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EX-32.2 - EXHIBIT 32.2 - Forbes Energy Services Ltd.a201810qq3fes-ex322.htm
EX-32.1 - EXHIBIT 32.1 - Forbes Energy Services Ltd.a201810qq3fes-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Forbes Energy Services Ltd.a201810qq3fes-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Forbes Energy Services Ltd.a201810qq3fes-ex311.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________________________
Form 10-Q 
__________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-35281
__________________________________________________________
Forbes Energy Services Ltd.
(Exact name of registrant as specified in its charter)
__________________________________________________________
Delaware
 
98-0581100
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3000 South Business Highway 281
Alice, Texas
 
78332
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(361) 664-0549 
__________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
x
 
 
 
 
 
 
Emerging growth company
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    ¨  Yes    x  No
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court (as defined in Exchange Act Rule 12b-2).    x  Yes    ¨  No
The number of shares of common stock, par value $0.01 per share, of Forbes Energy Services Ltd. outstanding as of November 14, 2018 was 5,421,967.

 
 
 
 
 




FORBES ENERGY SERVICES LTD.
TABLE OF CONTENTS
 


2


FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any oral statements made in connection with it include certain forward-looking statements within the meaning of the federal securities laws. You can generally identify forward-looking statements by the appearance in such a statement of words like “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or “should” or other comparable words or the negative of these words. When you consider our forward-looking statements, you should keep in mind the risk factors we describe and other cautionary statements we make in this Quarterly Report on Form 10-Q. Our forward-looking statements are only predictions based on expectations that we believe are reasonable. Our actual results could differ materially from those anticipated in, or implied by, these forward-looking statements as a result of known risks and uncertainties set forth below and elsewhere in this Quarterly Report on Form 10-Q. These factors include or relate to the following:
the effect of the cyclical nature of energy exploration and development activities;
continuing incurrence of operating losses due to such downturn;
oil and natural gas commodity prices;
market response to global demands to curtail use of oil and natural gas;
capital budgets and spending by the oil and natural gas industry;
the ability or willingness of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels for oil;
oil and natural gas production levels by non-OPEC countries;
supply and demand for oilfield services and industry activity levels;
our ability to maintain stable pricing;
possible impairment of our long-lived assets;
potential for excess capacity;
competition;
substantial capital requirements;
significant operating and financial restrictions under our loan and security agreement which provides for a term loan of $50.0 million, or the New Loan Agreement;
technological obsolescence of operating equipment;
dependence on certain key employees;
concentration of customers;
substantial additional costs of compliance with reporting obligations, the Sarbanes-Oxley Act and New Loan Agreement covenants;
seasonality of oilfield services activity;
collection of accounts receivable;
environmental and other governmental regulation;
the potential disruption of business activities caused by the physical effects, if any, of climate change;
risks inherent in our operations;
ability to fully integrate future acquisitions;
variation from projected operating and financial data;
variation from budgeted and projected capital expenditures;
volatility of global financial markets; and
the other factors discussed under “Risk Factors” beginning on page 10 of the Annual Report on Form 10-K for the year ended December 31, 2017.
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

3


expectations, the forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.

4


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

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

Successor

September 30,
2018

December 31,
2017
Assets



Current assets



Cash and cash equivalents
$
6,617


$
5,465

       Cash - restricted
14,701


30,015

Accounts receivable - trade, net
34,717


24,341

Accounts receivable - other
908


496

Prepaid expenses and other current assets
5,030


11,212

Total current assets
61,973


71,529

Property and equipment, net
113,103


117,191

Intangible assets, net
11,012


11,852

Other assets
883


1,185

Total assets
$
186,971


$
201,757

Liabilities and Stockholders’ Equity



Current liabilities



Current portions of long-term debt
$
2,054


$
7,566

Accounts payable - trade
15,769


7,497

Accounts payable - related parties


11

Accrued interest payable
1,304


998

Accrued expenses
12,035


11,084

Total current liabilities
31,162


27,156

Long-term debt, net of current portion
55,486


51,288

Deferred tax liability
362


379

Total liabilities
87,010


78,823






Commitments and contingencies (Note 8)

 





Common stock, $0.01 par value, 40,000 shares authorized, 5,422 and 5,336 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
54

 
53

Additional paid-in capital
149,620

 
148,866

Accumulated deficit
(49,713
)

(25,985
)
Total stockholders’ equity
99,961


122,934

Total liabilities and stockholders’ equity
$
186,971


$
201,757

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

5


Forbes Energy Services Ltd.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)
 
 
Successor
 
Three Months Ended September 30,
 
2018
 
2017
Revenues
 
 
 
Well servicing
$
32,175

 
$
23,513

Fluid logistics
15,437

 
10,782

Total revenues
47,612

 
34,295

Expenses
 
 
 
Well servicing
25,350

 
16,883

Fluid logistics
12,079

 
10,371

General and administrative
6,545

 
6,458

Depreciation and amortization
7,566

 
7,134

Total expenses
51,540

 
40,846

Operating loss
(3,928
)
 
(6,551
)
Other income (expense)
 
 
 
Interest income
1

 
5

Interest expense
(2,474
)
 
(2,170
)
Pre-tax loss
(6,401
)
 
(8,716
)
Income tax expense
32

 
260

Net loss
$
(6,433
)
 
$
(8,976
)
Loss per share of common stock
 
 
 
Basic and diluted loss per share
$
(1.20
)
 
$
(1.70
)
Weighted average number of shares outstanding
 
 
 
Basic and diluted
5,368

 
5,279

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

6


Forbes Energy Services Ltd.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)
 
 
Successor
 
 
Predecessor
 
Nine months ended September 30, 2018
 
April 13 through September 30, 2017
 
 
January 1 through April 12, 2017
 
 
 
 
Revenues
 
 
 
 
 
 
Well servicing
$
82,406

 
$
41,652

 
 
$
19,554

Fluid logistics
42,038

 
20,493

 
 
11,211

Total revenues
124,444

 
62,145

 
 
30,765

Expenses
 
 
 
 
 
 
Well servicing
67,689

 
30,698

 
 
15,952

Fluid logistics
33,919

 
19,425

 
 
11,207

General and administrative
17,341

 
9,588

 
 
5,012

Depreciation and amortization
22,381

 
12,815

 
 
13,601

Total expenses
141,330

 
72,526

 
 
45,772

Operating loss
(16,886
)
 
(10,381
)
 
 
(15,007
)
Other income (expense)
 
 
 
 
 
 
Interest income
3

 
11

 
 
13

Interest expense
(7,267
)
 
(4,067
)
 
 
(2,254
)
Gain (loss) on reorganization items, net

 
(1,299
)
 
 
44,503

Pre-tax income (loss)
(24,150
)
 
(15,736
)
 
 
27,255

Income tax (benefit) expense
(422
)
 
243

 
 
27

Net income (loss)
(23,728
)
 
(15,979
)
 
 
27,228

Preferred stock dividends

 

 
 
(46
)
Net income (loss) attributable to common stockholders
$
(23,728
)
 
$
(15,979
)
 
 
$
27,182

Income (loss) per share of common stock
 
 
 
 
 
 
Basic and diluted income (loss) per share
$
(4.44
)
 
$
(3.04
)
 
 
$
0.99

Weighted average number of shares outstanding
 
 
 
 
 
 
Basic and diluted
5,347

 
5,262

 
 
27,508

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


7


Forbes Energy Services Ltd.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
 
Successor
 
 
Predecessor
 
Nine months ended September 30, 2018
 
April 13 through September 30, 2017
 
 
January 1 through April 12, 2017
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss)
$
(23,728
)
 
$
(15,979
)
 
 
$
27,228

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
 
 
 
Depreciation and amortization
22,381

 
12,815

 
 
13,601

Share-based compensation
755

 
1,034

 
 

Reorganization items (non-cash)

 

 
 
(51,166
)
Deferred tax (benefit) expense
(17
)
 
15

 
 
(47
)
Gain on disposal of assets
(427
)
 
(338
)
 
 
(950
)
Bad debt expense
89

 
145

 
 
1

Amortization of debt discount
653

 
968

 
 
234

Interest paid in kind
3,027

 
1,676

 
 

Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts receivable
(10,877
)
 
(8,069
)
 
 
(916
)
Prepaid expenses and other assets
602

 
2,985

 
 
(748
)
Accounts payable - trade
4,349

 
(4,457
)
 
 
6,608

Accounts payable - related parties
(11
)
 
(8
)
 
 
2

Accrued expenses
913

 
549

 
 
324

Accrued interest payable
306

 
(6
)
 
 
1,575

Net cash used in operating activities
(1,985
)
 
(8,670
)
 
 
(4,254
)
Cash flows from investing activities:
 
 
 
 
 
 
Proceeds from sale of property and equipment
2,086

 
1,086

 
 
937

Purchases of property and equipment
(12,769
)
 
(4,044
)
 
 
(400
)
Net cash provided by (used in) investing activities
(10,683
)
 
(2,958
)
 
 
537

Cash flows from financing activities:
 
 
 
 
 
 
Payments for capital leases
(1,494
)
 
(664
)
 
 
(444
)
Payments for debt issuance costs

 

 
 
(5,000
)
Payment of Prior Senior Notes

 

 
 
(20,000
)
Repayment of Prior Loan Agreement

 

 
 
(15,000
)
Proceeds from New Loan Agreement

 

 
 
50,000

Net cash provided by (used in) financing activities
(1,494
)
 
(664
)
 
 
9,556

Net increase (decrease) in cash, cash equivalents, and cash - restricted
(14,162
)
 
(12,292
)
 
 
5,839

Cash, cash equivalents, and cash - restricted:
 
 
 
 
 
 
Beginning of period
35,480

 
53,839

 
 
48,000

End of period
$
21,318

 
$
41,547

 
 
$
53,839

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

8


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

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. The Company's operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with an additional location in Pennsylvania. The Company believes that its broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of its customers' wells.

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

2. Basis of Presentation

Fresh Start Accounting
    
On January 22, 2017, FES Ltd. and its domestic subsidiaries, or collectively, the Debtors, filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas-Corpus Christi Division, or the Bankruptcy Court, pursuant to the terms of a restructuring support agreement that contemplated the reorganization of the Debtors pursuant to a prepackaged plan of reorganization, as amended and supplemented, the Plan. On March 29, 2017, the Bankruptcy Court entered an order confirming the Plan. On April 13, 2017, or the Effective Date, the Plan became effective pursuant to its terms and the Debtors emerged from their chapter 11 cases.
Upon emergence from bankruptcy on the Effective Date, the Company qualified for and adopted fresh start accounting in accordance with the provisions of ASC 852 as (i) the holders of FES Ltd.’s prior common stock, par value $0.04 per share, or the Old Common Stock, received none of the new class of common stock, par value $0.01 per share, or the New Common Stock, issued upon the Debtors' emergence from bankruptcy and (ii) the reorganization value of the Company's assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims. The effects of the Plan and the application of fresh start accounting are reflected in the Company's condensed consolidated financial statements from and after April 13, 2017. References to the "Successor" pertain to the Company from and after the Effective Date. References to "Predecessor" pertain to the Company prior to the Effective Date.
The Company applied fresh start accounting from and after the Effective Date. Fresh start accounting required the Company to present its assets, liabilities and equity as if it were a new entity upon emergence from bankruptcy, with no beginning retained earnings or deficit as of the fresh start reporting date. As a result of the adoption of fresh start accounting, the Company’s unaudited condensed consolidated financial statements from and after the Effective Date will not be comparable to its financial statements prior to such date.

Reorganization Items
Reorganization items represent amounts incurred subsequent to the filing of the Bankruptcy Petitions as a direct result of the filing of the Plan and are comprised of the following (in thousands):


9


 
 
Successor
 
 
Predecessor
 
 
April 13 through September 30, 2017
 
 
January 1 through April 12, 2017
Reorganization legal and professional fees
 
$
(1,299
)
 
 
$
(6,729
)
Deferred loan costs expensed
 

 
 
(2,104
)
Gain on settlement of liabilities subject to compromise
 

 
 
140,441

Fresh start adjustments
 

 
 
(87,105
)
Gain (loss) on reorganization items, net
 
$
(1,299
)
 
 
$
44,503


Interim Financial Information
The unaudited condensed consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these condensed consolidated financial statements should be read along with the annual audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments which are of normal recurring natures considered necessary for a fair representation have been made in the accompanying unaudited financial statements.

Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated balance sheets and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Cash - Restricted
Restricted cash at September 30, 2018 (Successor) and December 31, 2017 (Successor) was $14.7 million and $30.0 million, respectively. The components of restricted cash at September 30, 2018 (Successor) included $6.0 million related to the loan and security agreement which provides for a term loan of $50.0 million, or the New Loan Agreement, which is subject to satisfaction of certain release restrictions and $8.7 million in a cash collateral account related to letters of credit and the Company's corporate credit card program under a new letter of credit facility entered into with Regions, or the New Regions Letter of Credit Facility. The release conditions set forth in the New Loan Agreement include, among other things, (i) no default or event of default under the New Loan Agreement having occurred or being continuing as of the date of the requested release of proceeds of the New Loan Agreement, or that would exist after giving effect to the release requested to be made on such date, and (ii) the Company’s unrestricted cash and cash equivalents being less than $7.0 million after giving pro forma effect to the requested release.

Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," or ASU 2014-09, which provides guidance for revenue recognition and which supersedes nearly all existing revenue recognition guidance under ASU 2014-09 and created ASC 606. This ASU provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On January 1, 2018, the Company adopted ASC 606 on a modified retrospective basis for all contracts. As a result of the Company's adoption, there were no changes to the timing of the revenue recognition or measurement of revenue, and there was no cumulative effect of adoption as of January 1, 2018. Therefore, the only changes to the financial statements related to the adoption are in the footnote disclosures as included here-in.
Revenue is measured as consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by providing service to a customer. Amounts are billed upon completion of service and are generally due within 30 days.
The Company has its principal revenue generating activities organized into two service lines, well servicing and fluid logistics. The Company's well servicing line consists primarily of maintenance, workover, completion, plugging and

10


abandonment, and tubing testing services. The Company's fluid logistics line provides supporting services to the well servicing line as well as direct sales to customers for fluid management and movement. The Company generally establishes a master services agreement with each customer and provides associated services on a work order basis in increments of days, by the hour for services performed or on occasion, bid/turnkey pricing. Services provided under the well servicing and the fluid logistics segments are short in duration and generally completed within 30 days.

The majority of the Company’s contracts with customers in both the well servicing and fluid logistics segments are short-term in nature and are recognized as “over-time” performance obligations as the services are performed. The Company applies the “as-invoiced” practical expedient as the amount of consideration the Company has a right to invoice corresponds directly with the value of the Company’s performance to date. Because of the short-term nature of the Company’s services, which generally last a few hours to multiple days, the Company does not have any contracts with a duration longer than one year that require disclosure. The Company has no material contract assets or liabilities.

The Company does not have any revenue expected to be recognized in the future related to remaining performance obligations or contracts with variable consideration related to undelivered performance obligations. There was no revenue recognized in the current period from performance obligations satisfied in previous periods. The Company's significant judgments made in connection with the adoption of ASC 606 included the determination of when the Company satisfies its performance obligation to customers and the applicability of the as invoiced practical expedient.
The following tables show revenue disaggregated by primary geographical markets and major service lines for the three months ended September 30, 2018 (Successor) and the three months ended September 30, 2017 (Successor).
Successor
 
 
Three months ended September 30, 2018
 
 
Well Servicing
Fluid Logistics
Total
Primary Geographical Markets
 
(in thousands)
South Texas
 
 
$
20,260

$
7,580

$
27,840

East Texas (1)
 
 
1,630

835

2,465

Central Texas
 
 

3,728

3,728

West Texas
 
 
10,285

3,294

13,579

Total
 
 
$
32,175

$
15,437

$
47,612

 
 
 
 
 
 
Successor
 
 
Three months ended September 30, 2017
 
 
Well Servicing
Fluid Logistics
Total
Primary Geographical Markets
 
(in thousands)
South Texas
 
 
$
18,397

$
5,681

$
24,078

East Texas (1)
 
 
1,378

810

2,188

Central Texas
 
 

1,511

1,511

West Texas
 
 
3,738

2,780

6,518

Total
 
 
$
23,513

$
10,782

$
34,295

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

11


The following tables show revenue disaggregated by primary geographical markets and major service lines for the nine months ended September 30, 2018 (Successor) and the periods of April 13 through September 30, 2017 (Successor) and January 1 through April 12, 2017 (Predecessor).
Successor
 
 
Nine months ended September 30, 2018
 
 
Well Servicing
Fluid Logistics
Total
Primary Geographical Markets
 
(in thousands)
South Texas
 
 
$
54,955

$
20,879

$
75,834

East Texas (1)
 
 
3,382

1,987

5,369

Central Texas
 
 

10,193

10,193

West Texas
 
 
24,069

8,979

33,048

Total
 
 
$
82,406

$
42,038

$
124,444

Successor
 
 
April 13 through September 30, 2017
 
 
Well Servicing
Fluid Logistics
Total
Primary Geographical Markets
 
(in thousands)
South Texas
 
 
$
32,867

$
10,942

$
43,809

East Texas (1)
 
 
5,047

1,436

6,483

Central Texas
 
 

2,850

2,850

West Texas
 
 
3,738

5,265

9,003

Total
 
 
$
41,652

$
20,493

$
62,145

Predecessor
 
 
January 1 through April 12, 2017
 
 
Well Servicing
Fluid Logistics
Total
Primary Geographical Markets
 
(in thousands)
South Texas
 
 
$
14,691

$
5,872

$
20,563

East Texas (1)
 
 
868

945

1,813

Central Texas
 
 

1,593

1,593

West Texas
 
 
3,995

2,801

6,796

Total
 
 
$
19,554

$
11,211

$
30,765

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



12


3. 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, the Company's revenue, profitability, cash flows and future rate of growth are substantially dependent on its ability to (1) maintain adequate equipment utilization, (2) maintain adequate pricing for the services it provides, and (3) maintain a trained workforce. Failure to do so could adversely affect the Company's financial position, results of operations, and cash flows.

Because the Company's revenues are generated primarily from customers who are subject to the same factors as the Company, the Company's operations are also susceptible to market volatility resulting from economic, cyclical, weather, or other factors related to such industry. The Company is subject to changes in the level of operating and capital spending in the industry, decreases in oil and natural gas prices, and/or industry perception about future oil and natural gas prices that may materially decrease demand for the Company's services, or may have an adverse effect on our financial position, results of operations and cash flows.

4. Property and Equipment
Property and equipment consisted of the following:
 
 
 
Successor
 
Estimated
Life in Years
 
September 30, 2018
 
December 31, 2017
 
 
 
(in thousands)
Well servicing equipment
9-15 years
 
$
93,329

 
$
80,899

Autos and trucks
5-10 years
 
46,146

 
42,831

Disposal wells
5-15 years
 
3,977

 
3,977

Building and improvements
5-30 years
 
5,614

 
5,474

Furniture and fixtures
3-15 years
 
2,246

 
1,950

Land
 
 
868

 
868

 
 
 
152,180

 
135,999

Accumulated depreciation
 
 
(39,077
)
 
(18,808
)
 
 
 
$
113,103

 
$
117,191

Depreciation expense was $7.3 million and $6.8 million for the three months ended September 30, 2018 (Successor) and 2017 (Successor), respectively. Depreciation expense was $21.5 million, $12.3 million and $13.4 million for the nine months ended September 30, 2018 (Successor), the period of April 13 through September 30, 2017 (Successor) and January 1 through April 12, 2017 (Predecessor), respectively.

5. Intangible Assets
The Company's major class of intangible assets subject to amortization consists of customer relationships, trade names and covenants not to compete. The Company expenses costs associated with extensions or renewals of intangible assets. There were no such extensions or renewals in each of the three and nine months ended September 30, 2018 (Successor), the period of April 13 through September 30, 2017 (Successor) and the period of January 1 through April 12, 2017 (Predecessor). Amortization expense is calculated using the straight-line method over the period indicated. Amortization expense for the three months ended September 30, 2018 (Successor) and 2017 (Successor) was $0.3 million. Amortization expense for the nine months ended September 30, 2018 (Successor), the period of April 13 through September 30, 2017 (Successor) and the period of January 1 through April 12, 2017 (Predecessor) was $0.8 million, $0.5 million and $0.2 million, respectively.


13


The following sets forth the identified intangible assets by major asset class:
 
Useful Life
(years)
 
Gross
Carrying Value
 
Accumulated
Amortization
 
Net Book
Value
 
 
 
(in thousands)
As of September 30, 2018 (Successor)
 
 
 
 
 
 
 
Customer relationships
15
 
$
8,678

 
$
(849
)
 
$
7,829

Trade names
15
 
2,472

 
(242
)
 
2,230

Covenants not to compete
4
 
1,505

 
(552
)
 
953

 
 
 
$
12,655

 
$
(1,643
)
 
$
11,012

 
 
 
 
 
 
 
 
 
Useful Life
(years)
 
Gross
Carrying Value
 
Accumulated
Amortization
 
Net Book
Value
 
 
 
(in thousands)
As of December 31, 2017 (Successor)
 
 
 
 
 
 
 
Customer relationships
15
 
$
8,678

 
$
(415
)
 
$
8,263

Trade names
15
 
2,472

 
(118
)
 
2,354

Covenants not to compete
4
 
1,505

 
(270
)
 
1,235

 
 
 
$
12,655

 
$
(803
)
 
$
11,852



6. Long-Term Debt

Long-term debt at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
 
Successor
 
September 30, 2018
 
 
December 31, 2017
 
(in thousands)
Third party equipment capital leases
$
6,711

 
 
$
5,822

Insurance notes

 
 
5,882

New Loan Agreement, including $4.7 million and $1.7 million of accrued interest paid in kind and net of debt discount of $3.9 million and $4.5 million as of September 30, 2018 and December 31, 2017, respectively
50,829

 
 
47,150

Total debt
57,540

 
 
58,854

Less: Current portion
(2,054
)
 
 
(7,566
)
Total long-term debt
$
55,486

 
 
$
51,288


14


New Loan Agreement
On the Effective Date, the Company entered into the New Loan Agreement. Forbes Energy Services LLC, or the Borrower, is the borrower under the New Loan Agreement. The Borrower’s obligations have been guaranteed by FES Ltd. and by Texas Energy Services, LLC, C.C. Forbes, LLC and Forbes Energy International, LLC, each direct subsidiaries of the Borrower and indirect subsidiaries of FES Ltd. The New Loan Agreement provides for a term loan of $50.0 million, which was fully funded on the Effective Date. Subject to certain exceptions and permitted encumbrances, the obligations under this loan are secured by a first priority security interest in substantially all the assets of the Company other than cash collateralizing the New Regions Letters of Credit Facility. Such term loan has a stated maturity date of April 13, 2021. The proceeds of such term loan are only permitted to be used for (i) the payment on account of the Prior Senior Notes in an amount equal to $20.0 million; (ii) the payment of costs, expenses and fees incurred on or prior to the Effective Date in connection with the preparation, negotiation, execution and delivery of the New Loan Agreement and documents related thereto; and (iii) subject to satisfaction of certain release conditions set forth in the New Loan Agreement, for general operating, working capital and other general corporate purposes of the Borrower not otherwise prohibited by the terms of the New Loan Agreement. The release conditions set forth in the New Loan Agreement include, among other things, (i) no default or event of default under the New Loan Agreement having occurred or being continuing as of the date of the requested release of proceeds of the New Loan Agreement, or that would exist after giving effect to the release requested to be made on such date, and (ii) the Company’s unrestricted cash and cash equivalents being less than $7.0 million after giving pro forma effect to the requested release. At September 30, 2018, $6.0 million included in restricted cash was subject to these release restrictions.

Borrowings under this term loan bear interest at a rate equal to five percent (5%) per annum payable quarterly in cash, or the Cash Interest Rate, plus (ii) an initial rate for paid in kind interest of seven percent (7%) commencing April 13, 2017 to be capitalized and added to the principal amount of the term loan on the first day of each quarter or, at the election of the Borrower, paid in cash. The paid in kind interest increases by two percent (2%) twelve months after the Effective Date and every twelve months thereafter until maturity. Upon and after the occurrence of an event of default, the Cash Interest Rate will increase by two percentage points per annum. At September 30, 2018, the applicable interest rate was 14% per annum.

The New Loan Agreement includes customary negative covenants for an asset-based term loan, including covenants limiting the ability of the Company to, among other things, (i) effect mergers and consolidations, (ii) sell assets, (iii) create or suffer to exist any lien, (iv) make certain investments, (v) incur debt and (vi) transact with affiliates. In addition, the New Loan Agreement includes customary affirmative covenants for an asset-based term loan, including covenants regarding the delivery of financial statements, reports and notices to the Agent. The New Loan Agreement also contains customary representations and warranties and event of default provisions for a secured term loan. At September 30, 2018, we are in compliance with our New Loan Agreement.

New Regions Letters of Credit Facility
On the Effective Date the Company entered into the New Regions Letters of Credit Facility pursuant to which Regions may issue, upon request by the Company, letters of credit and continue to provide charge cards for use by the Company. Amounts available under the New Regions Letters of Credit Facility are subject to customary fees and are secured by a first-priority lien on, and security interest in, a cash collateral account with Regions containing cash equal to at least (i) 105% of the sum of (a) all amounts owing for any drawings under letters of credit, including any reimbursement obligations, (b) the aggregate undrawn amount of all outstanding letters of credit, (c) all sums owing to Regions or any affiliate pursuant to any letter of credit document and (d) all obligations of the Company arising thereunder, including any indemnities and obligations for reimbursement of expenses and (ii) 120% of the aggregate line of credit for charge cards issued by Regions to the Company. The fees for each letter of credit for the period from and excluding the date of issuance of such letter of credit to and including the date of expiration or termination, are equal to (x) the average daily face amount of each outstanding letter of credit multiplied by (y) a per annum rate determined by Regions from time to time in its discretion based upon such factors as Regions shall determine, including, without limitation, the credit quality and financial performance of the Company. As of September 30, 2018, such rate was 3.00%. In the event the Company is unable to repay amounts due under the New Regions Letters of Credit Facility, Regions could proceed against such cash collateral account. Regions has no commitment under the New Regions Letters of Credit Facility to issue letters of credit. At September 30, 2018, the facility had $8.6 million in letters of credit outstanding.


15


Capital Leases
The Company financed the purchase of certain vehicles and equipment through commercial loans and capital leases with aggregate principal amounts outstanding as of September 30, 2018 (Successor) and December 31, 2017 (Successor) of approximately $6.7 million and $5.8 million, respectively. These loans are repayable in a range of 42 to 48 monthly installments with the maturity dates to September 2022. Interest accrues at rates ranging from 3.4% to 4.9% and is payable monthly. The loans are collateralized by equipment purchased with the proceeds of such loans. The Company paid total principal payments of approximately $0.5 million during the three months ended September 30, 2018 (Successor) and $0.3 million during the three months ended September 30, 2017. The Company paid total principal payments of approximately $1.5 million during the nine months ended September 30, 2018, $0.7 million for the period of April 13 through September 30, 2017 (Successor) and $0.4 million for the period of January 1 through April 12, 2017 (Predecessor).

Following are required principal payments due on capital leases existing as of September 30, 2018:
 
October - December 2018
 
2019
 
2020
 
2021
 
2022 and thereafter
 
(in thousands)
Capital lease principal payments
$
478

 
$
1,961

 
$
2,039

 
$
1,504

 
$
729


Management has historically acquired all light duty trucks (pickup trucks) through capital leases and may use capital leases or cash to purchase equipment held under operating leases that have reached the end of the lease term. See Note 8 - Commitments and Contingencies.
Insurance Notes
During October of 2017, the Company entered into an insurance promissory note for the payment of insurance premiums at an interest rate of 2.9% with an aggregate principal amount outstanding as of December 31, 2017 (Successor) of approximately $5.9 million. As of September 30, 2018, the insurance promissory note had been paid in full.

7. Fair Value Measurements
Fair value is defined as the amount that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Financial Assets and Liabilities
The carrying amounts of cash and cash equivalents, accounts receivable-trade, accounts receivable-other, accounts payable-trade, and insurance notes, approximate fair value because of the short maturity of these instruments. The fair values of 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). The fair values of the New Loan Agreement as of the respective dates are set forth below:
 
 
September 30, 2018
 
 
December 31, 2017
 
Carrying Amount
 
Fair Value
 
 
Carrying Amount
 
Fair Value
Successor
(in thousands)
New Loan Agreement
$
50,829

 
$
56,731

 
 
$
47,150

 
$
55,550


8. Commitments and Contingencies
    
Concentrations of Credit Risk

FDIC insurance coverage is currently $250,000 per depositor at each financial institution, and the Company's non-interest bearing cash balances typically exceed federally insured limits. The Company restricts investment of temporary cash investments to financial institutions with high credit standings.


16


The Company's customer base consists primarily of multi-national and independent oil and natural gas producers. The Company does not require collateral on its trade receivables. For the nine months ended September 30, 2018 (Successor), the Company's largest customer, five largest customers, and ten largest customers constituted 13.9%, 44.2% and 56.9% of consolidated revenues, respectively. For the nine months ended September 30, 2018 (Successor), two customers constituted 13.9% and 11.3% of consolidated revenues, respectively. The loss of any one of the Company's top five customers could have a materially adverse effect on the revenues and profits of the Company. Further, the Company's trade accounts receivable are from companies within the oil and natural gas industry and as such the Company is exposed to normal industry credit risks. As of September 30, 2018, the Company's largest customer, five largest customers, and ten largest customers constituted 5.6%, 33.8% and 36.8% of accounts receivable, respectively.

Litigation

From time to time, the Company is subject to various claims and legal actions that arise in the ordinary course of business. There are no pending material legal proceedings, and the Company is not aware of any material threatened legal proceedings, to which the Company is a party or to which its property is subject that would have a material adverse effect on the Company's financial statements as of September 30, 2018. It is reasonably possible that cases could be resolved and result in liabilities that exceed the amounts currently reserved.

Self-Insurance

The Company is self-insured under its Employee Group Medical Plan for the first $150,000 per individual. The Company is self-insured with a retention for the first $250,000 in general liability. The Company has an additional premium payable clause under its lead $10 million limit excess policy that states in the event a loss exceeds $1 million, a loss additional premium of up to 15% of paid losses in excess of $1 million will be due. The loss additional premium is payable at the time when the loss is paid and will be payable over a period agreed by insurers. The Company has accrued liabilities totaling $5.7 million and $7.2 million as of September 30, 2018 (Successor) and December 31, 2017 (Successor), respectively, for the projected additional premium and self-insured portion of these insurance claims as of the financial statement dates. This accrual includes claims made as well as an estimate for claims incurred but not reported as of the financial statement dates.

Other

The Company is currently undergoing sales and use tax audits for multi-year periods. The Company believes the outcome of these audits will not have a material adverse effect on its results of operations or financial position. Because certain of these audits are in a preliminary stage, an estimate of the possible loss or range of loss cannot be estimated at this time.

Off-Balance Sheet Arrangements
The Company is often party to certain transactions that constitute off-balance sheet arrangements such as performance bonds, guarantees, operating leases, and bank guarantees that are not reflected in the Company's condensed consolidated balance sheets. These arrangements are made in the Company's normal course of business and they are not reasonably likely to have a current or future material adverse effect on its financial condition, results of operations, liquidity, or cash flows. The Company's off-balance sheet arrangements include $8.6 million in letters of credit and operating leases.

9. Share-Based Compensation

On the Effective Date, all prior equity interests (which included the Old Common Stock, FES Ltd.’s prior preferred stock, awards under the prior compensation plans and the preferred stock purchase rights under the Rights Agreement) in FES Ltd. were extinguished without recovery.

Management Incentive Plan
On the Effective Date, pursuant to the operation of the Plan, the Management Incentive Plan became effective.

A summary of the Company's share-based compensation expense during the periods presented are as follows:

17


 
 
Successor
 
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
 
 
(in thousands)
Share based compensation expense recognized
$
253

 
$
755

 
 
 
 
 
 
 
 
 
Successor
 
 
 
 
September 30, 2018
 
 
 
 
 
Unrecognized compensation cost (in thousands)
 
 
 
$
2,911

Remaining weighted-average service period (years)
 
 
 
2.91


There was no share based compensation expense recognized during the comparable periods in the prior year. During the period from April 13 through December 31, 2017 (Successor), the Company granted 450,000 restricted stock units to officers and employees subject to the Management Incentive Plan. Below is a summary of the unvested restricted stock units awarded.

 
 
 
Number of Shares
 
 
Weighted Average Fair Value
Unvested as of December 31, 2017 (Successor)
363,600
 
 
$
11.00

  Granted
 

 
 
$

  Vested
 
(85,570
)
 
 
$

  Forfeited
 
 
(3,320
)
 
 
$

Unvested as of September 30, 2018 (Successor)
 
 
274,710

 
 
$
11.00


10. Related Party Transactions
During the three months ended September 30, 2018 (Successor) and 2017 (Successor) the Company incurred approximately $275,000 and $277,000, respectively, in related party expenses, primarily related to leases and rents. During the nine months ended September 30, 2018 (Successor) and the periods of April 13 through September 30, 2017 (Successor) and January 1 through April 12, 2017 (Predecessor) the Company incurred approximately $841,000, $463,000 and $439,000, respectively, in related party expenses.
There was no related party revenue for the three and nine months ended September 30, 2018 (Successor) and the period of April 13 through September 30, 2017 (Successor). Related party revenue for each of the periods of April 1 through April 12, 2017 (Predecessor) and January 1 through April 12, 2017 (Predecessor) was $1,000. From time to time, vendors of the Company factor their receivables from the Company with a related party. For the period of January 1 through April 12, 2017 (Predecessor), the Company made payments of $65,000 for receivables factored to a related party. The nature of these transactions do not result in recording in the Company’s financial records any revenue, any expense or any receivable and does not result in any payable distinct in amount from the amount payable to such vendors as originally incurred. There were no such payments made during the three and nine months ended September 30, 2018 (Successor) or for the period of April 13 through September 30, 2017 (Successor).

As of September 30, 2018 (Successor), there were no related party accounts receivable or accounts payable. As of December 31, 2017 (Successor), related party accounts payable were $11,000 and there were no related party accounts receivable.  
In addition to such related party transactions above, Lawrence “Larry” First, a director of FES Ltd., serves as the Chief Investment Officer and Managing Director of Ascribe Capital LLC, or Ascribe, and Brett G. Wyard, also a director of FES Ltd., serves as a Managing Partner of Solace Capital Partners, or Solace. Ascribe and/or one or more of its affiliates own approximately 23.7% of the outstanding New Common Stock as of November 9, 2018, and is owed approximately $14.1 million of the aggregate principal amount of the New Loan Agreement. Solace and/or one of its affiliates own approximately 15.5% of the outstanding New Common Stock as of November 9, 2018, and is owed approximately $12.8 million of the aggregate principal amount of the term loan covered by the New Loan Agreement. Moreover, an affiliate of Solace and

18


affiliates of Ascribe are parties to certain registration rights agreement dated as of the Effective Date by and among the Company and certain stockholders of the Company.
    
11. Earnings per Share
On the Effective Date, the Old Common Stock, the prior Series B Senior Convertible Preferred Stock, or the Prior Preferred Stock, and awards then outstanding under the Prior Compensation Plans were extinguished without recovery.
Basic earnings (loss) per share, or EPS, is computed by dividing net income (loss) available to common stockholders by the weighted-average common stock outstanding during the period. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock, such as options and convertible preferred stock, were exercised and converted into common stock. Potential common stock equivalents relate to outstanding stock options and unvested restricted stock units, which are determined using the treasury stock method, and the Prior Preferred Stock, which were determined using the "if-converted" method. In applying the if-converted method, conversion is not assumed for purposes of computing diluted EPS if the effect would be antidilutive.
The following tables sets forth the computation of basic and diluted loss per share (in thousands, except per share amounts): 
 
Successor
 
Three months ended September 30, 2018
 
Three months ended September 30, 2017
Basic and diluted:
 
 
 
Net loss
$
(6,433
)
 
$
(8,976
)
Weighted-average common shares
5,368

 
5,279

Basic and diluted net loss per share
$
(1.20
)
 
$
(1.70
)
 
Successor
 
 
Predecessor
 
Nine months ended September 30, 2018
April 13 through September 30, 2017
 
 
January 1 through April 12, 2017
Basic and diluted:
 
 
 
 
 
Net income (loss)
$
(23,728
)
$
(15,979
)
 
 
$
27,228

       Preferred stock dividends


 
 
(46
)
Net income (loss) attributable to common stockholders
$
(23,728
)
$
(15,979
)
 
 
$
27,182

Weighted-average common shares
5,347

5,262

 
 
27,508

Basic and diluted net income (loss) per share
$
(4.44
)
$
(3.04
)
 
 
$
0.99


There were 274,710 unvested restricted stock units that were not included in the calculation of diluted EPS for the three and nine months ended September 30, 2018 (Successor) because their effect would have been antidilutive. There were 363,300 unvested restricted stock units that were not included in the calculation of diluted EPS for the three months ended September 30, 2017 (Successor) and the period from April 13, 2017 through September 30, 2017 (Predecessor) because their effect would have been antidilutive. There were 5,292,531 shares of Old Common Stock equivalents underlying the Prior Preferred Stock included in the weighted average common shares for the period January 1, 2017 through April 12, 2017 (Predecessor) as the Prior Preferred Stock was dilutive and a participating security. There were 602,625 stock options that were not included in the calculation of diluted EPS for the period January 1, 2017 through April 12, 2017 (Predecessor) because their effect would have been antidilutive.

12. Business Segment Information
The Company has determined that it has two reportable segments organized based on its products and services—well servicing and fluid logistics.


19


Well Servicing
At September 30, 2018, the Company's well servicing segment utilized its fleet of 168 well servicing rigs, which was comprised of 154 workover rigs and 14 swabbing rigs, in addition to 8 coiled tubing spreads and other related assets and equipment. These assets are used to provide (i) well maintenance, including remedial repairs and removal and replacement of downhole production equipment, (ii) well workovers, including significant downhole repairs, re-completions and re-perforations, (iii) completion and swabbing activities, (iv) plugging and abandonment services, and (v) pressure testing of oil and natural gas production tubing and scanning tubing for pitting and wall thickness using tubing testing units.
Fluid Logistics
The fluid logistics segment utilizes the Company's fleet of 249 owned or leased fluid transport trucks and related assets, 92 other heavy trucks including specialized vacuum, high pressure pump and tank trucks, 2,865 frac tanks, 15 salt water disposal wells and facilities, and related equipment. These assets are used to transport, store and dispose of a variety of drilling and produced fluids used in and generated by oil and natural gas production activities. These services are required in most workover and completion projects and are routinely used in the daily operation of producing wells.
The following tables set forth certain financial information with respect to the Company’s reportable segments for the three and nine months ended September 30, 2018 (Successor), and the periods of April 13 through September 30, 2017 (Successor), April 1 through April 12, 2017 (Predecessor) and January 1 through April 12, 2017 (Predecessor):
 
 
Successor
 
Three months ended September 30, 2018
 
 
Nine months ended September 30, 2018
 
(in thousands)
 
 
(in thousands)
 
Well Servicing
 
Fluid Logistics
 
Total
 
 
Well Servicing
 
Fluid Logistics
 
Total
Operating revenues
$
32,175

 
$
15,437

 
$
47,612

 
 
$
82,406

 
$
42,038

 
$
124,444

Direct operating costs
25,350

 
12,079

 
37,429

 
 
67,689

 
33,919

 
101,608

Segment operating profit
$
6,825

 
$
3,358

 
$
10,183

 
 
$
14,717

 
$
8,119

 
$
22,836

Depreciation and amortization
$
4,080

 
$
3,486

 
$
7,566

 
 
$
11,998

 
$
10,383

 
$
22,381

Capital expenditures (1)
$
6,980

 
$
914

 
$
7,894

 
 
$
15,705

 
$
3,369

 
$
19,074

Total assets
$
197,221

 
$
97,201

 
$
294,422

 
 
$
197,221

 
$
97,201

 
$
294,422

Long-lived assets
$
85,708

 
$
38,407

 
$
124,115

 
 
$
85,708

 
$
38,407

 
$
124,115

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Capital expenditures listed above include all cash and non-cash additions to property and equipment, including capital leases and fixed assets recorded in accounts payable at period end.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
 
 
Three months ended September 30, 2017
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Well Servicing
 
Fluid Logistics
 
Total
Operating revenues
 
 
 
 
 
 
 
$
23,513

 
$
10,782

 
$
34,295

Direct operating costs
 
 
 
 
 
 
 
16,883

 
10,371

 
27,254

Segment operating profit
 
 
 
 
 
 
 
$
6,630

 
$
411

 
$
7,041

Depreciation and amortization
 
 
 
 
 
 
 
$
3,604

 
$
3,530

 
$
7,134

Capital expenditures (1)
 
 
 
 
 
 
 
$
7,140

 
$
1,341

 
$
8,481

Total assets
 
 
 
 
 
 
 
$
113,847

 
$
69,141

 
$
182,988

Long-lived assets
 
 
 
 
 
 
 
$
70,944

 
$
47,169

 
$
118,113

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


 

20


 
Successor
 
 
Predecessor
 
April 13, 2017 through September 30, 2017
 
 
January 1, 2017 through April 12, 2017
 
(in thousands)
 
 
(in thousands)
 
Well Servicing
 
Fluid Logistics
 
Total
 
 
Well Servicing
 
Fluid Logistics
 
Total
Operating revenues
$
41,652

 
$
20,493

 
$
62,145

 
 
$
19,554

 
$
11,211

 
$
30,765

Direct operating costs
30,698

 
19,425

 
50,123

 
 
15,952

 
11,207

 
27,159

Segment operating profit
$
10,954

 
$
1,068

 
$
12,022

 
 
$
3,602

 
$
4

 
$
3,606

Depreciation and amortization
$
6,441

 
$
6,374

 
$
12,815

 
 
$
6,927

 
$
6,674

 
$
13,601

Capital expenditures (1)
$
8,054

 
1,795

 
$
9,849

 
 
$
286

 
$
114

 
$
400

Total assets
$
113,847

 
$
69,141

 
$
182,988

 
 
$
607,638

 
$
434,371

 
$
1,042,009

Long-lived assets
$
70,944

 
$
47,169

 
$
118,113

 
 
$
135,942

 
$
84,384

 
$
220,326

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

 
Successor
 
Three months ended September 30, 2018
 
 
Nine months ended September 30, 2018
Reconciliation of the Company's Operating Loss As Reported:
(in thousands)
 
 
(in thousands)
Segment operating profits
$
10,183

 
 
$
22,836

General and administrative expense
6,545

 
 
17,341

Depreciation and amortization
7,566

 
 
22,381

Operating loss
(3,928
)
 
 
(16,886
)
Other expense, net
(2,473
)
 
 
(7,264
)
Pre-tax loss
$
(6,401
)
 
 
$
(24,150
)
 
 
Successor
 
 
Predecessor
 
April 13, 2017 through September 30, 2017
 
 
January 1 through April 12, 2017
Reconciliation of the Company's Operating Loss As Reported:
(in thousands)
 
 
(in thousands)
Segment operating profits
$
12,022

 
 
$
3,606

General and administrative expense
9,588

 
 
5,012

Depreciation and amortization
12,815

 
 
13,601

Operating loss
(10,381
)
 
 
(15,007
)
Other expense, net
(4,056
)
 
 
(2,241
)
Gain (loss) on reorganization items, net
(1,299
)
 
 
44,503

Pre-tax income (loss)
$
(15,736
)
 
 
$
27,255


 
Successor
 
September 30, 2018
 
 
December 31, 2017
Reconciliation of the Company's Assets As Reported:
(in thousands)
Total reportable segments
$
294,422

 
 
$
215,134

Elimination of internal transactions
(467,770
)
 
 
(311,147
)
Parent
360,319

 
 
297,770

Total assets
$
186,971

 
 
$
201,757




21


13. Supplemental Cash Flow Information
 
 
 
Successor
 
 
Predecessor
 
Nine months ended September 30, 2018
 
April 13 through September 30, 2017
 
 
January 1 through April 12, 2017
Cash paid for
(in thousands)
 
 
(in thousands)
Interest
$
2,486

 
$
657

 
 
$
453

Supplemental schedule of non-cash investing and financing activities
 
 
 
 
 
 
Changes in accounts payable related to capital expenditures
$
3,923

 
$

 
 
$

Capital leases on equipment
$
2,382

 
$
344

 
 
$

Preferred stock dividends and accretion costs
$

 
$

 
 
$
10



14. Recent Accounting Pronouncements

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230), Restricted Cash," or ASU 2016-18. ASU 2016-18 provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. On January 1, 2018 the Company adopted the provisions of ASU 2016-18 on a retrospective basis. The 2017 statement of cash flows has been restated to conform to the requirements of ASU 2016-18 and the 2018 presentation.
           
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the same such amounts shown in the consolidated statements of cash flows.

 
 
Successor
 
 
Predecessor
 
 
September 30, 2018
 
December 31, 2017
 
 
September 30, 2017
 
December 31, 2016
 
 
(in thousands)
 
 
(in thousands)
Cash and cash equivalents
 
$
6,617

 
$
5,465

 
 
$
7,568

 
$
20,437

Restricted cash
 
14,701

 
30,015

 
 
33,979

 
27,563

Cash and cash equivalents and restricted cash as shown in the consolidated statement of cash flows
 
$
21,318

 
$
35,480

 
 
$
41,547

 
$
48,000

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", or ASU 2016-13, which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for annual periods beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," or ASU 2016-02, which increases the transparency and comparability about leases among entities. The new guidance requires lessees to recognize a lease liability and a corresponding lease asset for operating leases with lease terms greater than 12 months. It also requires additional disclosures about leasing arrangements to help users of financial statements better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 becomes effective for interim and annual periods beginning after December 15, 2018 and required a modified retrospective approach to adoption.  In July 2018, the FASB issued ASU No. 2018-11, "Leases" (Topic 842): Targeted Improvements which provides for the election of transition methods between the modified retrospective method and the optional transition relief method. The modified retrospective method is applied to all prior reporting periods presented with a cumulative-effect adjustment recorded in the earliest comparative period while the optional transition relief method is applied beginning in the period of adoption with a cumulative-effect adjustment recorded in such period. Also, this standard allows lessors to elect to not separate non-lease components from the associated lease

22


components if certain criteria are met. The Company has engaged a third party to assist in evaluating the impact of this new standard on its consolidated financial statements and related disclosures. As of September 30, 2018, the Company has identified approximately 400 leases, which includes capital leases on equipment, property leases, salt water disposal wells, and various other leases and is modeling the effects on the financial statements, however has not completed the analysis.  The Company expects to recognize additional lease assets and liabilities related to operating leases with terms longer than one year as result of the pronouncement.  The Company also has not finalized its decision on whether the modified retrospective method or the optional transitional relief method will be adopted.

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, 2017 included in our Annual Report on Form 10-K, as amended. 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, 2017.
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, plus one location in Pennsylvania. We believe that our broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of our customers’ wells. Our headquarters and executive offices are located at 3000 South Business Highway 281, Alice, Texas 78332. We can be reached by phone at (361) 664-0549.
As used in this Quarterly Report on Form 10-Q, the “Company,” “we,” and “our” mean FES Ltd. and its subsidiaries, except as otherwise indicated.
As discussed in Note 2 to the consolidated financial statements in Item 1, we applied fresh start accounting upon emergence from bankruptcy on April 13, 2017, the Effective Date, which resulted in the Company becoming a new entity for financial reporting purposes. The effects of the Plan and the application of fresh start accounting are reflected in our condensed consolidated financial statements from and after April 13, 2017 (Successor). References to the "Successor" pertain to the Company from and after the Effective Date. References to "Predecessor" pertain to the Company prior to the Effective Date.
We provide a wide range of services to a diverse group of companies. During the three months ended September 30, 2018, we provided services to approximately 359 companies. During the nine months ended September 30, 2018 (Successor), we generated consolidated revenues of approximately $124.4 million.
We conduct our operations through the following two business segments:

Well Servicing. Our well servicing segment comprised 66.2% of consolidated revenues for the nine months ended September 30, 2018. At September 30, 2018, our well servicing segment utilized our fleet of 168 well servicing rigs, which was comprised of 154 workover rigs and 14 swabbing rigs, as well as 8 coiled tubing spreads and other related assets and equipment. These assets are used to provide (i) well maintenance, including remedial repairs and removal and replacement of downhole production equipment, (ii) well workovers, including significant downhole repairs, re-completions and re-perforations, (iii) completion and swabbing activities, (iv) plugging and abandonment services, and (v) pressure testing of oil and natural gas production tubing and scanning tubing for pitting and wall thickness using tubing testing units.

Fluid Logistics. Our fluid logistics segment comprised 33.8% of consolidated revenues for the nine months ended September 30, 2018. 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

23


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 56.7% of revenues for the nine months ended September 30, 2018, 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.

Fresh Start Accounting
Upon our emergence from bankruptcy, we adopted fresh start accounting in accordance with the provisions of Accounting Standards Codification 852, “Reorganizations,” or ASC 852, as (i) the holders of Old Common Stock received none of the New Common Stock issued upon the Debtors' emergence from bankruptcy and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims. We applied fresh start accounting from and after the Effective Date. Fresh start accounting required us to present our assets, liabilities and equity as if we were a new entity upon emergence from bankruptcy, with no beginning retained earnings or deficit as of the fresh start reporting date. The cancellation of the Old Common Stock and the issuance of the New Common Stock on the Effective Date caused a change of control under ASC 852. As a result of the adoption of fresh start accounting, our unaudited condensed consolidated financial statements from and after April 13, 2017 will not be comparable to our financial statements prior to such date.

Factors Affecting Results of Operations

Market Conditions

The oil and natural gas industry experienced a significant decline in oil exploration and production activity that began in the fourth quarter of 2014 and continued into the first half of 2017. The price of West Texas Intermediate (“WTI”) oil fell from a price of $104 per barrel as of June 30, 2014 to a low of $30 per barrel in February of 2016.  Oil prices traded in a range of approximately $45 to $55 in the last half of 2016 and through most of 2017.  During the last half of 2017 oil prices trended upward in response to market conditions, and as of September 30, 2018, the price of WTI was approximately $70 per barrel. As oil prices began to rise, U.S. drilling rig count increased from in 404 rigs in May 2016 to 1,054 rigs in September 2018, an increase of 650, with the count stabilizing in the last half of 2017 then experiencing a modest increase in the first half of 2018.  During this same time period Texas drilling rig count increased from 454 rigs to 529 rigs, an increase of 75 compared to 327 and 451, or an increase of 124 during the same nine month period in 2017.  The two basins in which we operate, the Eagle Ford and Permian, had rig count increases of 9 and 86, respectively, from 21 and 117.  Of note, while we are actively pursuing additional business in the Permian, currently 33.04% of our revenues are generated in the Eagle Ford where the rig count increased by 9.

24



Below are three charts that provide total U.S. rig counts, total Texas rig counts and WTI oil price trends for the twelve months ended September 30, 2018 and 2017.

chart-7e197873afc6520a97c.jpg


chart-3b3b7cb606805e87ac7.jpg
Source: Rig counts are per Baker Hughes, Inc. (www.bakerhughes.com). Rig counts are the averages of the weekly rig count activity.

25




chart-27e99dff60a555eea46.jpg
The declines in oil and natural gas prices and exploration activities, that began in 2014 and continued through 2016 and into the first few months of 2017, created a more challenging market for the provision of our services. In response to these market conditions, we implemented cost reduction measures and continued to analyze cost reduction opportunities while ensuring that appropriate functions and capacity were preserved allowing us to be opportunistic as market conditions improved in the second quarter of 2017. Through the first half of 2017, capital spending was largely limited to capital commitments incurred before the market downturn, purchases of certain, limited pieces of equipment with greater operating efficiencies to improve margins, and the purchase of certain equipment under operating leases at the end of their term. In the last part of 2017 and the nine months of 2018, we began maintenance capital spending in response to increased demand for our services.
The second key metric, other than volume of work, that impacts profitability is pricing. In 2015 and 2016, price concessions were granted to customers in recognition of the oil and natural gas pricing declines. Since the oil and natural gas price environment began to improve, price increases have been requested and received from customers in certain operating areas.

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. However, during the bottom of the downturn our customers were even limiting these expenditures. 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 including the precipitous decline in oil and natural gas prices that began in late 2014 with only a recent modest increase in the price of oil.

Workover Rig Rates
Our well servicing segment revenues are dependent on the prevailing market rates for workover rigs. Utilization and average rates increased through the first nine months of 2018 (Successor), compared to the periods of April 13 through September 30, 2017 (Successor) and April 1 through April 12, 2017 (Predecessor).


26


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 2016 and continued through the first quarter of 2017. During the later part of the second quarter of 2017 we began to see improvements in both utilization and pricing. These improvements have continued through the first nine months of 2018.

Operating Expenses

During the third quarter of 2018 (Successor), consolidated operating expenses increased when compared to the periods of April 13 through September 30, 2017 (Successor) and April 1 through April 12, 2017 (Predecessor) were consistent with our increased activity. Future earnings and cash flows will be dependent on our ability to manage our overall cost structure as well as continued efforts to maintain or increase rates to customers.

Capital Expenditures

During the third quarter of 2018, capital expenditures consisted of purchases of equipment and vehicles whose operating leases had reached the end of their term, new well servicing equipment, major equipment overhauls and replacements of heavy trucks.

Results of Operations

Three Months Ended September 30, 2018 (Successor) Compared to the Three Months Ended September 30, 2017

The following tables compare our segment operating results for the three months ended September 30, 2018 (Successor) and three months ended September 30, 2017 (Successor). Operating expenses exclude general and administrative expenses, depreciation, and amortization.

27


Revenues
 
Successor
 
Three months ended September 30, 2018
% of total revenue
 
Three months ended September 30, 2017
% of total revenue
 
(in thousands, except percentages)
Well Servicing
$
32,175

67.6
%
 
$
23,513

68.6
%
Fluid Logistics
15,437

32.4
%
 
10,782

31.4
%
Total
$
47,612

 
 
$
34,295

 
 
 
 
 
 
 
Operating Expenses (1)
 
Successor
 
Three months ended September 30, 2018
% of segment revenue
 
Three months ended September 30, 2017
% of segment revenue
 
(in thousands, except percentages)
Well Servicing
$
25,350

78.8
%
 
$
16,883

71.8
%
Fluid Logistics
12,079

78.2
%
 
10,371

96.2
%
Total
$
37,429

 
 
$
27,254

 
 
 
 
 
 
 
Segment Profit (1)
 
Successor
 
Three months ended September 30, 2018
Gross margin %
 
Three months ended September 30, 2017
Gross margin %
 
(in thousands, except percentages)
Well Servicing
$
6,825

21.2
%
 
$
6,630

28.2
%
Fluid Logistics
3,358

21.8
%
 
411

3.8
%
Total
$
10,183

21.4
%
 
$
7,041

20.5
%
(1) Excluding general and administrative expenses, and depreciation and amortization.
Revenues
Consolidated Revenues. Consolidated revenues during the three months ended September 30, 2018 (Successor) increased as compared to the three months ended September 30, 2017 (Successor) due to increased activity from both our well servicing and fluid logistics customers as they increased activity in response to rising oil prices.
Well Servicing. The revenues from the well servicing segment during the three months ended September 30, 2018 (Successor) increased as compared to the three months ended September 30, 2017 (Successor) due to a 18.4% increase in rates and a 15.3% increase in hours worked.
          
Fluid Logistics. Our revenues from the fluid logistics segment during the three months ended September 30, 2018 (Successor) increased as compared to the three months ended September 30, 2017 (Successor) due to an increase in average hourly trucking rates, a 21.3% increase in trucking hours and increases from tank rental and skim oil sales. Our principal fluid logistics assets at September 30, 2018 and 2017 were as follows:
 
Successor
 
September 30, 2018
 
September 30, 2017
Fluid Logistics segment:
 
 
 
Vacuum trucks
249

 
261

Other heavy trucks
92

 
110

Frac tanks
2,865

 
2,866

Salt water disposal wells (1)
15

 
16



28


(1) At September 30, 2018, 10 salt water disposal wells, included in the above well count, were subject to ground leases or other operating arrangements with third parties.
Operating Expenses
 
Successor
 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Well servicing
$
25,350

 
$
16,883

Fluid logistics
12,079

 
10,371

General and administrative
6,545

 
6,458

Depreciation and amortization
7,566

 
7,134

Total expenses
$
51,540

 
$
40,846


Consolidated Operating Expenses. Direct operating costs for the three months ended September 30, 2018 (Successor) increased as compared to the three months ended September 30, 2017 (Successor), consistent with our increased activity.
Well Servicing. Direct operating costs for our well servicing segment for the three months ended September 30, 2018 (Successor) increased as compared to the three months ended September 30, 2017 (Successor). This increase was primarily attributable to higher labor, fuel costs and equipment rental costs resulting from the coiled tubing division of our well servicing segment preparing to deploy additional equipment. Other costs were consistent with the increased activity experienced during the period.
Fluid Logistics. Direct operating costs for our fluid logistics segment for the three months ended September 30, 2018 (Successor) increased as compared to the three months ended September 30, 2017 (Successor), consistent with increased activity. Fluid logistics costs as a percentage of fluid logistics revenue were 78.3% for the three months ended September 30, 2018 (Successor) compared to 96.2% for the three months ended September 30, 2017 (Successor). This percentage decrease was primarily a result of reduced labor costs as a percentage of revenue due to higher composite customer rates, increased rentals, increased skim oil sales, and improved utilization and efficiencies of our work force with additional activity. Additionally, repairs and maintenance expense and property tax expense declined and gain on disposal of assets increased as we disposed of older or non-productive assets.
General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2018 (Successor) increased as compared to the three months ended September 30, 2017 (Successor). General and administrative expenses as a percentage of revenues was 13.7% and 18.8% for the three months ended September 30, 2018 (Successor) and the three months ended September 30, 2017 (Successor), respectively. This decrease as a percentage of revenue is primarily due to increased revenues and lower professional fees.
Depreciation and Amortization. Depreciation and amortization expenses for the three months ended September 30, 2018 (Successor) increased slightly compared to the three months ended September 30, 2017 (Successor) due to the addition of new capital assets placed into service in the current quarter.
Other Income (Expense)
 
Successor
 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Interest income
$
1

 
$
5

Interest expense
(2,474
)
 
(2,170
)
Other income (expense), net
$
(2,473
)
 
$
(2,165
)
 
 
 
 
Income tax expense
$
32

 
$
260


29


Interest Expense. Interest expense for the three months ended September 30, 2018 (Successor) increased when compared to the three months ended September 30, 2017 (Successor). Interest expense for the three months ended September 30, 2018 primarily related to interest on our New Loan Agreement along with more third party equipment leases.

Income Taxes. We recognized income tax expense of $32 thousand for the three months ended September 30, 2018 (Successor). We recognized income tax expense of $260 thousand for the three months ended September 30, 2017 (Successor). Our effective tax rate was 0.5% for the three months ended September 30, 2018 (Successor). Our effective tax rate was (3.0)% for the three months ended September 30, 2017 (Successor) due to the fact that the Company has recorded a full valuation allowance against its net deferred assets. At September 30, 2018 (Successor), we estimate our NOL carryforwards were approximately $74.4 million. On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changed U.S. tax law by, among other things, lowering the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the decrease in the corporate income tax rate, we revalued our ending net deferred tax assets at December 31, 2017, but did not recognize any income tax impact in 2017 due to the offsetting change in the valuation allowance.


Nine Months Ended September 30, 2018 Compared to the Periods of April 13, 2017 through September 30, 2017 (Successor) and January 1 through April 12, 2017 (Predecessor)

The following tables compare the operating results of our segments for nine months ended September 30, 2018, the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) (in thousands, except percentages). Operating expenses exclude general and administrative expenses, depreciation and amortization and impairment.
Revenues
 
Successor
 
 
Predecessor
 
Nine months ended September 30, 2018
% of revenue
 
April 13 through September 30, 2017
% of revenue
 
 
January 1 through April 12, 2017
% of revenue
Well Servicing
$
82,406

66.2
%
 
$
41,652

67.0
%
 
 
$
19,554

63.6
%
Fluid Logistics
42,038

33.8
%
 
20,493

33.0
%
 
 
11,211

36.4
%
Total
$
124,444

 
 
$
62,145

 
 
 
$
30,765

 
 
 
 
 
 
 
 
 
 
 
Operating Expenses (1)
 
Successor
 
 
Predecessor
 
Nine months ended September 30, 2018
% of segment revenue
 
April 13 through September 30, 2017
% of segment revenue
 
 
January 1 through April 12, 2017
% of segment revenue
Well Servicing
$
67,689

82.1
%
 
$
30,698

73.7
%
 
 
$
15,952

81.6
%
Fluid Logistics
33,919

80.7
%
 
19,425

94.8
%
 
 
11,207

100.0
%
Total
$
101,608

 
 
$
50,123

 
 
 
$
27,159

 
 
 
 
 
 
 
 
 
 
 
Segment Profit (1)
 
Successor
 
 
Predecessor
 
Nine months ended September 30, 2018
Gross margin %
 
April 13 through September 30, 2017
Gross margin %
 
 
January 1 through April 12, 2017
Gross margin %
Well Servicing
$
14,717

17.9
%
 
$
10,954

26.3
%
 
 
3,602

18.4
%
Fluid Logistics
8,119

19.3
%
 
1,068

5.2
%
 
 
4

%
Total
$
22,836

18.4
%
 
$
12,022

19.3
%
 
 
$
3,606

11.7
%
(1) Excluding general and administrative expenses, depreciation and amortization, and impairment of assets.

30


Revenues
Consolidated Revenues. Consolidated revenues during the nine months ended September 30, 2018 increased as compared to the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) primarily due to increased activity from both our well servicing and fluid logistics customers as they increased utilization in response to rising oil prices.

Well Servicing. Revenues from our well servicing segment during the nine months ended September 30, 2018 increased as compared to the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) due to a 16.6% increase in hours and a 15.3% increase in rates.
          
Fluid Logistics. Revenues from our fluid logistics segment during the nine months ended September 30, 2018 increased as compared to the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) driven by an increase in average hourly trucking rates, skim oil revenues, rental income and a 11.8% increase in hours.
Operating Expenses
 
Successor
 
 
Predecessor
 
Nine months ended September 30, 2018
 
April 13 through September 30, 2017
 
 
January 1 through April 12, 2017
Well servicing
$
67,689

 
$
30,698

 
 
$
15,952

Fluid logistics
33,919

 
19,425

 
 
11,207

General and administrative
17,341

 
9,588

 
 
5,012

Depreciation and amortization
22,381

 
12,815

 
 
13,601

Total expenses
$
141,330

 
$
72,526

 
 
$
45,772


Consolidated Operating Expenses. Direct operating expenses during the nine months ended September 30, 2018 increased as compared to the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) consistent with increased activities in both our well servicing and fluid logistics segments.
Well Servicing. Direct operating costs for our well servicing segment during the nine months ended September 30, 2018 increased as compared to the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor). This increase was primarily attributable to higher labor, insurance costs and fuel costs resulting from the coiled tubing division of our well servicing segment preparing to deploy additional equipment. Other costs were consistent with the increased activity experienced during the period.
Fluid Logistics. Direct operating costs for our fluid logistics segment during the nine months ended September 30, 2018 increased as compared to the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) due to higher gain on sales of assets in the Predecessor period and increases in fuel costs. Fluid logistics costs as a percentage of fluid logistics revenue were 80.7%, 94.8% and 100.0% for the nine months ended September 30, 2018 and the periods of April 13 through September 30, 2017 (Successor) and January 1 through April 12, 2017 (Predecessor), respectively. This percentage decrease was primarily a result of reduced labor costs as a percentage of revenue due to higher composite customer rates and improved utilization and efficiencies of our work force with additional activity.
General and Administrative Expenses. General and administrative expenses as a percentage of revenues were 13.9%, 15.4% and 16.3% during the nine months ended September 30, 2018 and for the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. General and administrative expenses during the nine months ended September 30, 2018 increased as compared to the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor). The increase is attributable to an increase in transaction costs related to potential acquisitions.
Depreciation and Amortization. Depreciation and amortization expenses during the nine months ended September 30, 2018 decreased as compared to the periods of April 13, 2017 through September 30, 2017 (Successor) and of January 1, 2017 through April 12, 2017 (Predecessor) due to a decrease in the depreciable value of property and equipment as a result of fresh start accounting.

31


Other Income (Expense)
 
Successor
 
 
Predecessor
 
Nine months ended September 30, 2018
 
 
April 13 through September 30, 2017
 
January 1 through April 12, 2017
Interest income
$
3

 
 
$
11

 
$
13

Interest expense
(7,267
)
 
 
(4,067
)
 
(2,254
)
Gain (loss) on reorganization items, net

 
 
(1,299
)
 
44,503

Other income (expense), net
$
(7,264
)
 
 
$
(5,355
)
 
$
42,262

 
 
 
 
 
 
 
Income tax expense (benefit)
$
(422
)
 
 
$
243

 
$
27

Interest Expense. Interest expense during the nine months ended September 30, 2018 increased as compared to the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor) due to higher interest rates on the New Loan Agreement and a reduction in interest expense on the Prior Senior Notes during the first quarter of 2017, because such interest was no longer incurred after the date of Bankruptcy Petitions discharged in the chapter 11 cases.
Gain (Loss) on Reorganization Items, Net. Gain (loss) on reorganization items, net was $(1.3) million and $44.5 million for the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. There were no reorganization costs for the same period in the current year. For the Predecessor period, the $44.5 million gain was generated by the settlement of liabilities subject to compromise of $140.4 million offset by the fresh start and reorganization adjustments of $87.1 million and legal, professional fess and loan costs of $8.8 million.

Income Taxes. We recognized an income tax benefit of $0.4 million during the nine months ended September 30, 2018, income tax expense of $0.2 million during the period April 13, 2017 through September 30, 2017 (Successor) and income tax expense of less than $0.1 million for the period of January 1, 2017 through April 12, 2017 (Predecessor). Our effective tax rate was (1.7)% during the nine months ended September 30, 2018 due to increased benefit resulting from the expiration of certain foreign tax liabilities in which the statute of limitations expired. Our effective tax rate was 1.5% and 0.1% for the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changed U.S. tax law by, among other things, lowering the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the decrease in the corporate income tax rate, we revalued our ending net deferred tax assets at December 31, 2017, but did not recognize any income tax impact in 2017 due to the offsetting change in the valuation allowance.

Adjusted EBITDA

“Adjusted EBITDA” is defined as income (loss) from continuing operations before interest, taxes, depreciation, amortization, gain (loss) on early extinguishment of debt and non-cash stock based compensation, excluding non-recurring items. Management does not include gain (loss) on extinguishment of debt, non-cash stock based compensation or other nonrecurring items in its calculations of EBITDA because it believes that such amounts are not representative of our core operations. Further, management believes that most investors exclude gain (loss) on extinguishment of debt, stock based compensation recorded under FASB ASC Topic 718 and other nonrecurring items from customary EBITDA calculations as those items are often viewed as either non-recurring and not reflective of ongoing financial performance or have no cash impact on operations.

Adjusted EBITDA is a non-GAAP financial measure that is used as a supplemental financial measure by our management and directors and by our investors to assess the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; the ability of our assets to generate cash sufficient to pay interest on our indebtedness; and our operating performance and return on invested capital as compared to those of other companies in the well services industry, without regard to financing methods and capital structure. We use adjusted EBITDA in other filings with the Commission.

Adjusted EBITDA has limitations as an analytical tool and should not be considered an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income and operating income and these measures may vary among other companies. Limitations to using Adjusted EBITDA as an analytical tool include:

32


 
 
Adjusted EBITDA does not reflect our current or future requirements for capital expenditures or capital commitments;
 
 
Adjusted EBITDA does not reflect changes in, or cash requirements necessary to service interest or principal payments on our debt;
 
 
Adjusted EBITDA does not reflect income taxes;
 
 
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
 
 
Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Reconciliation of Net Income (Loss) to Adjusted EBITDA
(Unaudited)
 
 
 
 
 
 
 
 
 
 
Successor
 
 
Predecessor
 
 
Nine months ended September 30, 2018
 
April 13 through September 30, 2017
 
 
January 1 through April 12, 2017
 
 
(in thousands)
 
 
 
 
(in thousands)
Net income (loss)
 
$
(23,728
)
 
$
(15,979
)
 
 
$
27,228

   Interest income
 
(3
)
 
(11
)
 
 
(13
)
   Interest expense
 
7,267

 
4,067

 
 
2,254

   Income tax (benefit) expense
 
(422
)
 
243

 
 
27

   Depreciation and amortization
 
22,381

 
12,815

 
 
13,601

   Share-based compensation
 
755

 

 
 

Acquisition related costs
 
2,776

 

 
 

   Restructuring expenses
 
190

 

 
 

Gain on disposal of assets
 
(427
)
 
(338
)
 
 
(950
)
   (Gain) loss on reorganization items, net
 

 
1,299

 
 
(44,503
)
Adjusted EBITDA
 
$
8,789

 
$
2,096

 
 
$
(2,356
)

Liquidity and Capital Resources

Our current and future liquidity is greatly dependent upon our operating results. Our ability to continue to meet our liquidity needs is subject to and will be affected by cash utilized in operations, the economic or business environment in which we operate, weakness in oil and natural gas industry conditions, the financial condition of our customers and vendors, and other factors. Furthermore, as a result of the challenging market conditions we continue to face, we anticipate continued net cash used in operating activities due to working capital needs in connection with increasing activity. We believe that our current reserves of cash and availability under the New Loan Agreement are sufficient to finance our cash requirements for current and future operations, budgeted capital expenditures, debt service and other obligations for at least the next twelve months; nevertheless, it is possible that our cash on hand will not be sufficient to cover such expenses. In such event, we would be required to seek additional liquidity, and, prior to any such insufficiency, the Company would take steps to secure such additional liquidity from existing or additional financing sources. There can be no assurance that such financing could be obtained on attractive terms or at all.

Historically, we have funded our operations, including capital expenditures, through our cash flow from operations, the revolving credit facility under the Prior Loan Agreement, vendor financings, the issuance of senior notes and the proceeds from our public and private equity offerings.

As of September 30, 2018 (Successor), we had $6.6 million in unrestricted cash and cash equivalents and $57.5 million in contractual debt.

33



Restricted cash at September 30, 2018 (Successor) was $14.7 million. The components of restricted cash at September 30, 2018 included $6.0 million related to the New Loan Agreement which is subject to satisfaction of certain release restrictions and $8.7 million in a cash collateral account related to letters of credit and our corporate credit card program under the New Regions Letter of Credit Facility. The release conditions set forth in the New Loan Agreement include, among other things, (i) no default or event of default under the New Loan Agreement having occurred or being continuing as of the date of the requested release of proceeds of the New Loan Agreement, or that would exist after giving effect to the release requested to be made on such date, and (ii) our unrestricted cash and cash equivalents being less than $7.0 million after giving pro forma effect to the requested release.

The $57.5 million in contractual debt was comprised of $50.8 million for the New Loan Agreement net of debt issuance costs and $6.7 million in equipment notes. Of our total debt, $2.1 million was short-term debt outstanding on the current portion of long-term debt and $55.5 million of the outstanding contractual debt was classified as long-term debt.

New Loan Agreement
    
Forbes Energy Services LLC, or the Borrower, is the borrower under the New Loan Agreement. The Borrower’s obligations have been guaranteed by FES Ltd. and by Texas Energy Services, LLC, C.C. Forbes, LLC and Forbes Energy International, LLC, each direct subsidiaries of the Borrower and indirect subsidiaries of FES Ltd. The New Loan Agreement provides for a term loan of $50.0 million, which was fully funded on the Effective Date. Subject to certain exceptions and permitted encumbrances, the obligations under this loan are secured by a first priority security interest in substantially all the assets of the Company other than cash collateralizing the New Regions Letters of Credit Facility. Such term loan has a stated maturity date of April 13, 2021. The proceeds of such term loan are only permitted to be used for (i) the payment on account of the Prior Senior Notes in an amount equal to $20.0 million; (ii) the payment of costs, expenses and fees incurred on or prior to the Effective Date in connection with the preparation, negotiation, execution and delivery of the New Loan Agreement and documents related thereto; and (iii) subject to satisfaction of certain release conditions set forth in the New Loan Agreement, for general operating, working capital and other general corporate purposes of the Borrower not otherwise prohibited by the terms of the New Loan Agreement. The release conditions set forth in the New Loan Agreement include, among other things, (i) no default or event of default under the New Loan Agreement having occurred or being continuing as of the date of the requested release of proceeds of the New Loan Agreement, or that would exist after giving effect to the release requested to be made on such date, and (ii) the Company’s unrestricted cash and cash equivalents being less than $7.0 million after giving pro forma effect to the requested release. At September 30, 2018, $6.0 million included in restricted cash was subject to these release restrictions.

Borrowings under this term loan bear interest at a rate equal to five percent (5%) per annum payable quarterly in cash, or the Cash Interest Rate, plus (ii) an initial rate for paid in kind interest of seven percent (7%) commencing April 13, 2017 to be capitalized and added to the principal amount of the term loan on the first day of each quarter, or at the election of the Borrower, paid in cash. The paid in kind interest increases by two percent (2%) twelve months after the Effective Date and every twelve months thereafter until maturity. Upon and after the occurrence of an event of default, the Cash Interest Rate will increase by two percentage points per annum. At September 30, 2018, the applicable interest rate was 14% per annum.

The New Loan Agreement includes customary negative covenants for an asset-based term loan, including covenants limiting our ability to, among other things, (i) effect mergers and consolidations, (ii) sell assets, (iii) create or suffer to exist any lien, (iv) make certain investments, (v) incur debt and (vi) transact with affiliates. In addition, the New Loan Agreement includes customary affirmative covenants for an asset-based term loan, including covenants regarding the delivery of financial statements, reports and notices to the Agent. The New Loan Agreement also contains customary representations and warranties and event of default provisions for a secured term loan. At September 30, 2018, we were in compliance with our New Loan Agreement.
 


34


New Regions Letters of Credit Facility

On the Effective Date, we entered into the New Regions Letters of Credit Facility pursuant to which Regions may issue, upon request by the Company, letters of credit and continue to provide charge cards for use by the Company. Amounts available under the New Regions Letters of Credit Facility are subject to customary fees and are secured by a first-priority lien on, and security interest in, a cash collateral account with Regions containing cash equal to at least (i) 105% of the sum of (a) all amounts owing for any drawings under letters of credit, including any reimbursement obligations, (b) the aggregate undrawn amount of all outstanding letters of credit, (c) all sums owing to Regions or any affiliate pursuant to any letter of credit document and (d) all obligations of the Company arising thereunder, including any indemnities and obligations for reimbursement of expenses and (ii) 120% of the aggregate line of credit for charge cards issued by Regions to the Company. The fees for each letter of credit for the period from and excluding the date of issuance of such letter of credit to and including the date of expiration or termination, are equal to (x) the average daily face amount of each outstanding letter of credit multiplied by (y) a per annum rate determined by Regions from time to time in its discretion based upon such factors as Regions shall determine, including, without limitation, the credit quality and financial performance of the Company. As of September 30, 2018, such rate was 3.00%. In the event we are unable to repay amounts due under the New Regions Letters of Credit Facility, Regions could proceed against such cash collateral account. Regions has no commitment under the New Regions Letters of Credit Facility to issue letters of credit. At September 30, 2018, the facility had $8.6 million in letters of credit outstanding.

Cash Flows

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

Cash Flows from Operating Activities

Cash flows from operating activities were $(2.0) million, $(8.7) million and $(4.3) million for the nine months ended September 30, 2018 (Successor) and the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. The change in cash used in operating activities was primarily related to changes in working capital including increases in accounts receivable offset by increases accounts payable and accrued liabilities.

Cash Flows from Investing Activities

Cash flows from investing activities were $(10.7) million, $(3.0) million and $0.5 million for the nine months ended September 30, 2018 (Successor) and the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. The change was primarily due to increased purchases of property and equipment for our coiled tubing division of our well servicing segment for the nine months ended September 30, 2018 (Successor).

35



Cash Flows from Financing Activities

Cash flows from financing activities were $(1.5) million, $(0.7) million and $9.6 million for the nine months ended September 30, 2018 (Successor) and the periods of April 13, 2017 through September 30, 2017 (Successor) and January 1, 2017 through April 12, 2017 (Predecessor), respectively. The amounts in the Successor periods related to debt payments on our equipment loans. The cash provided by financing activities for the period January 1, 2017 through April 12, 2017 (Predecessor), which included the impact of cash transactions occurring upon emergence from bankruptcy, was due to net proceeds from the New Loan Agreement, offset in part by repayment of the Prior Loan Agreement, repayment of the Prior Senior Notes, and payment of debt issuance costs related to the New Loan Agreement.

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. See Note 8 - Commitment and Contingencies.

Seasonality and Cyclical Trends

The oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices. Such cyclical trends also include the resultant levels of cash flows generated and allocated by exploration and production companies to their drilling, completion and workover budget. The volatility of the oil and natural gas industry and the decline in oil and natural gas prices have negatively impacted the level of exploration and production activity and capital expenditures by our customers. This has adversely affected, and continues to adversely affect, the demand for our services, which has had, and if it continues, will continue to have, a material adverse effect on our business, financial condition, results of operations, and cash flows.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the applicable reporting periods. On an ongoing basis, management reviews its estimates, particularly those related to depreciation and amortization methods, useful lives and impairment of long-lived assets, and asset retirement obligations, using currently available information. Changes in facts and circumstances may result in revised estimates, and actual results could differ from those estimates. There have been no material changes to the critical accounting policies and estimates set forth in Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2017, except for the application of ASU No. 2014-09 which created FASB ASC Topic 606 “Revenue from Contracts with Customers” to our accounting and financial reporting activities.
 



36


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, 2017.

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 September 30, 2018. 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 rules and forms of the Security and Exchange Commission, or the SEC. 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 September 30, 2018, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures over financial reporting were effective.

Changes in Internal Control over Financial Reporting
On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers. Although the new revenue recognition standard did not have a material impact on our revenue recognition, we nevertheless implemented changes to our processes related to revenue recognition and the control activities within them.
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) during the fiscal quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

    


37


PART II—OTHER INFORMATION
 
Item 1.
Legal Proceedings

There are no pending material legal proceedings, and the Company is not aware of any material threatened legal proceedings, to which the Company is a party or to which its property is subject that would have a material adverse effect on the Company's financial statements as of September 30, 2018.

Item 1A.
Risk Factors

A description of our risk factors can be found in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.

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.


38


Item 6. Exhibits
Number
 
 
Description of Exhibits
 
 
 
 
2.1

—  

 
3.1

—  

 
3.2

—  

 
4.1

—  

 
10.1


 
10.2


 
10.3


 
10.4


 
10.5


 
10.6


 
10.7


 
10.8

—  

 
10.9

—  

 
10.10

—  

 
31.1*

—  

 
31.2*

—  

 
32.1*

—  

 
32.2*

—  

 
99.1

—  

 
101*

—  

 
Interactive Data Files
 _________________________
*
Filed herewith.



39


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.
 
 
 
 
November 14, 2018
 
By:
 
/s/ JOHN E. CRISP
 
 
 
 
John E. Crisp
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
 
 
 
 
 
 
 
 
 
November 14, 2018
 
By:
 
/S/ L. MELVIN COOPER
 
 
 
 
L. Melvin Cooper
Senior Vice President,
Chief Financial Officer and Assistant Secretary
(Principal Financial and Accounting Officer)


40