Forbes Energy Services Ltd. - FORM 10-Q - August 14, 2014

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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 June 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-35281
__________________________________________________________
Forbes Energy Services Ltd.
(Exact name of registrant as specified in its charter)
__________________________________________________________
Texas
 
98-0581100
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3000 South Business Highway 281
Alice, Texas
 
78332
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(361) 664-0549 
__________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    ¨  Yes    x  No
Shares outstanding of each of the registrant’s classes of common stock as of August 12, 2014:
Class
  
Outstanding as of August 12, 2014
Common Stock, $.04 par value
  
21,791,723

 
 
 
 
 



FORBES ENERGY SERVICES LTD.
TABLE OF CONTENTS
 


2

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any oral statements made in connection with it include certain forward-looking statements within the meaning of the federal securities laws. You can generally identify forward-looking statements by the appearance in such a statement of words like “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or “should” or other comparable words or the negative of these words. When you consider our forward-looking statements, you should keep in mind the risk factors we describe and other cautionary statements we make in this Quarterly Report on Form 10-Q. Our forward-looking statements are only predictions based on expectations that we believe are reasonable. Our actual results could differ materially from those anticipated in, or implied by, these forward-looking statements as a result of known risks and uncertainties set forth below and elsewhere in this Quarterly Report on Form 10-Q. These factors include or relate to the following:

•
supply and demand for oilfield services and industry activity levels;
•
potential for excess capacity;
•
spending by the oil and natural gas industry given the continuing worldwide economic slowdown;
•
our level of indebtedness;
•
possible impairment of our long-lived assets;
•
our ability to maintain stable pricing;
•
competition;
•
substantial capital requirements;
•
significant operating and financial restrictions under our indenture and revolving credit facility;
•
technological obsolescence of operating equipment;
•
dependence on certain key employees;
•
concentration of customers;
•
substantial costs of compliance with reporting obligations, the Sarbanes-Oxley Act and indenture covenants;
•
a material weakness in internal controls over financial reporting;
•
seasonality of oilfield services activity;
•
collection of accounts receivable;
•
environmental and other governmental regulation, including potential climate change legislation;
•
the potential disruption of business activities caused by the physical effects, if any, of climate change;
•
risks inherent in our operations;
•
market response to global demands to curtail use of oil and natural gas;
•
ability to fully integrate future acquisitions;
•
variation from projected operating and financial data;
•
variation from budgeted and projected capital expenditures;
•
volatility of global financial markets; and
•
the other factors discussed under “Risk Factors” beginning on page 10 of the Annual Report on Form 10-K for the year ended December 31, 2013.
We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. To the extent these risks, uncertainties and assumptions give rise to events that vary from our expectations, the forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.

3

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements

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

 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
16,762

 
$
26,409

Accounts receivable - trade, net of allowance of $3.7 million and $4.0 million for 2014 and 2013, respectively
95,233

 
82,209

Accounts receivable - related parties
342

 
185

Accounts receivable - other
326

 
592

Prepaid expenses and other
8,885

 
14,004

Total current assets
121,548

 
123,399

Property and equipment, net
334,229

 
341,869

Intangible assets, net
23,723

 
25,154

Deferred financing costs, net of accumulated amortization of $4.8 million and $3.7 million for 2014 and 2013, respectively
5,790

 
6,860

Restricted cash
1,381

 
1,380

Other assets
1,767

 
1,896

Total assets
$
488,438

 
$
500,558

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities
 
 
 
Current portions of long-term debt
$
7,148

 
$
9,374

Accounts payable - trade
20,790

 
27,016

Accounts payable - related parties
164

 
559

Accrued dividends
61

 
61

Accrued interest payable
1,260

 
1,367

Accrued expenses
17,427

 
14,727

Total current liabilities
46,850

 
53,104

Long-term debt, net of current portion
287,851

 
290,266

Deferred tax liability
20,138

 
21,610

Total liabilities
354,839

 
364,980

Commitments and contingencies (Note 10)

 


Temporary equity
 
 
 
Series B senior convertible preferred shares
14,580

 
14,560

Shareholders’ equity
 
 
 
Common stock, $.04 par value, 112,500 shares authorized, 21,766 and 21,474 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
871

 
859

Additional paid-in capital
194,303

 
193,527

Accumulated deficit
(76,155
)
 
(73,368
)
Total shareholders’ equity
119,019

 
121,018

Total liabilities and shareholders’ equity
$
488,438

 
$
500,558

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

4

Forbes Energy Services Ltd.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)
 
 
Three months ended June 30,
 
Six months ended June 30
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Well servicing
$
70,356

 
$
54,633

 
$
139,449

 
$
104,797

Fluid logistics
42,819

 
49,049

 
83,637

 
100,623

Total revenues
113,175

 
103,682

 
223,086

 
205,420

Expenses
 
 
 
 
 
 
 
Well servicing
54,046

 
42,504

 
106,449

 
82,842

Fluid logistics
31,582

 
34,445

 
61,943

 
71,878

General and administrative
9,096

 
7,617

 
17,571

 
14,951

Depreciation and amortization
13,555

 
13,195

 
26,806

 
26,197

Total expenses
108,279

 
97,761

 
212,769

 
195,868

Operating income
4,896

 
5,921

 
10,317

 
9,552

Other income
 
 
 
 
 
 
 
Interest income
5

 
1

 
6

 
5

Interest expense
(6,953
)
 
(7,022
)
 
(14,200
)
 
(14,017
)
Loss from continuing operations before taxes
(2,052
)
 
(1,100
)
 
(3,877
)
 
(4,460
)
Income tax benefit
(559
)
 
(434
)
 
(1,090
)
 
(1,195
)
Loss from continuing operations
(1,493
)
 
(666
)
 
(2,787
)
 
(3,265
)
Loss from discontinued operations, net of tax benefit of $0, $59, $0, and $126, respectively
—

 
(109
)
 
—

 
(236
)
Net loss
(1,493
)
 
(775
)
 
(2,787
)
 
(3,501
)
Preferred stock dividends
(194
)
 
(194
)
 
(388
)
 
(388
)
Net loss attributable to common shareholders
$
(1,687
)
 
$
(969
)
 
$
(3,175
)
 
$
(3,889
)
Loss per share of common stock from continuing operations
 
 
 
 
 
 
 
Basic and diluted loss per share
$
(0.08
)
 
$
(0.04
)
 
$
(0.15
)
 
$
(0.17
)
Loss per share of common stock from discontinued operations
 
 
 
 
 
 
 
Basic and diluted loss per share
$
—

 
$
(0.01
)
 
$
—

 
$
(0.01
)
Loss per share of common stock
 
 
 
 
 
 
 
Basic and diluted loss per share
$
(0.08
)
 
$
(0.05
)
 
$
(0.15
)
 
$
(0.18
)
Weighted average number of shares outstanding
 
 
 
 
 
 
 
Basic and diluted
21,753

 
21,364

 
21,678

 
21,331

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

5

Forbes Energy Services Ltd.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
(in thousands)
 
 
Temporary Equity
 
 
 
 
 
 
 
 
 
 
 
Preferred Shares
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance: December 31, 2013
588

 
$
14,560

 
21,474

 
$
859

 
$
193,527

 
$
(73,368
)
 
$
121,018

Share-based
compensation
—

 
—

 
—

 
—

 
964

 
—

 
964

Net loss
—

 
—

 
—

 
—

 
—

 
(2,787
)
 
(2,787
)
Common shares issued under stock plan:
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of restricted stock
—

 
—

 
292

 
12

 
200

 
—

 
212

Preferred shares dividends
and accretion
—

 
20

 
—

 
—

 
(388
)
 
—

 
(388
)
Balance: June 30, 2014
588

 
$
14,580

 
21,766

 
$
871

 
$
194,303

 
$
(76,155
)
 
$
119,019

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

6

Forbes Energy Services Ltd.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
 
Six months ended June 30
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(2,787
)
 
$
(3,501
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
26,806

 
26,197

Share-based compensation
1,980

 
1,628

Deferred tax benefit
(1,472
)
 
(1,243
)
(Gain) loss on disposal of assets, net
(27
)
 
409

Bad debt expense
336

 
730

Amortization of deferred financing cost
1,070

 
737

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(13,086
)
 
10,004

Accounts receivable - related party
(158
)
 
(18
)
Prepaid expenses and other assets
2,197

 
(1,581
)
Accounts payable - trade
(9,586
)
 
(2,675
)
Accounts payable - related party
(395
)
 
(29
)
Accrued expenses
2,250

 
(1,373
)
Net cash provided by operating activities
7,128

 
29,285

Cash flows from investing activities:
 
 
 
Proceeds from sale of property and equipment
190

 
982

Purchases of property and equipment
(13,682
)
 
(17,390
)
Change in restricted cash
(1
)
 
60

Net cash used in investing activities
(13,493
)
 
(16,348
)
Cash flows from financing activities:
 
 
 
Payments of debt
(2,447
)
 
(2,942
)
Payment of tax withholding obligations related to restricted stock
(467
)
 
(57
)
Dividends paid on Series B Senior Convertible Preferred Shares
(368
)
 
(368
)
Net cash used in financing activities
(3,282
)
 
(3,367
)
Effect of currency translation on cash and cash equivalents
—

 
2

Net increase (decrease) in cash and cash equivalents
(9,647
)
 
9,572

Cash and cash equivalents:
 
 
 
Beginning of period
26,409

 
17,619

End of period
$
16,762

 
$
27,191

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

7

Forbes Energy Services Ltd.
Notes to Condensed Consolidated Financial Statements

1. Organization and Nature of Operations
Nature of Business
Forbes Energy Services Ltd., or FES Ltd is an independent oilfield services contractor that provides a wide range of well site services to oil and natural gas drilling and producing companies to help develop and enhance the production of oil and natural gas. These services include fluid hauling, fluid disposal, well maintenance, completion services, workovers and re-completions, plugging and abandonment, and tubing testing. Our operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with additional locations in Mississippi, in Pennsylvania. We believe that our broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of our customers' wells. Our headquarters and executive offices are located at 3000 South Business Highway 281, Alice, Texas 78332. We can be reached by phone at (361) 664-0549.

As used in these Consolidated Financial Statements, the “Company,” the “Forbes Group,” “we,” and “our” mean FES Ltd and its direct and indirect subsidiaries, except as otherwise indicated.

2. Risk and Uncertainties
As an independent oilfield services contractor that provides a broad range of drilling-related and production-related services to oil and natural gas companies, primarily onshore in Texas, our revenue, profitability, cash flows and future rate of growth are substantially dependent on our ability to (1) maintain adequate equipment utilization, (2) maintain adequate pricing for the services we provide, and (3) maintain a trained work force. Failure to do so could adversely affect our financial position, results of operations, and cash flows.

Because our revenues are generated primarily from customers who are subject to the same factors generally impacting the oil and natural gas industry, our operations are also susceptible to market volatility resulting from economic, cyclical, weather related, or other factors related to such industry. Changes in the level of operating and capital spending in the industry, decreases in oil and natural gas prices, or industry perception about future oil and natural gas prices could materially decrease the demand for our services, adversely affecting our financial position, results of operations and cash flows.

3. Basis of Presentation
Interim Financial Information
The unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or “GAAP” for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. Therefore, these condensed consolidated financial statements should be read along with the annual audited consolidated financial statements and notes thereto included in Forbes Group’s Annual Report on Form 10-K for the year ended December 31, 2013. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. Interim results for the three and six months ended June 30, 2014 may not be indicative of results that will be realized for the full year ending December 31, 2014. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated balance sheets and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
    

8


Recent Accounting Pronouncements
    
In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"). ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals that have not been reported in previously issued financial statements. The Company does not believe this pronouncement will have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 provides a framework that replaces the existing revenue recognition guidance. It is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period, however, ASU No. 2014-09 requires retrospective application. Forbes Group has not yet determined if this pronouncement will have a material impact on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12,  “Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. It is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. Forbes Group has not yet determined if this pronouncement will have a material impact on its consolidated financial statements.

4. Intangible Assets
Our major classes of intangible assets subject to amortization consist of our customer relationships, trade names, safety training program and dispatch software. The Company expenses costs associated with extensions or renewals of intangible assets. There were no such extensions or renewals in the six months ended June 30, 2014 or 2013. Amortization expense is calculated using the straight-line method over the period indicated. Amortization expense for each of the three months ended June 30, 2014 and 2013 was $0.7 million and for each of the six months ended June 30, 2014 and 2013 was $1.4 million. Estimated amortization expense for the years 2014 through 2017 is $2.9 million per year and in 2018 is $2.7 million. The weighted average amortization period remaining for intangible assets is 8.3 years.
 
The following sets forth the identified intangible assets by major asset class:
 
 
 
 
As of June 30, 2014
 
As of December 31, 2013
 
Useful
Life
(years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net Book
Value
 
 
 
(in thousands)
Customer relationships
15
 
$
31,896

 
$
(13,822
)
 
$
18,074

 
$
31,896

 
$
(12,758
)
 
$
19,138

Trade names
15
 
8,050

 
(3,488
)
 
4,562

 
8,050

 
(3,220
)
 
4,830

Safety training program
15
 
1,182

 
(512
)
 
670

 
1,182

 
(473
)
 
709

Dispatch software
10
 
1,135

 
(738
)
 
397

 
1,135

 
(681
)
 
454

Other
10
 
58

 
(38
)
 
20

 
58

 
(35
)
 
23

 
 
 
$
42,321

 
$
(18,598
)
 
$
23,723

 
$
42,321

 
$
(17,167
)
 
$
25,154




9


5. Share-Based Compensation

Incentive Compensation Plans

From time to time, the Company grants stock options, restricted stock units, or other awards to its employees, including executive officers, and directors. As of June 30, 2014, there were 1,136,819 shares available for future grants under the Company's 2012 Incentive Compensation Plan, or the 2012 Plan. There have been no stock option awards issued under the 2012 Plan.

Stock Options

The following table presents a summary of the Company’s stock option activity for the six months ended June 30, 2014.
 
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Options outstanding at December 31, 2013
1,400,425

 
$
6.99

 
 
 
 
Stock options:
 
 
 
 
 
 
 
Granted
—

 


 

 


Exercised
—

 
 
 

 


Forfeited
(251,800
)
 
2.65

 

 
 
Options outstanding at June 30, 2014
1,148,625

 
$
7.94

 
5.94 years
 
$
439,556

Exercisable at June 30, 2014
962,475

 
$
7.70

 
5.71 years
 
$
439,556

During the three months ended June 30, 2014 and 2013, the Company recorded total stock-based compensation expense related to stock options of $0.4 million and $0.6 million, respectively. During the six months ended June 30, 2014 and 2013, the Company recorded total stock-based compensation expense related to stock options of $0.9 million and $0.9 million, respectively. There was no stock-based compensation cost capitalized for the three or six months ended June 30, 2014 or 2013. As of June 30, 2014, total unrecognized stock-based compensation cost for stock options amounted to $0.3 million (net of estimated forfeitures) and is expected to be recorded over a weighted-average period of 0.2 years.

A summary of the status of the Company's nonvested options as of December 31, 2013, and the changes during the six months ended June 30, 2014, is presented below.

 
Shares
 
Weighted-
Average
Grant-Date Fair Value
Nonvested at December 31, 2013
186,150

 
$
9.16

Granted
—

 
 
Vested
—

 
 
Forfeited
—

 
 
Nonvested at June 30, 2014
186,150

 
$
9.16



10


Restricted Stock Units
    The following table presents a summary of restricted stock unit grant activity for the period ended June 30, 2014:
 
Number of Units
 
Grant Date Average Fair Value Per Unit
Outstanding at December 31, 2013
674,789

 
 
$
3.49

 
Granted
461,527

 
 
 
3.85

 
Vested
(450,868
)
 
 
 
3.79

 
Forfeited
—

 
 

 
 
Nonvested at June 30, 2014
685,448

 
 
$
3.53

 
In the six months ended June 30, 2014, participants utilized a net withholding exercise method, in which restricted stock units were surrendered to cover payroll withholding tax. The total pretax cash outflow, as included in withholding tax payments in our condensed consolidated statements of cash flows, for this net withholding exercise was $0.5 million.
Stock compensation expense for the restricted stock units granted for the three months ended June 30, 2014 and 2013 was $0.4 million and $0.4 million, respectively. Stock compensation expense for the restricted stock units for the six months ended June 30, 2014 and 2013 was $0.8 million, and $0.7 million respectively. The remaining compensation expense of $2.2 million will be recognized over a weighted-average period of 2.4 years.


6. Property and Equipment
Property and equipment consisted of the following:
 
 
Estimated
Life in Years
 
June 30,
2014
 
December 31,
2013
 
 
 
(in thousands)
Well servicing equipment
3-15 years
 
$
418,904

 
$
417,124

Autos and trucks
5-10 years
 
114,423

 
103,443

Disposal wells
5-15 years
 
38,006

 
37,867

Building and improvements
5-30 years
 
16,955

 
13,544

Furniture and fixtures
3-15 years
 
5,805

 
5,395

Land
 
 
1,452

 
1,876

 
 
 
595,545

 
579,249

Accumulated depreciation
 
 
(261,316
)
 
(237,380
)
 
 
 
$
334,229

 
$
341,869

Depreciation expense was $12.9 million and $25.4 million for the three and six months ended June 30, 2014, respectively, and $12.5 million and $24.8 million for the three and six months ended June 30, 2013, respectively.


11

7. Long-Term Debt
Long-term debt at June 30, 2014 and December 31, 2013 consisted of the following:
 
 
June 30,
2014
 
December 31,
2013
 
(in thousands)
9% Senior Notes
$
280,000

 
$
280,000

Third party equipment notes and capital leases
13,518

 
15,109

Insurance notes
1,481

 
4,531

 
294,999

 
299,640

Less: Current portion
(7,148
)
 
(9,374
)
 
$
287,851

 
$
290,266

9% Senior Notes
On June 7, 2011, FES Ltd issued $280.0 million in principal amount of 9% Senior Notes due 2019 (the “9% Senior Notes”). The 9% Senior Notes mature on June 15, 2019, and require semi-annual interest payments, in arrears, at an annual rate of 9% on June 15 and December 15 of each year, until maturity commencing December 15, 2011. No principal payments are due until maturity.
The 9% Senior Notes are guaranteed by the current domestic subsidiaries (the “Guarantor Subs”) of FES Ltd, which include Forbes Energy Services LLC (“FES LLC”), C.C. Forbes, LLC (“CCF”), TX Energy Services, LLC (“TES”), Superior Tubing Testers, LLC (“STT”) and Forbes Energy International, LLC (“FEI LLC”). All of the Guarantor Subs are 100% owned and each guarantees the securities on a full and unconditional and joint and several basis, subject to customary release provisions. During 2013 and 2014, the assets and operations of the Non-Guarantor Subs were minor as defined by SEC Regulation S-X. The Forbes Group may, at its option, redeem all or part of the 9% Senior Notes from time to time at specified redemption prices and subject to certain conditions required by the indenture governing the 9% Senior Notes (the “9% Senior Indenture”). The Forbes Group is required to make an offer to purchase the notes and to repurchase any notes for which the offer is accepted at 101% of their principal amount, plus accrued and unpaid interest, if there is a change of control. The Forbes Group is required to make an offer to repurchase the notes and to repurchase any notes for which the offer is accepted at 100% of their principal amount, plus accrued and unpaid interest, following certain asset sales.

The Forbes Group is permitted under the terms of the 9% Senior Indenture to incur additional indebtedness in the future, provided that certain financial conditions set forth in the 9% Senior Indenture are satisfied. The Forbes Group is subject to certain covenants contained in the 9% Senior Indenture, including provisions that limit or restrict the Forbes Group's and certain future subsidiaries' abilities to incur additional debt, to create, incur or permit to exist certain liens on assets, to make certain dispositions of assets, to make payments on certain subordinated indebtedness, to pay dividends or certain other payments to equity holders, to engage in mergers, consolidations or other fundamental changes, to change the nature of its business or to engage in transactions with affiliates. Due to cross-default provisions in the 9% Senior Indenture and the loan agreement governing our revolving credit facility, with certain exceptions, a default and acceleration of outstanding debt under one debt agreement would result in the default and possible acceleration of outstanding debt under the other debt agreement. Accordingly, an event of default could result in all or a portion of our outstanding debt under our debt agreements becoming immediately due and payable. If this occurred, we might not be able to obtain waivers or secure alternative financing to satisfy all of our obligations simultaneously, which would adversely affect our business and operations.

The Company is in compliance with the covenants in the indenture governing the 9% Senior Indenture at June 30, 2014.

Revolving Credit Facility
On September 9, 2011, FES Ltd. and its current domestic subsidiaries entered into a loan and security agreement with Regions Bank, SunTrust Bank, CIT Bank and Capital One Leverage Finance Corp., as lenders, and Regions Bank, as agent for the secured parties, or the Agent. This loan and security agreement was amended in December 2011, July 2012 and July 2013. On the July 2013 amendment, the CIT Bank opted out of the lending group, with Regions Bank increasing its participation by taking the CIT Bank's position. The loan and security agreement initially provided for an asset based revolving credit facility with a maximum initial borrowing credit of $75.0 million, subject to borrowing base availability. The third amendment increased the maximum borrowing credit to $90.0 million, subject to borrowing base availability, any reserves established by

12

the facility agent in its discretion, compliance with a fixed charge coverage ratio covenant if availability under the facility falls below certain thresholds and, for borrowings above $75.0 million, compliance with the debt incurrence covenant in the the 9% Senior Indenture that prohibits the incurrence of debt except for certain limited exceptions, including indebtedness incurred under the permitted credit facility debt basket to the greater of $75.0 million or 18% of our Consolidated Tangible Assets (as defined in the 9% Senior Indenture) reported for the last fiscal quarter for which financial statements are available. As of June 30, 2014, 18% of our Consolidated Tangible Assets was approximately $82.6 million. Under the loan and security agreement, our borrowing base at any time is equal to (i) 85% of eligible accounts, which are determined by Agent in its reasonable discretion, plus (ii) the lesser of 85% of the appraised value, subject to certain adjustments, of our well services equipment that has been properly pledged and appraised, is in good operating condition and is located in the United States, or 100% of the net book value of such equipment, minus (iii) any reserves established by the Agent in its reasonable discretion. As of June 30, 2014, the borrowing base was $90.0 million and borrowing availability was $76.7 million.
As amended, the loan and security agreement has a stated maturity of July 26, 2018. There was nothing drawn on this facility and $5.9 million in letters of credit outstanding against the facility at June 30, 2014.
Prior to the third amendment, at our option, borrowings under this credit facility would have borne interest at a rate equal to either (i) the LIBOR rate plus an applicable margin of between 2.25% to 2.75% based on borrowing availability or (ii) a base rate plus an applicable margin of between 1.25% to 1.75% based on borrowing availability, where the base rate was equal to the greater of the prime rate established by Regions Bank, the overnight federal funds rate plus 0.50% or the LIBOR rate for a one month period plus 1.00%. The third amendment decreased the revolving interest rate whereby borrowings under the Loan Agreement will bear interest at a rate equal to either (a) the LIBOR rate plus an applicable margin of between 2.00% to 2.50% based on borrowing availability or (b) a base rate plus an applicable margin of between 1.00% to 1.50% based on borrowing availability, where the base rate is equal to the greater of the prime rate established by Regions Bank, the overnight federal funds rate plus 0.5% or the LIBOR rate for a one month period plus 1%.
In addition to paying interest on outstanding principal under the facility, a fee of 0.375% per annum will accrue on unutilized availability under the credit facility. We are required to pay a fee of between 2.25% to 2.75%, based on borrowing availability, with respect to the principal amount of any letters of credit outstanding under the facility. We are also responsible for certain other administrative fees and expenses.
FES LLC, FEI LLC, TES, CCF and STT are the borrowers under the loan and security agreement. Their obligations have been guaranteed by one another and by FES Ltd. Subject to certain exceptions and permitted encumbrances, including the exemption of real property interests from the collateral package, the obligations under this facility are secured by a first priority security interest in all of our assets.
We are able to voluntarily repay outstanding loans at any time without premium or penalty (subject to the fees discussed above). If at any time our outstanding loans under the credit facility exceed the availability under our borrowing base, we may be required to repay the excess. Further, we are required to use the net proceeds from certain events, including certain judgments, tax refunds or insurance awards to repay outstanding loans, however, we may reborrow following such repayments if the conditions to borrowing are met.
The loan and security agreement contains customary covenants for an asset-based credit facility, which include (i) restrictions on certain mergers, consolidations and sales of assets; (ii) restrictions on the creation or existence of liens; (iii) restrictions on making certain investments; (iv) restrictions on the incurrence or existence of indebtedness; (v) restrictions on transactions with affiliates; (vi) requirements to deliver financial statements, report and notices to the Agent and (vii) a springing requirement to maintain a consolidated Fixed Charge Coverage Ratio (which is defined in the loan and security agreement) of 1.1:1.0 in the event that our excess availability under the credit facility falls below the greater of $11.3 million or 15.0% of our maximum credit under the facility for sixty consecutive days; provided that, the restrictions described in (i)-(v) above are subject to certain exceptions and permissions limited in scope and dollar value. The loan and security agreement also contains customary representations and warranties and event of default provisions. As of June 30, 2014 we are in compliance with all applicable covenants in the loan and security agreement.
Third Party Equipment Notes and Capital Leases
The Forbes Group finances the purchase of certain vehicles and equipment through commercial loans and capital leases with aggregate principal amounts outstanding as of June 30, 2014 and December 31, 2013 of approximately $13.5 million and $15.1 million, respectively. These loans are repayable in a range of 42 to 60 monthly installments with the maturity dates ranging from May 2014 to January 2018. Interest accrues at rates ranging from 4.7% to 8.4% and is payable monthly. The loans are collateralized by equipment purchased with the proceeds of such loans. The Forbes Group made total principal payments of approximately $1.2 million and $1.4 million for three months ended June 30, 2014 and 2013, respectively, and approximately $2.4 million and $2.9 million for the six months ended June 30, 2014 and 2013, respectively.

13

Insurance Notes
In October of 2013, the Forbes Group entered into a $5.9 million promissory note at an interest rate of 2.9% for the payment of insurance premiums. The outstanding principal amount under such note as of June 30, 2014 and December 31, 2013 was approximately $1.5 million and $4.5 million, respectively. The amount outstanding could be substantially offset by the cancellation of the related insurance coverage.

8. Fair Value of Financial Instruments
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The carrying amounts of cash and cash equivalents, accounts receivable-trade, accounts receivable-related parties, accounts receivable – other, accounts payable – trade, accounts payable – related parties, and insurance notes, approximate fair value because of the short maturity of these instruments. The fair values of third party notes and equipment notes approximate their carrying values, based on current market rates at which the company could borrow funds with similar maturities (Level 2 in the fair value hierarchy).
 
 
June 30, 2014
 
December 31, 2013
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
(in thousands)
9.0% Senior Notes
$
280,000

 
$
290,500

 
$
280,000

 
$
275,800


The fair value of our 9% Senior notes is based on dealer quoted market prices at June 30, 2014 and December 31, 2013, respectively, and is considered Level 1 within the fair value hierarchy.

 
9. Related Party Transactions
The Forbes Group enters into transactions with related parties in the normal course of conducting business. The following tables represent related party transactions.
 
 
 
 
 
 
As of
 
 
 
 
 
 
June 30,
2014
 
December 31, 2013
 
 
 
 
 
 
(in thousands)
Related parties cash and cash equivalents balances:
 
 
 
 
 
 
 
 
Balance at Texas Champion Bank (1)
 
 
 
 
 
$
945

 
$
698

Balance at Brush Country Bank (2)
 
 
 
 
 
450

 
469

 
 


 
 
 
 
 


Related parties receivable:
 
 
Alice Environmental (3)
 
 
 
 
 
$
—

 
$
1

Dorsal Services, Inc. (4)
 
 
 
 
 
61

 
61

Wolverine Construction, Inc. (5)
 
 
 
 
 
281

 
123

 
 
 
 
 
 
$
342

 
$
185

 
 
 
 
 
 
 
 
 
Related parties payable:
 

 
 
 
 
 
 
Animas Holdings, LLC (6)
 
 
 
 
 
$
15

 
$
—

Alice Environmental (3)
 
 
 
 
 
107

 
218

Dorsal Services, Inc. (4)
 
 
 
 
 
26

 
256

Tasco Tool Services, Inc. (7)
 
 
 
 
 
6

 
16

JITSU Services, LLC (8)
 
 
 
 
 
—

 
30

Texas Quality Gate Guard Services, LLC (9)
 
 
 
 
 
—

 
29

Texas Water Disposal, LLC (10)
 
 
 
 
 
10

 
10

 
 
 
 
 
 
$
164

 
$
559

 
 
 
 
 
 
 
 
 

14

 
 
Three months ended June 30,
 
Six months ended June 30
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Related parties capital expenditures:
 
 
 
 
 
 
 
 
Forbes Ranch (11)
 
—

 
25

 
—

 
25

 
 
$
—

 
$
25

 
$
—

 
$
25

Related parties revenue activity:
 
 
 
 
 
 
 
 
Alice Environmental(3)
 
—

 
—

 
1

 
—

Dorsal Services, Inc. (4)
 
—

 
—

 
1

 
17

  Tasco Tool Services, Inc. (7)
 
1

 
1

 
1

 
21

Wolverine Construction, Inc. (5)
 
248

 
—

 
308

 
—

Testco Well Services, LLC (12)
 
—

 
18

 
—

 
18

   Texas Water Disposal LLC (10)
 
—

 
—

 
57

 
—

 
 
$
249

 
$
19

 
$
368

 
$
56

 
 
 
 
 
 
 
 
 
Related parties expense activity:
 
 
 
 
 
 
 
 
Alice Environmental (3)
 
$
344

 
$
456

 
$
966

 
$
919

Dorsal Services, Inc. (4)
 
113

 
1

 
306

 
22

Tasco Tool Services, Inc. (7)
 
68

 
17

 
138

 
26

FCJ Management, LLC (13)
 
9

 
9

 
18

 
18

JITSU Services, LLC (8)
 
92

 
101

 
152

 
203

Texas Quality Gate Guard Services, LLC (9)
 
—

 
172

 
—

 
237

  Animas Holdings, LLC (6)
 
115

 
329

 
203

 
348

Testco Well Services, LLC (12)
 
—

 
2

 
—

 
2

Texas Water Disposal LLC (10)
 
1

 
—

 
3

 
—

 
 
$
742

 
$
1,087

 
$
1,786

 
$
1,775

(1)The Company has a deposit relationship with Texas Champion Bank. Travis Burris, one of the directors of FES Ltd., is also the President, Chief Executive Officer, and director of Texas Champion Bank. Mr. Crisp, our President and Chief Executive Officer and one of our directors, serves on the board of directors of Texas Champion Bank.
(2)Mr. Crisp and Mr. Forbes, our Executive Vice President and Chief Operating Officer and one of our directors are shareholders of Brush Country Bank, an institution with which the Company conducts business and has deposits.
(3)Messrs. John E. Crisp and Charles C. Forbes, Jr., are also owners and managers of Alice Environmental Holdings, LLC, and indirect owners and managers of Alice Environmental Services, LP. These two companies are collectively referred to as Alice Environmental. The Company leases or rents land and buildings, aircraft, and other equipment from Alice Environmental.
(4)Dorsal Services, Inc. provides trucking services to the Company. Mr. Crisp, is a partial owner of Dorsal Services, Inc.
(5)Wolverine Construction, Inc. is an entity that is owned by two sons and a brother of Mr. Crisp, and a son of Mr. Forbes. Wolverine rents equipment from the Company.
(6)Animas Holdings, LLC or Animas, is a property and disposal company that is owned by the two sons of Mr. Crisp and three children of Mr. Forbes and Ms. Forbes, who served as one of our directors until June 11, 2014. The Company pays Animas for waste water disposal and lease facilities.
(7)Tasco Tool Services, Inc. is a down-hole tool company that is partially owned and managed by a company that is owned by Mr. Forbes, along with Robert Jenkins, a manager of one of the subsidiaries of FES Ltd. Tasco rents and sells tools to the Company from time to time.
(8)JITSU Services, LLC or JITSU, is a financial leasing company owned by Janet Forbes and Mr. Crisp. The Company currently leases ten vacuum trucks from JITSU.
(9)Texas Quality Gate Guard Services, LLC, or Texas Quality Gate Guard Services, is an entity owned by Messrs. Crisp and Forbes and a son of Mr. Crisp. Texas Quality Gate Guard Services has provided security services to the Company.
(10) Texas Water Disposal, LLC. is partially owned by a brother of Mr. Crisp. Texas Water Disposal is a company that owns a salt water disposal well that is used by the Company.
(11) Forbes Ranch is owned by a brother of Mr. Forbes. We purchased a truck scaled from Forbes Ranch during the second quarter of 2013.
(12)Testco Well Services, LLC is a company that provides valve and gathering system testing services to the Company. Messrs. Crisp and Forbes, along with a son of Mr. Crisp were partial owners of Testco. In August 2013, Testco Well Services, LLC was sold to an unrelated party and is no longer a related party.
(13) FCJ Management, LLC or FCJ, is an entity that leases land and facilities to the Company and is owned by Messrs. Crisp, and Forbes and Robert Jenkins, a manager of one of the subsidiaries of FES Ltd.


15


10. Commitments and Contingencies
    
Concentrations of Credit Risk
FDIC insurance coverage is currently $250,000 per depositor at each financial institution, and our non-interest bearing cash balances exceeded federally insured limits. The Company restricts investment of temporary cash investments to financial institutions with high credit standings. The Company's customer base consists primarily of multi-national and independent oil and natural gas producers. The Company does not require collateral on its trade receivables. For the three months ended June 30, 2014, the Company's largest customer, five largest customers, and ten largest customers constituted 17.4%, 40.4%, and 56.0% of consolidated revenues, respectively. For the six months ended June 30, 2014 the Company's largest customer, five largest customers, and ten largest customers constituted 16.9%, 40.4%, and 56.8% of consolidated revenues, respectively. The loss of any one of our top five customers could have a materially adverse effect on the revenues and profits of the Company. Further, our trade accounts receivable are from companies within the oil and natural gas industry, and as such the Company is exposed to normal industry credit risks. As of June 30, 2014, the Company's largest customer, five largest customers, and ten largest customers constituted 12.9%, 37.8%, and 55.0% of accounts receivable, respectively. The Company continually evaluates its reserves for potential credit losses and establishes reserves for such losses.

Self-Insurance

The Company is self-insured under its Employee Group Medical Plan for the first $250,000 per individual. As of October 15, 2013, the Company purchased new auto liability and general liability insurance policies and is now self-insured for the first $0.5 million and $1.0 million, respectively, claimed under these policies. As of June 30, 2014 and December 31, 2013 self-insurance reserves amount to approximately $6.6 million and $1.2 million, respectively. These claims are unprocessed, therefore their values are estimated and included in accrued expenses in the accompanying consolidated balance sheets.

Litigation

The Company is subject to various other claims and legal actions that arise in the ordinary course of business. We do not believe that any of these claims and actions, separately or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations, or cash flows, although we cannot guarantee that a material adverse effect will not occur.

Off-Balance Sheet Arrangements
We are often party to certain transactions that require off-balance sheet arrangements such as performance bonds, guarantees, operating leases for equipment, and bank guarantees that are not reflected in our condensed consolidated balance sheets. These arrangements are made in our normal course of business and they are not reasonably likely to have a current or future material adverse effect on our financial condition, results of operations, liquidity or cash flows.


11. Supplemental Cash Flow Information
 
 
Six months ended June 30
 
 
2014
 
2013
 
 
(in thousands)
Cash paid for
 
 
 
 
Interest
 
$
13,153

 
$
13,324

Income tax
 
70

 
50

Supplemental schedule of non-cash investing and financing activities
 
 
 
 
Changes in accounts payable related to capital expenditures
 
3,360

 
2,446

Capital leases on equipment
 
856

 
414

Preferred stock dividends and accretion costs
 
20

 
21



16


12. Earnings per Share
Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common shareholders by the weighted average common stock outstanding during the period. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock, such as options and convertible preferred stock, were exercised and converted into common stock. Potential common stock equivalents that have been issued by the Forbes Group relate to outstanding stock options and unvested restricted stock units which are determined using the treasury stock method, and the Series B Senior Convertible Preferred Stock (the "Series B Preferred Stock"), which are determined using the "if-converted" method.
The Series B Preferred Stock are participating securities as they participate in undistributed earnings with common stock, whether that participation is conditioned upon the occurrence of a specified event or not. A participating security is included in the computation of basic EPS using the two-class method. Under the two-class method, basic EPS for the Company’s common stock is computed by dividing net income applicable to common shares by the weighted-average common stock outstanding during the period. Under the certificate of designation for our Series B Preferred Stock (the “Series B Certificate of Designation”), if at any time the Company declares a dividend in cash which is greater in value than five percent on a cumulative basis over the previous twelve month period of the then current “Common Share Fair Market Value,” as that term is defined in the Series B Certificate of Designation, the Series B Preferred Stock will be entitled to receive a dividend payable in cash equal to the amount in excess of five percent of the then Common Share Fair Market Value per common share they would have received if all outstanding Series B Preferred Stock had been converted into common shares. There were no earnings allocated to the Series B Preferred Stock for the quarters ended June 30, 2014 and 2013 since there was a net loss for those periods and earnings for the quarter were not in excess of amounts prescribed by the Series B Certificate of Designation for our Series B Preferred Stock. Diluted EPS for the Company’s common stock is computed using the more dilutive of the two-class method or the if-converted method. The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding:
 
 
Three months ended June 30,
 
Six months ended June 30
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
 
(in thousands)
Weighted average shares outstanding
21,753

 
21,364

 
21,678

 
21,331

Dilutive effect of stock options and restricted stock
—

 
—

 
—

 
—

Dilutive effect of preferred stock
—

 
—

 
—

 
—

Diluted weighted average shares outstanding
21,753

 
21,364

 
21,678

 
21,331


There were 1,148,625 stock options, 685,448 units of unvested restricted stock, and 5,292,531 shares of common stock equivalents underlying the Series B Preferred Stock outstanding as of June 30, 2014 that were not included in the calculation of diluted EPS for the three and six months ended June 30, 2014 because their effect would have been antidilutive.
The following table sets forth the computation of basic and diluted loss per share:
 
 
Three months ended June 30,
 
Six months ended June 30
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Basic and diluted:
 
 
 
 
 
 
 
Net loss
$
(1,493
)
 
$
(775
)
 
$
(2,787
)
 
$
(3,501
)
Preferred stock dividends and accretion
(194
)
 
(194
)
 
(388
)
 
(388
)
Net loss attributable to common shareholders
$
(1,687
)
 
$
(969
)
 
$
(3,175
)
 
$
(3,889
)
Weighted-average common shares
21,753

 
21,364

 
21,678

 
21,331

Basic and diluted net loss per share
$
(0.08
)
 
$
(0.05
)
 
$
(0.15
)
 
$
(0.18
)


17


13. Income Taxes
The Company’s tax benefit from application of the effective tax rate for the six months ended June 30, 2014 was estimated to be 28.1% based on pre-tax loss of $3.9 million. For the six months ended June 30, 2013, the Company's effective tax rate was an expense of 26.8%. The difference between the effective rate and 35.0% statutory rate is mainly due to Texas Margins Tax and non-deductible expenses.

The Forbes Group is subject to the Texas Margins Tax. The Texas Margins Tax is a tax equal to one percent of Texas sourced revenue reduced by the greater of (a) cost of goods sold (as defined by Texas law), (b) compensation (as defined by Texas law), or (c) thirty percent of the Texas sourced revenue. The Forbes Group accounts for the revised Texas Franchise tax in accordance with ASC 740, as the tax is derived from a taxable base that consists of income less deductible expenses. As of June 30, 2014, the annual franchise tax expense is estimated to be approximately $0.5 million for 2014.
14. Business Segment Information
The Forbes Group has two reportable segments organized based on its products and services—well servicing and fluid logistics. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

The following tables set forth certain financial information with respect to the Company’s reportable segments for the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30
 
Well Servicing
 
Fluid Logistics
 
Consolidated
 
Well Servicing
 
Fluid Logistics
 
Consolidated
2014
(in thousands)
 
(in thousands)
Revenues
$
70,356

 
$
42,819

 
$
113,175

 
$
139,449

 
$
83,637

 
$
223,086

Direct operating costs
54,046

 
31,582

 
85,628

 
106,449

 
61,943

 
168,392

Segment profits
$
16,310

 
$
11,237

 
$
27,547

 
$
33,000

 
$
21,694

 
$
54,694

Depreciation and amortization
$
6,070

 
$
7,485

 
$
13,555

 
$
11,955

 
$
14,851

 
$
26,806

Capital expenditures
6,572

 
5,182

 
11,754

 
8,917

 
8,981

 
17,898

Total assets
612,256

 
485,889

 
1,098,145

 
612,256

 
485,889

 
1,098,145

Long lived assets
195,790

 
137,576

 
333,366

 
195,790

 
137,576

 
333,366

2013
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
54,633

 
$
49,049

 
$
103,682

 
$
104,797

 
$
100,623

 
$
205,420

Direct operating costs
42,504

 
34,445

 
76,949

 
82,842

 
71,878

 
154,720

Segment profits
$
12,129

 
$
14,604

 
$
26,733

 
$
21,955

 
$
28,745

 
$
50,700

Depreciation and amortization
$
5,765

 
$
7,430

 
$
13,195

 
$
11,457

 
$
14,740

 
$
26,197

Capital expenditures
3,449

 
6,972

 
10,421

 
7,850

 
12,400

 
20,250

Total assets
549,544

 
478,622

 
1,028,166

 
549,544

 
478,622

 
1,028,166

Long lived assets
196,075

 
146,624

 
342,699

 
196,075

 
146,624

 
342,699

 

18

 
Three months ended June 30,
Six months ended June 30
 
2014
 
2013
2014
 
2013
Reconciliation of the Forbes Group Operating Income As Reported:
(in thousands)
(in thousands)
Segment profits
$
27,547

 
$
26,733

$
54,694

 
$
50,700

General and administrative expense
9,096

 
7,617

17,571

 
14,951

Depreciation and amortization
13,555

 
13,195

26,806

 
26,197

Operating income
4,896

 
5,921

10,317

 
9,552

Other income and expenses, net
(6,948
)
 
(7,021
)
(14,194
)
 
(14,012
)
Loss from continuing operations before income taxes
$
(2,052
)
 
$
(1,100
)
$
(3,877
)
 
$
(4,460
)
 
 
June 30, 2014
 
December 31, 2013
Reconciliation of the Forbes Group Assets As Reported:
(in thousands)
Total reportable segments
$
1,098,145

 
$
1,068,042

Elimination of internal transactions
(1,710,420
)
 
(1,640,530
)
Parent
1,100,713

 
1,073,046

Total assets
$
488,438

 
$
500,558


15. Series B Senior Convertible Preferred Stock

Under our Series B Certificate of Designation, we are authorized to issue 825,000 shares of Series B Senior Convertible Preferred Stock (the “Series B Preferred Stock”), par value $0.01 per share. On May 28, 2010 the Company completed a private placement of 580,800 shares of Series B Preferred Stock at a price per share of CAD $26.37 for an aggregate purchase price in the amount of approximately USD $14.5 million based on the exchange rate between U.S. dollars and Canadian dollars then in effect of $1.00 to CDN $1.0547. The Company received net proceeds of USD $13.8 million after closing fee paid to investors of USD $0.3 million and legal fees and other offering costs of USD $0.4 million. This is presented as temporary equity on the balance sheet. The common stock into which the Series B Preferred Stock is convertible has certain demand and “piggyback” registration rights.
The value of the Series B Preferred Stock, for accounting purposes, is being accreted up to redemption value from the date of issuance to the earliest redemption date of the instrument using the effective interest rate method. If the Series B Preferred Stock had been redeemed as of June 30, 2014 and December 31, 2013, the redemption amount applicable at each date would have been approximately $14.6 million.

Dividends
The Series B Preferred Stock is entitled to receive preferential dividends equal to five percent (5.0%) per annum of the original issue price per share, payable quarterly in February, May, August and November of each year. Such dividends may be paid by the Company in cash or in kind (in the form of additional shares of Series B Preferred Stock). In the event that the payment in cash or in kind of any such dividend would cause the Company to violate a covenant under its debt agreements, the obligation to pay, in cash or in kind, will be suspended until the earlier to occur of (i) and only to the extent any restrictions under the debt agreements lapse or are no longer applicable or (ii) February 16, 2015. During any such suspension period, the preferential dividends shall continue to accrue and accumulate. As shares of the Series B Preferred Stock are convertible into shares of our common stock, each dividend paid in kind will have a dilutive effect on our shares of common stock.
Preferred stock dividends are recorded at their fair value. If paid in cash, the amount paid represents fair value. If paid in kind, the fair value of the preferred stock dividends is determined using valuation techniques that include a component representing the intrinsic value of the dividends (which represents the fair value of the common stock into which the preferred stock could be converted) and an option component (which is determined using a Black-Scholes Option Pricing Model). Dividends and accretion for the three and six months ended June 30, 2014 and 2013 was $0.2 million in each period. The Company has paid all required quarterly dividends in cash through June 30, 2014.


19

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the audited consolidated financial statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K. Any forward-looking statements made by or on our behalf are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements involve risks and uncertainties in that the actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ include risks set forth in the Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013.
Overview
Forbes Energy Services Ltd., or FES Ltd., is an independent oilfield services contractor that provides a wide range of well site services to oil and natural gas drilling and producing companies to help develop and enhance the production of oil and natural gas. These services include fluid hauling, fluid disposal, well maintenance, completion services, workovers and re-completions, plugging and abandonment, and tubing testing. Our operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with additional locations in Mississippi, in Pennsylvania and, prior to the disposition of our assets in Mexico in January 2012, in Mexico. We believe that our broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of our customers’ wells.
As used in this Quarterly Report on Form 10-Q, the “Company,” the “Forbes Group,” “we,” and “our” mean FES Ltd. and its subsidiaries, except as otherwise indicated.
We currently provide a wide range of services to a diverse group of companies. Through the three and six months ended June 30, 2014, we provided services to over 595 companies. Our customer base includes Anadarko Petroleum Corporation, Chesapeake Energy Corporation, ConocoPhillips Company, and Shell Oil Company, among others. John E. Crisp, Charles C. Forbes, Jr. and our senior management team, have cultivated deep and ongoing relationships with these customers during their average of over 37 years of experience in the oilfield services industry. For the three and six months ended June 30, 2014, we generated consolidated revenues of approximately $113.2 million and $223.1 million , respectively.
We currently conduct our operations through the following two business segments:

•
Well Servicing. Our well servicing segment comprised 62.3% and 62.5% of consolidated revenues for the three and six months ended June 30, 2014, respectively. At June 30, 2014, our well servicing segment utilized our modern fleet of 169 well servicing rigs, which was comprised of 158 workover rigs and 11 swabbing rigs, as well as six coiled tubing spreads, nine tubing testing units, and related assets and equipment. These assets are used to provide (i) well maintenance, including remedial repairs and removal and replacement of downhole production equipment, (ii) well workovers, including significant downhole repairs, re-completions and re-perforations, (iii) completion and swabbing activities, (iv) plugging and abandonment services, and (v) pressure testing of oil and natural gas production tubing and scanning tubing for pitting and wall thickness using tubing testing units.

•
Fluid Logistics. Our fluid logistics segment comprised 37.7% and 37.5% of consolidated revenues for the three and six months ended June 30, 2014, respectively. Our fluid logistics segment utilized our fleet of owned or leased fluid transport trucks and related assets, including specialized vacuum, high-pressure pump and tank trucks, hot oil trucks, frac tanks, fluid mixing tanks, salt water disposal wells and facilities, and related equipment. These assets are used to provide, transport, store, and dispose of a variety of drilling and produced fluids used in, and generated by, oil and natural gas production. These services are required in most workover and completion projects and are routinely used in daily operations of producing wells.

We believe that our two business segments are complementary and create synergies in terms of selling opportunities. Our multiple lines of service are designed to capitalize on our existing customer base to grow it within existing markets, generate more business from existing customers, and increase our operating performance. By offering our customers the ability to reduce the number of vendors they use, we believe that we help improve our customers’ efficiency. This is demonstrated by the fact that 79.3% and 80.3% of our revenues for the three and six months ended June 30, 2014, respectively, were from customers that utilized services of both of our business segments. Further, by having multiple service offerings that span the life cycle of the well, we believe that we have a competitive advantage over smaller competitors offering more limited services.


20

Factors Affecting Results of Operations

Oil and Natural Gas Prices

Demand for well servicing and fluid logistics services is generally a function of the willingness of oil and natural gas companies to make operating and capital expenditures to explore for, develop and produce oil and natural gas, which in turn is affected by current and anticipated levels of oil and natural gas prices. Exploration and production spending is generally categorized as either operating expenditures or capital expenditures. Activities by oil and natural gas companies designed to add oil and natural gas reserves are classified as capital expenditures, and those associated with maintaining or accelerating production, such as workover and fluid logistics services, are categorized as operating expenditures. Operating expenditures are typically more stable than capital expenditures and are less sensitive to oil and natural gas price volatility. In contrast, capital expenditures by oil and natural gas companies for drilling are more directly influenced by current and expected oil and natural gas prices and generally reflect the volatility of commodity prices.

Workover Rig Rates

Our well servicing segment revenues are dependent on the prevailing market rates for workover rigs. Rates and utilization for workover rigs increased slightly through the first half of 2014. Composite rates for the first half of 2014 increased slightly compared to the rate levels in the fourth quarter of 2013.

Fluid Logistics Rates

Our fluid logistics segment revenues are dependent on the prevailing market rates for fluid transport trucks and the related assets, including specialized vacuum, high-pressure pump and tank trucks, hot oil trucks, frac tanks, fluid mixing tanks and salt water disposal wells. Pricing and utilization decreased through 2013 and continued to decrease through the first half of 2014. We believe that pricing and utilization have decreased, in part, due to more efficient drilling processes by our customers and from excess equipment available in the market, which has resulted in price reductions and certain lost customer opportunities.

Operating Expenses
During 2014, labor rates have been relatively stable in our fluid logistics and well servicing segments. Employee headcount continues to decrease in our fluid logistics segment driving down labor costs in that segment. Headcount in the well servicing segment has increased slightly which has increased labor costs in that segment. We also experienced higher parts and supplies costs related to coil tubing units. Future earnings and cash flows will be dependent on our ability to manage our overall cost structure and either maintain our existing prices or obtain price increases from our customers as our operating costs increase.

Equipment rental and lease costs continue to be a significant component of our operating expenses. During the first half of 2014, we did not enter into any additional operating leases. However, we expect that we will continue to meet certain equipment needs through rental or leasing arrangements.
 
Capital Expenditures

During the first half of 2014 we received one swabbing rig, 18 additional hot oil trucks and other well servicing equipment and incurred the associated costs of placing this equipment in service. In addition, we continue to evaluate salt water disposal well and facility locations to better serve its customers. We have also ordered four well service rigs that should be received by the end of the year.




21



Results of Operations
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
The following table compares our operating results for the three months ended June 30, 2014 and 2013 (in thousands, except percentages). Direct operating costs exclude general and administrative expenses, depreciation and amortization.
 
Revenue
 
Direct operating costs
 
2014
 
2013
 
2014
 
% of revenues
 
2013
 
% of revenue
 
Change
 
% Change
Well Servicing
$
70,356

 
$
54,633

 
$
54,046

 
76.8
%
 
$
42,504

 
77.8
%
 
$
11,542

 
27.2
 %
Fluid Logistics
42,819

 
49,049

 
31,582

 
73.8
%
 
34,445

 
70.2
%
 
(2,863
)
 
(8.3
)%
Total
$
113,175

 
$
103,682

 
$
85,628

 
75.7
%
 
$
76,949

 
74.2
%
 
$
8,679

 
11.3
 %
The following table compares segment profits for the three months ended June 30, 2014 and 2013 (in thousands, except percentages).
 
2014
 
2013
 
Amount
 
Gross margin % (1)
 
Amount
 
Gross margin % (1)
Well servicing
16,310

 
23.7
%
 
12,129

 
22.2
%
Fluid logistics
11,237

 
25.9
%
 
14,604

 
29.8
%
Total
$
27,547

 
24.5
%
 
$
26,733

 
25.8
%
(1) Not including general and administrative expenses, depreciation and amortization
Consolidated Revenues. The increase in consolidated revenues is a result of increased activity in the well servicing segment offset by decreased activity in the fluid logistics segment in the first quarter of 2014 as compared to 2013.
Well Servicing. Revenues from the well servicing segment increased due to an increase in rig hours as well as higher utilization of our coiled tubing services. We utilized 169 and 162 well service rigs as of June 30, 2014 and 2013, respectively, and utilized six and five coiled tubing spreads as of June 30, 2014 and 2013, respectively.
Fluid Logistics. Revenues from the fluid logistics segment decreased due to a decrease in trucking hours for the three months ended June 30, 2014 when compared to the same period in 2013. Billable trucking hours decreased during the three months ended June 30, 2014 approximately 12.1% when compared to the three months ended June 30, 2013. Utilization and rate decreases resulted, in part, from more efficient drilling processes by our customers and from excess equipment available in the market, which has resulted in certain lost customer opportunities. Our principal fluid logistics assets at June 30, 2014 and 2013 were as follows:
 
June 30
 
2014
 
2013
Fluid logistics segment:
 
 
 
Vacuum trucks(1)
463

 
473

High-pressure pump trucks (1)
21

 
21

Hot Oil Trucks
28

 
7

Other heavy trucks (1)
79

 
77

Frac tanks
3,000

 
3,111

Fluid mixing tanks
295

 
161

Salt water disposal wells (2)
24

 
25

(1)     At June 30, 2014, 173 vaccum trucks and 21 other heavy trucks, included in the above equipment counts, were leased.
(2)     At June 30, 2014, 18 salt water disposal wells, included in the above well count, were subject to ground leases or
other operating arrangements to third parties. One of these wells is subject to an ongoing dispute over the lease.
Another of these wells is currently in the process of being permitted.

22

Consolidated Operating Expenses. The slight increase in operating expenses as a percentage of revenue in the three months ending June 30, 2014 compared to the three months ending June 30, 2013 was due to the increases in repairs and maintenance expenses in the well servicing segment offset in part by an increase of revenues in the well servicing segment and a decrease in operating expenses in the fluid logistics segment.
Well Servicing. The well servicing segment direct operating costs, excluding general and administrative expenses, depreciation and amortization, decreased as a percentage of revenue for the three months ending June 30, 2014 compared to the three months ending June 30, 2013.  This decrease is due primarily to higher overall rig utilization in the second quarter of 2014 offset by increases in parts, supplies and repair expenses.
Fluid Logistics. Direct operating costs, excluding general and administrative expenses, depreciation and amortization, for the fluid logistics segment increased 2.7% as a percentage of revenue for the three months ending June 30, 2014 compared to 2013. This was attributable to a drop in revenues resulting from decreased hours and lower frac tank rental revenues as reductions in operational operating expenses typically lag the reductions in revenue. These results stemmed from continued industry pressure on hours and pricing due primarily to excess equipment available in the market.

General and Administrative Expenses. General and administrative expenses increased by approximately $1.5 million, to $9.0 million for the three months ended June 30, 2014 as compared to the same period in 2013. General and administrative expense as a percentage of revenues was 8.0% and 7.3% for the three months ended June 30, 2014 and 2013, respectively. The primary reasons for the increase were increases in wages, an increase in information technology costs, and an increase in health insurance expenses.
Depreciation and Amortization. Depreciation and amortization expenses increased by $0.4 million, or 2.7%, to $13.6 million. The additional depreciation expense resulted from equipment purchased in 2013 and 2014.
Interest and Other Expenses. Interest and other expenses increased approximately $0.1 million comparing the three months ended June 30, 2014 to the same period in the prior year. The slight increase was due to slightly increased debt related to insurance and leases as compared to 2013.
Income Taxes. We recognized an income tax benefit of $0.6 million and $0.4 million for the three months ended June 30, 2014 and June 30, 2013, respectively. Our effective tax rate for the three months ended June 30, 2014 is 27.2% compared to 39.5% for the same period in the prior year. The higher rate for the three months ended June 30, 2013 was due to a change in management's full year 2013 forecast during that quarter. The company's second quarter provision was recorded to effectuate the change in forecast. The difference between the effective rate and the 35.0% statutory rate is mainly due to tax rate benefit for the Texas Margins Tax and non-deductible expenses.
Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013
The following table compares our operating results for the six months ended June 30, 2014 and 2013 (in thousands, except percentages). Direct operating costs exclude general and administrative expenses, depreciation and amortization.
 
Revenue
 
Direct operating costs
 
2014
 
2013
 
2014
 
% of revenues
 
2013
 
% of revenue
 
Change
 
% Change
Well Servicing
139,449

 
$
104,797

 
106,449

 
76.3
%
 
$
82,842

 
79.0
%
 
$
23,607

 
28.5
 %
Fluid Logistics
83,637

 
100,623

 
61,943

 
74.1
%
 
71,878

 
71.4
%
 
(9,935
)
 
(13.8
)%
Total
$
223,086

 
$
205,420

 
$
168,392

 
75.5
%
 
$
154,720

 
75.3
%
 
$
13,672

 
8.8
 %
The following table compares segment profits for the six months ended June 30, 2014 and 2013 (in thousands, except percentages).
 
2014
 
2013
 
Amount
 
Gross margin % (1)
 
Amount
 
Gross margin % (1)
Well servicing
33,000

 
23.7
%
 
$
21,955

 
21.0
%
Fluid logistics
21,694

 
25.9
%
 
28,745

 
28.6
%
Total
$
54,694

 
24.5
%
 
$
50,700

 
24.7
%
(1) Not including general and administrative expenses, depreciation, and amortization.

23

Consolidated Revenues. The increase in consolidated revenues is a result of increased activity in the well servicing segment offset by decreased activity in the fluid logistics segment in the first half of 2014 as compared to 2013.
Well Servicing. Revenues from the well servicing segment increased due to an increase in rig hours as well as higher utilization of our coiled tubing services. We utilized 169 and 162 well service rigs as of June 30, 2014 and 2013, respectively, and utilized six and five coiled tubing spreads as of June 30, 2014 and 2013, respectively.
Fluid Logistics. Revenues from the fluid logistics segment decreased due to a decrease in trucking hours and rates for the six months ended June 30, 2014 when compared to the same period in 2013. Billable trucking hours decreased during the six months ended June 30, 2014 approximately 17.5% when compared to the six months ended June 30, 2013. Utilization and rate decreases resulted, in part, from more efficient drilling processes by our customers and from excess equipment available in the market, which has resulted in certain lost customer opportunities. Our principal fluid logistics assets at June 30, 2014 and June 30, 2013 were as follows:
 
June 30
 
2014
 
2013
Fluid logistics segment:
 
 
 
Vacuum trucks (1)
463

 
473

High-pressure pump trucks (1)
21

 
21

Hot Oil Trucks
28

 
7

Other heavy trucks (1)
79

 
77

Frac tanks
3,000

 
3,111

Fluid mixing tanks
295

 
161

Salt water disposal wells (2)
24

 
25

(1)     At June 30, 2014, 173 vaccum trucks and 21 other heavy trucks, included in the above equipment counts, were leased.
(2)     At June 30, 2014, 18 salt water disposal wells, included in the above well count, were subject to ground leases or
other operating arrangements to third parties. One of these wells is subject to an ongoing dispute over the lease.
Another of these wells is currently in the process of being permitted.
Consolidated Operating Expenses. The operating expenses as a percentage of revenue was relatively flat in the six months ending June 30, 2014 compared to the same period in 2013.
Well Servicing. The well servicing segment direct operating costs, excluding general and administrative expenses, depreciation and amortization, decreased 2.7% as a percentage of revenue for the six months ending June 30, 2014 compared to the same period in 2013.  This decrease is due primarily to higher overall rig utilization in the first quarter of 2014, offset by slight increases in parts, supplies and maintenance costs.
Fluid Logistics. Direct operating costs, excluding general and administrative expenses, depreciation and amortization, for the fluid logistics segment increased 2.7% as a percentage of revenue for the six months ending June 30, 2014 compared to the same period in 2013. This was attributable to a drop in revenues resulting from decreased hours and lower frac tank rental revenues as reductions in operational expenses typically lag the reductions in revenue. These results stemmed from continued industry pressure on hours and pricing due primarily to excess equipment available in the market.

General and Administrative Expenses. General and administrative expenses increased by approximately $2.6 million, to $17.6 million for the six months ended June 30, 2014 as compared to the same period in 2013. General and administrative expense as a percentage of revenues was 7.9% and 7.3% for the six months ended June 30, 2014 and June 30, 2013, respectively. The primary reasons for the increase were increases in compensation expense, an increase in information technology, and an increase in health insurance expenses.
Depreciation and Amortization. Depreciation and amortization expenses increased by $0.6 million or 2.3%, to $26.8 million. The additional depreciation expense resulted from equipment purchased in 2013 and 2014.
Interest and Other Expenses. Interest and other expenses decreased approximately $0.2 million comparing the six months ended June 30, 2014 to the same period in the prior year. The slight decrease was due to slightly lower interest rates on new debt acquired in 2014.

24

Income Taxes. We recognized an income tax benefit of $1.1 million and $1.2 million for the six months ended June 30, 2014 and 2013, respectively. Our effective tax rate for the six months ended June 30, 2014 is 28.1% compared to 26.8% for the same period in the prior year.

Liquidity and Capital Resources
Overview
We have historically funded our operations, including capital expenditures with bank borrowings, vendor financings, cash flow from operations, the issuance of senior notes and the proceeds from our public and private equity offerings.
As of June 30, 2014, we had $16.8 million in cash and cash equivalents, $295.0 million in contractual debt and capital leases and $3.2 million of accounts payable related to equipment. Also, as of June 30, 2014, we had 588,059 outstanding shares of Series B Senior Convertible Preferred Stock, which is reflected in the balance sheet as temporary equity in an amount of $14.6 million. During periods when the Company's common stock maintains a five day volume weighted average trading price above $3.33 per share, the Series B Preferred Stock is redeemable, in whole or in part, at the Company's option for a price of $25 per share, plus accrued and unpaid dividends. Nevertheless, if the Company elects to redeem the Series B Preferred Stock, the holders thereof would have the opportunity prior to redemption to convert each share of the Series B Preferred Stock into nine shares of common stock. In May 2017, the Company is required to redeem the Series B Preferred Stock at 95% of the fair market value of the common stock as determined in accordance with the certificate of designation of the Series B Preferred Stock.
The $295.0 million in contractual debt was comprised of $280.0 million in senior notes and $15.0 million in notes and/or capital leases on equipment and insurance notes. Of our total debt, $287.9 million of the outstanding contractual debt was classified as long-term debt and $7.1 million was short-term debt outstanding or the current portion of long-term debt. In addition, we have $3.2 million of non interest bearing short-term equipment vendor financings for well servicing rigs and other equipment included in accounts payable. The $15.0 million in equipment and insurance notes consisted of $13.5 million in equipment notes and $1.5 million in insurance notes related to our general liability, workers compensation, and other insurances. We incurred $6.1 million and $11.8 million for capital equipment acquisitions during the three and six months ended June 30, 2014, compared to $10.4 million and $20.3 million for the three and six months ended June 30, 2013, respectively.
On September 9, 2011, we entered into a loan and security agreement with certain lenders and Regions Bank, as agent for the secured parties, or the Agent. This loan and security agreement was amended, in December 2011, July 2012 and July 2013. The loan and security agreement initially provided for an asset based revolving credit facility with a maximum initial credit of $75 million, subject to borrowing base availability, and other limitations. The third amendment increased the maximum borrowing credit to $90.0 million, subject to borrowing base availability, any reserves established by the facility agent in its discretion, compliance with a fixed coverage charge ratio covenant if availability under the facility falls below certain thresholds and, for borrowings above $75.0 million, compliance with the debt incurrence covenant in the indenture governing the 9% Senior Notes this indenture covenant prohibits the incurrence of debt except for certain limited exceptions, including indebtedness incurred under the permitted credit facility debt basket to the greater of $75.0 million or 18% of our Consolidated Tangible Assets (as defined in the indenture governing the 9% Senior Notes) reported for the last fiscal quarter for which financial statements are available. Under the indenture governing the 9% Senior Notes, Consolidated Tangible Assets is defined as our total assets, determined on a consolidated basis in accordance with GAAP, excluding unamortized debt discount and expenses and other unamortized deferred charges, to the extent such items are non-cash expenses or charges, goodwill, patents, trademarks, service marks, trade names, copyrights and other items properly classified as intangibles in accordance with GAAP. As of June 30, 2014, 18% of our Consolidated Tangible Assets was approximately $82.6 million. Under the loan and security agreement, our borrowing base at any time is equal to (i) 85% of eligible accounts, which are determined by Agent in its reasonable discretion, plus (ii) the lesser of 85% of the appraised value, subject to certain adjustments, of our well servicing equipment that has been properly pledged and appraised, is in good operating condition and is located in the United States, or 100% of the net book value of such equipment, minus(iii) any reserves established by the Agent in its reasonable discretion. As of June 30, 2014, borrowing base was $90 million and borrowing availability was $76.7 million. As amended, the loan and security agreement has a stated maturity of July 26, 2018.
Prior to the third amendment, at our option, borrowings under this credit facility would have borne interest at a rate equal to either (i) the LIBOR rate plus an applicable margin of between 2.25% to 2.75% based on borrowing availability or (ii) a base rate plus an applicable margin of between 1.25% to 1.75% based on borrowing availability, where the base rate was equal to the greater of the prime rate established by Regions Bank, the overnight federal funds rate plus 0.50% or the LIBOR rate for a one month period plus 1.00%. The third amendment decreased the revolving interest rate whereby borrowings under the Loan Agreement will bear interest at a rate equal to either (a) the LIBOR rate plus an applicable margin of between 2.00% to 2.50% based on borrowing availability or (b) a base rate plus an applicable margin of between 1.00% to 1.50% based on borrowing

25

availability, where the base rate is equal to the greater of the prime rate established by Regions Bank, the overnight federal funds rate plus 0.50% or the LIBOR rate for a one month period plus 1.00%.
As of June 30, 2014, there were no amounts drawn and $5.9 million in outstanding letters of credit outstanding against the facility.
    
The indenture governing the 9% Senior Notes and the loan agreement governing our senior secured revolving credit facility impose significant restrictions on us and increase our vulnerability to adverse economic and industry conditions that could limit our ability to obtain additional or replacement financing. For example, the indenture governing the 9% Senior Notes only allows us to incur indebtedness, other than certain specific types of permitted indebtedness, if such indebtedness is unsecured and if the Fixed Charge Coverage Ratio (as defined in each indenture) for the most recently completed four full fiscal quarters is at least 2.0 to 1.0. We are currently able to incur indebtedness under this ratio. Our credit facility only allows us to incur specific types of permitted indebtedness, which includes a $40.0 million basket of permitted indebtedness for capital leases, mortgage financings or purchase money obligations incurred for the purpose of installation or improvement of property, plant or equipment.
Should we fail to satisfy our obligations under the indenture governing the 9% Senior Notes, the loan agreement governing our credit facility and any future debt agreements we may enter into could constitute an event of default under one or more of such agreements. Further, due to cross-default provisions in our debt agreements, a default and acceleration of our outstanding debt under one debt agreement may result in the default and acceleration of outstanding debt under the other debt agreements. Accordingly, an event of default could result in all or a portion of our outstanding debt becoming immediately due and payable. If this should occur, we might not be able to obtain waivers or secure alternative financing to satisfy all of our obligations simultaneously. Our ability to access the capital markets or to consummate any asset sales might be restricted at a time when we would like or need to raise capital. These events could have a material adverse effect on our business, financial position, results of operations and cash flows and our ability to satisfy our obligations.
A downturn could require us to seek funding to meet working capital requirements. Further, should management elect to incur capital expenditures in excess of the levels projected for 2014 or to pursue other capital intensive activities, additional capital may be required to fund these activities. Within certain constraints, we can conserve capital by reducing or delaying capital expenditures, deferring non-regulatory maintenance expenditures and further reducing operating and administrative costs.

Cash Flows

Our cash flows depend, to a large degree, on the level of spending by oil and gas companies development and production activities. Sustained increases or decreases in the price of natural gas or oil could have a material impact on these activities, and could also materially affect our cash flows. Certain sources and uses of cash, such as the level of discretionary capital expenditures, purchases and sales of investments, issuances and repurchases of debt and of our common stock are within our control and are adjusted as necessary based on market conditions.

Cash Flows from Operating Activities

Net cash provided by operating activities totaled $7.1 million for the six months ended June 30, 2014, compared to $29.3 million for the six months ended June 30, 2013. The decrease in cash provided by operating activities of $22.2 million for the six months ending June 30, 2014 was principally due to changes in accounts receivable, accounts payable, and accrued expenses, primarily resulting from the decline in the fluid logistics segment.

Cash Flows from Investing Activities

Cash flows used in investing activities was $13.5 million for the six months ending June 30, 2014 compared to $16.3 million for the same period in 2013. The change was primarily related to a reduction in the purchase of property and equipment which decreased from $17.4 million for the six months ended June 30, 2013 compared to $13.7 million for the current period. Our capital expenditures for the first six months of 2014 were $17.8 million. This was comprised of additions to our fluid logistics segment of approximately $9.0 million and additions to our well servicing segment of approximately $8.6 million. Additions to the fluid logistics segment consisted primarily of hot oil trucks. Additions to the well servicing segment included well servicing rig equipment, vehicles, coiled tubing equipment, and other ancillary equipment. In addition, we currently have four well service rigs on order that should be delivered by year end. As discussed in more detail above, our ability to seek additional financing may be restricted by certain of our debt covenants.

26


Cash Flows from Financing Activities

Cash flows used in financing activities declined by approximately $0.1 million in the six months ending June 30, 2014 when compared to June 30, 2013, this was primarily driven by the expiration of certain capital leases after June 30, 2013.

Off-Balance Sheet Arrangements

We are often party to certain transactions that require off-balance sheet arrangements such as performance bonds, guarantees, operating leases for equipment, and bank guarantees that are not reflected in our condensed consolidated balance sheets. These arrangements are made in our normal course of business and they are not reasonably likely to have a current or future material adverse effect on our financial condition, results of operations, liquidity or cash flows.

Contractual Obligations and Financing

There have been no material changes to contractual obligations and financing as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

Seasonality

Our operations are impacted by seasonal factors. Historically, our business has been negatively impacted during the winter months due to inclement weather, fewer daylight hours, and holidays. Our well servicing rigs are mobile, and we operate a significant number of oilfield vehicles. During periods of heavy snow, ice or rain, we may not be able to move our equipment between locations, thereby reducing our ability to generate rig or truck hours. In addition, the majority of our well servicing rigs work only during daylight hours. In the winter months as daylight time becomes shorter, the amount of time that the well servicing rigs work is shortened, which has a negative impact on total hours worked. Finally, during the fourth quarter, we historically have experienced significant slowdowns during the Thanksgiving and Christmas holiday seasons.


Critical Accounting Policies

There have been no material changes to the critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the market risk disclosures set forth in Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits 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 required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2014, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures over financial reporting were effective.


27


Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13-a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

    


28

PART II—OTHER INFORMATION
 
Item 1.
Legal Proceedings

There are no pending material legal proceedings, and the Forbes Group is not aware of any material threatened legal proceedings, to which the Forbes Group is a party or to which its property is subject.

Item 1A.
Risk Factors

There were no material changes from the risk factors previously disclosed in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.
Default Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

29

Item 6. Exhibits

Number
 
 
Description of Exhibits
 
 
 
 
2.1

—  
 
Agreement and Plan of Reorganization effective January 1, 2008 among Forbes Energy Services LLC and the respective members of C.C. Forbes, LLC, TX Energy Services, LLC and Superior Tubing Testers, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-4/A filed June 27, 2008, Registration No. 333-150853).
2.2

—  
 
Agreement and Plan of Reorganization effective May 29, 2008 among Forbes Energy Services Ltd. and the members of Forbes Energy Services LLC (incorporated by reference to Exhibit 2.2 to the Company’s Registration Statement on Form S-4/A filed June 27, 2008, Registration No. 333-150853).
2.3

—  
 
Plan of Conversion of Forbes Energy Services Ltd. (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form 8-A filed August 12, 2011).
2.4

—  
 
Certificate of Conversion of Forbes Energy Services, Ltd (incorporated by reference to exhibit 2.2 to the Company’s Registration Statement on Form 8-A filed August 12, 2011)
3.1

—  
 
Certificate of Formation of Forbes Energy Services Ltd. (including the certificates of designation for the Company’s Series A Preferred Stock and Series B Preferred Stock attached as appendices thereto) (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 8-A filed August 12, 2011).
3.2

—  
 
Amended and Restated Bylaws of Forbes Energy Services Ltd. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A filed August 12, 2011).
3.3

—  
 
Certificate of Correction to Certificate of Conversion as filed with the Secretary of the State of the State of Texas, effective May 14, 2014.
4.1

—  
 
Rights Agreement dated as of May 19, 2008 between Forbes Energy Services Ltd. and CIBC Mellon Trust Company, as Rights Agent, which includes as Exhibit A the Certificate of Designations of Series A Junior Participating Preferred Shares, as Exhibit B the form of Right Certificate and as Exhibit C the form of Summary of Rights to Purchase Shares (incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement on Form S-4/A filed June 27, 2008, Registration No. 333-150853).
4.2

—  
 
Amendment to Rights Agreement dated as of July 8, 2013 between Forbes Energy Services Ltd. and CIBC Mellon Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 8, 2013).
4.3

—  
 
Certificate of Designation of the Series B Senior Convertible Preferred Shares (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed May 28, 2010).
4.4

—  
 
Indenture, dated June 7, 2011 among Forbes Energy Services Ltd., as issuer, the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 7, 2011).
4.5

—  
 
Amended and Restated Certificate of Designation of the Series B Senior Convertible Preferred Shares (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 25, 2011).
4.6

—  
 
Specimen Certificate for the Company’s common stock, $0.04 par value (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A filed August 12, 2011).
10.1

—  
 
Form of Recoupment Clawback Executive Acknowledgement.
31.1*

—  
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2*

—  
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1*

—  
 
Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*

—  
 
Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*

—  
 
Interactive Data Files
 _________________________
*
Filed herewith.



30

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
FORBES ENERGY SERVICES LTD.
 
 
 
 
August 14, 2014
 
By:
 
/s/ JOHN E. CRISP
 
 
 
 
John E. Crisp
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
 
 
 
 
 
 
 
 
 
August 14, 2014
 
By:
 
/S/ L. MELVIN COOPER
 
 
 
 
L. Melvin Cooper
Senior Vice President,
Chief Financial Officer and Assistant Secretary
(Principal Financial and Accounting Officer)


31

EXHIBIT INDEX 
Number
 
 
Description of Exhibits
2.1

—

 
Agreement and Plan of Reorganization effective January 1, 2008 among Forbes Energy Services LLC and the respective members of C.C. Forbes, LLC, TX Energy Services, LLC and Superior Tubing Testers, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-4/A filed June 27, 2008, Registration No. 333-150853).
2.2

—

 
Agreement and Plan of Reorganization effective May 29, 2008 among Forbes Energy Services Ltd. and the members of Forbes Energy Services LLC (incorporated by reference to Exhibit 2.2 to the Company’s Registration Statement on Form S-4/A filed June 27, 2008, Registration No. 333-150853).
2.3

—

 
Plan of Conversion of Forbes Energy Services Ltd. (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form 8-A filed August 12, 2011).
2.4

—

 
Certificate of Conversion of Forbes Energy Services, Ltd (incorporated by reference to exhibit 2.2 to the Company’s Registration Statement on Form 8-A filed August 12, 2011)
3.1

—

 
Certificate of Formation of Forbes Energy Services Ltd. (including the certificates of designation for the Company’s Series A Preferred Stock and Series B Preferred Stock attached as appendices thereto) (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 8-A filed August 12, 2011).
3.2

—

 
Amended and Restated Bylaws of Forbes Energy Services Ltd. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A filed August 12, 2011).
3.3

—

 
Certificate of Correction to Certificate of Conversion, as filed with the Secretary of State of the State of Texas, effective May 14, 2014.
4.1

—

 
Rights Agreement dated as of May 19, 2008 between Forbes Energy Services Ltd. and CIBC Mellon Trust Company, as Rights Agent, which includes as Exhibit A the Certificate of Designations of Series A Junior Participating Preferred Shares, as Exhibit B the form of Right Certificate and as Exhibit C the form of Summary of Rights to Purchase Shares (incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement on Form S-4/A filed June 27, 2008, Registration No. 333-150853).
4.2

—

 
Amendment to Rights Agreement dated as of July 8, 2013 between Forbes Energy Services Ltd. and CIBC Mellon Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 8, 2013).
4.3

—

 
Certificate of Designation of the Series B Senior Convertible Preferred Shares (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed May 28, 2010).
4.4

—

 
Indenture, dated June 7, 2011 among Forbes Energy Services Ltd., as issuer, the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 7, 2011).
4.5

—

 
Amended and Restated Certificate of Designation of the Series B Senior Convertible Preferred Shares (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 25, 2011).
4.6

—

 
Specimen Certificate for the Company’s common stock, $0.04 par value (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A filed August 12, 2011).
10.1

—

 
Form of Recoupment Clawback Executive Acknowledgement.
31.1*

—

 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2*

—

 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1*

—

 
Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*

—

 
Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*

—

 
Interactive Data Files
 _________________________
*
Filed herewith.



32

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