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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
 (Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 30, 2020
or 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from             to            .
 
Commission File Number 1-13455
 
TETRA Technologies, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
74-2148293
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
24955 Interstate 45 North
 
The Woodlands,
 
Texas
77380
(Address of Principal Executive Offices)
(Zip Code)
(281) 367-1983
(Registrant’s Telephone Number, Including Area Code)

_______________________________________________________________________
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
TTI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes   No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

 As of August 6, 2020, there were 125,838,030 shares outstanding of the Company’s Common Stock, $0.01 par value per share.




TETRA Technologies, Inc. and Subsidiaries
Table of Contents
 
Page
PART I—FINANCIAL INFORMATION
 
 
1
2
3
5
7
8
25
42
42
 
 
PART II—OTHER INFORMATION
 
42
42
43
44
44
44
45
46




Table of Contents

PART I
FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Revenues:
 

 
 

 
 
 
 
Product sales
$
98,173

 
$
135,350

 
$
183,206

 
$
227,131

Services
94,268

 
153,446

 
232,177

 
305,393

Total revenues
192,441

 
288,796

 
415,383

 
532,524

Cost of revenues:
 

 
 

 
 
 
 
Cost of product sales
75,004

 
108,253

 
133,971

 
182,841

Cost of services
58,888

 
98,049

 
148,615

 
200,205

Depreciation, amortization, and accretion
29,842

 
31,817

 
59,302

 
62,445

Impairments and other charges
8,977

 
2,311

 
14,348

 
2,457

Insurance recoveries
(591
)
 

 
(591
)
 

Total cost of revenues
172,120

 
240,430

 
355,645

 
447,948

Gross profit
20,321

 
48,366

 
59,738

 
84,576

General and administrative expense
34,014

 
36,295

 
64,551

 
70,572

Interest expense, net
17,586

 
18,529

 
35,442

 
36,908

Warrants fair value adjustment (income) expense
11

 
(1,520
)
 
(327
)
 
(1,113
)
CCLP Series A Preferred Units fair value adjustment (income) expense

 
146

 

 
1,309

Other (income) expense, net
3,839

 
627

 
4,278

 
(324
)
Loss before taxes and discontinued operations
(35,129
)
 
(5,711
)
 
(44,206
)
 
(22,776
)
Provision for income taxes
2,001

 
2,490

 
3,155

 
4,099

Loss before discontinued operations
(37,130
)
 
(8,201
)
 
(47,361
)
 
(26,875
)
Discontinued operations:
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of taxes
163

 
(345
)
 
18

 
(771
)
Net loss
(36,967
)
 
(8,546
)
 
(47,343
)
 
(27,646
)
Less: loss attributable to noncontrolling interest
15,712

 
1,633

 
24,537

 
9,895

Net loss attributable to TETRA stockholders
$
(21,255
)
 
$
(6,913
)
 
$
(22,806
)
 
$
(17,751
)
Basic net loss per common share:
 

 
 
 
 
 
 
Loss before discontinued operations attributable to TETRA stockholders
$
(0.17
)
 
$
(0.06
)
 
$
(0.18
)
 
$
(0.13
)
Income (loss) from discontinued operations attributable to TETRA stockholders
$
0.00

 
$
0.00

 
$
0.00

 
$
(0.01
)
Net loss attributable to TETRA stockholders
$
(0.17
)
 
$
(0.06
)
 
$
(0.18
)
 
$
(0.14
)
Average shares outstanding
125,886

 
125,612

 
125,736

 
125,646

Diluted net loss per common share:
 

 
 

 
 
 
 
Loss before discontinued operations attributable to TETRA stockholders
$
(0.17
)
 
$
(0.06
)
 
$
(0.18
)
 
$
(0.13
)
Income (loss) from discontinued operations attributable to TETRA stockholders
$
0.00

 
$
0.00

 
$
0.00

 
$
(0.01
)
Net loss attributable to TETRA stockholders
$
(0.17
)
 
$
(0.06
)
 
$
(0.18
)
 
$
(0.14
)
Average diluted shares outstanding
125,886

 
125,612

 
125,736

 
125,646


See Notes to Consolidated Financial Statements

1


TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Net loss
$
(36,967
)
 
$
(8,546
)
 
$
(47,343
)
 
$
(27,646
)
Foreign currency translation adjustment, net of taxes of $0 in 2020 and 2019
1,095

 
848

 
(5,372
)
 
442

Comprehensive loss
(35,872
)
 
(7,698
)
 
(52,715
)
 
(27,204
)
Less: Comprehensive loss attributable to noncontrolling interest
15,597

 
1,550

 
24,651

 
9,636

Comprehensive loss attributable to TETRA stockholders
$
(20,275
)
 
$
(6,148
)
 
$
(28,064
)
 
$
(17,568
)
 

See Notes to Consolidated Financial Statements

2


TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
 
June 30,
2020
 
December 31,
2019
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
56,722

 
$
17,704

Restricted cash
58

 
64

Trade accounts receivable, net of allowances of $10,223 in 2020 and $5,262 in 2019
114,306

 
175,918

Inventories
115,506

 
136,510

Prepaid expenses and other current assets
22,395

 
21,158

Total current assets
308,987

 
351,354

Property, plant, and equipment:
 

 
 

Land and building
57,766

 
60,586

Machinery and equipment
1,356,238

 
1,335,157

Automobiles and trucks
27,350

 
31,681

Chemical plants
58,990

 
57,692

Construction in progress
9,869

 
34,393

Total property, plant, and equipment
1,510,213

 
1,519,509

Less accumulated depreciation
(796,629
)
 
(760,872
)
Net property, plant, and equipment
713,584

 
758,637

Other assets:
 

 
 

Patents, trademarks and other intangible assets, net of accumulated amortization of $91,458 in 2020 and $88,422 in 2019
70,175

 
74,199

Deferred tax assets, net
41

 
24

Operating lease right-of-use assets
75,524

 
68,131

Other assets
20,283

 
19,577

Total other assets
166,023

 
161,931

Total assets
$
1,188,594

 
$
1,271,922

 

See Notes to Consolidated Financial Statements

3


TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
 
 
June 30,
2020
 
December 31,
2019
 
(Unaudited)
 
 

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Trade accounts payable
$
52,423

 
$
88,917

Unearned income
13,127

 
9,831

Accrued liabilities and other
79,904

 
87,877

Liabilities of discontinued operations
1,873

 
2,098

Total current liabilities
147,327

 
188,723

Long-term debt, net
843,292

 
842,871

Deferred income taxes
3,245

 
2,988

Asset retirement obligations
12,862

 
12,762

Warrants liability
123

 
449

Operating lease liabilities
60,693

 
53,919

Other liabilities
8,366

 
7,384

Total long-term liabilities
928,581

 
920,373

Commitments and contingencies
 

 
 

Equity:
 

 
 

TETRA stockholders' equity:
 

 
 

Common stock, par value $0.01 per share; 250,000,000 shares authorized at June 30, 2020 and December 31, 2019; 128,773,914 shares issued at June 30, 2020 and 128,304,354 shares issued at December 31, 2019
1,288

 
1,283

Additional paid-in capital
469,777

 
466,959

Treasury stock, at cost; 2,908,217 shares held at June 30, 2020, and 2,823,191 shares held at December 31, 2019
(19,434
)
 
(19,164
)
Accumulated other comprehensive income (loss)
(57,441
)
 
(52,183
)
Retained deficit
(385,328
)
 
(362,522
)
Total TETRA stockholders' equity
8,862

 
34,373

Noncontrolling interests
103,824

 
128,453

Total equity
112,686

 
162,826

Total liabilities and equity
$
1,188,594

 
$
1,271,922

 

See Notes to Consolidated Financial Statements

4


TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Equity
(In Thousands)

 
Common Stock
Par Value
 
Additional Paid-In
Capital
 
Treasury
Stock
 
Accumulated Other 
Comprehensive Income (Loss)
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Equity
 
 
 
 
Currency
Translation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
$
1,283

 
$
466,959

 
$
(19,164
)
 
$
(52,183
)
 
$
(362,522
)
 
$
128,453

 
$
162,826

Net loss for first quarter 2020

 

 

 

 
(1,551
)
 
(8,825
)
 
(10,376
)
Translation adjustment, net of taxes of $0

 

 

 
(6,238
)
 

 
(229
)
 
(6,467
)
Comprehensive loss

 

 

 

 

 

 
(16,843
)
Distributions to public unitholders

 

 

 

 

 
(309
)
 
(309
)
Equity award activity
4

 

 

 

 

 

 
4

Treasury stock activity, net

 

 
(89
)
 

 

 

 
(89
)
Equity compensation expense

 
1,145

 

 

 

 
228

 
1,373

Other

 
(16
)
 

 

 

 
(15
)
 
(31
)
Balance at March 31, 2020
$
1,287

 
$
468,088

 
$
(19,253
)
 
$
(58,421
)
 
$
(364,073
)
 
$
119,303

 
$
146,931

Net loss for second quarter 2020

 

 

 

 
(21,255
)
 
(15,712
)
 
(36,967
)
Translation adjustment, net of taxes of $0

 

 

 
980

 

 
115

 
1,095

Comprehensive loss

 

 

 

 

 

 
(35,872
)
Distributions to public unitholders

 

 

 

 

 
(311
)
 
(311
)
Equity award activity
1

 

 

 

 

 

 
1

Treasury stock activity, net

 

 
(181
)
 

 

 

 
(181
)
Equity compensation expense

 
1,685

 

 

 

 
449

 
2,134

Other

 
4

 

 

 

 
(20
)
 
(16
)
Balance at June 30, 2020
$
1,288

 
$
469,777

 
$
(19,434
)
 
$
(57,441
)
 
$
(385,328
)
 
$
103,824

 
$
112,686





5


 
Common Stock
Par Value
 
Additional Paid-In
Capital
 
Treasury
Stock
 
Accumulated Other 
Comprehensive Income (Loss)
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Equity
 
 
 
 
Currency
Translation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
1,285

 
$
460,680

 
$
(18,950
)
 
$
(51,663
)
 
$
(217,952
)
 
$
139,349

 
$
312,749

Net loss for first quarter 2019

 

 

 

 
(10,838
)
 
(8,262
)
 
(19,100
)
Translation adjustment, net of taxes of $0

 

 

 
(582
)
 

 
176

 
(406
)
Comprehensive loss

 

 

 

 

 

 
(19,506
)
Distributions to public unitholders

 

 

 

 

 
(307
)
 
(307
)
Equity award activity
(1
)
 

 

 

 

 

 
(1
)
Treasury stock activity, net

 

 
(155
)
 

 

 

 
(155
)
Equity compensation expense

 
1,628

 

 

 

 
311

 
1,939

Conversions of CCLP Series A Preferred

 

 

 

 

 
2,539

 
2,539

Cumulative effect adjustment

 

 

 

 
2,843

 

 
2,843

Other

 
(67
)
 

 

 

 
76

 
9

Balance at March 31, 2019
$
1,284

 
$
462,241

 
$
(19,105
)
 
$
(52,245
)
 
$
(225,947
)
 
$
133,882

 
$
300,110

Net loss for second quarter 2019

 

 

 

 
(6,913
)
 
(1,633
)
 
(8,546
)
Translation adjustment, net of taxes of $0

 

 

 
765

 

 
83

 
848

Comprehensive loss

 

 

 

 

 

 
(7,698
)
Distributions to public unitholders

 

 

 

 

 
(308
)
 
(308
)
Treasury stock activity, net

 

 
(11
)
 

 

 

 
(11
)
Equity compensation expense

 
2,100

 

 

 

 
567

 
2,667

Other

 
(36
)
 

 

 

 
(33
)
 
(69
)
Balance at June 30, 2019
$
1,284

 
$
464,305

 
$
(19,116
)
 
$
(51,480
)
 
$
(232,860
)
 
$
132,558

 
$
294,691


See Notes to Consolidated Financial Statements


6


TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited) 
 
Six Months Ended June 30,
 
2020
 
2019
Operating activities:
 

 
 

Net loss
$
(47,343
)
 
$
(27,646
)
Reconciliation of net loss to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion
59,302

 
62,445

Impairment and other charges
14,348

 
2,457

Benefit for deferred income taxes
467

 
550

Equity-based compensation expense
2,896

 
4,932

Provision for doubtful accounts
5,504

 
922

Amortization and expense of financing costs
2,755

 
2,644

Insurance recoveries associated with damaged equipment
(591
)
 

Equipment received in lieu of cash
725

 

Debt exchange expenses
4,754

 

CCLP Series A Preferred Unit distributions and adjustments

 
3,178

Warrants fair value adjustment
(326
)
 
(1,113
)
Contingent consideration liability fair value adjustment

 
(800
)
Gain on sale of assets
(2,019
)
 
(872
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
54,827

 
(7,075
)
Inventories
10,733

 
(92
)
Prepaid expenses and other current assets
(3,038
)
 
(4,327
)
Trade accounts payable and accrued expenses
(42,853
)
 
4,766

Other
246

 
(1,592
)
Net cash provided by operating activities
60,387

 
38,377

Investing activities:
 

 
 

Purchases of property, plant, and equipment, net
(19,608
)
 
(60,604
)
Acquisition of businesses, net of cash acquired

 
(11,417
)
Proceeds on sale of property, plant, and equipment
5,311

 
1,214

Insurance recoveries associated with damaged equipment
591

 

Other investing activities
(357
)
 
(447
)
Net cash used in investing activities
(14,063
)
 
(71,254
)
Financing activities:
 

 
 

Proceeds from long-term debt
338,343

 
194,090

Principal payments on long-term debt
(341,364
)
 
(154,217
)
CCLP distributions
(620
)
 
(615
)
Redemptions of CCLP Series A Preferred

 
(19,760
)
Tax remittances on equity based compensation
(341
)
 
(458
)
Debt issuance costs and other financing activities
(2,504
)
 
(325
)
Net cash provided by (used in) financing activities
(6,486
)
 
18,715

Effect of exchange rate changes on cash
(826
)
 
105

Increase (decrease) in cash and cash equivalents
39,012

 
(14,057
)
Cash and cash equivalents and restricted cash at beginning of period
17,768

 
40,102

Cash and cash equivalents and restricted cash at end of period
$
56,780

 
$
26,045

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 

 
 
Interest paid
$
35,127

 
$
33,449

Income taxes paid
2,195

 
4,501

See Notes to Consolidated Financial Statements

7


TETRA Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES

Organization 

We are a geographically diversified oil and gas services company, focused on completion fluids and associated products and services, water management, frac flowback, production well testing and offshore rig cooling services, and compression services and equipment. We were incorporated in Delaware in 1981. We are composed of three divisions – Completion Fluids & Products, Water & Flowback Services, and Compression. Unless the context requires otherwise, when we refer to “we,” “us,” and “our,” we are describing TETRA Technologies, Inc. and its consolidated subsidiaries on a consolidated basis.

Presentation  

Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The information furnished reflects all normal recurring adjustments, which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods. Operating results for the period ended June 30, 2020 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2020.

We consolidate the financial statements of our CSI Compressco LP subsidiary ("CCLP") as part of our Compression Division, as we determined that CCLP is a variable interest entity and we are the primary beneficiary. We control the financial interests of CCLP and have the ability to direct the activities of CCLP that most significantly impact its economic performance through our ownership of its general partner. The share of CCLP net assets and earnings that is not owned by us is presented as noncontrolling interest in our consolidated financial statements. Our cash flows from our investment in CCLP are limited to the quarterly distributions we receive on our CCLP common units and general partner interest (including incentive distribution rights) and the amounts collected for services we perform on behalf of CCLP, as TETRA's capital structure and CCLP's capital structure are separate, and do not include cross default provisions or cross guarantees.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the U.S. Securities and Exchange Commission ("SEC") and do not include all information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. These financial statements should be read in conjunction with the financial statements for the year ended December 31, 2019 and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 16, 2020.

Significant Accounting Policies

Our significant accounting policies are described in the notes to our consolidated financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K. There have been no significant changes in our accounting policies or the application thereof during the second quarter of 2020.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, and impairments during the reporting period. Actual results could differ from those estimates, and such differences could be material.

Reclassifications

Certain previously reported financial information has been reclassified to conform to the current year's presentation. The impact of such reclassifications was not significant to the prior year's overall presentation.


8


Assets Held for Sale

As of June 30, 2020, we had $2.6 million in net book value of compressor equipment classified as held for sale within net property, plant, and equipment on our consolidated balance sheets. For further details of the impairment recorded to adjust the net book value to fair value upon this classification, see Note 3 - Impairments and Other Charges below.

Impairments and Other Charges

Impairments of long-lived assets, including identified intangible assets, are determined periodically when indicators of impairment are present. If such indicators are present, the determination of the amount of impairment is based on our judgment as to the future undiscounted operating cash flows to be generated from the relevant assets throughout their remaining estimated useful lives. If these undiscounted cash flows are less than the carrying amount of the related assets, an impairment is recognized for the excess of the carrying value over fair value. Fair value of intangible assets is generally determined using the discounted present value of future cash flows using discount rates commensurate with the risks inherent with the specific assets. Assets held for disposal are recorded at the lower of carrying value or estimated fair value less estimated selling costs. See Note 3 - "Impairments and Other Charges" for additional discussion of recorded impairments.

Revenue Recognition
 
Performance Obligations. Revenue is generally recognized when we transfer control of our products or services to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services to our customers. We receive cash equal to the invoice price for most sales of product and services and payment terms typically range from 30 to 60 days from the date we invoice our customer. Since the period between when we deliver products or services and when the customer pays for such products or services is not expected to exceed one year, we have elected not to calculate or disclose a financing component for our customer contracts.

Depending on the terms of the arrangement, we may also defer the recognition of revenue for a portion of the consideration received because we have to satisfy a future performance obligation. For example, consideration received from customers during the fabrication of new compressor packages is typically deferred until control of the compressor package is transferred to our customer.

For any arrangements with multiple performance obligations, we use management's estimated selling price to determine the stand-alone selling price for separate performance obligations. For revenue associated with mobilization of service equipment as part of a service contract arrangement, such revenue, if significant, is deferred and amortized over the estimated service period.

Product Sales. Product sales revenues are generally recognized when we ship products from our facility to our customer. The product sales for our Completion Fluids & Products Division consist primarily of clear brine fluids ("CBFs"), additives, and associated manufactured products. Product sales for our Water & Flowback Services Division are typically attributed to specific performance obligations within certain production testing service arrangements. Parts and equipment sales comprise the product sales for the Compression Division.

Services. Service revenues represent revenue recognized over time, as our customer arrangements typically provide agreed upon day-rates (monthly service rates for compression services) and we recognize service revenue based upon the number of days services have been performed. Service revenue recognized over time is associated with a majority of our Water & Flowback Services Division arrangements, compression service and aftermarket service contracts within our Compression Division, and a small portion of Completion Fluids & Products Division revenue that is associated with completion fluid service arrangements. With the exception of the initial terms of the compression services contracts for medium- and high-horsepower compressor packages of our Compression Division, our customer contracts are generally for terms of one year or less. The majority of the service arrangements in the Water & Flowback Services Division are for a period of 90 days or less.

Sales taxes, value added taxes, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We have elected to recognize the cost for freight and shipping costs as part of cost of product sales when control over our products (i.e. delivery) has transferred to the customer.


9


Use of Estimates. In recognizing revenue for variable consideration arrangements, the amount of variable consideration recognized is limited so that it is probable that significant amounts of revenues will not be reversed in future periods when the uncertainty is resolved. For products returned by the customer, we estimate the expected returns based on an analysis of historical experience. For volume discounts earned by the customer, we estimate the discount (if any) based on our estimate of the total expected volume of products sold or services to be provided to the customer during the discount period. In certain contracts for the sale of CBFs, we may agree to issue credits for the repurchase of reclaimable used fluids from certain customers at an agreed price that is based on the condition of the fluids.

Contract Assets and Liabilities. We consider contract assets to be trade accounts receivable when we have an unconditional right to consideration and only the passage of time is required before payment is due. In certain instances, particularly those requiring customer specific documentation prior to invoicing, our invoicing of the customer is delayed until certain documentation requirements are met. In those cases, we recognize a contract asset rather than a billed trade accounts receivable until we are able to invoice the customer. Contract assets, along with billed trade accounts receivable, are included in trade accounts receivable in our consolidated balance sheets.

We classify contract liabilities as unearned income in our consolidated balance sheets. Such deferred revenue typically results from advance payments received on orders for new compressor equipment prior to the time such equipment is completed and transferred to the customer in accordance with the customer contract. New equipment sales orders generally take less than twelve months to build and deliver.

Bill-and-Hold Arrangements. We design and fabricate compressor packages based on our customer’s specifications. In some cases, the customer will request us to hold the equipment, upon completion of the unit, until the job site is ready to receive the equipment. When this occurs, we along with the customer sign a bill-and-hold agreement, which outlines that the customer has title to the equipment, the equipment is ready for delivery, we cannot use the equipment or direct it to another customer, and we have a present right to payment. When those criteria have been met and the agreement is executed, we recognize the revenue on the equipment because control of the equipment has passed to our customer and our performance obligations are complete. Entering into these arrangements is something we have done as a courtesy for certain customers for many years. The equipment subject to the bill-and-hold agreements has generally been invoiced and paid for through progressive billings such that at the time the bill-and-hold agreement is executed, the majority of the contractual cash obligation of the customer has been received by us.
Operating Costs
 
Cost of product sales includes direct and indirect costs of manufacturing and producing our products, including raw materials, fuel, utilities, labor, overhead, repairs and maintenance, materials, services, transportation, warehousing, equipment rentals, insurance, and certain taxes. Cost of services includes operating expenses we incur in delivering our services, including labor, equipment rental, fuel, repair and maintenance, transportation, overhead, insurance, and certain taxes. We include in product sales revenues the reimbursements we receive from customers for shipping and handling costs. Shipping and handling costs are included in cost of product sales. Amounts we incur for “out-of-pocket” expenses in the delivery of our services are recorded as cost of services. Reimbursements for “out-of-pocket” expenses we incur in the delivery of our services are recorded as service revenues. Depreciation, amortization, and accretion includes depreciation expense for all of our facilities, equipment and vehicles, amortization expense on our intangible assets, and accretion expense related to our decommissioning and other asset retirement obligations.
 
We include in general and administrative expense all costs not identifiable to our specific product or service operations, including divisional and general corporate overhead, professional services, corporate office costs, sales and marketing expenses, insurance, and certain taxes. 
 
Foreign Currency Translation
 
We have designated the euro, the British pound, the Norwegian krone, the Canadian dollar, the Brazilian real, and the Mexican peso as the functional currencies for our operations in Finland and Sweden, the United Kingdom, Norway, Canada, Brazil, and certain of our operations in Mexico, respectively. The U.S. dollar is the designated functional currency for all of our other foreign operations. The cumulative translation effects of translating the applicable accounts from the functional currencies into the U.S. dollar at current exchange rates are included as a separate component of equity. Foreign currency exchange (gains) and losses are included in other

10


(income) expense, net and totaled $0.4 million and $2.3 million during the three and six months ended June 30, 2020, respectively, and $0.8 million and $(0.5) million during the three and six months ended June 30, 2019, respectively.

Fair Value Measurements
 
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements are utilized on a recurring basis in the determination of the carrying values of certain liabilities, including the liabilities for the warrants to purchase 11.2 million shares of our common stock (the "Warrants") and our foreign currency derivative contracts. Refer to Note 9 - "Fair Value Measurements" for further discussion.

Fair value measurements are also utilized on a nonrecurring basis in certain circumstances, such as in the allocation of purchase consideration for acquisition transactions to the assets and liabilities acquired, including intangible assets and goodwill (a Level 3 fair value measurement), the initial recording of our asset retirement obligations, and for the impairment of long-lived assets, including goodwill (a Level 3 fair value measurement).

New Accounting Pronouncements
 
Standards adopted in 2020

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The adoption of this standard did not have a material impact on our consolidated financial statements.

Standards not yet adopted

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses on financial instruments not accounted for at fair value through net income. The provisions require credit impairments to be measured over the contractual life of an asset and developed with consideration for past events, current conditions, and forecasts of future economic information. Credit impairment will be accounted for as an allowance for credit losses deducted from the amortized cost basis at each reporting date. We are continuing to work through our implementation plan which includes evaluating the impact on our allowance for doubtful accounts methodology, identifying new reporting requirements, and implementing changes to business processes, systems, and controls to support adoption of the standard. Upon adoption, the allowance for doubtful accounts is expected to increase with an offsetting adjustment to retained earnings. Updates at each reporting date after initial adoption will be recorded through selling, general, and administrative expense. ASU 2016-13 has an effective date of the first quarter of fiscal 2023. We continue to assess the potential effects of these changes to our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions related to intraperiod tax allocation, interim period income tax calculation methodology, and the recognition of deferred tax liabilities for outside basis differences. It also simplifies certain aspects of accounting for franchise taxes and clarifies the accounting for transactions that results in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for us the first quarter of fiscal 2021. We continue to assess the potential effects of these changes to our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”, which provides optional expedients and exceptions for applying US GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impacts of the provisions of ASU 2020-04 on our consolidated financial statements.

11


NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS
    
As of June 30, 2020, we had $50.0 million of remaining contractual performance obligations for compression services. As a practical expedient, this amount does not reflect revenue for compression service contracts whose original expected duration is less than twelve months and does not consider the effects of the time value of money. Expected revenue to be recognized in the future as of June 30, 2020 for completion of performance obligations of compression service contracts are as follows:
 
2020
 
2021
 
2022
 
2023
 
2024
 
Total
 
(In Thousands)
Compression service contracts remaining performance obligations
$
35,385

 
$
12,735

 
$
1,807

 
$
62

 
$
46

 
$
50,035


For sales of CBFs where we have agreed to issue credits for the repurchase of reclaimable used fluids at an agreed price based on the condition of the fluid upon return, we adjust the revenue recognized in the period of shipment by an estimated amount, based on historical experience, of the credit expected to be issued. As of June 30, 2020, the amount of remaining credits expected to be issued for the repurchase of reclaimable used fluids was $1.5 million recorded in inventory (right of return asset) and either accounts payable or as a reduction to accounts receivable. There were no material differences between amounts recognized during the three and six month period ended June 30, 2020, compared to estimates made in a prior period from these variable consideration arrangements.

Our contract asset balances, primarily associated with customer documentation requirements, were $19.4 million and $34.9 million as of June 30, 2020 and December 31, 2019, respectively. Contract assets, along with billed trade accounts receivable, are included in trade accounts receivable in our consolidated balance sheets.

Collections primarily associated with progressive billings to customers for the construction of compression equipment is included in unearned income in the consolidated balance sheets. The following table reflects the changes in unearned income in our consolidated balance sheets for the periods indicated:
 
Six Months Ended
June 30,
 
2020
 
2019
 
(In Thousands)
Unearned Income, beginning of period
$
9,678

 
$
25,333

Additional unearned income
32,834

 
84,456

Revenue recognized
(29,881
)
 
(78,119
)
Unearned income, end of period
$
12,631

 
$
31,670



During the six month period ended June 30, 2020, we recognized product sales revenue of $5.9 million from unearned income that was deferred as of December 31, 2019. During the six months ended June 30, 2019, we recognized product sales revenue of $19.1 million from unearned income that was deferred as of December 31, 2018.

As of June 30, 2020, contract costs were immaterial.
    

12


We disaggregate revenue from contracts with customers into Product Sales and Services within each segment, as noted in our three reportable segments in Note 11. In addition, we disaggregate revenue from contracts with customers by geography based on the following table below.
 
Three months ended June 30,
 
Six months ended June 30,
 
2020
 
2019
 
2020
 
2019
 
(In Thousands)
Completion Fluids & Products
 
 
 
 
 
 
 
U.S.
32,102

 
37,536

 
$
70,060

 
$
69,142

International
39,244

 
42,231

 
76,523

 
72,206

 
71,346

 
79,767

 
146,583

 
141,348

Water & Flowback Services
 
 
 
 
 
 
 
U.S.
22,866

 
68,412

 
77,250

 
141,611

International
1,857

 
4,712

 
4,940

 
10,191

 
24,723

 
73,124

 
82,190

 
151,802

Compression
 
 
 
 
 
 
 
U.S.
88,583

 
126,122

 
169,183

 
219,638

International
7,789

 
9,783

 
17,427

 
19,736

 
96,372

 
135,905

 
186,610

 
239,374

Total Revenue
 
 
 
 
 
 
 
U.S.
143,551

 
232,070

 
316,493

 
430,391

International
48,890

 
56,726

 
98,890

 
102,133

 
192,441

 
288,796

 
$
415,383

 
$
532,524


NOTE 3 IMPAIRMENTS AND OTHER CHARGES

Impairments of Long-Lived Assets

During the first half of 2020, the COVID-19 pandemic and decline in oil and gas prices had a significant impact on our customers and industry. These events led to a significant reduction in the operations of our customers resulting in a decrease in demand in certain of our service lines.

During the first quarter of 2020, we started to see our customers revise their capital budgets downwards and adjust their operations accordingly, which led to a decline in orders for new compression equipment to be fabricated and sold to third parties. We concluded that these events were indicators of impairment for all our asset groups within our Compression Division and certain asset groups within our Completion Fluids & Products Division. We performed recoverability analyses on the relevant asset groups within these divisions. Based upon these recoverability analyses, we determined that the carrying values of our Midland manufacturing facility and related new unit sales inventory in our Compression Division exceeded their respective fair values. Therefore, we recorded impairments of approximately $5.4 million related to these assets. Fair value was estimated based on a market approach.

During the second quarter of 2020, primarily as a result of continued negative impacts on our compression fleet associated with the COVID-19 pandemic and declines in oil and gas prices, our Compression Division recorded impairments and other charges of approximately $9.0 million associated with non-core used compressor equipment that we have held for sale, the low-horsepower class of our compression fleet, and field inventory for compression and related services. Fair value used to determine impairments was estimated based on a market approach. Given the dynamic nature of the events, we are not able to reasonably estimate how long our operations will be adversely impacted and the full impact these events will have on our operations. As a result, we could have indicators of impairment again in future periods resulting in additional asset impairments.

13


NOTE 4 – INVENTORIES

Components of inventories as of June 30, 2020 and December 31, 2019 are as follows: 
 
June 30, 2020
 
December 31, 2019
 
(In Thousands)
Finished goods
$
63,952

 
$
70,135

Raw materials
4,030

 
4,125

Parts and supplies
35,814

 
47,793

Work in progress
11,710

 
14,457

Total inventories
$
115,506

 
$
136,510



Finished goods inventories include newly manufactured clear brine fluids as well as used brines that are repurchased from certain customers for recycling. Work in progress inventory consists primarily of new compressor packages located at our Compression Division manufacturing facility in Midland, Texas.
NOTE 5 – LEASES

We have operating leases for some of our transportation equipment, office space, warehouse space, operating locations, and machinery and equipment. We have finance leases for certain storage tanks and equipment rentals. These finance leases are not material to our financial statements. Our leases have remaining lease terms ranging from 1 to 16 years. Some of our leases have options to extend for various periods, while some have termination options with prior notice of generally 30 days or six months. The office space, warehouse space, operating location leases, and machinery and equipment leases generally require us to pay all maintenance and insurance costs. During the fourth quarter of 2019, CCLP entered into a lease agreement commitment for 14 compressor packages. The leases are for an initial term of seven years and commence upon the completion of the equipment fabrication. During the first quarter, CCLP took delivery of eight compressor packages. During the second quarter, CCLP took delivery of the remaining six compressor packages. We have no other lease commitments that have not yet commenced that create significant rights and obligations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Variable rent expense was not material.

Our corporate headquarters facility located in The Woodlands, Texas, was sold on December 31, 2012, pursuant to a sale and leaseback transaction. As a condition to the consummation of the purchase and sale of the facility, the parties entered into a lease agreement for the facility having an initial lease term of 15 years, which is classified as an operating lease. Under the terms of the lease agreement, we have the ability to extend the lease for five successive five-year periods at base rental rates to be determined at the time of each extension.

Components of lease expense, included in either cost of revenues or general and administrative expense based on the use of the underlying asset, are as follows (inclusive of lease expense for leases not included on our consolidated balance sheet based on our accounting policy election to exclude leases with a term of 12 months or less):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
 
(In Thousands)
Operating lease expense
$
5,319

 
$
4,987

 
$
10,467

 
$
10,031

Short-term lease expense
5,423

 
9,552

 
14,853

 
20,713

Total lease expense
$
10,742

 
$
14,539

 
$
25,320

 
$
30,744


14



Supplemental cash flow information:
 
 
Six Months Ended June 30,
 
 
2020
 
2019
 
 
(In Thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
     Operating cash flows - operating leases
 
$
12,065

 
$
9,398

 
 
 
 
 
Right-of-use assets obtained in exchange for lease obligations:
 
 
 
 
     Operating leases
 
$
17,069

 
$
4,881



Supplemental balance sheet information:
 
June 30, 2020
 
December 31, 2019
 
(In Thousands)
Operating leases:
 
 
 
     Operating lease right-of-use assets
$
75,524

 
$
68,131

 
 
 
 
     Accrued liabilities and other
$
16,402

 
$
15,850

     Operating lease liabilities
60,693

 
53,919

     Total operating lease liabilities
$
77,095

 
$
69,769


Additional operating lease information:
 
June 30, 2020
 
December 31, 2019
Weighted average remaining lease term:
 
 
 
     Operating leases
6.36 Years

 
6.43 Years

 
 
 
 
Weighted average discount rate:
 
 
 
     Operating leases
9.74
%
 
9.46
%

    
Future minimum lease payments by year and in the aggregate, under non-cancellable operating leases with terms in excess of one year consist of the following at June 30, 2020:
 
 
Operating Leases
 
(In Thousands)
 
 
 
Remainder of 2020
 
$
11,662

2021
 
20,294

2022
 
16,684

2023
 
13,026

2024
 
11,505

Thereafter
 
32,611

Total lease payments
 
105,782

Less imputed interest
 
(28,687
)
Total lease liabilities
 
$
77,095


    
At June 30, 2020, future minimum rental receipts under a non-cancellable sublease for office space in one of our locations totaled $5.3 million. For the three and six months ended June 30, 2020, we recognized sublease income of $0.3 million and $0.6 million.

15


NOTE 6 – LONG-TERM DEBT AND OTHER BORROWINGS
 
We believe our capital structure, excluding CCLP, ("TETRA") and CCLP's capital structure should be considered separately, as there are no cross default provisions or cross guarantees between CCLP's debt and TETRA's debt.

Consolidated long-term debt as of June 30, 2020 and December 31, 2019, consists of the following:
 
 
June 30, 2020
 
December 31, 2019
 
 
(In Thousands)
TETRA
Scheduled Maturity
 
 
 
Asset-based credit agreement (presented net of unamortized deferred financing costs of $0 million as of June 30, 2020 and $1.0 million as of December 31, 2019)
September 2023
$

 
$

Term credit agreement (presented net of the unamortized discount of $6 million as of June 30, 2020 and $6.4 million as of December 31, 2019 and net of unamortized deferred financing costs of $8.8 million as of June 30, 2020 and $9.5 million as of December 31, 2019)
September 2025
205,713

 
204,633

TETRA total debt
 
205,713

 
204,633

Less current portion
 

 

TETRA total long-term debt
 
$
205,713

 
$
204,633

 
 
 
 
 
CCLP
 
 
 
 
CCLP asset-based credit agreement (presented net of unamortized deferred financing costs of $0.7 million as of June 30, 2020 and $0.9 million of December 31, 2019)
June 2023
746

 
2,622

CCLP 7.25% Senior Notes (presented net of the unamortized discount of $0.4 million as of June 30, 2020 and $1.7 million as of December 31, 2019 and net of unamortized deferred financing costs of $0.6 million as of June 30, 2020 and $2.8 million as of December 31, 2019)
August 2022
79,745

 
291,444

CCLP 7.50% First Lien Notes (presented net of unamortized deferred financing costs of $5.7 million as of June 30, 2020 and $5.8 million as of December 31, 2019, net of the unamortized discount of $0.2 million as of June 30, 2020, and net of deferred restructuring gain of $5.6 million as of June 30, 2020)
April 2025
399,613

 
344,172

CCLP 10.00%/10.75% Second Lien Notes (presented net of the unamortized discount of $0.8 million as of June 30, 2020, net of unamortized deferred financing costs of $1.3 million as of June 30, 2020, and net of deferred restructuring gain of $4 million as of June 30, 2020)
April 2026
157,475

 

CCLP total debt
 
637,579

 
638,238

Less current portion
 

 

CCLP total long-term debt
 
$
637,579

 
$
638,238

Consolidated total long-term debt
 
$
843,292

 
$
842,871



As of June 30, 2020, TETRA had no outstanding balance and $6.4 million in letters of credit against its asset-based credit agreement ("ABL Credit Agreement"). Because there was no outstanding balance on this Credit Agreement, associated deferred financing costs of $1.2 million as of June 30, 2020, were classified as other long-term assets on the accompanying consolidated balance sheet. As of June 30, 2020, subject to compliance with the covenants, borrowing base, and other provisions of the ABL Credit Agreement that may limit borrowings, TETRA had an availability of $37.1 million under this agreement. There was a $1.5 million balance outstanding and $2.8 million in letters of credit against the CCLP asset-based credit agreement ("CCLP Credit Agreement") as of June 30, 2020. As of June 30, 2020, and subject to compliance with the covenants, borrowing base, and other provisions of the CCLP Credit Agreement that may limit borrowings, CCLP had availability of $12.3 million.

TETRA and CCLP credit and senior note agreements contain certain affirmative and negative covenants, including covenants that restrict the ability to pay dividends or other restricted payments. TETRA and CCLP are both in compliance with all covenants of their respective credit and senior note agreements as of June 30, 2020.

16


Second Amendment to Credit Agreement

On June 11, 2020, CSI Compressco, LP and CSI Compressco Sub Inc (the “Borrowers”) entered into the Second Amendment to Loan and Security Agreement (the “Amendment”) amending the Loan and Security Agreement dated June 29, 2018 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) with Bank of America, N.A., in its capacity as administrative agent, issuing bank and swing line issuer (“Administrative Agent”), and the other lenders and loan parties party thereto. The Amendment provided for changes and modifications to the Credit Agreement which include, among other things, changes to certain terms of the Credit Agreement as follows: (i) resizing of the maximum credit commitment under the Credit Agreement from $50,000,000 to $35,000,000; (ii) the inclusion of a $5,000,000 reserve with respect to the Borrowing Base (as defined in the Credit Agreement) thereunder, which would result in reduced borrowing availability; (iii) the removal of the financial covenant compliance test with respect to the Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement); (iv) an increase in the applicable margin related to (x) LIBOR Rate Loans (as defined in the Credit Agreement) to a range between 3.00% and 3.50% and (y) Base Rate Loans (as defined in the Credit Agreement) to a range between 2.00% and 2.50%, in each case, which shall be determined according to average daily excess availability under the Credit Agreement; and (v) an increase in the rate used to calculate the commitment fee in respect of the unutilized commitments under the Credit Agreement to 0.50%. In connection to this amendment, $0.2 million of financing costs were incurred by CCLP and deferred against the carrying value of the amount outstanding, if any. Additionally, $0.2 million of financing fees were charged to other (income) expense, net during the three month period ended June 30, 2020.

First Supplemental Indenture for the Old Notes

On June 11, 2020, CSI Compressco, LP and CSI Compressco Finance Inc. (the "Issuers") announced that they had accepted for exchange $215,208,000, or approximately 72.7%, of their outstanding 7.25% Senior Notes due 2022 (the "Old Notes") that were validly tendered (and not validly withdrawn) by 11:59 p.m., New York City time, on June 10, 2020, for (i) $50,000,000 of the Issuers' 7.50% Senior Secured First Lien Notes due 2025 (the "7.50% First Lien Notes") and (ii) $155,529,000 aggregate principal amount of new 10.00%/10.75% Senior Secured Second Lien Notes due 2026 (the "10.00%/10.75% Second Lien Notes" and, together with the 7.50% First Lien Notes, the "New Notes"), pursuant to its previously announced exchange offer and consent solicitation (the "Exchange Offer"), which commenced on April 17, 2020. In connection with the exchange offer, CCLP incurred financing fees of $4.8 million which were charged to other (income) expense, net during the three month period ended June 30, 2020.

On June 12, 2020, following receipt of the requisite consents of the holders of the Old Notes, the Issuers entered into the First Supplemental Indenture (the "First Supplemental Indenture"), by and among the Issuers, the subsidiary guarantors named therein and U.S. Bank National Association, as trustee, to the Indenture, dated as of August 4, 2014 (the "Unsecured Indenture"), by and among the Issuers, the subsidiary guarantors named therein and U.S. Bank National Association, as trustee.

The First Supplemental Indenture eliminated substantially all of the restrictive covenants and certain of the default provisions in the Unsecured Indenture and became operative upon the consummation by the Issuers of the Exchange Offer.

On June 12, 2020, the Issuers issued $50,000,000 in aggregate principal amount of New First Lien Notes to certain holders of the Old Notes pursuant to the terms of the Exchange Offer. In March 2018, the Issuers had issued $350,000,000 in aggregate principal amount of 7.50% Senior Secured Notes due 2025 (the
"Existing First Lien Notes" and, together with the New First Lien Notes, the "7.50% First Lien Notes") pursuant to the First Lien Base Indenture. The New First Lien Notes were issued as "additional notes" under the First Lien Base Indenture and will be treated as a single class with such notes but will not trade fungibly with the Existing First Lien Notes.

Second Lien Notes Indenture
 
On June 12, 2020, the Issuers issued $155,529,000 in aggregate principal amount of the 10.00%/10.75% Second Lien Notes to certain holders of the Old Notes pursuant to the terms of the Exchange Offer. The Issuers issued the 10.00%/10.75% Second Lien Notes pursuant to an indenture, dated June 12, 2020 (the "Second Lien Notes Indenture"),by and among the Issuers, the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (the "Second Lien Trustee"). In connection with the payment of PIK Interest (as defined

17


below), if any, in respect of the 10.00%/10.75% Second Lien Notes, the Issuers will be entitled, without the consent of the Holders, to increase the outstanding aggregate principal amount of the 10.00%/10.75% Second Lien Notes or issue additional notes ("PIK notes") under the Second Lien Notes Indenture on the same terms and conditions as the 10.00%/10.75% Second Lien Notes offered hereby (each such increase or issuance, a "PIK Payment"). The Issuers may issue additional 10.00%/10.75% Second Lien Notes under the Second Lien Notes Indenture from time to time. Any issuance of additional 10.00%/10.75% Second Lien Notes (including PIK notes) is subject to all of the covenants in the Second Lien Notes Indenture. The 10.00%/10.75% Second Lien Notes and any additional 10.00%/10.75% Second Lien Notes subsequently issued under the indenture, will be treated as a single class for all purposes under the indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase. Subject to the making of PIK Payments, the Issuers will issue 10.00%/10.75% Second Lien Notes in denominations of $2,000 and integral multiples of $1,000 in excess of $2,000; provided that PIK Payments may result in 10.00%/10.75% Second Lien Notes being issued in denominations of $1.00 and integral multiples of $1.00. The 10.00%/10.75% Second Lien Notes will mature on April 1, 2026. Interest on the 10.00%/10.75% Second Lien Notes will be payable semi-annually in arrears on April 1 and October 1, commencing on October 1, 2020. The Issuers will make each interest payment to the holders of record on March 15 and September 15 immediately preceding each interest payment date. Interest will accrue at (1) the annual rate of 7.250% payable in cash, plus (2) at the election of the Issuers (made by delivering a notice to the Second Lien Trustee not less than five business days prior to the record date), the annual rate of (i) 2.750% payable in cash (together with the annual rate set forth in clause (1), the "Cash Interest Rate") or (ii) 3.500% payable by increasing the principal amount of the outstanding 10.00%/10.75% Second Lien Notes or by issuing additional PIK notes, in each case rounding up to the nearest $1.00 (such increased principal amount or additional PIK notes, the "PIK Interest"). In the absence of an interest payment election made by the Issuers as set forth above, interest on the notes will be payable as if the Issuers had elected to pay PIK Interest with respect to the portion of interest payable pursuant to clause (2) above.

The 10.00%/10.75% Second Lien Notes are jointly and severally, and fully and unconditionally, guaranteed (the "Guarantees") on a senior secured basis initially by each of the Partnership's domestic restricted subsidiaries (other than Finance Corp, certain immaterial subsidiaries and certain other excluded domestic subsidiaries, the "Guarantors") and will be secured by a second-priority security interest in substantially all of the Issuers' and the Guarantors' assets (other than certain excluded assets) (the "Collateral") as collateral security for their obligations under the 10.00%/10.75% Second Lien Notes, subject to certain permitted encumbrances and exceptions. At any time prior to April 1, 2023, the Issuers may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 10.00%/10.75% Second Lien Notes issued under the Second Lien Notes Indenture at a redemption price of 110.000% of the principal amount of the 10.00%/10.75% Second Lien Notes, plus accrued and unpaid interest to the redemption date, with an amount of cash equal to the net cash proceeds of certain equity offerings. On or after April 1, 2023, the Issuers may redeem all or part of the 10.00%/10.75% Second Lien Notes at redemption prices (expressed as percentages of the principal amount) equal to (i) 107.500% for the twelve month period beginning on April 1, 2023; (ii) 105.000% for the twelve-month period beginning on April 1, 2024 and (iii) 100.000% at any time thereafter, plus accrued and unpaid interest up to, but not including, the redemption date. In addition, at any time prior to April 1, 2023, the Company may redeem all or a part of the 10.00%/10.75% Second Lien Notes at a redemption price equal to 100% of the principal amount of the 10.00%/10.75% Second Lien Notes to be redeemed plus a make-whole premium, plus accrued and unpaid interest up to, but not including, the redemption date.

The Second Lien Notes Indenture contains customary covenants restricting the Partnership's ability and the ability of its restricted subsidiaries to: (i) pay distributions on, purchase or redeem its common units or purchase or redeem its subordinated debt; (ii) incur or guarantee additional indebtedness or issue certain kinds of preferred equity securities; (iii) create or incur certain liens securing indebtedness; (iv) sell assets, including dispositions of the Collateral; (v) consolidate, merge or transfer all or substantially all of its assets; (vi) enter into transactions with affiliates; and (vii) enter into agreements that restrict distributions or other payments from its restricted subsidiaries to the Partnership. These covenants are subject to a number of important limitations and exceptions, including certain provisions permitting the Partnership, subject to the satisfaction of certain conditions, to transfer assets to certain of its unrestricted subsidiaries. Moreover, if the 10.00%/10.75% Second Lien Notes receive an investment grade rating from at least two rating agencies and no default has occurred and is continuing under the 10.00%/10.75% Second Lien Notes Indenture, many of the restrictive covenants in the Second Lien Notes Indenture will be terminated. The Second Lien Notes Indenture also contains customary events of default and acceleration provisions relating to such events of default, which provide that upon an event of default under the Second Lien Notes Indenture, the Second Lien Trustee or the holders of at least 25% in aggregate principal amount of the then outstanding 10.00%/10.75% Second Lien Notes may declare all of the 10.00%/10.75% Second Lien Notes to be due and payable immediately.

18


NOTE 7 – DISCONTINUED OPERATIONS

On March 1, 2018, we closed a series of related transactions that resulted in the disposition of our Offshore Division. As a result, we have accounted for our Offshore Division, consisting of our Offshore Services and Maritech segments, as discontinued operations. See Note 8 - "Commitments and Contingencies" for further discussion. A summary of financial information related to our discontinued operations is as follows:

Reconciliation of the Line Items Constituting Pretax Loss from Discontinued Operations to the After-Tax Loss from Discontinued Operations
(in thousands)
 
Three Months Ended
June 30, 2020
 
Three Months Ended
June 30, 2019
 
Offshore Services
 
Maritech
 
Total
 
Offshore Services
 
Maritech
 
Total
Major classes of line items constituting pretax loss from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Revenue
$

 
$

 
$

 
$

 
$

 
$

Cost of revenues
(274
)
 

 
(274
)
 

 

 

Depreciation, amortization, and accretion

 

 

 

 

 

General and administrative expense
111

 

 
111

 
345

 

 
345

Other (income) expense, net

 

 

 

 

 

Pretax income (loss) from discontinued operations
163

 

 
163

 
(345
)
 

 
(345
)
Pretax Income (loss) on disposal of discontinued operations
 
 
 
 

 
 
 
 
 

Total pretax income (loss) from discontinued operations
 
 
 
 
163

 
 
 
 
 
(345
)
Income tax provision (benefit)
 
 
 
 

 
 
 
 
 

Total income (loss) from discontinued operations
 
 
 
 
$
163

 
 
 
 
 
$
(345
)
 
Six Months Ended
June 30, 2020
 
Six Months Ended
June 30, 2019
 
Offshore Services
 
Maritech
 
Total
 
Offshore Services
 
Maritech
 
Total
Major classes of line items constituting pretax loss from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Revenue
$

 
$

 
$

 
$

 
$

 
$

Cost of revenues
(334
)
 

 
(334
)
 
22

 

 
22

Depreciation, amortization, and accretion

 

 

 

 

 

General and administrative expense
316

 

 
316

 
749

 

 
749

Other (income) expense, net

 

 

 

 

 

Pretax income (loss) from discontinued operations
18

 

 
18

 
(771
)
 

 
(771
)
Pretax income (loss) on disposal of discontinued operations
 
 
 
 

 
 
 
 
 

Total pretax income (loss) from discontinued operations
 
 
 
 
18

 
 
 
 
 
(771
)
Income tax provision (benefit)
 
 
 
 

 
 
 
 
 

Total income (loss) from discontinued operations
 
 
 
 
$
18

 
 
 
 
 
$
(771
)
    

19


Reconciliation of Major Classes of Assets and Liabilities of the Discontinued Operations to Amounts Presented Separately in the Statement of Financial Position
(in thousands)
 
June 30, 2020
 
December 31, 2019
 
Offshore Services
 
Maritech
 
Total
 
Offshore Services
 
Maritech
 
Total
Carrying amounts of major classes of assets included as part of discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Trade receivables
$

 
$

 
$

 
$

 
$

 
$

Other current assets

 

 

 

 

 

Assets of discontinued operations
$

 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Carrying amounts of major classes of liabilities included as part of discontinued operations
 
 
 
 
 
 
 
 
 
 
 
Trade payables
$
1,231

 
$

 
$
1,231

 
$
1,233

 
$

 
$
1,233

Accrued liabilities
414

 
228

 
642

 
745

 
120

 
865

Liabilities of discontinued operations
$
1,645

 
$
228

 
$
1,873

 
$
1,978

 
$
120

 
$
2,098


NOTE 8 – COMMITMENTS AND CONTINGENCIES
 
Litigation
 
We are named defendants in several lawsuits and respondents in certain governmental proceedings arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or other proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse impact on our financial condition, results of operations, or liquidity.

Contingencies of Discontinued Operations

    In early 2018, we closed the Maritech Asset Purchase and Sale Agreement with Orinoco Natural Resources, LLC ("Orinoco") that provided for the purchase by Orinoco of Maritech's remaining oil and gas properties and related assets. Shortly thereafter, we closed the Maritech Membership Interest Purchase and Sale Agreement with Orinoco that provided for the purchase by Orinoco of all of the outstanding membership interests in Maritech. As a result of these transactions, we have effectively exited the business of our former Maritech segment.

Under the Maritech Asset Purchase and Sale Agreement, Orinoco assumed all of Maritech’s decommissioning liabilities related to the leases sold to Orinoco (the “Orinoco Lease Liabilities”) and, under the Maritech Membership Interest Purchase and Sale Agreement, Orinoco assumed all other liabilities of Maritech, including the decommissioning liabilities associated with the oil and gas properties previously sold by Maritech (the “Legacy Liabilities”), subject to certain limited exceptions unrelated to the decommissioning liabilities. To the extent that Maritech or Orinoco fails to satisfy decommissioning liabilities associated with any of the Orinoco Lease Liabilities or the Legacy Liabilities, we may be required to satisfy such liabilities under third party indemnity agreements and corporate guarantees that we previously provided to the US Department of the Interior and other parties, respectively.

Pursuant to a Bonding Agreement entered into as part of these transactions (the "Bonding Agreement"), Orinoco provided non-revocable performance bonds in an aggregate amount of $46.8 million to cover the performance by Orinoco and Maritech of the asset retirement obligations of Maritech (the “Initial Bonds”) and agreed to replace, within 90 days following the closing, the Initial Bonds with other non-revocable performance bonds, meeting certain requirements, in the aggregate sum of $47.0 million (collectively, the “Interim Replacement Bonds”). Orinoco further agreed to replace, within 180 days following the closing, the Interim Replacement Bonds with a maximum of three non-revocable performance bonds in the aggregate sum of $47.0 million, meeting certain requirements (the “Final Bonds”). Among the other requirements of the Final Bonds was that they must provide coverage for all of the asset retirement obligations of Maritech instead of only relating to specific properties. In the event Orinoco did not provide the Interim Replacement Bonds or the Final Bonds, Orinoco was required to make certain cash escrow payments to us.

20



    The payment obligations of Orinoco under the Bonding Agreement were guaranteed by Thomas M. Clarke and Ana M. Clarke pursuant to a separate guaranty agreement (the “Clarke Bonding Guaranty Agreement”). Orinoco has not delivered such replacement bonds and neither it nor the Clarkes has made any of the agreed upon cash escrow payments and we filed a lawsuit against Orinoco and the Clarkes to enforce the terms of the Bonding Agreement and the Clarke Bonding Guaranty Agreement. A summary judgment was initially granted in favor of Orinoco and the Clarkes which dismissed our claims against Orinoco under the Bonding Agreement and against the Clarkes under the Clarke Bonding Guaranty Agreement. We filed an appeal and also asked the trial court to grant a new trial on the summary judgment or to modify the judgment because we believe this judgment should not have been granted. On November 5, 2019, the trial court signed an order granting our motion for new trial and vacating the prior order granting summary judgment for Orinoco and the Clarkes. The parties are awaiting direction from the court on a new scheduling order and/or trial setting. The Initial Bonds, which are non-revocable, remain in effect.

    If we become liable in the future for any decommissioning liability associated with any property covered by either an Initial Bond or an Interim Replacement Bond while such bonds are outstanding and the payment made to us under such bond is not sufficient to satisfy such liability, the Bonding Agreement provides that Orinoco will pay us an amount equal to such deficiency and if Orinoco fails to pay any such amount, such amount must be paid by the Clarkes under the Clarke Bonding Guaranty Agreement. However, if the Final Bonds or the full amount of the escrowed cash have been provided, neither Orinoco nor the Clarkes would be liable to pay us for any such deficiency. Our financial condition and results of operations may be negatively affected if Orinoco is unable to cover any such deficiency or if we become liable for a significant portion of the decommissioning liabilities.

     In early 2018, we also closed the sale of our Offshore Division to Epic Companies, LLC (“Epic Companies,” formerly known as Epic Offshore Specialty, LLC). Part of the consideration we received was a promissory note of Epic Companies in the original principal amount of $7.5 million (the “Epic Promissory Note”) payable to us in full, together with interest at a rate of 1.52% per annum, on December 31, 2019, along with a personal guaranty agreement from Thomas M. Clarke and Ana M. Clarke guaranteeing the payment obligations of Epic Companies pursuant to the Epic Promissory Note (the “Clarke Promissory Note Guaranty Agreement”). Additionally, pursuant to the Equity Interest Purchase Agreement (the “Offshore Services Purchase Agreement”) and other agreements with Epic Companies, certain other amounts relating to the Offshore Division totaling approximately $1.5 million were payable to us. At the end of August 2019, Epic Companies filed for bankruptcy. We recorded a reserve of $7.5 million for the full amount of the promissory note, including accrued interest, and the certain other receivables in the amount of $1.5 million during the quarter ended September 30, 2019. The Epic Promissory Note became due on December 31, 2019 but neither Epic nor the Clarkes made the required payment. Upon the default by Epic and the Clarkes, we filed a lawsuit against the Clarkes on January 15, 2020 in Montgomery County, Texas for breach of the Clarke Promissory Note Guaranty Agreement, seeking the amounts due under the Epic Promissory Note and related interest, as well as attorneys’ fees and expenses. The Clarkes each filed an answer and counterclaims for fraud and negligent misrepresentation and seek monetary damages in excess of $1 million, punitive damages, and attorneys’ fees. We have taken discovery from the Clarkes. Currently, the case is set for its first trial setting on October 19, 2020. We will vigorously prosecute our claim and defend against the claims by the Clarkes.
NOTE 9 – FAIR VALUE MEASUREMENTS
 
Financial Instruments

Warrants

The Warrants are valued using a Black Scholes option valuation model that includes implied volatility of the trading price (a Level 3 fair value measurement).


21


Derivative Contracts

We and CCLP each enter into short term foreign currency forward derivative contracts with third parties as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of June 30, 2020, we and CCLP had the following foreign currency derivative contracts outstanding relating to portions of our foreign operations:
Derivative Contracts
 
US Dollar Notional Amount
 
Traded Exchange Rate
 
Settlement Date

 
(In Thousands)
 

 

Forward purchase Euro
 
$
9,000

 
1.14
 
7/2/2020
Forward sale Mexican peso
 
5,292

 
22.58
 
7/2/2020

Under this program, we and CCLP may enter into similar derivative contracts from time to time. Although contracts pursuant to this program will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they are not formally designated as hedge contracts or qualify for hedge accounting treatment. Accordingly, any change in the fair value of these derivative contracts during a period will be included in the determination of earnings for that period.

The fair values of foreign currency derivative contracts are based on quoted market values (a Level 2 fair value measurement). The fair values of our and CCLP's foreign currency derivative contracts as of June 30, 2020 and December 31, 2019, are as follows:
Foreign currency derivative contracts
Balance Sheet Location
 
 Fair Value at
June 30, 2020
 
 Fair Value at
December 31, 2019

 

 
(In Thousands)
Forward purchase contracts
 
Current assets
 
$
95

 
$
86

Forward sale contracts
 
Current liabilities
 

 
(53
)
Forward purchase contracts
 
Current liabilities
 
(127
)
 
(3
)
Net asset (liability)
 
 
 
$
(32
)
 
$
30



None of our foreign currency derivative contracts contain credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the three and six months ended June 30, 2020, we recognized $0.1 million and $(0.9) million of net (gains) losses, respectively, reflected in other (income) expense, net, associated with our foreign currency derivative program. During the three and six months ended June 30, 2019, we recognized $0.2 million and $0.7 million of net (gains) losses, respectively, reflected in other (income) expense, net, associated with our foreign currency derivative program.

During the six months ended June 30, 2020, we recorded impairments of approximately $9.0 million, reflecting the decreased fair value for certain assets. The fair values used in these impairment calculations were estimated based on a market approach, which is based on significant unobservable inputs (Level 3) in accordance with the fair value hierarchy.


22


Recurring and nonrecurring fair value measurements by valuation hierarchy as of June 30, 2020 and December 31, 2019, are as follows:
 
 
 
Fair Value Measurements Using
 
Total as of
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Description
June 30, 2020
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
Midland manufacturing facility and related assets
$
19,646

 
$

 
$

 
$
19,646

Non-core used compressor equipment held for sale
2,600

 

 
 
 
2,600

Warrants liability
(123
)
 

 

 
(123
)
Asset for foreign currency derivative contracts
95

 

 
95

 

Liability for foreign currency derivative contracts
(127
)
 

 
(127
)
 

Net asset
$
22,091