounted for in our accrual process for all workers’ compensation, vehicular liability and general liability claims. The deductibles have a $5 million maximum per vehicular liability claim, and a $2 million maximum per general liability claim and a $1 million maximum per workers’ compensation claim. As of March 31, 2019 and December 31, 2018, we have recorded $51.7 million and $50.1 million, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had $13.8 million and $13.1 million of insurance receivables as of March 31, 2019 and December 31, 2018, respectively. We believe that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued for existing claims.
Environmental Remediation Liabilities
For environmental reserve matters, including remediation efforts for current locations and those relating to previously disposed properties, we record liabilities when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. As of each of March 31, 2019 and December 31, 2018, we have recorded $2.3 million and $2.2 million, respectively, for our environmental remediation liabilities. We believe that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued.
NOTE 11. LOSS PER SHARE
Basic loss per share is determined by dividing net loss attributable to Key by the weighted average number of common shares actually outstanding during the period. Diluted loss per common share is based on the increased number of shares that would be outstanding assuming conversion of potentially dilutive outstanding securities using the treasury stock and “as if converted” methods.
The components of our loss per share are as follows (in thousands, except per share amounts):
 
 
 
 
 
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Basic and Diluted EPS Calculation:
 
 
 
 
Numerator
 
 
 
 
Net loss
 
$
(23,441
)
 
$
(24,963
)
Denominator
 
 
 
 
Weighted average shares outstanding
 
20,369

 
20,218

Basic and diluted loss per share
 
$
(1.15
)
 
$
(1.23
)
Restricted stock units (“RSUs”), stock options, and warrants are included in the computation of diluted earnings per share using the treasury stock method. Restricted stock awards are legally considered issued and outstanding when granted and are included in basic weighted average shares outstanding.

15


The company has issued potentially dilutive instruments such as RSUs, stock options, and warrants. However, the company did not include these instruments in its calculation of diluted loss per share during the periods presented, because to include them would be anti-dilutive. The following table shows potentially dilutive instruments (in thousands):
 
 
 
 
 
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
RSUs
 
1,882

 
1,166

Stock options
 
74

 
163

Warrants
 
1,838

 
1,838

Total
 
3,794

 
3,167

No events occurred after March 31, 2019 that would materially affect the number of weighted average shares outstanding.
NOTE 12. SHARE-BASED COMPENSATION
Common Stock Awards
We recognized employee share-based compensation expense of $0.7 million and $2.0 million during the three months ended March 31, 2019 and 2018, respectively. Our employee share-based awards, including common stock awards, stock option awards and phantom shares which vest in equal installments over a three-year period or which vest in a 40%-60% split respectively over a two-year period. Additionally, we recognized share-based compensation expense related to our outside directors of $0.1 million and $0.3 million during the three months ended March 31, 2019 and 2018, respectively. The unrecognized compensation cost related to our unvested share-based awards as of March 31, 2019 is estimated to be $6.7 million and is expected to be recognized over a weighted-average period of 1.6 years.
Stock Option Awards
We recognized compensation expense related to our stock options of zero and less than $0.1 million during the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, all outstanding stock options are vested and there are no unrecognized costs related to our stock options.
Phantom Share Plan
We recognized compensation expense related to our phantom shares of $0.1 million and $0.3 million during the three months ended March 31, 2019 and 2018, respectively. The unrecognized compensation cost related to our unvested phantom shares as of March 31, 2019 is estimated to be less than $0.1 million and is expected to be recognized over a weighted-average period of 1.3 years.
NOTE 13. TRANSACTIONS WITH RELATED PARTIES
The Company has purchased or sold equipment or services from a few affiliates of certain directors. Additionally, the Company has a corporate advisory services agreement between with Platinum Equity Advisors, LLC (“Platinum”) pursuant to which Platinum provides certain business advisory services to the Company. The dollar amounts related to these related party activities are not material to the Company’s condensed consolidated financial statements.
NOTE 14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities. These carrying amounts approximate fair value because of the short maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date.
Term Loan Facility due 2021. Because the variable interest rates of these loans approximate current market rates, the fair values of the loans borrowed under this facility approximate their carrying values.
NOTE 15. LEASES
We have operating leases for certain corporate offices and operating locations. We determine if a contract is a lease or contains an embedded lease at the contracts inception. Operating lease right-of-use (“ROU”) assets are included in other current and other non-current assets, operating lease liabilities are included in other current and other non-current liabilities in our consolidated balance sheets.

16


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 lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our risk adjusted incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease. Our leases have remaining lease terms of less than one year to five years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. Lease expense for lease payments is recognized on a straight-line basis over the non-cancelable term of the lease.
We recognized $0.7 million of costs related to our operating leases during the three months ended March 31, 2019. As of March 31, 2019, our leases have a weighted average remaining lease term of 2.2 years and a weighted average discount rate of 7.3%.
The maturities of our operating lease liabilities as of March 31, 2019 are as follows (in thousands):
 
March 31, 2019
Remainder of 2019
$
1,801

2020
1,233

2021
496

2022
126

2023
126

Thereafter
21

Total lease payments
3,803

Less imputed interest
(276
)
Total
$
3,527

NOTE 16. SEGMENT INFORMATION
Our reportable business segments are Rig Services, Fishing and Rental Services, Coiled Tubing Services and Fluid Management Services. We also have a “Functional Support” segment associated with overhead and other costs in support of our reportable segments. We evaluate the performance of our segments based on gross margin measures. All inter-segment sales pricing is based on current market conditions.
Rig Services
Our Rig Services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, well maintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gas producers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes and capabilities, allowing us to service all types of wells. Many of our rigs are outfitted with our proprietary KeyView® technology, which captures and reports well site operating data and provides safety control systems. We believe that this technology allows our customers and our crews to better monitor well site operations, improves efficiency and safety, and adds value to the services that we offer.
The completion and recompletion services provided by our rigs prepare wells for production, whether newly drilled, or recently extended through a workover operation. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing these zones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in the completion process. Completion services vary by well and our work may take a few days to several weeks to perform, depending on the nature of the completion.
The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and time consuming than normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover.
Maintenance services provided with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of these maintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores, and pulling rods and other downhole equipment from wellbores to identify and

17


resolve production problems. Maintenance services are generally less complicated than completion and workover related services and require less time to perform.
Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. These plugging and abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services is not significantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are no longer productive.
Fishing and Rental Services
We offer a full line of fishing services and rental equipment designed for use in providing drilling and workover services. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, pumps, power swivels, reversing units and foam air units. We sold our well testing assets and our frac stack equipment used to support hydraulic fracturing operations and the associated flowback of frac fluids in the second quarter of 2017.
Demand for our fishing and rental services is closely related to capital spending by oil and natural gas producers, which is generally a function of oil and natural gas prices.
Coiled Tubing Services
Coiled Tubing Services involve the use of a continuous metal pipe spooled onto a large reel which is then deployed into oil and natural gas wells to perform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemical treatments. Coiled tubing is also used for a number of horizontal well applications such as milling temporary isolation plugs that separate frac zones, and various other pre- and post-hydraulic fracturing well preparation services.
Fluid Management Services
We provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover and maintenance activities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site and transported for disposal in saltwater disposal wells owned by us or a third party. In addition, we operate a fleet of hot oilers capable of pumping heated fluids used to clear soluble restrictions in a wellbore. Demand and pricing for these services generally correspond to demand for our well service rigs.
Functional Support
Our Functional Support segment includes unallocated overhead costs associated with administrative support for our reporting segments.
Financial Summary
The following tables set forth our unaudited segment information as of and for the three months ended March 31, 2019 and 2018 (in thousands):
As of and for the three months ended March 31, 2019
 
Rig Services
 
Fishing and Rental Services
 
Coiled Tubing Services
 
Fluid Management Services
 
Functional
Support
 
Reconciling
Eliminations
 
Total
Revenues from external customers
$
65,026

 
$
14,587

 
$
10,673

 
$
18,987

 
$

 
$

 
$
109,273

Intersegment revenues
88

 
908

 

 
43

 

 
(1,039
)
 

Depreciation and amortization
5,989

 
4,150

 
1,256

 
2,441

 
460

 

 
14,296

Other operating expenses
54,581

 
11,560

 
11,555

 
16,437

 
16,156

 

 
110,289

Operating income (loss)
4,456

 
(1,123
)
 
(2,138
)
 
109

 
(16,616
)
 

 
(15,312
)
Interest expense, net of amounts capitalized
10

 
7

 
16

 
11

 
9,189

 

 
9,233

Income (loss) before income taxes
4,469

 
(1,124
)
 
(2,153
)
 
106

 
(24,701
)
 

 
(23,403
)
Long-lived assets(1)
134,880

 
49,352

 
17,368

 
53,168

 
19,023

 

 
273,791

Total assets
185,482

 
61,353

 
27,417

 
66,407

 
62,841

 
9,252

 
412,752

Capital expenditures
1,830

 
2,073

 
766

 
157

 
214

 

 
5,040


18


As of and for the three months ended March 31, 2018
 
Rig Services
 
Fishing and Rental Services
 
Coiled Tubing Services
 
Fluid Management Services
 
Functional
Support
 
Reconciling
Eliminations
 
Total
Revenues from external customers
$
70,304

 
$
13,835

 
$
18,423

 
$
22,754

 
$

 
$

 
$
125,316

Intersegment revenues
65

 
515

 
9

 
351

 

 
(940
)
 

Depreciation and amortization
7,787

 
5,754

 
1,172

 
5,179

 
464

 

 
20,356

Other operating expenses
59,567

 
12,033

 
13,319

 
20,639

 
17,227

 

 
122,785

Operating income (loss)
2,950

 
(3,952
)
 
3,932

 
(3,064
)
 
(17,691
)
 

 
(17,825
)
Interest expense, net of amounts capitalized

 

 

 

 
8,144

 

 
8,144

Income (loss) before income taxes
3,006

 
(3,945
)
 
3,932

 
(3,028
)
 
(24,927
)
 

 
(24,962
)
Long-lived assets(1)
155,688

 
57,971

 
20,419

 
70,275

 
130,559

 
(105,733
)
 
329,179

Total assets
212,529

 
69,762

 
38,943

 
86,595

 
189,836

 
(95,666
)
 
501,999

Capital expenditures
3,466

 
366

 
3,057

 
1,483

 
1,072

 

 
9,444

(1)
Long-lived assets include fixed assets, intangibles and other non-current assets.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW    
Key Energy Services, Inc., and its wholly owned subsidiaries provide a full range of well services to major oil companies and independent oil and natural gas production companies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services, and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States. An important component of the Company’s growth strategy is to make acquisitions that will strengthen its core services or presence in selected markets, and the Company also makes strategic divestitures from time to time. The Company expects that the industry in which it operates will experience consolidation, and the Company expects to explore opportunities and engage in discussions regarding these opportunities, which could include mergers, consolidations or acquisitions or further dispositions or other transactions, although there can be no assurance that any such activities will be consummated.
The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of and for the three months ended March 31, 2019 and 2018, included elsewhere herein, and the audited consolidated financial statements and notes thereto included in our 2018 Form 10-K and Part I, Item 1A. Risk Factors of our 2018 Form 10-K.
We provide information regarding four business segments: Rig Services, Fishing and Rental Services, Coiled Tubing Services and Fluid Management Services. We also have a “Functional Support” segment associated with overhead and other costs in support of our reportable segments. See “Note 16. Segment Information” in “Item 1. Financial Statements” of Part I of this report for a summary of our business segments.
PERFORMANCE MEASURES
The Baker Hughes U.S. rig count data, which is publicly available on a weekly basis, is often used as an indicator of overall Exploration and Production (“E&P”) company spending and broader oilfield activity. In assessing overall activity in the U.S. onshore oilfield service industry in which we operate, we believe that the Baker Hughes U.S. land drilling rig count is the best available barometer of E&P companies’ capital spending and resulting activity levels. Historically, our activity levels have been highly correlated with U.S. onshore capital spending by our E&P company customers as a group.

19


 
 
WTI Cushing Oil(1)
 
NYMEX Henry
Hub Natural Gas(1)
 
Average Baker
Hughes U.S. Land
Drilling Rigs(2)
 
Average AESC Well Service Active Rig Count(3)
2019:
 
 
 
 
 
 
 
 
First Quarter
 
$
54.82

 
$
2.92

 
1,023

 
1,295

 
 
 
 
 
 
 
 
 
2018:
 
 
 
 
 
 
 
 
First Quarter
 
$
62.91

 
$
3.08

 
951

 
1,220

Second Quarter
 
$
68.07

 
$
2.85

 
1,021

 
1,297

Third Quarter
 
$
69.69

 
$
2.93

 
1,032

 
1,337

Fourth Quarter
 
$
59.97

 
$
3.77

 
1,050

 
1,316

(1)
Represents the average of the monthly average prices for each of the periods presented. Source: EIA and Bloomberg
(2)
Source: www.bakerhughes.com
(3)
Source: www.aesc.net
Internally, we measure activity levels for our well servicing operations primarily through our rig and trucking hours. Generally, as capital spending by E&P companies increases, demand for our services also rises, resulting in increased rig and trucking services and more hours worked. Conversely, when activity levels decline due to lower spending by E&P companies, we generally provide fewer rig and trucking services, which results in fewer hours worked.
Our rig activity occurs primarily on weekdays during daylight hours. Accordingly, we track rig activity on a “per working day” basis. Key’s working days per quarter, which exclude national holidays, are indicated in the table below. Our trucking activity tends to occur on a 24/7 basis. Accordingly, we track our trucking activity on a “per calendar day” basis. The following table presents our quarterly rig and trucking hours from 2018 through the first quarter of 2019:
 
 
Rig Hours
 
Trucking Hours
 
Key’s 
Working Days(1)
2019:
 
 
 
 
 
 
First Quarter
 
151,309

 
150,740

 
63

 
 
 
 
 
 
 
2018:
 
 
 
 
 
 
First Quarter
 
175,232

 
214,194

 
63

Second Quarter
 
187,578

 
201,427

 
64

Third Quarter
 
180,943

 
184,310

 
63

Fourth Quarter
 
156,453

 
179,405

 
62

Total 2018
 
700,206

 
779,336

 
252

(1)
Key’s working days are the number of weekdays during the quarter minus national holidays.
MARKET AND BUSINESS CONDITIONS AND OUTLOOK
Our core businesses depend on our customers’ willingness to make expenditures to produce, develop and explore for oil and natural gas in onshore U.S. basins. Industry conditions are influenced by numerous factors, such as oil and natural gas prices, the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, political instability in oil producing countries, and available supply of and demand for the services we provide. Higher oil prices have historically spurred additional demand for our services as oil and gas producers increase spending on production maintenance and drilling and completion of new wells.
Over the first nine months of 2018, strengthening oil prices led to improvement in demand for our services, particularly services associated with the completion of oil and natural gas wells, and we were able to increase prices for most of our service offerings. We did not though, experience as substantial a change in activity as it relates to our services driven by our customer’s spending on the maintenance of existing oil and gas wells, particularly conventional wells. During the fourth quarter of 2018, oil prices fell, we believe reducing demand for all of our services during a period where we also typically experience lower demand due to holidays and fewer daylight hours.
Over the first quarter of 2019, oil prices began to recover from the lows experienced in late 2018. We though, experienced a decline in revenues compared to the prior quarter and the corresponding period in 2018 due to seasonal effects including weather,

20


and lower demand for completion driven services. We believe that many of our clients did not react to the improved oil price with higher spending or increases in planned expenditures that would have increased demand for our services. We expect that due to the improved commodity price, demand for our services will increase over the remainder of 2019. Additionally, we believe that the continued aging of horizontal wells will increase demand for well maintenance services as customers seek to maintain or increase production through accretive regular well maintenance at economically supportive oil prices for conventional and horizontal oil wells over the next several years. With increased demand for oilfield services broadly, and specifically in the services we offer, we expect the demand for qualified employees to also increase. An inability to attract and retain qualified employees to meet the needs of our customers may constrain our growth in 2019 and future periods or offset price increases realized due to inflation in labor costs necessary to attract and retain employees.
RESULTS OF OPERATIONS
The following table shows our consolidated results of operations for the three months ended March 31, 2019 and 2018, respectively (in thousands):
 
 
 
 
 
Three Months Ended
 
March 31,
 
2019
 
2018
REVENUES
$
109,273

 
$
125,316

COSTS AND EXPENSES:

 

Direct operating expenses
88,194

 
98,211

Depreciation and amortization expense
14,296

 
20,356

General and administrative expenses
22,095

 
24,574

Operating loss
(15,312
)
 
(17,825
)
Interest expense, net of amounts capitalized
9,233

 
8,144

Other income, net
(1,142
)
 
(1,007
)
Loss before income taxes
(23,403
)
 
(24,962
)
Income tax expense
(38
)
 
(1
)
NET LOSS
$
(23,441
)
 
$
(24,963
)
Consolidated Results of Operations — Three Months Ended March 31, 2019 and 2018
Revenues
Our revenues for the three months ended March 31, 2019 decreased $16.0 million, or 12.8%, to $109.3 million from $125.3 million for the three months ended March 31, 2018, due to lower spending from our customers as a result of lower oil prices. These market conditions resulted in reduced customer activity and a reduction in the price received for our services. See “Segment Operating Results — Three Months Ended March 31, 2019 and 2018 below for a more detailed discussion of the change in our revenues.
Direct Operating Expenses
Our direct operating expenses decreased $10.0 million, to $88.2 million (80.7% of revenues), for the three months ended March 31, 2019, compared to $98.2 million (78.4% of revenues) for the three months ended March 31, 2018. This decrease is primarily a result of a decrease in employee compensation costs, fuel expense and repair and maintenance expense due to a decrease in activity levels.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $6.1 million, or 29.8%, to $14.3 million during the three months ended March 31, 2019, compared to $20.4 million for the three months ended March 31, 2018. This decrease is primarily due to assets being fully depreciated.
General and Administrative Expenses
General and administrative expenses decreased $2.5 million, to $22.1 million (20.2% of revenues), for the three months ended March 31, 2019, compared to $24.6 million (19.6% of revenues) for the three months ended March 31, 2018. This decrease is primarily due to lower employee compensation costs due to reduced staffing levels, reduced facilities expense and a decrease in legal settlement expenses.

21


Interest Expense, Net of Amounts Capitalized
Interest expense increased $1.1 million, or 13.4%, to $9.2 million for the three months ended March 31, 2019, compared to $8.1 million for the same period in 2018. This increase is primarily related to the increase in the variable interest rate on our long-term debt.
Other Income, Net
During the three months ended March 31, 2019, we recognized other income, net, of $1.1 million, compared to other income, net, of $1.0 million for the three months ended March 31, 2018.
The following table summarizes the components of other income, net for the periods indicated (in thousands):
 
 
 
 
 
Three Months Ended
 
March 31,
 
2019
 
2018
Interest income
$
(323
)
 
$
(184
)
Other
(819
)
 
(823
)
Total
$
(1,142
)
 
$
(1,007
)
Income Tax Expense
We recorded an income tax expense of less than $0.1 million on a pre-tax loss of $23.4 million for the three months ended March 31, 2019, compared to an income tax expense of less than $0.1 million on a pre-tax loss of $25.0 million for the same period in 2018. Our effective tax rate was (0.2%) for the three months ended March 31, 2019, compared to 0.0% for the three months ended March 31, 2018. Our effective tax rates differ from the applicable U.S. statutory rates due to a number of factors, including the mix of profit and loss between U.S. and international taxing jurisdictions with varying statutory rates, the impact of permanent differences, and other tax adjustments, such as valuation allowances against deferred tax assets, and tax expense or benefit recognized for uncertain tax positions. 
Segment Operating Results — Three Months Ended March 31, 2019 and 2018
The following table shows operating results for each of our segments for the three months ended March 31, 2019 and 2018 (in thousands):
For the three months ended March 31, 2019
 
Rig Services
 
Fishing and Rental Services
 
Coiled Tubing Services
 
Fluid Management Services
 
Functional
Support
 
Total
Revenues from external customers
$
65,026

 
$
14,587

 
$
10,673

 
$
18,987

 
$

 
$
109,273

Operating expenses
60,570

 
15,710

 
12,811

 
18,878

 
16,616

 
124,585

Operating income (loss)
4,456

 
(1,123
)
 
(2,138
)
 
109

 
(16,616
)
 
(15,312
)
For the three months ended March 31, 2018
 
Rig Services
 
Fishing and Rental Services
 
Coiled Tubing Services
 
Fluid Management Services
 
Functional
Support
 
Total
Revenues from external customers
$
70,304

 
$
13,835

 
$
18,423

 
$
22,754

 
$

 
$
125,316

Operating expenses
67,354

 
17,787

 
14,491

 
25,818

 
17,691

 
143,141

Operating income (loss)
2,950

 
(3,952
)
 
3,932

 
(3,064
)
 
(17,691
)
 
(17,825
)
Rig Services
Revenues for our Rig Services segment decreased $5.3 million, or 7.5%, to $65.0 million for the three months ended March 31, 2019, compared to $70.3 million for the three months ended March 31, 2018. The decrease for this segment is primarily due to lower spending from our customers as a result of lower oil prices and unfavorable weather. These market conditions resulted in reduced customer activity and a reduction in the price received for our services.
Operating expenses for our Rig Services segment were $60.6 million for the three months ended March 31, 2019, which represented a decrease of $6.8 million, or 10.1%, compared to $67.4 million for the same period in 2018. This decrease is primarily a result of a decrease in employee compensation costs, fuel expense and repair and maintenance expense due to a decrease in activity levels and a decrease in depreciation expense.

22


Fishing and Rental Services
Revenues for our Fishing and Rental Services segment increased $0.8 million, or 5.4%, to $14.6 million for the three months ended March 31, 2019, compared to $13.8 million for the three months ended March 31, 2018. The increase for this segment is primarily due to an increase in completion and production spending from our customers.
Operating expenses for our Fishing and Rental Services segment were $15.7 million for the three months ended March 31, 2019, which represented a decrease of $2.1 million, or 11.7%, compared to $17.8 million for the same period in 2018. The decrease for this segment is primarily due to the decrease in depreciation expense and repair and maintenance expense.
Coiled Tubing Services
Revenues for our Coiled Tubing Services segment decreased $7.8 million, or 42.1%, to $10.7 million for the three months ended March 31, 2019, compared to $18.4 million for the three months ended March 31, 2018. The decrease for this segment is primarily due to lower spending from our customers on oil and gas well drilling and completion, as a result of lower oil prices. These market conditions resulted in reduced customer activity and a reduction in the price received for our services.
Operating expenses for our Coiled Tubing Services segment were $12.8 million for the three months ended March 31, 2019, which represented a decrease of $1.7 million, or 11.6%, compared to $14.5 million for the same period in 2018. This decrease is primarily a result of a decrease in employee compensation costs and repair and maintenance expense due to a decrease in activity levels.
Fluid Management Services
Revenues for our Fluid Management Services segment decreased $3.8 million, or 16.6%, to $19.0 million for the three months ended March 31, 2019, compared to $22.8 million for the three months ended March 31, 2018. The decrease for this segment is primarily due to lower spending from our customers as a result of lower oil prices. These market conditions resulted in reduced customer activity and a reduction in the price received for our services.
Operating expenses for our Fluid Management Services segment were $18.9 million for the three months ended March 31, 2019, which represented a decrease of $6.9 million, or 26.9%, compared to $25.8 million for the same period in 2018. This decrease is primarily a result of a decrease in employee compensation costs, fuel expense and repair and maintenance expense due to a decrease in activity levels and a decrease in depreciation expense.
Functional Support
Operating expenses for Functional Support, which represent expenses associated with managing our reporting segments, decreased $1.1 million, or 6.1%, to $16.6 million (15.2% of consolidated revenues) for the three months ended March 31, 2019 compared to $17.7 million (14.1% of consolidated revenues) for the same period in 2018. The decrease is primarily due to lower employee compensation costs due to reduced staffing levels and a decrease in legal settlement expenses.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition and Liquidity
As of March 31, 2019, we had total liquidity of $57.3 million, which consists of $35.7 million cash and cash equivalents and $21.6 million of borrowing capacity available under our ABL Facility. This compares to total liquidity of $74.3 million which consisted of $50.3 million cash and cash equivalents and $24 million of borrowing capacity available under our ABL Facility as of December 31, 2018. Our working capital was $45.1 million as of March 31, 2019, compared to $55.0 million as of December 31, 2018. Our working capital decreased from the prior year end primarily as a result of a decrease in cash and cash equivalents and accounts receivable, partially offset decrease in accrued payroll and insurance. As of March 31, 2019, we had no borrowings outstanding and $34.6 million in committed letters of credit outstanding under our ABL Facility.

23


The following table summarizes our cash flows for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
 
 
 
Three Months Ended
 
March 31,
 
2019
 
2018
Net cash used in operating activities
$
(11,342
)
 
$
(23,424
)
Cash paid for capital expenditures
(5,040
)
 
(9,444
)
Proceeds received from sale of fixed assets
2,389

 
6,943

Repayments of long-term debt
(625
)
 
(625
)
Other financing activities, net

 
1

Net decrease in cash, cash equivalents and restricted cash
$
(14,618
)
 
$
(26,549
)
Cash used in operating activities was $11.3 million for the three months ended March 31, 2019 compared to cash used in operating activities of $23.4 million for the three months ended March 31, 2018. Net cash used in operating activities for the three months ended March 31, 2019 as compared to cash used in operating activities for the three months ended March 31, 2018 was primarily a result in changes in working capital
Cash used in investing activities was $2.7 million for the three months ended March 31, 2019 compared to cash used in investing activities of $2.5 million for the three months ended March 31, 2018. Cash outflows during these periods consisted capital expenditures. Our capital expenditures are primarily related to the addition of new equipment and the ongoing maintenance of our equipment. Cash inflows during these periods consisted of proceeds from sales of fixed assets.
Cash used in financing activities was $0.6 million for the three months ended March 31, 2019 compared to cash used in financing activities of $0.6 million for the three months ended March 31, 2018. Financing cash outflows for the three months ended March 31, 2019 and March 31, 2018 primarily relate to the repayment of long-term debt.
Sources of Liquidity and Capital Resources
We believe that our internally generated cash flows from operations, current reserves of cash and availability under our ABL Facility are sufficient to finance our cash requirements for current and future operations, budgeted capital expenditures, debt service and other obligations for the next twelve months.
At March 31, 2019, our annual debt maturities for our 2021 Term Loan Facility were as follows (in thousands):
 
 
Year
Principal
Payments
2019
$
1,875

2020
2,500

2021
240,000

Total principal payments
$
244,375

ABL Facility
The Company and Key Energy Services, LLC are borrowers (the “ABL Borrowers”) under an ABL Facility with the financial institutions party thereto from time to time as lenders (the “ABL Lenders”), Bank of America, N.A., as administrative agent for the lenders (the “Administrative Agent”) and Bank of America, N.A. and Wells Fargo Bank, National Association, as co-collateral agents for the lenders. The ABL Facility provides for aggregate commitments from the ABL Lenders of $100 million, and matures on June 15, 2021.
The ABL Facility provides the ABL Borrowers with the ability to borrow up to an aggregate principal amount equal to the lesser of (i) the aggregate revolving commitments then in effect and (ii) the sum of (a) 85% of the value of eligible accounts receivable plus (b) 80% of the value of eligible unbilled accounts receivable, subject to a limit equal to the greater of (x) $35 million and (y) 25% of the commitments. The amount that may be borrowed under the ABL Facility is subject to increase or reduction based on certain segregated cash or reserves provided for by the ABL Facility. In addition, the percentages of accounts receivable and unbilled accounts receivable included in the calculation described above is subject to reduction to the extent of certain bad debt write-downs and other dilutive items provided in the ABL Facility.
Borrowings under the ABL Facility bear interest, at the ABL Borrowers’ option, at a per annum rate equal to (i) LIBOR for 30, 60, 90, 180, or, with the consent of the ABL Lenders, 360 days, plus an applicable margin that varies from 2.50% to 4.50% depending on the Borrowers’ fixed charge coverage ratio at such time or (ii) a base rate equal to the sum of (a) the greatest of

24


(x) the prime rate, (y) the federal funds rate, plus 0.50% or (z) 30-day LIBOR, plus 1.0% plus (b) an applicable margin that varies from 1.50% to 3.50% depending of the Borrowers’ fixed charge coverage ratio at such time. In addition, the ABL Facility provides for unused line fees of 1.00% to 1.25% per year, depending on utilization, letter of credit fees and certain other factors.
The ABL Facility may in the future be guaranteed by certain of the Company’s existing and future subsidiaries (the “ABL Guarantors,” and together with the ABL Borrowers, the “ABL Loan Parties”). To secure their obligations under the ABL Facility, each of the ABL Loan Parties has granted or will grant, as applicable, to the Administrative Agent a first-priority security interest for the benefit of the ABL Lenders in its present and future accounts receivable, inventory and related assets and proceeds of the foregoing (the “ABL Priority Collateral”). In addition, the obligations of the ABL Loan Parties under the ABL Facility are secured by second-priority liens on the Term Priority Collateral (as described below under “Term Loan Facility”).
The revolving loans under the ABL Facility may be voluntarily prepaid, in whole or in part, without premium or penalty, subject to breakage or similar costs.
The ABL Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the ABL Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The ABL Facility also contains a requirement that the ABL Borrowers comply, during certain periods with a fixed charge coverage ratio of 1.00 to 1.00.
As of March 31, 2019, we have no borrowings outstanding and $34.6 million of letters of credit outstanding with borrowing capacity of $21.6 million available subject to covenant constraints under our ABL Facility.
On April 5, 2019, the ABL Borrowers, as borrowers, the financial institutions party thereto as lenders and Bank of America, N.A. (the “ABL Agent”), as administrative agent for the lenders, entered into Amendment No. 1 (“Amendment No. 1”) to the ABL Facility, among the ABL Borrowers, the financial institutions party thereto from time to time as lenders, the ABL Agent and the co-collateral agents for the lenders, Bank of America, N.A. and Wells Fargo Bank, National Association. The amendment makes changes to, among other things, lower (i) the applicable margin for borrowings to (x) from between 2.50% and 4.50% to between 2.00% and 2.50% for LIBOR borrowings and (y) from 1.50% and 3.50% to between 1.00% and 1.50% for base rate borrowings, in each case depending on the ABL Borrowers’ fixed charge coverage ratio at such time, (ii) appoint the Bank of America, N.A. as sole collateral agent under the ABL Facility, (iii) extend the maturity of the credit facility from June 15, 2021 to the earlier of (x) April 5, 2024 and (y) 6 months prior to the maturity date of the ABL Borrowers’ term loan credit agreement and other material debts, as identified under the ABL Facility, (iv) increase the maximum amount of revolving loan commitment increases from $30 million to $50 million and (v) revise certain triggers applicable to the covenants under the ABL Facility.
Term Loan Facility
The Company is a party to a Term Loan Facility among the Company, as borrower, certain subsidiaries of the Company named as guarantors therein, the financial institutions party thereto from time to time as Lenders (collectively, the “Term Loan Lenders”) and Cortland Capital Market Services LLC and Cortland Products Corp., as agent for the Lenders. The Term Loan Facility had an initial outstanding principal amount of $250 million as of December 15, 2016.
The Term Loan Facility will mature on December 15, 2021, although such maturity date may, at the Company’s request, be extended by one or more of the Term Loan Lenders pursuant to the terms of the Term Loan Facility. Borrowings under the Term Loan Facility bear interest, at the Company’s option, at a per annum rate equal to (i) LIBOR for one, two, three, six, or, with the consent of the Term Loan Lenders, 12 months, plus 10.25% or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the Federal Funds rate, plus 0.50% and (z) 30-day LIBOR, plus 1.0% plus (b) 9.25%.
The Term Loan Facility is guaranteed by certain of the Company’s existing and future subsidiaries (the “Term Loan Guarantors,” and together with the Company, the “Term Loan Parties”). To secure their obligations under the Term Loan Facility, each of the Term Loan Parties has granted or will grant, as applicable, to the Agent a first-priority security interest for the benefit of the Term Loan Lenders in substantially all of each Term Loan Party’s assets other than certain excluded assets and the ABL Priority Collateral (the “Term Priority Collateral”). In addition, the obligations of the Term Loan Parties under the Term Loan Facility are secured by second-priority liens on the ABL Priority Collateral (as described above under “ABL Facility”).
The loans under the Term Loan Facility may be prepaid at the Company’s option, subject to the payment of a prepayment premium in certain circumstances as provided in the Term Loan Facility. A prepayment prior to the first anniversary of the loan would have been required to have been made with a make-whole amount with the calculation of the make-whole amount as specified in the Term Loan Facility. If a prepayment is made after the first anniversary of the loan but prior to the second anniversary, such prepayment must be made at 106% of the principle amount, if a prepayment is made after the second anniversary but prior to the third anniversary, such prepayment must be made at 103% of the principle amount. After the third anniversary, if a prepayment is made, no prepayment premium is due. The Company is required to make principal payments in the amount of $625,000 per quarter. In addition, pursuant to the Term Loan Facility, the Company must prepay or offer to prepay, as applicable, term loans

25


with the net cash proceeds of certain debt incurrences and asset sales, excess cash flow, and upon certain change of control transactions, subject in each case to certain exceptions.
The Term Loan Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the Term Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The Term Loan Facility also contains financial covenants requiring that the Company maintain an asset coverage ratio of at least 1.35 to 1.0 and that Liquidity (as defined in the Term Loan Facility) must not be less than $37.5 million (of which at least $20.0 million must be in cash or cash equivalents held in deposit accounts) as of the last day of any fiscal quarter, subject to certain exceptions and cure rights.
Debt Compliance
At March 31, 2019, we were in compliance with all the financial covenants under our ABL Facility and the Term Loan Facility. Based on management’s current projections, we expect to be in compliance with all the covenants under our ABL Facility and Term Loan Facility for the next twelve months. A breach of any of these covenants, ratios or tests could result in a default under our indebtedness.
Capital Expenditures
During the three months ended March 31, 2019, our capital expenditures totaled $5.0 million, primarily related to the addition of new equipment needed to take advantage of the increases in activity. Our capital expenditure plan for 2019 contemplates spending between $15 million and $20 million, subject to market conditions. This is primarily related to the addition of new equipment needed to take advantage of the increases in activity and the ongoing maintenance of our equipment. Our capital expenditure program for 2019 is subject to market conditions, including activity levels, commodity prices, industry capacity and specific customer needs as well as cash flows, including cash generated from asset sales. Our focus for 2019 has been the maximization of our current equipment fleet, but we may choose to increase our capital expenditures in the remainder of 2019 to expand our presence in a market. We currently anticipate funding our 2019 capital expenditures through a combination of cash on hand, operating cash flow, proceeds from sales of assets and borrowings under our ABL Facility. Should our operating cash flows or activity levels prove to be insufficient to fund our currently planned capital spending levels, management expects that it will adjust our capital spending plans accordingly. We may also incur capital expenditures for strategic investments and acquisitions.
Off-Balance Sheet Arrangements
At March 31, 2019 we did not, and we currently do not, have any off-balance sheet arrangements that have or are reasonably likely to have a material, current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our quantitative and qualitative disclosures about market risk from those disclosed in our 2018 Form 10-K. More detailed information concerning market risk can be found in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2018 Form 10-K.
ITEM 4.     CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on this evaluation, management concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the first quarter of 2019 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
We are subject to various suits and claims that have arisen in the ordinary course of business. We do not believe that the disposition of any of our ordinary course litigation will result in a material adverse effect on our consolidated financial position, results of operations or cash flows. For additional information on legal proceedings, see “Note 10. Commitments and Contingencies” in “Item 1. Financial Statements” of Part I of this report, which is incorporated herein by reference.
ITEM 1A.
RISK FACTORS
As of the date of this filing, there have been no material changes in the risk factors previously disclosed in Part I, “Item 1A. Risk Factors” of our 2018 Form 10-K.
ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
The Exhibit Index, which proceeds the signature pages to this report and is incorporated by reference herein, sets forth a list of exhibits to this report.

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EXHIBIT INDEX
Exhibit No.
 
Description
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
10.3
 
 
 
 
10.4
 
 
 
 
10.5
 
 
 
 
10.6*
 
 
 
 
10.7*
 
 
 
 
31.1*
  
 
 
31.2*
  
 
 
32**
  
 
 
101*
  
Interactive Data File.
 
 
*
Filed herewith
 
 
**
Furnished herewith


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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:
May 9, 2019
 
 
By:
/s/ J. MARSHALL DODSON
 
 
 
 
 
J. Marshall Dodson
 
 
 
 
 
Senior Vice President and Chief Financial Officer
(As duly authorized officer and Principal Financial Officer)

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