Forbes Energy Services Ltd.

(Exact name of registrant as specified in its charter)

____________________________________________________________

Texas		98-0581100
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3000 South Business Highway 281 Alice, Texas		78332
(Address of principal executive offices)		(Zip Code)

---

---

•	the outcome of a vote by our stockholders on the merger proposal described in Note 20 to the consolidated financial statements;

•	satisfaction of the conditions required and successful completion of the merger proposal;

•	the effect of the continuing industry-wide downturn in and the cyclical nature of, energy exploration and development activities;

•	continuing incurrence of operating losses due to such downturn;

•	oil and natural gas commodity prices;

•	market response to global demands to curtail use of oil and natural gas;

•	capital budgets and spending by the oil and natural gas industry;

•	the ability or willingness of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels for oil;

•	oil and natural gas production levels by non-OPEC countries;

•	supply and demand for oilfield services and industry activity levels;

•	our ability to maintain stable pricing;

•	the impact on our markets of the outbreak of epidemic or pandemic disease, including COVID-19

•	possible impairment of our long-lived assets;

•	potential for excess capacity;

•	competition;

•	substantial capital requirements;

•	significant operating and financial restrictions under our loan and security agreement which provides for a term loan, or the Term Loan Agreement, excluding paid-in-kind interest;

•	technological obsolescence of operating equipment;

•	dependence on certain key employees;

•	concentration of customers;

•	substantial additional costs of compliance with reporting obligations, the Sarbanes-Oxley Act, Term Loan Agreement, Revolving Loan Agreement and the 5% Subordinated Convertible PIK Notes covenants;

•	seasonality of oilfield services activity;

•	collection of accounts receivable;

•	environmental and other governmental regulation;

•	the potential disruption of business activities caused by the physical effects, if any, of climate change;

•	risks inherent in our operations;

•	ability to fully integrate future acquisitions;

•	variation from projected operating and financial data;

•	variation from budgeted and projected capital expenditures;

---

•	volatility of global financial markets; and

•	the other factors discussed under “Risk Factors” beginning on page 10 of this Annual Report on Form 10-K.

---

PART I

Item 1.Business

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 well maintenance, completion services, workovers and recompletions, plugging and abandonment, tubing testing, fluid hauling and fluid disposal. Our operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with an additional location in Pennsylvania. We believe that our broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of our customers’ wells. Our headquarters and executive offices are located at 3000 South Business Highway 281, Alice, Texas 78332. We can be reached by phone at (361) 664-0549.

As used in this Annual Report on Form 10-K, the “Company,” “we,” and “our” mean FES Ltd. and its subsidiaries, except as otherwise indicated.

On January 22, 2017, FES Ltd. and its then domestic subsidiaries (collectively, the "Debtors"), as predecessors to the Company, filed voluntary petitions, or the Bankruptcy 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. We applied fresh start accounting upon emergence from bankruptcy on 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 consolidated financial statements from and after the Effective Date.

On November 16, 2018, we completed our acquisition of Cretic Energy Services, LLC (Cretic). Cretic provides coiled tubing services to E&P companies in the United States, primarily in the Permian Basin in Texas. The total consideration we paid for this acquisition was approximately $69.1 million in cash. We funded the Cretic acquisition with $50.0 million in proceeds from our Bridge Loan, $10.0 million addition to our Term Loan Agreement and cash on hand. We believe this acquisition has significantly enhanced our coiled tubing services and our position in the Permian Basin. See Note 5 - Acquisition of Cretic Energy Services, LLC to our Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding the acquisition of Cretic.

On December 18, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Superior Energy Services, Inc., a Delaware corporation (“Superior”), New NAM, Inc., a Delaware corporation and a newly formed, wholly owned subsidiary of Superior (“NAM”), Spieth Newco, Inc., a Delaware corporation and a newly formed, wholly owned subsidiary of the Company (“Newco”), Spieth Merger Sub, Inc., a Delaware corporation and a newly formed, wholly owned subsidiary of Newco (“NAM Merger Sub”), and Fowler Merger Sub, Inc., a Delaware corporation and a newly formed, wholly owned subsidiary of Newco (“Fowler Merger Sub”). Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the transactions contemplated in the Merger Agreement, NAM Merger Sub will merge with and into NAM (the “NAM Merger”) and Forbes Merger Sub will merge with and into the Company (the Forbes Merger, and together with the NAM Merger, the “Mergers”), with each of NAM and the Company continuing as surviving entities and wholly owned subsidiaries of Newco.

The Merger Agreement, and the transactions contemplated thereby, have been approved by the Company’s board of directors, the special committee of the Company’s board of directors, and the Superior board of directors. Newco filed a preliminary proxy statement/prospectus on February 13, 2020. In connection with the Merger Agreement, certain stockholders of the Company, including Ascribe Capital LLC and its affiliates (the “Ascribe Entities”) and Solace Capital Partners, L.P. (“Solace”), entered into voting and support agreements. The Company stockholders that are party to the voting agreements have committed to vote the shares of the Company’s common stock they beneficially own in favor of the adoption of the Merger Agreement and any other matters necessary for the consummation of the transaction contemplated by the Merger Agreement. The Ascribe Entities and Solace will beneficially own approximately 51% of the outstanding common stock of the Company as of the record date for the special meeting of the Company’s stockholders. As a result, the Ascribe Entities and Solace will have the ability to approve the Merger Agreement without the vote of any other stockholder.

The Mergers are expected to close in the second quarter of 2020, subject to the satisfaction or waiver of customary closing conditions, including approval of the Merger Agreement by the Company’s stockholders and satisfaction of certain financing conditions.

1

---

Table of Contents

We provide a wide range of services to a diverse group of companies. For the year ended December 31, 2019, we provided services to 504 companies. John E. Crisp, Steve Macek and our senior management team have cultivated deep and ongoing relationships with these customers during their average experience of over 35 years in the oilfield services industry.

We conduct our operations through the following three business segments:

•

Well Servicing. Our well servicing segment comprised 48.5% and 45.9% of our consolidated revenues for the years ended December 31, 2019 and 2018, respectively. Our well servicing segment utilizes our fleet of well servicing rigs, which at December 31, 2019 was comprised of 134 workover rigs and 7 swabbing rigs and other related assets and equipment. These assets are used to provide (i) well maintenance, including remedial repairs and removal and replacement of downhole production equipment, (ii) well workovers, including significant downhole repairs, re-completions and re-perforations, (iii) completion and swabbing activities, (iv) plugging and abandonment services, and (v) pressure testing of oil and natural gas production tubing and scanning tubing for pitting and wall thickness using tubing testing units.

•

Coiled Tubing. Our coiled tubing segment comprised 27.8% and 21.9% of our consolidated revenues for the years ended December 31, 2019 and 2018, respectively. This segment utilizes our fleet of 14 coiled tubing units, of which 11 are large diameter units (2 3/8” or larger).  These units provide a range of services accomplishing a wide variety of goals including horizontal completions, well bore clean-outs and maintenance, nitrogen services, thru-tubing services, formation stimulation using acid and other chemicals, and other pre- and post-hydraulic fracturing well preparation services.

•

Fluid Logistics. Our fluid logistics segment comprised 23.7% and 32.2% of our consolidated revenues for the years ended December 31, 2019 and 2018, respectively. Our fluid logistics segment utilizes our fleet of owned or leased fluid transport trucks and related assets, including specialized vacuum, high-pressure pump and tank trucks, hot oil trucks, frac tanks, fluid mixing tanks, salt water disposal wells and facilities, and related equipment. These assets are used to provide, transport, store, and dispose of a variety of drilling and produced fluids used in, and generated by, oil and natural gas production. These services are required in most workover and completion projects and are routinely used in daily operations of producing wells.

We believe that our three business segments are complementary and create synergies in terms of selling opportunities. Our multiple lines of service are designed to capitalize on our existing customer base to grow it within existing markets, generate more business from existing customers, and increase our operating performance. By offering our customers the ability to reduce the number of vendors they use, we believe that we help improve our customers’ efficiency. Further, by having multiple service offerings that span the life cycle of the well, we believe that we have a competitive advantage over smaller competitors offering more limited services.

The following table summarizes the number of locations and major components of our equipment fleet at December 31, 2019:

	December 31, 2019
Locations	22
Well Servicing Segment:
Workover rigs	134
Swabbing rigs	7
Other heavy trucks	12
Tubing testing units	7
Coiled Tubing Segment:
Coiled tubing units	14
Fluid Logistics Segment:
Vacuum trucks	103
Other heavy trucks	53
Frac and fluid mixing tanks	2,534
Salt water disposal wells (1)	11

(1)	At December 31, 2019, the 11 salt water disposal wells were subject to verbal or written ground leases or other operating arrangements with third parties. The above well count does not include one well that has been permitted and drilled but has not been completed.

2

---

Table of Contents

Corporate Structure

FES Ltd. was initially organized as a Bermuda exempt company on April 9, 2008. On August 12, 2011, FES Ltd. discontinued its existence as a Bermuda entity and converted into a Texas corporation, or the Texas Conversion. FES Ltd. has been and is the holding company for all of our operations. Forbes Energy Services LLC, or FES LLC, a Delaware limited liability company, is a wholly-owned subsidiary of FES Ltd. that acts as an intermediate holding company for our direct and indirect wholly-owned operating companies that have conducted our business historically: C.C. Forbes, LLC, or CCF, TX Energy Services, LLC, or TES, Forbes Energy International, LLC, or FEI, and since its acquisition effective November 16, 2018, Cretic Energy Services LLC, or CES.

Under the Plan, all of FES Ltd.’s previously outstanding equity interests, which included FES Ltd.’s prior common stock, par value $0.04 per share, or the Old Common Stock, FES Ltd.’s prior preferred stock, awards under FES Ltd.’s prior incentive compensation plans, and the preferred stock purchase rights under the rights agreement dated as of May 19, 2008, as subsequently amended on July 8, 2013, between FES Ltd. and CIBC Mellon Trust Company, as rights agent, in FES Ltd. were extinguished without recovery, FES Ltd. was "converted" to a Delaware corporation and FES Ltd. created a new class of common stock, par value $0.01 per share, or the New Common Stock.

On May 18, 2017, shares of the New Common Stock were authorized for trading on the Over-The-Counter Pink Market. On May 19, 2017, OTC Markets Group Inc. announced that the New Common Stock was qualified to trade on the OTCQX Best Market. On May 19, 2017, the New Common Stock began trading on the OTCQX Best Market under the symbol “FLSS.”

Our Competitive Position

We believe that the following competitive strengths position us well within the oilfield services industry:

•

Exposure to Revenue Streams Throughout the Life Cycle of the Well. Our maintenance and workover services give us exposure to demand from our customers throughout the life cycle of a well, from drilling through production and eventual abandonment. Each new well that is drilled provides us a potential multi-year stream of well servicing revenue, as our customers attempt to maximize and maintain a well’s productivity. Accordingly, demand for our production services is generally driven by the total number of producing wells in a region and is generally less volatile than demand for new well drilling services.

•

High Level of Customer Retention. Our top customers include many of the largest integrated and independent oil and natural gas companies operating onshore in the United States. We believe that our success comes from growing in our existing markets with existing customers due to the quality of our well servicing rigs, our personnel, and our safety record. We believe members of our senior management team have maintained excellent working relationships with our top customers in the United States with their combined experience in the oilfield services industry. We believe the complementary nature of our three business segments also helps us to retain customers because of the efficiency we offer a customer with multiple needs at the wellsite. Notably, approximately 69% of our total revenues for the year ended December 31, 2019 were from customers that utilize services in at least two 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.

•

Industry-Leading Safety Record. During the year ended December 31, 2019, we had approximately 2.2% fewer reported incidents than the industry average as published by the Bureau of Labor Statistics. We believe that our safety record and reputation are critical factors to purchasing and operations managers in their decision-making process. We have a strong safety culture based on our training programs and safety seminars for our employees and customers. For example, for several years, members of our senior management have played an integral part in joint safety training meetings with customer personnel.

•	Experienced Senior Management Team and Operations Staff. Our executive operations management team of John E. Crisp and Steve Macek have an average of 35 years each of experience within the oilfield services industry. In addition, our next level of management, which includes our division, regional and location managers, has an average of over 25 years of experience in the industry.

Our Business Strategy

Our strategy in this rapidly changing market:

•

Maintain Maximum Asset Utilization. We constantly monitor asset usage and industry trends as we strive to maximize utilization. We accomplish this through moving assets from regions with less activity to those with more activity or that are increasing in activity. We are focusing on basins that are either predominantly oil or contain natural gas with high liquids content, such as the Permian Basin in West Texas and the Eagle Ford Basin in South Texas. Drilling techniques have resulted in the need for less equipment for well completions or fewer hours for the equipment being

3

---

Table of Contents

used. This has directly impacted our utilization. In response, we continue to minimize costs by concentrating utilization in as few active assets as possible while eliminating or substantially reducing our operating expenses on the inactive assets.

•

Maintain a Presence in Proven and Established Oil and Liquids Rich Basins. We focus our operations on customers that operate in well-established basins which have proven production histories and that have maintained a high level of activity throughout various oil and natural gas pricing environments. While a substantial amount of our business is in the completion area, the majority of our business is production-related. We believe production-related services help create a more stable revenue stream, as these services are tied more to producing wells and less to drilling activity. Our experience shows that historically, production-related services tend to withstand depressed economic or industry conditions better than completion services.

•

Establish and Maintain Leadership Position in Core Operating Areas. Based on our estimates, we believe that we have a significant market share in well servicing and fluid logistics in South Texas. We strive to establish and maintain significant positions within each of our core operating areas. To achieve this goal, we maintain close customer relationships and offer high-quality services to our customers. In addition, our significant presence in our core operating areas facilitates employee retention, hiring and brand recognition.

•

Maintain a Disciplined Growth Strategy. We strategically evaluate opportunities for growth and expansion when customer demand dictates and dedicate the capital and staffing to respond. Conversely, we continually evaluate the viability and economics of our existing locations to ensure an efficient use of our management time and working capital. In some cases, this may result in closing a location or locations, reducing middle management, and reducing headcount. We believe both of these initiatives are necessary in order for the Company to be competitive in the current market environment.

Description of Business Segments

Well Servicing Segment

Our fleet of 141 well servicing rigs was comprised of 134 workover rigs and 7 swabbing rigs, as of December 31, 2019 and located in 9 areas across Texas plus 1 in Pennsylvania. This fleet allows us to provide a comprehensive offering of well services to oil and natural gas companies, including completions of newly drilled oil and natural gas wells, wellbore maintenance, workovers and recompletions, tubing testing, and plugging and abandonment services. As a result of the downturn, 28 and 81 rigs were stacked at December 31, 2019 and 2018, respectively.

Our well servicing rig fleet has an average age of less than twelve years. As part of our operational strategy, we enhanced our design specifications to improve the operational and safety characteristics of our well servicing rigs compared with some of the older well servicing rigs operated by others in the industry. These include increased derrick height and weight ratings and increased mud pump horsepower. We believe these enhanced features translate into increased demand for our equipment and services along with better pricing for our equipment and personnel. In addition, we augment our well servicing rig fleet with auxiliary equipment, such as mud pumps, power swivels, mud plants, mud tanks, blow-out preventers, lighting plants, generators, pipe racks, and tongs, which results in incremental rental revenue and increases financial performance of a typical well servicing job.

We provide the following services in our well servicing segment:

•

Completions. Utilizing our well servicing rig fleet, we perform completion services, which involve wellbore cleanout, well prepping for fracturing, drilling, setting and retrieving plugs, fishing operations, tool conveyance and logging, cementing, well unloading, casing and packer testing, pump-down plug, velocity strings, perforating, acidizing and/or stimulating a wellbore, along with swabbing operations that are utilized to clean a wellbore prior to production. Completion services are generally shorter term in nature and involve our equipment operating on a site for a period of two to three days, although some fishing jobs, which involve the recovery of equipment lost or stuck in the wellbore, can take longer.

•

Maintenance. Through our fleet of well servicing rigs, we provide for the removal and repair of sucker rods, downhole pumps, and other production equipment, repair of failed production tubing, and removal of sand, paraffin, and other downhole production-related byproducts that impair well performance. These operations typically involve our well servicing rigs operating on a wellsite for five to seven days.

•

Workovers and Recompletions. We provide workover and re-completion services for existing wellbores. These services are designed to significantly enhance production by re-perforating to initiate or re-establish productivity from an oil or natural gas wellbore. In addition, we provide major downhole repairs such as casing repair, production tubing replacement, and deepening and sidetracking operations used to extend a wellbore laterally or vertically. These operations are typically longer term in nature and involve our well servicing rigs operating on a wellsite for one to two weeks at a time.

4

---

Table of Contents

•

Tubing Testing. Our downhole tubing testing services allow operators to verify tubing integrity. Tubing testing services are performed as production tubing is run into a new wellbore or on older wellbores as production tubing is replaced during a workover operation. In addition to our downhole testing units, our electromagnetic scan trucks scan tubing while out of the wellbore. This scanning function provides key operational information related to corrosion pitting, holes and splits, and wall loss on tubing. Tubing testing services complement our other service offerings and provide a significant opportunity for cross-selling.

•

Plugging and Abandonment. Our well servicing rigs are also used in the process of permanently closing oil and natural gas wells that are no longer capable of producing in economic quantities, become mechanically impaired or are dry holes. Plugging and abandonment work can be performed with a well servicing rig along with wireline and cementing equipment; however, this service is typically provided by companies that specialize in plugging and abandonment work. Many well operators bid this work on a “lump sum” basis to include the sale or disposal of equipment salvaged from the well as part of the compensation received.

Coiled Tubing Segment

Our fleet of 14 coiled tubing units is comprised of 11 large diameter units (2 3/8” and larger) and three smaller diameter units.  Seven of the large diameter units were acquired with the acquisition of Cretic as disclosed in Note 5 - Acquisition of Cretic Energy Services, LLC. Our high capacity fleet can accommodate optimally designed work strings that are the size and length to efficiently meet the long lateral requirements in the most challenging well bores. The units are utilized in a wide range of well completion and intervention operations. The services offered are customized to the customer's job specific requirements. Our coiled tubing fleet has an average age of less than 8 years.

We provide the following services in our coiled tubing segment:

•

Completions. Utilizing our coiled tubing fleet, we perform completion services, which involve wellbore cleanout, well prepping for fracturing, fishing operations, tool conveyance and logging, cementing, well unloading, casing and packer testing, pump-down plug, velocity strings, perforating, acidizing and/or stimulating a wellbore. Completion services are generally shorter term in nature and involve our equipment operating on a site for a period of two to three days, although some fishing jobs, which involve the recovery of equipment lost or stuck in the wellbore, can take longer.

•	Maintenance. Through our fleet of coiled tubing units, we provide for removal of scale, sand, paraffin, and other downhole production-related byproducts that impair well performance. These operations typically involve our coiled tubing equipment operating on a wellsite for five to seven days.

•

Workovers and Recompletions. We provide workover and recompletion services for existing wellbores. These services are designed to significantly enhance production by re-perforating to initiate or re-establish productivity from an oil or natural gas wellbore. These operations are typically longer term in nature and involve our coiled tubing units operating on a wellsite for one to two weeks at a time.

Fluid Logistics Segment

Our fluid logistics segment provides an integrated array of oilfield fluid sales, transportation, storage, and disposal services that are required on most workover, drilling, and completion projects and are routinely used in daily operations of producing wells by oil and natural gas producers. We have a substantial operational footprint with 12 fluid logistics locations across Texas as of December 31, 2019, and an extensive fleet of transportation trucks, high-pressure pump trucks, hot oil trucks, frac tanks, fluid mixing tanks and salt water disposal wells. This combination of services enables us to provide a one-stop source for oil and natural gas companies. Although there are some large operators in our areas with whom we compete, we believe that the vast majority of our smaller competitors in this segment can provide some, but not all, of the equipment and services required by customers, thereby requiring our customers to use several companies to meet their requirements and increasing their administrative burden. In addition, by pursuing an integrated approach to service, we experience increased asset utilization rates, as multiple assets are usually required to service a customer.

We provide the following services in our fluid logistics segment:

•

Fluid Hauling. As of December 31, 2019, we owned 103 fluid service vacuum trucks, trailers, and other hauling trucks equipped with a fluid hauling capacity of up to 150 barrels per unit, with most of the units having a capacity of 130 barrels. As a result of the industry downturn, 17 trucks and trailers were stacked at December 31, 2019. Each fluid service truck unit is equipped to pump fluids from or into wells, pits, tanks, and other on-site storage facilities. The majority of our fluid service truck units are also used to transport water to fill frac tanks on well locations, including frac tanks provided by us and others, to transport produced salt water to disposal wells, including injection wells owned and/or operated by us, and to transport drilling and completion fluids to and from well locations. In conjunction with frac tank rentals, we use fluid service trucks to transport water for use by our customers in fracturing operations. Following completion of fracturing operations by our customers, our fluid service trucks are used to transport the

5

---

Table of Contents

flowback produced as a result of the fracturing operations from the wellsite to disposal wells. We also operate several hot oil trucks which are capable of providing heated water and oil for use in well and pipe maintenance.

•

Disposal Services. Most oil and natural gas wells produce varying amounts of salt water throughout their productive lives. Under Texas law, oil and natural gas waste and salt water produced from oil and natural gas wells are required to be disposed of in authorized facilities, including permitted salt water disposal wells. Disposal, or injection, wells are licensed by state authorities and are completed in permeable formations below the fresh water table. As of December 31, 2019, we operated 11 disposal wells in 10 locations across Texas, with an aggregate injection capacity of approximately 101,000 barrels per day. The wells are permitted to dispose of salt water and incidental non-hazardous oil and natural gas wastes throughout our operational bases in Texas. It is our intent to locate salt water disposal wells in close proximity to the producing wells of our customers. Although, in the normal course of production development, it is not uncommon for drilling and production activity to migrate closer to or farther away from our disposal wells. We maintain separators at all of our disposal wells that permit us to reclaim residual crude oil that we sell.

•

Equipment Rental. As of December 31, 2019, we owned a fleet of 2,534 fluid storage tanks that can store up to 500 barrels of fluid each. This equipment is used by oilfield operators to store various fluids at the wellsite, including fresh water, brine and acid for frac jobs, flowback, temporary production, and drilling fluids. We transport the tanks with our trucks to well locations that are usually within a 75-mile radius of our nearest location. Frac tanks are used during all phases of the life of a producing well. A typical fracturing operation conducted by a customer can be completed within four days using five to 40 or more frac tanks. Average age of our equipment is approximately eight years.

•

Fluid Sales. We sell and transport a variety of chemicals and fluids used in drilling, completion, and workover operations for oil and natural gas wells. Although this is a relatively small percentage of our overall business, the provision of these chemicals and fluids increases utilization of and enhances revenues from the associated equipment. Through these services, we provide fresh water used in fracturing fluid, completion fluids, cement, and drilling mud. In addition, we provide potassium chloride for completion fluids, brine water, and water-based drilling mud.

Financial Information about Segments and Geographic Areas

See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 15 to our Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding financial information by segment and geographic location.

Seasonality and Cyclical Trends

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

In addition, the oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices. This volatility has increased in recent periods, including the recent outbreak of COVID-19. 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.

Sales Organization

Our sales structure is primarily decentralized where each of our business regions cultivates and maintains relationships with customer representatives who manage operations in their respective regions. At the regional level, management maintains relationships with key personnel in the operators' branch or division offices and in each business unit function. In the field, regional managers, yard managers and supervisors are the primary point of contact for sales to operator field representatives. At the corporate level, our Chief Executive Officer and Director of Business Development work with account managers who are assigned to our larger customers, act as liaison between customer contacts, including purchasing managers and the appropriate contacts within each function of the Forbes organization. Sales representatives typically serve multiple roles and in that way are involved in most aspects of the sales cycle, from order fulfillment to billing. Our customers represent both large and small independent oil and natural gas companies that are largely managed at the field level, and depending on the structure, have corporate procurement groups also coordinating supply chain decisions. These corporate procurement groups are the primary focus of our designated sales personnel. We cross-market our well servicing rigs, coiled tubing units and our fluid logistics services, thereby offering our customers the ability to minimize vendors, which we believe improves the efficiency of our customers. This is demonstrated by

6

---

Table of Contents

the fact that approximately 69% of our revenues for the year ended December 31, 2019 were from customers that utilized services of two or more of our business segments.

Employees

As of December 31, 2019, we had 786 employees.

We provide comprehensive employee training and implement recognized standards for health and safety. None of our employees are represented by a union or employed pursuant to a collective bargaining agreement or similar arrangement. We have not experienced any strikes or work stoppages, and we believe we have good relations with our employees.

Continued retention of existing qualified management and field employees and availability of additional qualified management and field employees will be a critical factor in our continued success as we work to ensure that we have adequate levels of experienced personnel to service our customers.

Competition

Our competition includes small regional service providers as well as larger companies with operations throughout the continental United States and internationally. Our larger competitors are Basic Energy Services, Inc., Superior Energy Services, Inc., Key Energy Services, Inc., C&J Energy Services, Inc., and Stallion Oilfield Services, Ltd. Because of their size, we believe these companies market a large portion of their work to the major oil and natural gas companies. In addition to rates, we compete primarily on the basis of the age and quality of our equipment, our safety record, the quality and expertise of our employees, and our responsiveness to customer needs.

Customers

We served 504 customers for the year ended December 31, 2019. For the year ended December 31, 2019, our largest customer comprised approximately 10% of our total revenues; our five largest customers comprised approximately 36% of our total revenues; and our ten largest customers comprised approximately 45% of our total revenues. During the year ended December 31, 2019, our largest customer Chesapeake Energy comprised approximately 10% of our total revenues, respectively. The loss of our largest customer or of several of the customers in the top ten would materially adversely affect our revenues and results of operations. There can be no assurance that lost revenues could be replaced in a timely manner or at all.

We have master service agreements in place with most of our customers, under which jobs or projects are awarded on the basis of price, type of service, location of equipment, and the experience level of work crews. Our business segments charge customers by the hour, by the day, or by the project for the services, equipment, and personnel we provide.

Suppliers

We purchase well servicing chemicals, drilling fluids, and related supplies from various third-party suppliers. Although we do not have written agreements with any of our suppliers (other than leases with respect to certain equipment), we have not historically suffered from an inability to purchase or lease equipment or purchase raw materials.

Insurance

Our operations are subject to risks inherent in the oilfield services industry, such as equipment defects, malfunctions, failures and natural disasters. In addition, hazards such as unusual or unexpected geological formations, pressures, blow-outs, fires or other conditions may be encountered in drilling and servicing wells, as well as the transportation of fluids and our assets between locations. We have obtained insurance coverage against certain of these risks which we believe is customary in the industry. We have $100 million of liability coverage. Our general liability policy is self-insured up to $2 million for each occurrence. We also make estimates and accrue for amounts related to deductibles or self-insured retentions. Such insurance is subject to coverage limits and exclusions and may not be available for all of the risks and hazards to which we are exposed. In addition, no assurance can be given that such insurance will be adequate to cover our liabilities or will be generally available in the future or, if available, that premiums will be commercially justifiable. If we incur substantial liability and such damages are not covered by insurance or are in excess of policy limits, or if we incur such liability at a time when we are not able to obtain liability insurance, our business, results of operations, and financial condition could be materially and adversely affected.

Environmental Regulations

Our operations are subject to various federal, state and local laws and regulations in the United States pertaining to health, safety, and the environment. Laws and regulations protecting the environment have become more stringent over the years, and in certain circumstances may impose strict, joint and several liability, rendering us potentially liable for environmental damage without regard to negligence or fault on our part and for environmental response costs for which others have contributed. Moreover, cleanup costs, penalties, and other damages arising as a result of new, or changes to existing environmental laws and regulations could be substantial and could have a material adverse effect on our financial condition, results of operations, and cash flows. We

7

---

Table of Contents

believe that we conduct our operations in substantial compliance with current federal, state, and local requirements related to health, safety and the environment. There were no known material environmental liabilities at December 31, 2019 and 2018.

The following is a summary of the more significant existing environmental, health, and safety laws and regulations to which our operations are subject and for which compliance may have a material adverse effect on our results of operation or financial position. See Item 1A of this Annual Report for further details on the following: Risk Factors— Due to the nature of our business, we may be subject to environmental liability.

Hazardous Substances and Waste

The Comprehensive Environmental Response, Compensation, and Liability Act, as amended, or CERCLA, and comparable state laws in the United States impose liability without regard to fault or the legality of the original conduct on certain defined persons, including current and prior owners or operators of the site where a release of hazardous substances occurred and entities that disposed or arranged for the disposal of the hazardous substances found at the site and entities that selected and transported the hazardous substances to the site. Under CERCLA, these responsible persons may be assigned strict joint and severed liability for the costs of cleaning up the hazardous substances, for damages to natural resources, and for the costs of certain health studies. In the course of our operations, we handle materials that are regulated as hazardous substances and, as a result, may incur CERCLA liability for cleanup costs. Because of the expansive definition of "responsible parties" under CERCLA, we could be held liable for releases of hazardous substances that resulted from third party operations not under our control or for releases related to practices performed by us or others that were industry standard and in compliance with existing laws and regulations. Also, claims may be filed for personal injury and property damage allegedly caused by the release of or exposure to hazardous substances or other pollutants.

We also handle solid wastes that are subject to the requirements of the Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes. Certain materials generated in the exploration, development, or production of crude oil and natural gas are excluded from RCRA’s hazardous waste regulation under RCRA Subtitle C, but may be subject to regulation as a solid waste under RCRA Subtitle D. Moreover, these wastes, which include wastes currently generated during our operations, could be designated as “hazardous wastes” in the future and become subject to more rigorous and costly disposal requirements. Any such changes in the laws and regulations could have a material adverse effect on our operating expenses.

Although we have used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been released at properties owned or leased by us now or in the past, or at other locations where these hydrocarbons and wastes were taken for treatment or disposal. Under CERCLA, RCRA and analogous state laws, we could be required to clean up contaminated property (including contaminated groundwater), perform remedial activities to prevent future contamination, pay for associated natural resource damages, or pay significant monetary penalties for such releases.

Water Discharges

We operate facilities that are subject to requirements of the Clean Water Act, as amended, or CWA, and analogous state laws that impose restrictions and controls on the discharge of pollutants into navigable waters. Pursuant to these laws, permits must be obtained to discharge pollutants into state waters or waters of the United States, including to discharge storm water runoff from certain types of facilities. Spill prevention, control, and countermeasure requirements under the CWA require implementation of measures to help prevent the contamination of navigable waters in the event of a hydrocarbon spill. The CWA can impose substantial civil and criminal penalties for non-compliance. We believe that our disposal and equipment cleaning facilities are in substantial compliance with CWA requirements.

Air Emissions

Our facilities and operations are also subject to regulation under the Clean Air Act (CAA) and analogous state and local laws and regulations for air emissions. Changes in and scheduled implementation of these laws could lead to the imposition of new air pollution control requirements for our operations. Therefore, we may incur future capital expenditures to upgrade or modify air pollution control equipment or come into compliance where needed. The EPA promulgated new source performance standards regulating methane emissions from the oil and gas sector in June 2016. These regulations require a reduction in methane emissions from new and modified infrastructure and equipment in the oil and gas sector, including the drilling of new wells, by up to 45% from 2012 levels by the year 2025. The Trump Administration has rolled back the methane standards in 2019. We believe that our operations are in substantial compliance with CAA requirements.

Employee Health and Safety

We are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or OSHA, and comparable state laws that regulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used or produced in our operations be maintained and provided to employees, state and local government authorities, and citizens. In addition, OSHA requires that certain safety measures such as hazard controls and

8

---

Table of Contents

employee training be implemented to prevent employee exposure to safety and health hazards and dangerous conditions at oil and gas sites. We believe that our operations are in substantial compliance with OSHA requirements.

Climate Change Regulation

Continued political attention to issues concerning climate change, the role of human activity in it, and potential mitigation through regulation could have a material impact on our operations and financial results. International agreements and national or regional legislation and regulatory measures to limit greenhouse emissions are currently in various stages of discussion or implementation. These and other greenhouse gas emissions-related laws, policies, and regulations may result in substantial capital, compliance, operating and maintenance costs. Material price increases or incentives to conserve or use alternative energy sources could reduce demand for services that we currently provide and adversely affect our operations and financial results. The ultimate financial impact associated with compliance with these laws and regulations is uncertain and is expected to vary depending on the laws enacted in each jurisdiction, our activities in those jurisdictions and market conditions.

Other Laws and Regulations

We operate salt water disposal wells that are subject to the CWA, Safe Drinking Water Act, and state and local laws and regulations, including those established by the EPA’s Underground Injection Control Program which establishes the minimum program requirements. Our salt water disposal wells are located in Texas, which requires us to obtain a permit to operate each of these wells. We have such permits for each of our operating salt water disposal wells. The Texas regulatory agency may suspend, modify, or terminate any of these permits if such well operation is likely to result in pollution of fresh water, substantial violation of permit conditions or applicable rules, contributes to seismic activity or leaks to the environment. We maintain insurance against some risks associated with our well service activities, but there can be no assurance that this insurance will continue to be commercially available or available at premium levels that justify its purchase by us. The occurrence of a significant event that is not fully insured or indemnified could have a materially adverse effect on our financial condition and operations. In addition, hydraulic fracturing practices have come under increased scrutiny in recent years as various regulatory bodies and public interest groups investigate the potential impacts of hydraulic fracturing on fresh water sources. Risks associated with potential regulation of hydraulic fracturing are discussed in more detail under Item 1A. Risk Factors: Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased cost and additional operating restrictions or delays.

Available Information

Information regarding Forbes Energy Services Ltd. and its subsidiaries can be found on our website at http://www.forbesenergyservices.com. We make available on our website, free of charge, access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to the foregoing, as well as other documents that we file or furnish to the Securities and Exchange Commission, or the SEC, in accordance with Sections 13 or 15(d) of the Exchange Act as soon as reasonably practicable after these reports have been electronically filed with, or furnished to, the SEC. We also post copies of any press releases we issue on our website. We intend to use our website as a means of disclosing material non-public information and for complying with disclosure obligations under Regulation FD. Such disclosures will be included on our website under the heading “Investor Relations.” Accordingly, investors should monitor such portion of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. Information filed with the SEC may be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically. Our Third Amended and Restated Employee Code of Business Conduct and Ethics (which applies to all employees, including our Chief Executive Officer and Chief Financial Officer), Second Amended and Restated Code of Business Conduct and Ethics for Members of the Board of Directors (the "Board") and the charters for our Audit, Nominating/Corporate Governance and Compensation Committees, can all be found on the Investor Relations page of our website under “Corporate Governance.” We intend to disclose any changes to or waivers from the Third Amended and Restated Employee Code of Business Conduct and Ethics that would otherwise be required to be disclosed under Item 5.05 of Form 8-K on our website. We will also provide printed copies of these materials to any shareholder upon request to Forbes Energy Services Ltd., Attn: Chief Financial Officer, 3000 South Business Highway 281, Alice, Texas 78332. The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the Commission.

9

---

Table of Contents

Item 1A.	Risk Factors

The following information describes certain significant risks and uncertainties inherent in our business. You should take these risks into account when evaluating us. This section does not describe all risks applicable to us, our industry or our business, and it is intended only as a summary of known material risks that are specific to the Company. You should carefully consider such risks and uncertainties together with the other information contained in this Form 10-K. If any of such risks or uncertainties actually occurs, our business, financial condition or operating results could be harmed substantially and could differ materially from the plans and other forward-looking statements included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K and elsewhere herein.

RISKS RELATING TO THE FORBES MERGER

There can be no assurances when or if the Mergers will be completed.

Although we expect to complete the Mergers in the second quarter of 2020, there can be no assurances as to the exact timing of completion of the Mergers or that the Mergers will be completed at all. The completion of the Mergers is subject to customary approvals and conditions, many of which are outside of our control. Furthermore, there can be no assurance that the conditions required to complete the Mergers will be satisfied or waived on the anticipated schedule, or at all. If the Merger Agreement is terminated under certain circumstances, we may be obligated to pay Superior a termination fee.

Company stockholders will experience a reduction in percentage ownership and voting power in Newco as a result of the Mergers.

Company stockholders will experience a substantial reduction in their percentage ownership interests and effective voting power in respect of Newco relative to their percentage ownership interests in the Company prior to the Mergers. Consequently, Company stockholders should expect to exercise less influence over the management and policies of Newco following the Mergers than they currently exercise over the management and policies of the Company.

The Forbes Merger may trigger certain “change of control” provisions and other restrictions in contracts of the Company and the failure to obtain any required consents or waivers could adversely impact Newco.

Certain agreements of the Company will or may require the consent or waiver of one or more counterparties in connection with the Forbes Merger. The failure to obtain any such consent or waiver may permit such counterparties to terminate, or otherwise increase their rights or the Company’s obligations under, any such agreement because the Forbes Merger may violate an anti-assignment, change of control or similar provision relating to any of such transactions. If this occurs, the Company may have to seek to replace that agreement with a new agreement or seek an amendment to such agreement. The Company cannot assure you that it will be able to replace or amend any such agreement on comparable terms or at all. If any such agreement is material, the failure to obtain consents, amendments or waivers under, or to replace on similar terms or at all, any of these agreements could adversely affect the financial performance or results of operations of Newco following the Mergers.

If the Mergers do not close, Forbes will not benefit from the expenses incurred in its pursuit.

The Mergers may not be completed. If the Mergers are not completed, the Company will have incurred substantial expenses for which no ultimate benefit will have been received. The Company has incurred out-of-pocket expenses in connection with the Mergers for investment banking, legal and accounting fees and other related charges, much of which will be incurred even if the Mergers are not completed.

The termination of the Merger Agreement, or failure to otherwise complete the Mergers, could negatively impact the Company, including impairing its ability to continue as a going concern.

If the Merger Agreement is terminated, or the Company fails to complete the Mergers, there may be various consequences, including that the Company’s business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Mergers, without realizing any of the anticipated benefits of completing the transaction.

The Company has incurred substantial net losses and losses from operations for the years ended December 31, 2019 and 2018. As of December 31, 2019, the Company had cash and cash equivalents of approximately $5.2 million and positive working capital of approximately $9.2 million, after taking into account that the mandatorily convertible notes of $58.6 million will not result in a cash settlement. While the Company has access to a working capital facility that is based on the Company’s accounts receivable, as of December 31, 2019, only $4.1 million was available to borrow under such facility. The Company’s Revolving Loan is also due January 2021. Recent negotiations to extend the maturity date have not been successful and there can be no assurance that the Company will be able to negotiate an extension on the current Revolving Loan or have sufficient funds to repay such obligations when they come due. In addition, the Company has outstanding $58.6 million of mandatorily convertible PIK notes due November 30, 2020 (the “PIK Notes”), but does not at present have sufficient authorized common share capital to fully convert the PIK Notes upon maturity or other mandatory conversion event, such as change in control. In addition, the Company may not have access to other sources of external capital on reasonable terms or at all. We also expect to experience continued volatility in market demand

10

---

Table of Contents

which create normal oil and gas price fluctuations as well as external market pressures due to effects of global health concerns such as the recent outbreak of COVID-19 and the precipitous decline in oil prices that are not within our control. As a result of these and other factors, there is substantial doubt that the Company will be able to continue as a going concern. If the Mergers are not completed, these concerns will be heightened, and there can be no assurance that alternative strategic plans will provide sufficient liquidity for the Company to continue its operations.

In addition, a termination of the Merger Agreement or any failure to otherwise complete the Mergers may result in various consequences, including the following:

•	our business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Mergers, without realizing any of the anticipated benefits of completing the Mergers.

•	our management has and will continue to expend a significant amount of capital and time and resources on the Mergers, and a failure to consummate the Mergers as currently contemplated could have a material adverse effect on our business and results of operations;

•	the market price of our common stock may decline to the extent that the market price prior to the closing of the Mergers reflects a market assumption that the Mergers will be completed;

•	we may be required, under certain circumstances, to pay Superior a termination fee equal to $1.0 million under the Merger Agreement, which could adversely affect our financial condition and liquidity; and

•	negative reactions from the financial markets may occur if the anticipated return on our investment in Newco is not realized.

If the Mergers are not consummated, we cannot assure our stockholders that the risks described above will not negatively impact our business or financial results.

We are subject to business uncertainties with respect to our operations until the Mergers close.

In connection with the pendency of the Mergers, it is possible that some customers, suppliers and other persons with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with us, as the case may be, as a result of the Mergers, which could negatively affect our revenues, earnings and cash flows, as well as the market price of our common stock, regardless of whether the Mergers are completed. Such risks may be exacerbated by delays or other adverse developments with respect to the completion of the Mergers.

Uncertainties associated with the Mergers may distract management personnel and other key employees and divert their attention away from growing our business, which could adversely affect our future business and operations.

We are dependent on the experience and industry knowledge of our officers and other key employees to execute our business plans. Prior to completion of the Mergers, as a result of our expected management changes, our current and prospective employees may experience uncertainty about their roles following the completion of the Mergers, which may have an adverse effect on our ability to attract or retain key management and other key personnel.

Potential litigation against us or Superior could result in an injunction preventing the completion of the Mergers or a judgment resulting in the payment of damages.

Stockholders of our company and/or Superior may file lawsuits against us or Superior, respectively, and/or the directors and officers of such companies in connection with the Mergers. As of the date of this filing, there have been no such lawsuits filed against either Superior or us. However, if filed in the future, these lawsuits could prevent or delay the completion of the Mergers and result in significant costs to us, including any costs associated with the indemnification of directors and officers. The defense or settlement of any lawsuit or claim against us that remains unresolved at the time the Mergers is completed may adversely affect our business, financial condition, results of operations and cash flows.

Some of our executive officers have interests in the Mergers that are different from the interests of our stockholders generally.

Some of our executive officers have interests in the Mergers that are different from, or are in addition to, the interests of our stockholders generally. These interests may include vesting of their equity awards in connection with the consummation of the Mergers.

If the Mergers are completed, we may not achieve the anticipated benefits.

The success of Newco, in its combination of the Superior U.S. Business with our business as a result of the Mergers, will depend, in part, on Newco’s ability to realize the anticipated benefits and cost savings from combining the Superior U.S. Business with the Company’s business. There can be no assurance that the Superior U.S. Business and the Company will be able to successfully integrate, which may negatively impact our combination with the Superior U.S. Business. Difficulties in integrating the Superior U.S. Business and the Company may result in Newco performing differently than expected, in operational challenges, or in the failure to realize anticipated expense-related efficiencies that may have a negative impact on integration of Newco.

11

---

Table of Contents

RISKS RELATING TO OUR BUSINESS

The industry in which we operate is highly volatile and dependent on domestic spending by the oil and natural gas industry, and continued and prolonged reductions in oil and natural gas prices and in the overall level of exploration and development activities may further reduce our levels of utilization, demand for our services, or pricing for our services.

The levels of utilization, demand, pricing, and terms for oilfield services in our existing or future service areas largely depend upon the level of exploration and development activity for both crude oil and natural gas in the United States. Oil and natural gas industry conditions are influenced by numerous factors over which we have no control, including oil and natural gas prices, expectations about future oil and natural gas prices, levels of supply and consumer demand, the cost of exploring for, producing and delivering oil and natural gas, the expected rates of current production, the discovery rates of new oil and natural gas reserves, available pipeline and other oil and natural gas transportation capacity, political instability in oil and natural gas producing countries, merger and divestiture activity among oil and natural gas producers, political, regulatory and economic conditions, and the ability of oil and natural gas companies to raise equity capital or debt financing. Any addition to, or elimination or curtailment of, government incentives for companies involved in the exploration for and production of oil and natural gas could have a significant effect on the oilfield services industry in the United States.

Our operations may be materially affected by severe weather conditions, such as hurricanes, drought, or extreme temperatures. Such events could result in evacuation of personnel, suspension of operations or damage to equipment and facilities. Damage from adverse weather conditions could result in a material adverse effect on our financial condition, results of operations and cash flows.

Beginning in October 2014 and through the first half of 2017, oil prices worldwide dropped significantly. While market conditions generally improved somewhat in the second half of 2017 and continued through the beginning of 2019, oil prices dropped precipitously in the first quarter of 2020. Continued unusually low or significant further reduction in commodity prices could cause the cancellation or curtailment of additional drilling programs and the lowering of production spending on existing wells in the future. Lower oil and natural gas prices could also cause our customers to seek to terminate, renegotiate, or fail to honor our service contracts.

A continued and prolonged reduction in the overall level of exploration and development activities, whether resulting from changes in oil and natural gas prices or otherwise, could materially and adversely affect us by negatively impacting:

•	our revenues, cash flows and profitability;

•	the fair market value of our equipment fleet;

•	our ability to maintain or increase our borrowing capacity;

•	our ability to obtain additional capital to finance our business and make acquisitions, and the cost of that capital;

•	the collectability of our receivables; and

•	our ability to retain skilled personnel whom we would need in the event of an upturn in the demand for our services.

The ongoing decrease in utilization, demand for our services and pricing 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.

Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern, and our continued existence is dependent upon our ability to successfully execute our business plan.

The financial statements included with this report are presented under the assumption that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern, such as incurring substantial net losses and losses from operations for the years ended December 31, 2019 and 2018. As of December 31, 2019, the Company had cash and cash equivalents of approximately $5.2 million. While the Company has access to a working capital facility that is based on the Company’s accounts receivable, as of December 31, 2019, $4.1 million was available to borrow under such facility. The Company’s Revolving Loan is due January 2021, which is within the 12-month going concern evaluation period. Current negotiations to extend the maturity date have not been successful and there can be no assurance that the Company will be able to negotiate an extension on the current Revolving Loan or have sufficient funds to repay such obligations when they come due. As of December 31, 2019, the outstanding balance on the Revolving Loan is $4.0 million. An additional uncertainty for the Company relates to the possibility, absent the approval by the Company’s stockholders of an amendment to its certificate of incorporation, that there will not be sufficient authorized common shares to fully convert the $58.6 million accrued amount of PIK notes. In addition, the Company may not have access to other sources of external capital on reasonable terms or at all. We also expect to continue to experience volatility in market demand which create normal oil and gas price fluctuations as well as external market pressures due to effects of global health concerns such as COVID-19 and the recent oil price war triggered by Russia and Saudi Arabia, that are not within our control. The financial statements do not include any adjustments that might result from the outcome of this uncertainties.

12

---

Table of Contents

Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry.

A prolonged economic slowdown or recession in the United States, adverse events relating to the energy industry or regional, national and global economic conditions and factors, particularly a further or renewed slowdown in the oil and gas industry, could negatively impact our operations and therefore adversely affect our results. The risks associated with our business are more acute during periods of economic slowdown or recession because such periods may be accompanied by decreased exploration and development spending by our customers, decreased demand for oil and gas and decreased prices for oil and gas. The recent outbreak of COVID-19 has also resulted in increased volatility in financial and commodity markets, as well as decreased prices for oil and gas as a result of suspension of certain travel and industrial activity.

We extend credit to our customers which presents a risk of non-payment.

A substantial portion of our accounts receivable are with customers involved in the oil and natural gas industry, whose revenues are also affected by fluctuations in oil and natural gas prices, including the substantial decline in oil prices in recent periods. Collection of some of these receivables will be more difficult, and due to economic factors affecting this industry, we may experience an increase in uncollectible accounts. Failure to collect a significant level of receivables from one or more customers could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The market for oil and natural gas may be adversely affected by global demands to curtail use of such fuels.

Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas and technological advances in fuel economy and energy generation devices could reduce the demand for oil and other liquid hydrocarbons. We cannot predict the effect of changing demand for oil and natural gas products, and any major changes may have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may be unable to maintain or increase pricing on our core services.

We may periodically seek to increase the prices on our services to offset rising costs or to generate higher returns for our stockholders. However, we operate in a very competitive industry and, as a result, we are not always successful in raising or maintaining our existing prices. Additionally, during periods of increased market demand, a significant amount of new service capacity may enter the market, which also puts pressure on the pricing of our services and limits our ability to increase prices.

Even when we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset such rising costs. In periods of high demand for oilfield services, a tighter labor market may result in higher labor costs. During such periods, our labor costs could increase at a greater rate than our ability to raise prices for our services. Also, we may not be able to successfully increase prices without adversely affecting our activity levels. The inability to maintain or increase our pricing as costs increase could have a material adverse effect on our business, financial position, and results of operations.

Our customer base is concentrated within the oil and natural gas production industry and loss one or more significant customers could cause our revenue to decline substantially.

We served 504 customers for the year ended December 31, 2019. For the year ended December 31, 2019, our largest customer Chesapeake Energy comprised approximately 10% of our total revenues; our five largest customers comprised approximately 36% of our total revenues; and our ten largest customers comprised approximately 45% of our total revenues, respectively. Our top 100 customers amounted to approximately 92% of total revenues for the year ended December 31, 2019. The loss of our top customer or of several of our top customers would adversely affect our revenues and results of operations. We may be able to replace customers lost with other customers, but there can be no assurance that lost revenues could be replaced in a timely manner with the same margins or, perhaps, at all.

Our Term Loans, PIK Notes, and operating lease commitments could restrict our operations and make us more vulnerable to adverse economic conditions.

As of December 31, 2019, our long-term debt, including current portions, net of debt discount, was $134.7 million and our commitment for operating leases was $6.2 million. In the event a decline in activity is encountered, our level of indebtedness and lease payment obligations may adversely affect operations and limit our growth. Our level of indebtedness and lease payment obligations may affect our operations in several ways, including the following:

•	by increasing our vulnerability to general adverse economic and industry conditions;

•	due to the fact that the covenants that are contained in the Term Loan Agreement limit our ability to borrow funds, dispose of assets, pay dividends and make certain investments;

•	due to the fact that any failure to comply with the covenants of the Term Loan Agreement (including failure to make the required interest payments) could result and has in the past resulted in an event of default under the Term Loan Agreement,

13

---

Table of Contents

which, if not remedied, would result in all outstanding indebtedness due under the Term Loan Agreement becoming immediately due and payable;

•	due to the fact that our level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, or other general corporate purposes.

We cannot assure you that our business will generate sufficient cash flow from operations to enable us to make payments with respect to our indebtedness and lease commitments as they become due. If we fail to generate sufficient cash flow from future operations to meet any such obligations, we may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any debt that we have incurred or may incur in the future on attractive terms, commercially reasonably terms, or at all. Our future operating performance and our ability to service, extend or refinance any indebtedness will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. Our inability to generate sufficient cash flows to satisfy our debt and leasing obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our business, financial condition and operating results. If we cannot make scheduled payments on our indebtedness, we would be in default, which could result in an acceleration of any such indebtedness, the termination of lenders’ commitments to loan money and, in the case of secured indebtedness, allow the applicable lenders to foreclose against the assets securing such indebtedness.

These restrictions could have a material adverse effect on our business, financial position, results of operations, and cash flows, and the ability to satisfy the obligations under the Term Loan Agreement. Accordingly, an event of default could result in all or a portion of our outstanding debt under our debt agreements becoming immediately due and payable. If this occurred, we might not be able to obtain waivers or secure alternative financing to satisfy all of our obligations simultaneously, which would adversely affect our business and operations.

Impairment of our long-term assets may adversely impact our financial position and results of operations.

We have recorded asset impairment charges in the past, as well as during the year ended December 31, 2019. We periodically evaluate our long-lived assets, including our property and equipment, and intangible assets. In performing these assessments, we project future cash flows on an undiscounted basis for long-lived assets and compare these cash flows to the carrying amount of the related assets. These cash flow projections are based on our current operating plans, estimates and judgmental assumptions. We perform the assessment of potential impairment for our property and equipment and intangibles whenever facts and circumstances indicate that the carrying value of those assets may not be recoverable due to various external or internal factors. In such event, if we determine that our estimates of future cash flows were inaccurate or our actual results are materially different from what we have predicted, we could record additional impairment charges in future periods, which could have a material adverse effect on our financial position and results of operations.

The industry in which we operate is highly competitive.

The oilfield services industry is highly competitive and we compete with a substantial number of companies, some of which have greater technical and financial resources than we have. Examples of our larger competitors performing both well servicing and fluid logistics are Basic Energy Services, Inc., Superior Energy Services, Inc., Key Energy Services, Inc., and C&J Energy Services, Inc. Our largest competitor that competes with our fluid logistics segment is Stallion Oilfield Services, Ltd. Our ability to generate revenues and earnings depends primarily upon our ability to win bids in competitive bidding processes and to perform awarded projects within estimated times and costs. There can be no assurance that competitors will not substantially increase the resources devoted to the development and marketing of products and services that compete with ours or that new or existing competitors will not enter the various markets in which we are active. In certain aspects of our business, we also compete with a number of small and medium-sized companies that, like us, have certain competitive advantages such as low overhead costs and specialized regional strengths. Although activity increased in 2018 and 2019, before declining significantly as a result of the COVID-19 pandemic and recent substantial decline in oil prices, it is presently at reduced levels compared to prior years. These levels continue to result in pricing pressure in certain markets and lines of business and may result in lower revenues or margins to us.

The Term Loan Agreement imposes significant operating and financial restrictions on us that may prevent us from pursuing certain business opportunities and restrict or limit our ability to operate our business.

The Term Loan Agreement contains covenants that restrict or limit our ability to take various actions, such as:

•	incur additional indebtedness;

14

---

Table of Contents

•	create or suffer to exist liens;

•	enter into leases for equipment or real property;

•	make certain investments;

•	merge, consolidate, sell, or otherwise dispose of all or substantially all of our assets;

•	pay dividends or make other distributions on our capital stock;

•	enter into transactions with affiliates;

•	engage or enter into any new lines of business;

•	prepay, redeem, retire or repurchase certain of our indebtedness;

•	form a subsidiary; and

•	amend, modify or waive certain provisions of our (and our subsidiaries’) organizational documents.

In addition, our Term Loan Agreement requires us to satisfy certain financial conditions, some of which become more restrictive over time, and may require us to reduce our debt or take some other action in order to comply with them. The failure to comply with any of these financial conditions, including the covenants, would cause a default under our Term Loan Agreement. A default under any of our indebtedness, if not waived, could result in the acceleration of such indebtedness or other indebtedness, in which case the debt would become immediately due and payable. In the event of any acceleration of our indebtedness, we may not be able to pay our debt or borrow sufficient funds to refinance it, and any holders of secured indebtedness may seek to foreclose on the assets securing such indebtedness. Even if new financing is available, it may not be available on terms that are acceptable to us. These restrictions could also limit our ability to obtain future financings, make needed capital expenditures, withstand a downturn in our business or the economy in general, or otherwise conduct necessary corporate activities. We also may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under our Term Loan Agreement or existing limitations on the incurrence of additional indebtedness, including in connection with acquisitions. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our Term Loan Agreement.

We are subject to the risk of technological obsolescence.

We anticipate that our ability to maintain our current business and win new business will depend upon continuous improvements in operating equipment, among other things. There can be no assurance that we will be successful in our efforts in this regard or that we will have the resources available to continue to support this need to have our equipment remain technologically up to date and competitive. Our failure to do so could have a material adverse effect on us. No assurances can be given that competitors will not achieve technological advantages over us.

We are highly dependent on certain of our officers, management and key employees.

Our success is dependent upon our key management, technical and field personnel, especially John E. Crisp, our President and Chief Executive Officer, and Steve Macek, our Executive Vice President and Chief Operating Officer of FES, LLC. Any loss of the services of any of these officers, or managers with strong relationships with customers or suppliers, or a sufficient number of other key employees could have a material adverse effect on our business and operations. Our ability to expand our services is dependent upon our ability to attract and retain additional qualified employees.

We incur significant costs as a result of being obligated to comply with Securities Exchange Act reporting requirements, the Sarbanes-Oxley Act, and the Term Loan Agreement covenants and that our management is required to devote substantial time to compliance matters.

As a public company, we incur significant legal, accounting, insurance and other expenses, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and related rules implemented by the SEC. We will incur ongoing periodic expenses in connection with the administration of our organizational structure. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. In estimating these costs, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses not currently incurred. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board, our Board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to fines, sanctions and other regulatory action and potentially civil litigation.

15

---

Table of Contents

We engage in transactions with related parties and such transactions present possible conflicts of interest that could have an adverse effect on us.

We have historically entered into a significant number of transactions with related parties. The details of certain of these transactions are set forth in Note 13 to our Consolidated Financial Statements included in this Annual Report on Form 10-K. Related party transactions create the possibility of conflicts of interest with regard to our management. Such a conflict could cause an individual in our management to seek to advance his or her economic interests above ours. Further, the appearance of conflicts of interest created by related party transactions could impair the confidence of our investors. Our Board has adopted a Related Persons Transaction Policy that requires the Audit Committee to approve or ratify related party transactions that involve consideration in excess of $120,000. Notwithstanding this, it is possible that a conflict of interest could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Activity in the oilfield services industry is affected by seasonal and cyclical factors that may impact our revenues during certain periods.

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

In addition, the oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices. Such cyclical trends also include the resultant levels of cash flows generated and allocated by exploration and production companies to their drilling, completion and workover budget. The volatility of the oil and natural gas industry and the precipitous 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 in the future may 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.

We rely heavily on our suppliers and do not maintain written agreements with any suppliers.

Our ability to compete and grow will be dependent on our access to equipment, including well servicing rigs, parts, and components, among other things, at a reasonable cost and in a timely manner. We do not maintain written agreements with any of our suppliers (other than leases for certain equipment), and we are, therefore, dependent on the relationships we maintain with them. Failure of suppliers to deliver such equipment, parts and components at a reasonable cost and in a timely manner would be detrimental to our ability to maintain existing customers and obtain new customers. No assurance can be given that we will be successful in maintaining our required supply of such items.

The source and supply of materials has been consistent in the past, however, in periods of high industry activity, periodic shortages of certain materials have been experienced and costs have been affected. If current or future suppliers are unable to provide the necessary raw materials, or otherwise fail to deliver products in the quantities required, any resulting delays in the provision of services to our customers could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

We do not maintain current written agreements with respect to some of our salt water disposal wells.

Our ability to continue to provide well maintenance services depends on our continued access to salt water disposal wells. Many of our currently active salt water disposal wells are not subject to written operating agreements or are located on the premises of third parties with whom we do not have a current written lease. We do not maintain current written surface leases or right of way agreements with these third parties and we are, therefore, dependent on the relationships we maintain with them. Failure to maintain relationships with these third parties could impair our ability to access and maintain the applicable salt water disposal wells and any well servicing equipment located on their property. If that occurred, we would increase the levels of fluid injection at our remaining salt water disposal wells and would need to use additional third party disposal wells at substantial additional cost. Additionally, our permits to inject fluid into the salt water disposal wells are subject to maximum pressure limitations and if multiple salt water disposal wells became unavailable, this might adversely impact our operations.

Due to the nature of our business, we may be subject to environmental liability.

Our business operations and ownership of real property are subject to numerous federal, state and local environmental and health and safety laws and regulations, including those relating to emissions to air, discharges to water, treatment, storage and disposal of regulated materials, and remediation of soil and groundwater contamination. The nature of our business, including operations at our current and former facilities by prior owners, lessors or operators, exposes us to risks of liability under these laws

16

---

Table of Contents

and regulations due to the production, generation, storage, use, transportation, and disposal of materials that can cause contamination or personal injury if released into the environment or if certain types of exposures occur. Environmental laws and regulations may have a significant effect on the costs of transportation and storage of raw materials as well as the costs of the transportation, treatment, storage, and disposal of wastes. We believe we are in material compliance with applicable environmental and worker health and safety requirements. However, we may incur substantial costs, including fines, penalties, damages, criminal or civil sanctions, remediation costs, or experience interruptions in our operations for violations or liabilities arising under these laws and regulations. Although we may have the benefit of insurance maintained by our customers, by other third parties or by us, such insurances may not cover every expense. Further, we may become liable for damages against which we cannot adequately insure, or against which we may elect not to insure, because of high costs or other reasons.

Our customers are subject to similar environmental laws and regulations, as well as limits on emissions to the air and discharges into surface and sub-surface waters. Although regulatory developments that may occur in subsequent years could have the effect of reducing industry activity, we cannot predict the nature of any new restrictions or regulations that may be imposed. We may be required to increase operating expenses or capital expenditures in order to comply with any new restrictions or regulations.

Climate change legislation or regulations restricting emissions of “greenhouse gases” could result in increased operating costs and reduced demand for our services.

Continued political attention to issues concerning climate change, the role of human activity in it, and potential mitigation through regulation could have a material impact on our operations and financial results. International agreements and national or regional legislation and regulatory measures to limit greenhouse emissions are currently in various stages of discussion or implementation. These and other greenhouse gas emissions-related laws, policies, and regulations may result in substantial capital, compliance, operating and maintenance costs. Material price increases or incentives to conserve or use alternative energy sources could reduce demand for services that we currently provide and adversely affect our operations and financial results. The ultimate financial impact associated with compliance with these laws and regulations is uncertain and is expected to vary depending on the laws enacted in each jurisdiction, our activities in those jurisdictions and market conditions.

Significant physical effects of climatic change, if they should occur, have the potential to damage oil and natural gas facilities, disrupt production activities and could cause us or our customers to incur significant costs in preparing for or responding to those effects.

In an interpretative guidance on climate change disclosures, the SEC indicated that climate change could have an effect on the severity of weather (including hurricanes and floods), sea levels, the arability of farmland, and water availability and quality. If any such effects were to occur, they could have an adverse effect on our assets and operations or the assets and operations of our customers. We may not be able to recover through insurance some or any of the damages, losses, or costs that may result should the potential physical effects of climate change occur. Unrecovered damages and losses incurred by our customers could result in decreased demand for our services.

Increasing trucking regulations may increase our costs and negatively affect our results of operations.

In connection with the services we provide, we operate as a motor carrier and, therefore, are subject to regulation by the U.S. Department of Transportation, or U.S. DOT, and by various state agencies. These regulatory authorities exercise broad powers governing activities such as the authorization to engage in motor carrier operations and regulatory safety. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations and changes in the regulations that govern the amount of time a driver may drive in any specific period, onboard black box recorder devices, or limits on vehicle weight and size.

Interstate motor carrier operations are subject to safety requirements prescribed by the U.S. DOT. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations.

From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely affect the recruitment of drivers. Management cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. We may be required to increase operating expenses or capital expenditures in order to comply with any new restrictions or regulations.

We are subject to extensive governmental regulation.

In addition to environmental and trucking regulations, our operations are subject to a variety of other federal, state, and local laws, regulations and guidelines, including laws and regulations relating to health and safety, the conduct of operations, and the manufacture, management, transportation, storage and disposal of certain materials used in our operations. Also, we may become

17

---

Table of Contents

subject to such regulation in any new jurisdiction in which we may operate. We believe that we are in material compliance with such laws, regulations and guidelines.

We have invested financial and managerial resources to comply with applicable laws, regulations and guidelines and expect to continue to do so in the future. Although regulatory expenditures have not historically been material to us, such laws, regulations and guidelines are subject to change. Accordingly, it is impossible for us to predict the cost or effect of such laws, regulations, or guidelines on our future operations.

Our ability to use net operating loss carryforwards may be subject to limitations under Section 382 of the Internal Revenue Code.

In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”) and certain tax credits, to offset future taxable income and tax. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders changes by more than 50 percentage points over such stockholders’ lowest percentage of ownership during the testing period (generally three years).

In connection with our emergence from Chapter 11 bankruptcy proceedings in 2017, we experienced an ownership change for the purposes of Sec. 382 of the Code. At December 31, 2019, we estimate that we have $106.6 million gross NOLs. Any subsequent ownership changes under the provisions of Section 382 could further adversely affect the use of our NOLs in future periods.

Our operations are inherently risky, and insurance may not always be available at commercially justifiable rates or in amounts sufficient to fully protect us.

We have an insurance and risk management program in place to protect our assets, operations, and employees. We also have programs in place to address compliance with current safety and regulatory standards. However, our operations are subject to risks inherent in the oilfield services industry, such as equipment defects, malfunctions, failures, accidents, and natural disasters. In addition, hazards such as unusual or unexpected geological formations, pressures, blow-outs, fires, or other conditions may be encountered in drilling and servicing wells, as well as the transportation of fluids and company assets between locations. These risks and hazards could expose us to substantial liability for personal injury, loss of life, business interruption, property damage or destruction, pollution, and other environmental damages.

Although we have obtained insurance against certain of these risks, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which we are exposed. In addition, no assurance can be given that such insurance will be adequate to cover our liabilities or will be generally available in the future or, if available, that premiums will be commercially justifiable or that such coverage may not require us to accept additional deductibles. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur such liability at a time when we are not able to obtain liability insurance, our business, results of operations, and financial condition could be materially adversely affected.

We have anti-takeover provisions in our organizational documents that may discourage a change of control.

Our organizational documents contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board. These provisions provide for the following:

•	requirements that our Board be divided into three classes, serving in staggered three year terms, which may not be altered or repealed without the affirmative vote of the holders of at least 80% of the shares entitled to vote in an election of directors;

•	requirements that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of such stockholders and may not be effected by consent in writing by such stockholders;

•	requirements that special meetings of stockholders may be called only by our Chief Executive Officer, our Chairman of the Board, or our Board;

•	restrictions on the ability of a person who would be an “interested stockholder” (as defined in our Certificate of Incorporation) to effect various business combinations with us for a three-year period;

•	requirements that if notice is provided for a stockholders meeting, other than an annual meeting, the business transacted at such meeting shall be limited to the matters so stated in our notice of meeting;

•	renouncement of the “corporate opportunity” doctrine as it applies to certain stockholders and the affiliates of such stockholders; and

•	rights to issue authorized but unissued shares of our common stock and/or any preferred stock without stockholder approval.

In addition, our organizational documents do not provide for cumulative voting with respect to the election of directors or any other matters, and cumulative voting is not otherwise provided under state law. All of the foregoing provisions could make it more

18

---

Table of Contents

difficult for a third party to acquire, or discourage a third party from attempting to acquire control of us, even if the third party’s offer was considered beneficial by many stockholders. As a result, these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a takeover of the Company that would otherwise be beneficial to investors.

Future legal proceedings could adversely affect us and our operations.

Given the nature of our business, we are involved in litigation from time to time in the ordinary course of business. While we are not presently a party to any material legal proceedings, legal proceedings could be filed against us in the future. No assurance can be given as to the final outcome of any legal proceedings or that the ultimate resolution of any legal proceedings will not have a material adverse effect on us.

We may not be able to fully integrate future acquisitions.

We may undertake future acquisitions of businesses and assets in the ordinary course of business. Achieving the benefits of acquisitions depends in part on having the acquired assets perform as expected, successfully consolidating functions, retaining key employees and customer relationships, and integrating operations and procedures in a timely and efficient manner. Such integration may require substantial management effort, time, and resources and may divert management’s focus from other strategic opportunities and operational matters, and ultimately we may fail to realize anticipated benefits of acquisitions.

In particular, the benefits that are expected to result from the Cretic Acquisition will depend, in part, on our ability to realize the growth opportunities we anticipate from the Cretic Acquisition.

Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased cost and additional operating restrictions or delays.

Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations. Hydraulic fracturing involves the injection of water, sand, and chemicals under pressure into the formation to fracture the surrounding rock and stimulate production. Various governmental entities (within and outside the United States) are in the process of studying, restricting, regulating, or preparing to regulate hydraulic fracturing, directly and indirectly. Hydraulic fracturing operations are regulated through the underground injection control programs under the Safe Drinking Water Act and other environmental statutes. The EPA has adopted air emissions standards that apply to well completion activities. In June 2016, the EPA developed new standards for wastewater discharges associated with hydraulic fracturing and, in December 2016, completed a study on the impacts of hydraulic fracturing on groundwater. In 2015, the Bureau of Land Management also enacted regulations for hydraulic fracturing activities that would be unique to federal lands. These rules were, however, struck down by a federal court in June 2016 that determined that BLM did not have authority over fracking operations pursuant to the Energy Policy Act of 2005. Since then, legislation has been proposed that would provide for federal regulation of hydraulic fracturing and require disclosure of the chemicals used in the fracturing process. The legislation remains in committee and has not passed either house. In addition, many state governments now require the disclosure of chemicals used in the fracturing process and some jurisdictions have imposed an express or de facto ban on hydraulic fracturing. A law enacted by the Texas legislature and a rule enacted by The Railroad Commission of Texas in 2011 require disclosure regarding the composition of hydraulic fracturing products to certain parties, including The Railroad Commission of Texas. Furthermore, local groundwater districts may regulate the amount of groundwater that can be withdrawn and used for hydraulic fracturing operations. This could be a material issue due to the water-intensive nature of these operations. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for producers to perform fracturing to stimulate production from tight formations. In addition, if hydraulic fracturing is regulated at the federal level, fracturing activities could become subject to additional permitting requirements, and also to attendant permitting delays and potential increases in costs. Increased consumer activism against hydraulic fracturing or the prohibition or restriction of hydraulic fracturing on the part of our customers could potentially result in materially reduced demand for the Company’s services and could have a material adverse effect on our business, results of operations or financial condition.

Cybersecurity breaches, hostile cyber intrusions, or business system disruptions may adversely affect our business.

Our operations are highly dependent on digital technologies and services. Digital technologies and services are increasingly subject to cybersecurity threats such as unauthorized access to data and systems, loss or destruction of data (including confidential customer information), computer viruses, and phishing and cyberattacks. Moreover, sophisticated nation-state and nation-state supported actors now engage in intrusions and attacks and add to the risks to our internal data and systems.

Although we seek to implement security measures to protect against such cybersecurity risks, there can be no assurance that these measures will prevent or detect every type of attempt or attack. In addition, a cyberattack or security breach could go undetected for an extended period of time. If our measures for protecting against cybersecurity risks prove insufficient, we could be adversely affected by, among other things: unauthorized publication of our confidential business or proprietary information, unauthorized release of customer or employee data, violation of privacy or other laws, and exposure to litigation. These risks could have a material adverse effect on our business, results of operation, and financial condition.

19

---

Table of Contents

Business or economic disruptions or global health concerns beyond our control could seriously harm our business and results of operations.

 Broad-based business or economic disruptions could adversely affect our ongoing or planned business activities. For example, beginning in December 2019 an outbreak of a novel strain of coronavirus originated in Wuhan, China, and has since spread to a number of other countries, including the United States. The outbreak has prompted precautionary government-imposed closures of certain travel and businesses. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions, but if we or any of the third parties with whom we engage were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively impacted. The Company has not yet experienced any known business disruptions as a result of the coronavirus.

Item 1B.	Unresolved Staff Comments

None

Item 2.	Properties

The following sets forth the principal locations from which the Company currently conducts its operations. The Company leases or rents all of the properties set forth below, except for the Alice rig yard, the San Ygnacio truck yard, the Big Lake truck yard and the Madisonville truck yard, all of which are owned by the Company.

Locations		Date in Service		Service Offering
South Texas
Alice		9/1/2003		Fluid Logistics
Alice		9/1/2003		Well Servicing
Freer		9/1/2003		Fluid Logistics
San Ygnacio (1)		4/1/2004		Fluid Logistics
Goliad		8/1/2005		Fluid Logistics
Bay City		9/1/2005		Fluid Logistics
Edna		2/1/2006		Well Servicing
Three Rivers		8/1/2006		Fluid Logistics
Carrizo Springs		12/1/2006		Fluid Logistics
Victoria		2/15/2011		Well Servicing
Giddings		1/1/2013		Well Servicing
Pleasanton		3/6/2013		Coiled Tubing
Agua Dulce		8/1/2014		Well Servicing
West Texas
San Angelo		7/1/2006		Well Servicing
Monahans		8/31/2007		Well Servicing/Fluid Logistics
Odessa		9/30/2007		Well Servicing/Coiled Tubing
Big Lake		7/16/2008		Fluid Logistics
Midland		11/1/2012		Fluid Logistics
East Texas
Marshall (1)		12/1/2005		Fluid Logistics
Carthage (1)		3/1/2007		Well Servicing
Madisonville		8/1/2013		Fluid Logistics
Pennsylvania
Indiana		7/9/2009		Well Servicing

  ⁽¹⁾ These locations are no longer actively operated by the Company, however they are still owned or under leases for the Company's use.

Item 3.Legal Proceedings

From time to time, we are involved in legal proceedings and regulatory proceedings arising out of our operations. We establish reserves for specific liabilities in connection with legal actions that we deem to be probable and estimable. We are not currently a party to any proceeding, except as noted in Note 20 - Subsequent Events of our Notes to Consolidated Financial Statements, the adverse outcome of which would have a material adverse effect on our financial position or results of operations.

20

---

Table of Contents

Item 4.	Mine Safety Disclosures

None.

21

---

Table of Contents

PART II

 

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Shares

Since May 19, 2017, our common stock has been quoted on the OTCQX Best Market under the symbol "FLSS". From November 21, 2016 to April 12, 2017, the common stock of our predecessor was quoted on the Pink Sheets under the symbol "FESLQ." Over- the-counter market quotations for our common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

The Company has never declared a cash dividend on its common stock and has no plans of doing so now or in the foreseeable future. Additionally, the Term Loan Agreement prohibits the payment of dividends on our common stock. Subject to that limitation in the Term Loan Agreement, the declaration of dividends on common stock, if any, in the future would be subject to the discretion of our Board, which may consider factors such as our results of operations, financial condition, capital needs, liquidity, and acquisition strategy, among other factors.

Item 6.	Selected Financial Data

Not applicable.

22

---

Table of Contents

Item 7.	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 Item 8. Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, including statements using terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or “should” or other comparable words or the negative of these words. Forward-looking statements involve various risks and uncertainties. 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 “Part I-Item 1A. Risk Factors” beginning on page 10 herein.

Overview

We are an independent oilfield services contractor that provides well site services to oil and natural gas drilling and producing companies to help develop and enhance the production of oil and natural gas. These services include fluid hauling, fluid disposal, well maintenance, completion services, workovers and recompletions, plugging and abandonment, and tubing testing. Our operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with an additional location in Pennsylvania. We believe that our broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of our customers’ wells.

We provide a wide range of services to a diverse group of companies. For the year ended December 31, 2019, we provided services to 504 companies. John E. Crisp, Steve Macek and our senior management team have cultivated deep and ongoing relationships with these customers during their average experience of 35 years in the oilfield services industry.

We conduct our operations through the following three business segments:

•

Well Servicing. Our well servicing segment comprised 48.5% of our consolidated revenues for the year ended December 31, 2019. Our well servicing segment utilizes our fleet of well servicing rigs, which at December 31, 2019 was comprised of 134 workover rigs and 7 swabbing rigs and other related assets and equipment. These assets are used to provide (i) well maintenance, including remedial repairs and removal and replacement of downhole production equipment, (ii) well workovers, including significant downhole repairs, re-completions and re-perforations, (iii) completion and swabbing activities, (iv) plugging and abandonment services, and (v) pressure testing of oil and natural gas production tubing and scanning tubing for pitting and wall thickness using tubing testing units.

•

Coiled Tubing. Our coiled tubing segment comprised 27.8% of our consolidated revenues for the year ended December 31, 2019. This segment utilizes our fleet of 14 coiled tubing units, of which 11 are large diameter units (2 3/8” or larger).  These units provide a range of services accomplishing a wide variety of goals including horizontal completions, well bore clean-outs and maintenance, nitrogen services, thru-tubing services, formation stimulation using acid and other chemicals, and other pre- and post-hydraulic fracturing well preparation services.

•

Fluid Logistics. Our fluid logistics segment comprised 23.7% of our consolidated revenues for the year ended December 31, 2019. Our fluid logistics segment utilizes our fleet of owned or leased fluid transport trucks and related assets, including specialized vacuum, high-pressure pump and tank trucks, hot oil trucks, frac tanks, fluid mixing tanks, salt water disposal wells and facilities, and related equipment. These assets are used to provide, transport, store, and dispose of a variety of drilling and produced fluids used in, and generated by, oil and natural gas production. These services are required in most workover and completion projects and are routinely used in daily operations of producing wells.

We believe that our three business segments are complementary and create synergies in terms of selling opportunities. Our multiple lines of service are designed to capitalize on our existing customer base to grow it within existing markets, generate more business from existing customers, and increase our operating performance. By offering our customers the ability to reduce the number of vendors they use, we believe that we help improve our customers’ efficiency. Further, by having multiple service offerings that span the life cycle of the well, we believe that we have a competitive advantage over smaller competitors offering more limited services.

Cretic Energy Services, LLC Acquisition

On November 16, 2018, we completed our acquisition of Cretic Energy Services, LLC (Cretic). Cretic provides coiled tubing services to E&P companies in the United States, primarily in the Permian Basin in Texas. The total consideration we paid for the acquisition was approximately $69.1 million in cash. We funded the Cretic acquisition with $50.0 million in proceeds from our Bridge Loan, a $10.0 million addition to our Term Loan Agreement and cash, cash equivalents and cash-restricted on hand. We believe this acquisition has significantly enhanced our coiled tubing services and our position in the Permian Basin. See Note 5 -

23

---

Table of Contents

Acquisition of Cretic Energy Services, LLC to our Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding the acquisition of Cretic.

Superior Energy Services, Inc. Merger

On December 23, 2019, we announced that we had entered into an Agreement and Plan of Merger dated as of December 19, 2019 (as amended, supplemented, and modified from time to time, the “Merger Agreement”) with Superior Energy Services, Inc., a Delaware corporation (“Superior”), New NAM, Inc., a Delaware corporation and a newly formed, wholly owned subsidiary of Superior which, prior to the completion of the Mergers (as defined below), will hold the Superior’s North American Business and its associated assets and liabilities (“NAM”), Spieth Newco, Inc., a Delaware corporation and newly formed, wholly owned subsidiary of the Company (“Newco”), Spieth Merger Sub, Inc., a Delaware corporation and newly formed, wholly owned subsidiary of Newco (“NAM Merger Sub”), and Fowler Merger Sub, Inc., a Delaware corporation and newly formed, wholly owned subsidiary of Newco (“Forbes Merger Sub”), pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, NAM Merger Sub will merge with and into NAM (the “NAM Merger”) and Forbes Merger Sub will merge with and into the Company (the “Forbes Merger,” and together with the NAM Merger, the “Mergers”), with each of NAM and the Company continuing as surviving entities and wholly owned subsidiaries of Newco.

The Merger Agreement, and the transactions contemplated thereby, have been approved by the Company’s board of directors, the special committee of the Company’s board of directors, and the Superior board of directors. Newco filed a preliminary proxy statement/prospectus on February 13, 2020. In connection with the Merger Agreement, certain stockholders of the Company, including Ascribe Capital LLC and its affiliates (the “Ascribe Entities”) and Solace Capital Partners, L.P. (“Solace”), entered into voting and support agreements. The Company stockholders that are party to the voting agreements have committed to vote the shares of the Company’s common stock they beneficially own in favor of the adoption of the Merger Agreement and any other matters necessary for the consummation of the transaction contemplated by the Merger Agreement. The Ascribe Entities and Solace will beneficially own approximately 51% of the outstanding common stock of the Company as of the record date for the special meeting of the Company’s stockholders. As a result, the Ascribe Entities and Solace will have the ability to approve the Merger Agreement without the vote of any other stockholder.

The Mergers are expected to close in the second quarter of 2020, subject to the satisfaction or waiver of customary closing conditions, including approval of the Merger Agreement by the Company’s stockholders and satisfaction of certain financing conditions. See Note 20 - Subsequent Events of our Notes to Consolidated Financial Statements.

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 has resulted in continued volatility since that time. WTI prices fluctuated between $51 and $64 per barrel during 2019. The volatility and uncertainty of future oil and gas prices have discouraged significant capital and production investment from oil and gas companies, which have chosen instead to focus investment on sustaining ongoing production sources. During the last half of 2019, we experienced declines in activity as oil prices continued their volatility. During the first quarter of 2020, driven by COVID-19 and an oil price war triggered by Russia and Saudi Arabia, the price of WTI dropped precipitously to pricing in the lower thirty dollar per barrel range, and below. As a result, the trends are viewed as triggering events in 2020 and could affect the fair market value of the Company's equipment fleet and cause the Company to conclude at a future date that additional impairment is evident and may require a write-down of the Company's assets for accounting purposes, which could have a material adverse impact on the Company's financial position and results of operations.

Although global outputs can be adjusted to support commodity pricing levels and previous epidemic or pandemic diseases have not resulted in sustained industry harm, we do expect these factors to contribute to continued activity and price volatility. We believe COVID-19 will negatively impact oilfield activity for the majority of 2020. Similarly, the oil price decline, and continued uncertainty regarding its duration or repetition, will continue to have a negative impact on oil and gas activities, generally. In contradistinction, we believe the continued aging of horizontal wells and customers choosing to increase production through regular well maintenance in these horizontal wells, will strengthen demand and pricing for our well maintenance services. On December 31, 2019, the price of WTI was approximately $59.88 per barrel. As oil prices began to rise, U.S. drilling rig count increased from 404 rigs in May 2016 to 1,083 rigs as of December 31, 2018, then decreased to 805 rigs as of December 31, 2019, largely due to the continued volatility of oil prices.  During this same time period the Texas drilling rig count increased from 173 rigs in May 2016 to 532 rigs in December 2018, then decreased to 404 rigs as of December 31, 2019. The Company continues to actively pursue additional business in the two basins where we primarily operate, the Eagle Ford and Permian, to provide the variety of services needed to oil and gas companies in support of their ongoing reaction to price volatility.

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 December 31, 2019 and 2018.

24

---

Table of Contents

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

    

25

---

Table of Contents

Impact of the Current Environment

With the downward trend in oil prices that began in April 2019 and continued into 2020, drilling and completion activity experienced a decline, resulting in continued downward pressure on revenues limiting further growth which resulted in decreased earnings and lower EBITDA.

We continue to focus on meeting our customers' expectations and adjusting our cost structure where possible. We are also maintaining our focus on maximizing use of our active operating assets and maintaining cost controls.

Oil and Natural Gas Prices

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

Seasonality and Cyclical Trends

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

In addition, the oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices. Such cyclical trends also include the resultant levels of cash flows generated and allocated by exploration and production companies to their drilling, completion and workover budget.

Results of Operations

The following tables compare the operating results of our segments for the years ended December 31, 2019 and 2018 (in thousands, except percentages). Segment profit excludes general and administrative expenses, impairment of goodwill, and depreciation and amortization.

26

---

Table of Contents

Revenues
	Year Ended December 31, 2019			% of revenue			Year Ended December 31, 2018			% of revenue
Well Servicing	$	91,521		48.5	%		$	83,035		45.9	%
Coiled Tubing	52,335			27.8	%		39,572			21.9	%
Fluid Logistics	44,566			23.7	%		58,291			32.2	%
Total	$	188,422					$	180,898
Direct Operating Expenses(1)
	Year Ended December 31, 2019			% of segment revenue			Year Ended December 31, 2018			% of segment revenue
Well Servicing	$	72,980		79.7	%		$	67,889		81.8	%
Coiled Tubing	51,982			99.3	%		32,384			81.8	%
Fluid Logistics	34,635			77.7	%		46,552			79.9	%
Total	$	159,597					$	146,825
Segment Profit (1)
	Year Ended December 31, 2019			Segment profit %			Year Ended December 31, 2018			Segment profit %
Well Servicing	$	18,541		20.3	%		$	15,146		18.2	%
Coiled Tubing	353			0.7	%		7,188			18.2	%
Fluid Logistics	9,931			22.3	%		11,739			20.1	%
Total	$	28,825		15.3	%		$	34,073		18.8	%
(1) Excluding impairment of goodwill, general and administrative expenses, and depreciation and amortization.

Revenues

Consolidated Revenues. Consolidated revenues increased $7.5 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018. This was a direct result of increased spending by our customers during this period due to increased activity of services with higher billable rates from Well Servicing and a full year of operations from our acquisition of Cretic in November 2018, offset by a decrease in trucking hours from fluid logistics.

Well Servicing. Revenues from our well servicing segment increased $8.5 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to an increase in well service rig hours and an increase in rates.

Coiled Tubing.  Revenues from our coiled tubing segment increased $12.8 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to increase in coiled tubing unit hours from large diameter units which carry higher rates, resulting from the acquisition of Cretic in November of 2018.

Fluid Logistics. Revenues from our fluid logistics segment decreased $13.7 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to a decrease in our trucking hours partially due to the industry slow-down of active drilling and partially due to changes from the sale of certain trucking assets in underperforming yards and regions.

Segment Profit

Well Servicing. Segment profit from our well servicing segment increased $3.4 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to an increase in revenues offset by a decrease in expenses as a percentage of revenues due to more efficient use of personnel at higher operating levels.

Coiled Tubing.  Segment profit from our coiled tubing segment decreased $6.8 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to additional personnel and other costs associated with the Cretic acquisition.

27

---

Table of Contents

Fluid Logistics. Segment profit from our fluid logistics segment decreased $1.8 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to a decrease in trucking hours related to reduced customer demands, offset by a $4.5 million gain on disposal of certain assets sold in 2019, as management monetized dormant assets.

Operating Expenses

The following tables compares our operating expenses for the years ended December 31, 2019 and 2018 (in thousands):

	Year Ended December 31,
	2019				2018
Well servicing direct operating expenses	$	72,980			$	67,889
Coiled tubing direct operating expenses	51,982				32,384
Fluid logistics direct operating expenses	34,635				46,552
Impairment of goodwill	19,222				—
General and administrative	24,065				25,390
Depreciation and amortization	29,404				30,543
Total expenses	$	232,288			$	202,758

Well Servicing Direct Operating Expenses. Direct operating expenses for our well servicing segment increased $5.1 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to increases in repairs and maintenance, supplies and parts, fuel costs and out of town travel, consistent with the increase in revenues.

Coiled Tubing Direct Operating Expenses.  Direct operating expenses for our coiled tubing segment increased $19.6 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to an increase in activity and the Cretic acquisition. The higher costs were mainly associated with a $2.8 million allowance for bad debts related to a customer who filed for bankruptcy protection, as well as increases in wages, equipment rental, supplies and parts and travel.

Fluid Logistics Direct Operating Expenses. Direct operating expenses for our fluid logistics segment decreased $11.9 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, reflective of decreased revenues, due to a gain on the sale of certain fluid logistics equipment, and a decrease in wages and other operating cost as a result of exiting non-performing yards in 2019.

Impairment of Goodwill. We recognized a goodwill impairment charge of $19.2 million during the year ended December 31, 2019 as a result of declining cash flows during 2019 and lower than previously forecasted future cash flows for the coiled tubing reporting unit.

General and Administrative Expenses. General and administrative expenses decreased $1.3 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to a decrease in professional fees related to the acquisition of Cretic offset by merger related costs of $2.1 million and severance payments related to Cretic of $0.6 million.

Depreciation and Amortization. Depreciation and amortization expenses decreased $1.1 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to a significant number of assets becoming fully depreciated in 2019 coupled with the disposition of certain equipment associated with fleet management.

Other Income (Expense)

	Year Ended December 31,
	2019				2018
Interest income	$	49			$	8
Interest expense	(24,726		)		(11,158		)
Other income (expense), net	$	(24,677	)		$	(11,150	)
Income tax benefit	$	(144	)		$	(403	)

Interest Expense. Interest expense increased $13.6 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to the additional debt outstanding under the Revolving Loan Agreement and Term Loan Agreement, plus associated amortization of debt discount and deferred financing costs. In addition, the Company incurred additional debt with the acquisition of Cretic, including third party equipment finance leases, write-off of certain debt costs with the modification accounting related to the PIK Notes and the accretion of the PIK Notes for its conversion feature at a 17.6% premium.

28

---

Table of Contents

Income Taxes. We recognized an income tax benefit of $144 thousand for the year ended December 31, 2019, compared to $403 thousand of income tax benefit for the year ended December 31, 2018. Our effective tax benefit rate was 0.2% and 1.2% for the years ended December 31, 2019 and 2018. The income tax benefit in 2018 is from the reversal of an uncertain tax position from our former operations in Mexico in which the statute of limitations expired. At December 31, 2019, we estimate our gross NOL carryforwards are approximately $106.6 million (representing $22.4 million of gross deferred tax asset).

Adjusted EBITDA

“Adjusted EBITDA” is defined as income (loss) before interest, taxes, depreciation, amortization, gain (loss) on early extinguishment of debt and non-cash stock based compensation, excluding non-recurring items and items not reflective of ongoing operations. Management does not include gain (loss) on extinguishment of debt, non-cash stock based compensation, impairment of intangibles such as goodwill, 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 or 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.

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:

•	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 have to be replaced in the future. Adjusted EBITDA does not reflect 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 Loss to Adjusted EBITDA
(Unaudited)
	Year Ended December 31,
	2019				2018
	(in thousands)
Net loss	$	(68,399	)		$	(32,607	)
Interest income	(49		)		(8		)
Interest expense	24,726				11,158
Income tax benefit	(144		)		(403		)
Depreciation and amortization	29,404				30,543
Impairment of goodwill	19,222				—
Share-based compensation	925				1,103
Acquisition/merger related costs	3,155				5,196
Restructuring expenses	—				190
Gain on disposal of assets	(4,552		)		(1,337		)
Adjusted EBITDA	$	4,288			$	13,835

29

---

Table of Contents

Settlement expenses related to litigation were $3.1 million and $1.8 million for the years ended December 31, 2019 and 2018, respectively. We have not included expenses related to settlement of litigation in our calculation of Adjusted EBITDA as they are not considered non-recurring.

Liquidity and Capital Resources

Historically, we have funded our operations, including capital expenditures, through the credit facilities, vendor financings, and cash flow from operations, the issuance of senior notes and the proceeds from our public and private equity offerings. More recently, we have funded our operations through our Term Loan Agreement, Bridge Loan, PIK Notes, Revolving Loan Agreement and other financing activities.

As of December 31, 2019, we had $5.2 million in cash and cash equivalents and $134.7 million in contractual debt, net of debt discount.

The $134.7 million in contractual debt was comprised of $57.5 million under the Term Loan Agreement, $58.6 million under the PIK Notes, $4.0 million under the Revolving Loan Agreement, $10.0 million in finance leases and $4.5 million in insurance notes related to our general liability, workers compensation and other insurance. Of our total debt, $72.1 million was classified as current portion of long-term debt, and $62.6 million was classified as long-term.

Going Concern

The Company is required to evaluate whether there is a substantial doubt about its ability to continue as a going concern in each reporting period. In evaluating the Company’s ability to continue as a going concern, management has considered conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for one year following the date the Company’s financial statements are issued. These conditions and evaluations included the Company’s current financial condition and liquidity sources, including current cash balances, forecasted cash flows, obligations due within twelve months from the date of this annual report, including the Company’s obligations described in Note 9 - Long-Term Debt, and the other conditions and events described below.

The Company has incurred substantial net losses and losses from operations for the years ended December 31, 2019 and 2018. As of December 31, 2019, the Company had cash and cash equivalents of approximately $5.2 million. The Company has access to a working capital facility that is based on the Company’s accounts receivable and, as of December 31, 2019, had $4.1 million available to borrow under such facility. The Company’s Revolving Loan is due January 2021, which is within the 12-month going concern evaluation period and in addition has covenant provisions that cause the Company to be in default due to the modification of its independent auditors opinion with the inclusion of the emphasis of matter paragraph related to going concern (“Going Concern Opinion”). This covenant violation in the Revolving Loan Agreement allows the loan to be due on demand. Current negotiations to extend the maturity date have not been successful however a waiver for the Going Concern Opinion was obtained providing relief of default from the covenant violation through June 30, 2020. There can be no assurance that the Company will be able to negotiate an extension on the Revolving Loan, obtain future waivers, or have sufficient funds to repay such obligations when they come due. As of December 31, 2019, the Company has $4.0 million outstanding under its Revolving Loan, which is recorded as a current liability. An additional uncertainty for the Company relates to the possibility that there will not be sufficient authorized common shares to fully convert the $58.6 million accrued amount of PIK notes. In addition, the Company may not have access to other sources of external capital on reasonable terms or at all. We also expect to continue to experience volatility in market demand which create normal oil and gas price fluctuations as well as external market pressures due to effects of global health concerns such as COVID-19 and the oil price war triggered by Russia and Saudi Arabia that are not within our control.

Management’s plans to alleviate substantial doubt include: (i) completing the Mergers as further discussed in Note 20-Subsequent Events of our Notes to Consolidated Financial Statements, (although the Mergers have been approved by both Superior and the Company’s respective Boards of Directors, the transaction has not been finalized as of the date of this filing pending Company stockholder approval and customary regulatory filings); (ii) continuing to discuss amendments of its debt with the Company’s current lenders in order to extend the term of the Revolving Loan and the Term Loan; (iii) continuing negotiations with the holders of the PIK Notes as to the terms of the conversion and/or completing a stockholder vote to authorize more common shares available for issuance; (iv) continuing to manage operating costs by actively pursuing cost cutting measures to maximize liquidity in line with current industry economic expectations; and/or (v) pursuing additional financings with existing and new lenders. Based on the uncertainty of achieving these goals and the significance of the factors described, there is substantial doubt as to the Company’s ability to continue as a going concern for a period of one year after these financial statements are issued.

Term Loan Agreement

On April 13, 2017, the Company entered into the Term Loan Agreement. FES LLC is the borrower, or the Borrower, under the Term Loan Agreement. The Borrower’s obligations have been guaranteed by FES Ltd. and by TES, CCF and FEI, each direct subsidiaries of the Borrower and indirect subsidiaries of FES Ltd. The Term Loan Agreement, as amended, provided for a term loan of $60.0 million, excluding paid-in-kind interest. Subject to certain exceptions and permitted encumbrances, the obligations

30

---

Table of Contents

under the Term Loan Agreement are secured by a first priority security interest in substantially all the assets of the Company other than accounts receivable, cash and related assets, which constitute priority collateral under the Revolving Loan Agreement (described below). The Term Loan Agreement has a stated maturity date of April 13, 2021.

Borrowings under the Term Loan Agreement bear interest at a rate equal to five percent (5%) per annum payable quarterly in cash, or the Cash Interest Rate, plus (ii) an initial paid-in-kind interest rate of seven percent (7%) commencing April 13, 2017 to be capitalized and added to the principal amount of the term loan or, at the election of the Borrower, paid in cash. The paid-in-kind interest increases by two percent (2%) twelve months after April 13, 2017 and every twelve months thereafter until maturity. Upon and after the occurrence of an event of default, the Cash Interest Rate will increase by two percentage points per annum. During the year ended December 31, 2019, $6.4 million of interest was paid-in-kind. At December 31, 2019, the paid-in-kind interest rate was 11%.

We are permitted under the Term Loan Agreement to voluntarily repay the outstanding term loans at any time without premium or penalty. We are required to use the net proceeds from certain events, including but not limited to, the disposition of assets, certain judgments, indemnity payments, tax refunds, pension plan refunds, insurance awards and certain incurrences of indebtedness to repay outstanding loans under the Term Loan Agreement. We may also be required to use cash in excess of $20.0 million to repay outstanding loans under the Term Loan Agreement.

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

Amendment to Term Loan Agreement and Joinder

In connection with the Cretic acquisition, on November 16, 2018, the Company, as a guarantor, FES LLC, as borrower, and certain of their subsidiaries, as guarantors, entered into Amendment No. 1 to Loan and Security Agreement and Pledge and Security Agreement (the “Term Loan Amendment”) with the lenders party thereto and Wilmington Trust, National Association, as agent (the “Term Loan Agent”), pursuant to which the Term Loan Agreement, was amended to, among other things, permit (i) debt under the Revolving Loan Agreement (described below) and the liens securing the obligations thereunder, (ii) the incurrence of add-on term loans under the Term Loan Agreement in an aggregate principal amount of $10.0 million and (iii) the incurrence of one-year “last-out” bridge loans under the Term Loan Agreement in an aggregate principal amount of $50.0 million (the “Bridge Loan”).

In addition, on November 16, 2018, Cretic entered into joinder documentation pursuant to which it became a guarantor under the Term Loan Agreement and a pledgor under the Pledge and Security Agreement referred to in the Term Loan Agreement.

Revolving Loan Agreement

In connection with the Cretic Acquisition, on November 16, 2018, FES Ltd. and certain of its subsidiaries, as borrowers, entered into a Credit Agreement (the “Revolving Loan Agreement”) with the lenders party thereto and Regions Bank, as administrative agent and collateral agent (the “Revolver Agent”). The Revolving Loan Agreement provides for $35 million of revolving loan commitments, subject to a borrowing base comprised of 85% of eligible accounts receivable, 90% of eligible investment grade accounts receivable (in each case, less allowance for doubtful accounts) and 100% of eligible cash. The loans under the Revolving Loan Agreement accrue interest at a floating rate of LIBOR plus 2.50% - 3.25%, or a base rate plus 1.50% - 2.25%, with the margin based on the fixed charge coverage ratio from time to time. The Company is in violation of certain provisions of the Revolving Loan Agreement related to the Going Concern Opinion, which cause the loan to be in default. A limited waiver was obtained as described below, providing relief of this provision extending, through June 30, 2020, of the requirement to provide an unqualified opinion of the Company’s consolidated financial statements. Due to limitations of the waiver, which only included a time extension and not unconditional relief of providing an unqualified opinion from the independent auditors on the Company’s financial statements, the Company will not be able to remedy the violation once the waiver term expires, and there is no assurance that additional waivers can be obtained. As a result of the Company’s violation of the Revolving Loan Agreement provisions and only a conditional waiver obtained, the Company has recorded the outstanding balance of this note as a current liability as of December 31, 2019.

The Revolving Loan Agreement is secured on a first-lien basis by substantially all assets of the Company and its subsidiaries, subject to an intercreditor agreement between the Revolver Agent and the Term Loan Agent which provides that the priority collateral for the Revolving Loan Agreement consists of accounts receivable, cash and related assets, and that the other assets of the Company and its subsidiaries constitute priority collateral for the Term Loan Agreement. At December 31, 2019, we had $4.0 million in borrowings outstanding, $7.2 million in letters of credit outstanding and availability of $4.1 million.

31

---

Table of Contents

February and March 2020 Revolving Loan Amendments, Term Loan Amendment and Term Loan Waiver

On February 3, 2020 the Company and Regions Bank entered into an amendment to its Revolving Loan effective December 31, 2019, which among other things, reinstated a minimum excess line availability covenant for the monthly periods from December 2019 through July 2020 and removed the requirement to test for the purpose of a financial covenant, the fixed charge coverage ratio for the monthly periods from December 2019 through June 2020.

On March 20, 2020, the Company and certain of its subsidiaries, as borrowers, entered into the Third Amendment and Temporary Limited Waiver to Credit Agreement (the “March 2020 Revolving Loan Amendment”) with the lenders party thereto and the Revolver Agent. Pursuant to the March 2020 Revolving Loan Amendment, the requirement for the Company to deliver an unqualified audit opinion for the fiscal year ended December 31, 2019 was waived until June 30, 2020 (the “Revolving Loan Agreement Temporary Waiver”). In addition, the commitments under the Revolving Loan Agreement were reduced from $35 million to $27.5 million, and interest under the Revolving Loan Agreement was increased from a range of LIBOR plus 2.50% to 3.25% or base rate plus 1.50% to 2.25% based on the fixed charge coverage ratio from time to time, to LIBOR plus 4.25% or base rate plus 3.25%.

On March 20, 2020, the Company, as a guarantor, FES LLC, as borrower, and certain of their subsidiaries, as guarantors, obtained a corresponding waiver under the Term Loan Agreement for the requirement to deliver an unqualified audit opinion for the fiscal year ended December 31, 2019.

On March 23, 2020, the Company, as a guarantor, FES LLC, as borrower, and certain of their subsidiaries, as guarantors, entered into Amendment No. 3 to Loan and Security Agreement (the “March 2020 Term Loan Amendment”) with the lenders party thereto and the Term Loan Agent. Pursuant to the March 2020 Term Loan Amendment, there will be no cross-default to the Revolving Loan Agreement resulting from the expiration of the Revolving Loan Agreement Temporary Waiver.

5% Subordinated Convertible PIK Notes

On March 4, 2019, the Company issued $51.8 million aggregate original principal amount of 5.00% Subordinated Convertible PIK Notes due June 30, 2020 (the “PIK Notes”). On March 4, 2019, the Company, as Issuer, and Wilmington Trust, National Association, as Trustee, entered into an Indenture governing the terms of the PIK Notes.

The PIK Notes bear interest at a rate of 5.00% per annum. Interest on the PIK Notes will be capitalized to principal semi-annually in arrears on July 1 and January 1 of each year, commencing on July 1, 2019.

The PIK Notes are the unsecured general subordinated obligations of the Company and are subordinated in right of payment to any existing and future secured or unsecured senior debt of the Company, including debt incurred under the Term Loan Agreement and the Revolving Credit Agreement. The payment of the principal of, premium, if any, and interest on the PIK Notes will be subordinated to the prior payment in full of all of the Company’s existing and future senior indebtedness, including debt incurred under the Term Loan Agreement and the Revolving Credit Agreement. In the event of a liquidation, dissolution, reorganization or any similar proceeding, obligations on the PIK Notes will be paid only after senior indebtedness has been paid in full. Pursuant to the Indenture, the Company is not permitted to (1) make cash payments to pay principal of, premium, if any, and interest on or any other amounts owing in respect of the PIK Notes, or (2) purchase, redeem or otherwise retire the PIK Notes for cash, if any senior indebtedness is not paid when due or any other default on senior indebtedness occurs and the maturity of such indebtedness is accelerated in accordance with its terms unless, in any case, the default has been cured or waived, and the acceleration has been rescinded or the senior indebtedness has been repaid in full.

The Indenture also provides that upon a default by the Company in the payment when due of principal of, or premium, if any, or interest on, indebtedness in the aggregate principal amount then outstanding of $5.0 million or more, or acceleration of the Company’s indebtedness so that it becomes due and payable before the date on which it would otherwise have become due and payable, and if such default is not cured or waived within 30 days after notice to the Company by the trustee or by holders of at least 25% in aggregate principal amount of the PIK Notes then outstanding, the principal of, (and premium, if any) and accrued and unpaid interest on, the PIK Notes may be declared immediately due and payable.

The PIK Notes are redeemable in whole or from time to time in part at the Company’s option at a redemption price equal to the sum of (i) 100.0% of the principal amount of the PIK Notes to be redeemed and (ii) accrued and unpaid interest thereon to, but excluding, the redemption date, which amounts may be payable in cash or in shares of the Company’s common stock, (subject to limitations, if any, in the documentation governing the Company’s senior indebtedness). If redeemed for the Company’s common stock the holder will receive a number of shares of the Company’s common stock calculated based on the Fair Market Value of a share of the Company’s common stock at such time, in each case less a 15% discount per share. The 15% discount represents an implied conversion premium at issuance which will be settled in common stock at the date of conversion.  As such, the face value of the PIK Notes will be accreted to the settlement amount at June 30, 2020.  For the year ended December 31, 2019, the Company recorded $4.2 million in interest expense related to the accretion of the conversion premium.

The Indenture contains provisions permitting the Company and the trustee in certain circumstances, without the consent of the holders of the PIK Notes, and in certain other circumstances, with the consent of the holders of not less than a majority in

32

---

Table of Contents

aggregate principal amount of the PIK Notes at the time outstanding to execute supplemental indentures modifying the terms of the Indenture and the PIK Notes as described It is also provided in the Indenture that, subject to certain exceptions, the holders of a majority in aggregate principal amount of the PIK Notes at the time outstanding may on behalf of the holders of all the PIK Notes waive any past default or event of default under the Indenture and its consequences.

The Indenture provides for mandatory conversion of the PIK Notes at maturity (or such earlier date as the Company shall elect to redeem the PIK Notes), or upon a marketed public offering of the Company’s common stock or a Change of Control, in each case as defined in the Indenture, at a conversion rate per $100 principal amount of PIK Notes into a number of shares of the Company’s common stock calculated based on the Fair Market Value of a share of the Company’s common stock at such time, in each case less a 15% discount per share.

Fair Market Value means fair market value as determined by (A) in the case of a marketed public offering, the offering price per share paid by public investors in such marketed public offering, (B) in the case of a Change of Control, the value of the consideration paid per share by the acquirer in the Change of Control transaction, or (C) in the case of mandatory conversion at the Maturity Date (or such earlier date as the Company shall elect to redeem the PIK Notes), such value as shall be determined by a nationally recognized investment banking firm engaged by the Board of Directors of the Company.

Effective November 14, 2019, each of Ascribe Capital LLC and Solace Capital Partners LP, on behalf of each of their funds that is a holder of PIK Notes issued under the Indenture which in the aggregate hold $48.9 million of face value of the PIK Notes, agreed to extend the maturity date under the Indenture to November 30, 2020 of those  PIK Notes, the Excess PIK Notes, for which there are not at June 30, 2020 sufficient authorized shares of common stock of the Company to effect the mandatory conversion of the Excess PIK Notes, after giving effect to the conversion of PIK Notes held by other holders of PIK Notes who have not agreed to a maturity date extension or conversion deferral.  Each also agreed to defer the mandatory conversion feature under the Indenture for such Excess PIK Notes until after the Company’s stockholders have authorized sufficient additional shares of the Company’s common stock to permit such conversion.

The Company used the gross proceeds of $51.8 million that it received from the issuance of the PIK Notes to repay all of the outstanding principal and accrued and unpaid interest on the Bridge Loan.

Interest on the Bridge Loan prior to its repayment accrued at a rate of 14% (5% cash interest plus 9% PIK interest). The payment obligations of the Borrower under the Bridge Loan have been fully satisfied as of March 4, 2019.

Based on the terms of the Merger Agreement, the Company's existing debt, including the PIK Notes, is expected to be repaid or converted, as applicable, in connection with the Mergers.

Cash Flows

Our cash flows depend, to a large degree, on the level of spending by oil and gas companies' development and production activities. Although the prices of oil and natural gas have recovered somewhat since the decline that began in 2014 and continued into 2016, completion activity again slowed for our customer base in the fourth quarter of 2018 and has recently declined further during the last half of 2019 and into 2020 due to demand/supply imbalances, COVID-19 and the oil price war triggered by Russia and Saudi Arabia. These lower levels of activities will likely materially affect our future cash flows.

	Year Ended December 31,
	2019				2018
Net cash provided by (used in) operating activities	$	9,269			$	(762	)
Net cash provided by (used in) investing activities	1,508				(81,655		)
Net cash provided by (used in) financing activities	(13,636		)		55,093
Net decrease in cash, cash equivalents and cash - restricted	(2,859		)		(27,324		)
Cash, cash equivalents and cash - restricted:
Beginning of period	8,156				35,480
End of period	$	5,297			$	8,156

Cash flows from operating activities increased $10.0 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018. The increase resulted of from working capital changes related to accounts receivable, offset by changes in accounts payable and accrued liabilities.

Cash flows from investing activities increased $83.2 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018. The increase is related to proceeds from the sale of certain assets and insurance proceeds from assets for which there was a casualty loss, no significant business acquisitions in 2019, and fewer property and equipment purchases.

33

---

Table of Contents

Cash flows provided by financing activities decreased $68.7 million for the year ended December 31, 2019, to a use of $13.6 million, as compared to the year ended December 31, 2018. During the year ended December 31, 2019, we made $12.6 million in principal payments on our term loan agreement, made $4.4 million in principal payments on our Bridge Loan, made $5.0 million in payments for finance leases, and borrowed $4.0 million under the Revolving Loan Agreement.

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, for the short term, we anticipate continuing to use net cash in operating activities.

Capital Expenditures

Capital expenditures for the years ended December 31, 2019 and 2018 were $15.5 million and $21.9 million, respectively. Additions to our fluid logistics segment were primarily purchases of vacuum trucks and light trucks offset by the sale of certain unused equipment. Additions to our well servicing segment were for well service equipment and light trucks. Additions to our coiled tubing segment were for light trucks, pumping and support equipment.

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 10 - Commitments and Contingencies.

Critical Accounting Policies and Estimates

The Company’s accounting policies are more fully described in Note 4 - Summary of Significant Accounting Policies
to our Consolidated Financial Statements. As disclosed in Note 4, the preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Management reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates, and actual results could differ from those estimates.

The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Estimated Depreciable Lives

A substantial portion of our total assets is comprised of property and equipment, which totaled $125.4 million, representing 65.9% of total assets at December 31, 2019. Depreciation expense totaled $27.7 million and $29.3 million, which represented 11.9% and 14.4% of total operating expenses for the years ended December 31, 2019 and 2018, respectively. Given the significance of equipment to our financial statements, the determination of an asset’s economic useful life is considered to be a critical accounting estimate. Each asset included in equipment is recorded at cost and depreciated using the straight-line method over the asset’s estimated economic useful life. The estimated economic useful life is monitored by management to determine its continued appropriateness.

Intangible Assets

The Company's major classes of intangible assets consisted of its customer relationships, trade names and one covenant not to compete.

The Company expenses costs associated with extensions or renewals of intangible assets. There were no such extensions or renewals in the years ended December 31, 2019 and 2018. Amortization expense is calculated using the straight-line method.

Long-Lived Assets

The Company makes judgments and estimates regarding the carrying value of its long-lived assets, including amounts to be capitalized, estimated useful lives, depreciation and amortization methods to be applied, and possible impairment. The Company evaluates its long-lived assets whenever events and changes in circumstances indicate the carrying amount of its net assets may not be recoverable due to various external or internal factors. When an indicator of possible impairment exists, the Company uses estimated future undiscounted cash flows to assess recoverability of its long-lived assets. These cash flow projections require the Company to make judgments regarding long-term forecasts of future revenue and costs related to the assets subject to review. These forecasts include assumptions related to the rates the Company bills its customers, equipment utilization, equipment additions,

34

---

Table of Contents

staffing levels, pay rates, and other expenses. These forecasts also require assumptions about demand for the Company's products and services, future market conditions, and technological developments. The Company evaluated their long-lived assets for recoverability and determined that no impairment was indicated at December 31, 2019.

Volatility in the oil and natural gas industry, which is driven by factors over which the Company has no control, such as the COVID-19 virus, along with supply and demand dynamics and forecasted reductions in capital expenditures by operators and demand for oil are considered triggering events to test long-lived assets for recoverability during the first quarter of 2020. It is reasonably possible that the carrying value of certain assets may not be recoverable, and any related impairment could have a material adverse impact on the Company's financial position and results of operations.

Goodwill

During the third quarter ended September 30, 2019, the Company adopted the guidance contained in ASU No. 2017-04, “Intangibles-Goodwill and Other ASC Topic 350: Simplifying the Test for Goodwill Impairment,” which removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Goodwill impairment is the amount by which the Company’s reporting unit carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. To estimate the fair value of the Company’s invested capital, the Company used both a market approach based on the guideline companies’ method (“Market Comparable Approach”), and an income approach based on a discounted cash flow analysis.

The Market Comparable Approach estimates fair value using market multiples calculated from a set of comparable public companies. In performing the valuations, significant assumptions utilized include unobservable Level 3 inputs including cash flows, long-term growth rates reflective of management’s forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. Discount rates are based on the development of a weighted average cost of capital using guideline public company data, factoring in current market data and any Company specific risk factors. The value indicated by both methods was weighted to arrive at a concluded value.

Revenue Recognition

The Company accounts for revenues under Accounting Standards Codification (ASC) Topic - 606 - Revenue from Contracts with Customers effective January 1, 2018, the core principle of which is that a company should recognize revenue to match the delivery of goods or services to customers to the consideration the company expects to be entitled in exchange for transferring goods or services to a customer.

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

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

The Company does not have any revenue expected to be recognized in the future related to remaining performance obligations or contracts with variable consideration related to undelivered performance obligations. There was no revenue recognized in the current period from performance obligations satisfied in previous periods. The Company's significant judgments made in connection with ASC 606 included the determination of when the Company satisfies its performance obligation to customers and the applicability of the as invoiced practical expedient.

35

---

Table of Contents

Allowance for Doubtful Accounts

The determination of the collectability of amounts due from our customers requires us to use estimates and make judgments regarding future events and trends, including monitoring our customers’ payment history and current credit worthiness to determine that collectability is reasonably assured, as well as consideration of the overall business climate in which our customers operate. Inherently, these uncertainties require us to make frequent judgments and estimates regarding our customers’ ability to pay amounts due to us in order to determine the appropriate amount of valuation allowances required for doubtful accounts.

Income Taxes

Current and deferred net tax liabilities are recorded in accordance with enacted tax laws and rates. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the need for valuation allowances, we have considered and made judgments and estimates regarding estimated future taxable income and ongoing prudent and feasible tax planning strategies. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets. The existence of reversing taxable temporary differences supports the recognition by the Company of deferred tax assets. In the event that the Company's federal deferred tax assets exceed the Company's reversing taxable temporary differences, it is not more likely than not that those deferred tax assets would be realized due to the Company's lack of earnings history. The Company maintains a full valuation allowance for its deferred tax assets.

Litigation and Self-Insurance

The Company is self-insured under its Employee Group Medical Plan for the first $150 thousand per individual.

As of December 31, 2019, the Company had a per occurrence $2.0 million deductible for general liability. The Company has an additional premium payable clause under its lead of $10.0 million limit excess policy that states in the event losses exceed $2.0 million, an additional loss premium of 15% will be payable for losses in excess of $2.0 million. The additional loss premium is payable at the time when the insurers pay for the loss and will be payable over a period agreed by the insurers.

As of December 31, 2018, the Company was self-insured with a retention for the first $250 thousand in general liability. The Company had an additional premium payable clause under its lead $10.0 million limit excess policy that states in the event losses exceed $1.0 million, an additional loss premium of 15% to 17% will be payable for losses in excess of $1.0 million. The additional loss premium is payable at the time when the insurers pay for the loss and will be payable over a period agreed by the insurers.

We maintain accruals in our consolidated balance sheets related to self-insurance retentions by using third-party actuarial data and claims history.

We estimate our reserves related to litigation and self-insured risk based on the facts and circumstances specific to the litigation and self-insured risk claims and our past experience with similar claims. The actual outcome of litigation and insured claims could differ significantly from estimated amounts. These accruals are based on a third-party analysis developed using historical data to project future losses. Loss estimates in the calculation of these accruals are adjusted based upon reported claims and actual claim settlements.

In January 2020, a well control incident occurred on a producing well operated by a third party. Three fatalities and one injury are documented. The Company was one of the contractors engaged to perform a workover operation on the subject well.  Lawsuits have been filed against the operator of the well and the engaged contractors, including Forbes. The Company will assert indemnification claims against the operator and the engaged contractors.  The Company is cooperating with regulatory investigations, which are in early stages, and as a result, is unable to estimate a possible range of loss, if any, at this time.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", or ASU 2016-13, which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for annual periods beginning after December 15, 2018. In May and April 2019, the FASB issued ASU No. 2019-05 and ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" which further clarifies the ASU 2016-13. In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)” which delayed, for smaller reporting companies, the mandatory effective date for interim and annual reporting periods beginning after December 15, 2022. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment", or ASU 2017-04, which addresses concerns over the cost and complexity of the two-step goodwill impairment test by removing the second step of the test. An entity will apply a one-step quantitative test and record the amount

36

---

Table of Contents

of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 will be effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. During the third quarter of 2019, the Company adopted the guidance contained in ASU No. 2017-04 which removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Goodwill impairment is the amount by which the Company’s single reporting unit carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. To estimate the fair value of the Company’s equity, the Company used both a market approach based on the guideline companies’ method (“Market Comparable Approach”), and an income approach based on a discounted cash flow analysis.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The guidance is effective for all entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The Company determined that the adoption of this standard as of January 1, 2020 would not have a material impact on its financial statements.

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

37

---

Table of Contents

Item 8.	Consolidated Financial Statements

Index to Financial Statements

Forbes Energy Services Ltd. and Subsidiaries

Consolidated Financial Statements

 

	Page
Report of Independent Registered Public Accounting Firm	39
Consolidated Balance Sheets	40
Consolidated Statements of Operations	41
Consolidated Statements of Changes in Stockholders’ Equity	42
Consolidated Statements of Cash Flows	43
Notes to Consolidated Financial Statements	44

38

---

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Forbes Energy Services, Ltd.

Alice, Texas

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Forbes Energy Services, Ltd. (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 11 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.

Going Concern Uncertainty

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations and has been unable to renegotiate its expiring credit agreement which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company's auditor since 2009.

Austin, Texas

March 23, 2020

39

---

Forbes Energy Services Ltd. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except par value amounts)

	December 31,
	2019				2018
Assets
Current assets
Cash and cash equivalents	$	5,224			$	8,083
Cash - restricted	73				73
Accounts receivable - trade, net	24,789				45,950
Accounts receivable - other	2,302				2,228
Prepaid expenses and other current assets	12,903				14,691
Total current assets	45,291				71,025
Property and equipment, net	125,409				148,608
Operating lease right-of-use assets	6,235				—
Intangible assets, net	12,339				13,980
Goodwill	—				19,700
Other assets	991				3,072
Total assets	$	190,265			$	256,385
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable - trade	$	9,366			$	17,841
Accrued interest payable	3,034				1,993
Accrued expenses	12,734				14,348
Current portion of operating lease liabilities	1,476				—
Current portion of long-term debt	72,059				59,321
Total current liabilities	98,669				93,503
Long-term operating lease liabilities, net of current portion	4,759				—
Long-term debt, net of current portion and debt discount	62,636				71,095
Deferred tax liability	245				357
Total liabilities	166,309				164,955
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock, $0.01 par value, 40,000 shares authorized, 5,523 and 5,439 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively	55				54
Additional paid-in capital	150,892				149,968
Accumulated deficit	(126,991		)		(58,592		)
Total stockholders’ equity	23,956				91,430
Total liabilities and stockholders’ equity	$	190,265			$	256,385

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

40

---

Forbes Energy Services Ltd. and Subsidiaries

Consolidated Statements of Operations

(in thousands except, per share amounts)

 

	Year Ended December 31,
	2019				2018
Revenues
Well servicing	$	91,521			$	83,035
Coiled tubing	52,335				39,572
Fluid logistics	44,566				58,291
Total revenues	188,422				180,898
Expenses
Well servicing	72,980				67,889
Coiled tubing	51,982				32,384
Fluid logistics	34,635				46,552
Impairment of goodwill	19,222				—
General and administrative	24,065				25,390
Depreciation and amortization	29,404				30,543
Total expenses	232,288				202,758
Operating loss	(43,866		)		(21,860		)
Other income (expense)
Interest income	49				8
Interest expense	(24,726		)		(11,158		)
Pre-tax loss	(68,543		)		(33,010		)
Income tax benefit	(144		)		(403		)
Net loss	$	(68,399	)		$	(32,607	)
Loss per share of common stock
Basic and diluted	$	(12.50	)		$	(6.07	)
Weighted average number of shares of common stock outstanding
Basic and diluted	5,472				5,368

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

41

---

Table of Contents

Forbes Energy Services Ltd. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

	Common Stock							Additional Paid-In Capital				Accumulated Deficit				Total Stockholders’ Equity
	Shares			Amount
Balance at December 31, 2017	5,336			$	53			$	148,866			$	(25,985	)		$	122,934
Share-based compensation	103			1				1,102				—				1,103
Net loss	—			—				—				(32,607		)		(32,607		)
Balance at December 31, 2018	5,439			$	54			$	149,968			$	(58,592	)		$	91,430
Share-based compensation	84			1				924				—				925
Net loss	—			—				—				(68,399		)		(68,399		)
Balance at December 31, 2019	5,523			$	55			$	150,892			$	(126,991	)		$	23,956

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

42

---

Table of Contents

Forbes Energy Services Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,
	2019				2018
Cash flows from operating activities:
Net loss	$	(68,399	)		$	(32,607	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	29,404				30,543
Share-based compensation	925				1,103
Deferred tax benefit	(112		)		(22		)
Impairment of goodwill	19,222				—
Gain on disposal of assets	(4,552		)		(1,337		)
Bad debt expense	3,170				120
Amortization of debt discount/deferred financing costs/premium conversion	8,746				1,043
Interest paid-in-kind	9,113				4,285
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable	18,692				(9,645		)
Prepaid expenses and other assets	2,161				(2,663		)
Accounts payable - trade	(8,475		)		6,929
Accounts payable - related parties	—				(11		)
Accrued expenses	(1,667		)		505
Accrued interest payable	1,041				995
Net cash provided by (used in) operating activities	9,269				(762		)
Cash flows from investing activities:
Purchases of property and equipment	(12,768		)		(18,855		)
Purchase of Cretic, net of cash acquired	285				(67,202		)
Proceeds from sale of property and equipment	13,991				4,402
Net cash provided by (used in) investing activities	1,508				(81,655		)
Cash flows from financing activities:
Payments for finance leases	(5,038		)		(2,327		)
Proceeds from Revolving Loan Agreement	4,000				—
(Payments for) proceeds from Term Loan Agreement	(12,598		)		10,000
Proceeds from PIK Notes	4,422				—
Payments for debt issuance costs	—				(2,580		)
(Payments for) proceeds from Bridge Loan	(4,422		)		50,000
Net cash provided by (used in) financing activities	(13,636		)		55,093
Net decrease in cash, cash equivalents and cash - restricted	(2,859		)		(27,324		)
Cash, cash equivalents and cash - restricted:
Beginning of period	8,156				35,480
End of period	$	5,297			$	8,156

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

43

---

Table of Contents

Forbes Energy Services Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

1. Organization and Nature of Operations

Nature of Business

Forbes Energy Services Ltd., or FES Ltd., is an independent oilfield services contractor that provides well site services to oil and natural gas drilling and producing companies to help develop and enhance the production of oil and natural gas. These services include fluid hauling, fluid disposal, well maintenance, completion services, workovers and recompletions, plugging and abandonment, and tubing testing. The Company's operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with an additional location in Pennsylvania. The Company offers a broad range of services, which extends from initial drilling, through production, to eventual abandonment of oil and natural gas wells.

As used in these consolidated financial statements, the “Company”, “we” and “our” mean FES Ltd. and its subsidiaries, except as otherwise indicated.

2. Risk and Uncertainties

As an independent oilfield services contractor that provides a broad range of drilling-related and production-related services to oil and natural gas companies, primarily onshore in Texas, the Company's revenue, profitability, cash flows and future rate of growth are substantially dependent on the Company's ability to (1) maintain adequate equipment utilization, (2) maintain adequate pricing for the services the Company provides, and (3) maintain a trained work force. 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 generally impacting the oil and natural gas industry, its operations are also susceptible to market volatility resulting from economic, seasonal and cyclical, weather related, or other factors related to such industry. Changes in the level of operating and capital spending in the industry, decreases in oil and natural gas prices, or industry perception about future oil and natural gas prices could materially decrease the demand for the Company's services, adversely affecting its financial position, results of operations, and cash flows.

3. Going Concern

The Company is required to evaluate whether there is a substantial doubt about its ability to continue as a going concern each reporting period. In evaluating the Company’s ability to continue as a going concern, management has considered conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for one year following the date the Company’s financial statements are issued. These conditions and evaluations included the Company’s current financial condition and liquidity sources, including current cash balances, forecasted cash flows, the Company’s obligations due within twelve months of the date of these financial statements, including the Company’s obligations described in Note 9 - Long-Term Debt, and the other conditions and events described below.

The Company has incurred substantial net losses and losses from operations for the years ended December 31, 2019 and 2018. As of December 31, 2019, the Company had cash and cash equivalents of approximately $5.2 million. The Company has access to a working capital facility that is based on the Company’s accounts receivable and, as of December 31, 2019, had $4.1 million available to borrow under such facility. The Company’s Revolving Loan is due January 2021, which is within the 12-month going concern evaluation period and in addition has covenant provisions that cause the Company to be in default due to the modification of its independent auditors opinion with the inclusion of the emphasis of matter paragraph related to going concern (“Going Concern Opinion”). This covenant violation in the Revolving Loan Agreement allows the loan to be due on demand. Current negotiations to extend the maturity date have not been successful however a waiver for the Going Concern Opinion was obtained providing relief of default from the covenant violation through June 30, 2020. There can be no assurance that the Company will be able to negotiate an extension on the Revolving Loan, obtain future waivers, or have sufficient funds to repay such obligations when they come due. As of December 31, 2019 the Company has $4.0 million outstanding under its Revolving Loan, which is recorded as a current liability. An additional uncertainty for the Company relates to the possibility that there will not be sufficient authorized common shares to fully convert the $58.6 million accrued amount of PIK notes. In addition, the Company may not have access to other sources of external capital on reasonable terms or at all. We also expect to continue to experience volatility in market demand which create normal oil and gas price fluctuations as well as external market pressures due to effects of global health concerns such as COVID-19 and the oil price war triggered by Russia and Saudi Arabia that are not within our control.

Management’s plans to alleviate substantial doubt include: (i) completing its merger as further discussed in Note 20 - Subsequent Events, although the merger has been approved by both Superior and the Company’s respective Board of Directors, the transaction has not been finalized as of the date of this filing pending formal shareholder approval and customary regulatory filings (ii) continuing to discuss amendments of its debt with the Company’s current lenders in order to extend the term of the Revolving Loan; (iii) continue negotiating with the note holders of the mandatorily convertible note as to the terms of the conversion

44

---

Table of Contents

and/or complete a shareholder vote to authorize more common shares available for issuance.(iv) continuing to manage operating costs by actively pursuing cost cutting measures to maximize liquidity in line with current industry economic expectations; and/or (v) pursuing additional financings with existing and new lenders. Based on the uncertainty of achieving these goals and the significance of the factors described, there is substantial doubt as to the Company’s ability to continue as a going concern for a period of one year after the date these financial statements are issued.

4. Summary of Significant Accounting Policies

Basis of Consolidation

The Company’s consolidated financial statements include the accounts of FES Ltd. and all of its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or 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.

Fair Values of Financial Instruments

Fair value is the price that would be received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date.

There is a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:

•	Level 1 - Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

•	Level 2 - Inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.

•	Level 3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

In valuing certain assets and liabilities, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, assets and liabilities are classified in their entirety in the fair value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels.

The carrying amounts of cash and cash equivalents, accounts receivable-trade, accounts receivable-other, accounts payable-trade and insurance notes approximate fair value because of the short maturity of these instruments. The fair values of finance leases approximate their carrying values, based on current market rates at which the Company could borrow funds with similar maturities (Level 2 in the fair value hierarchy). The fair values of the Term Loan Agreement and the Bridge Loan as of the respective dates are set forth below (in thousands):

		December 31, 2019								December 31, 2018
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Term Loan Agreement		$	57,506			$	56,895			$	62,335			$	65,794
Bridge Loan		$	—			$	—			$	49,568			$	50,000

The Company has nonfinancial assets measured at fair value on a non-recurring basis which include property and equipment, intangible assets and goodwill for which fair value is calculated in connection with accounting for Cretic acquisition and impairment testing.  These fair value calculations incorporate a market and a cost approach and the inputs include projected revenue, costs,

45

---

Table of Contents

equipment utilization and other assumptions.  Given the unobservable inputs, those fair value measurements are classified as Level 3. As discussed in Note 6, the Company fully impaired its goodwill associated with the Cretic acquisition during 2019.

As discussed in Note 5, the Company acquired all of the outstanding units of Cretic Energy Services, LLC (Cretic). The acquisition of Cretic was accounted for as a business combination using the acquisition method of accounting. The estimated fair value allocated to certain property and equipment, identifiable intangible assets and goodwill were based on a combination of market, cost and income approaches.

Cash, Cash Equivalents and Cash - Restricted

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

The Company's restricted cash served as collateral for certain outstanding letters of credit and the Company's corporate credit card program.

The following table provides a reconciliation of cash, cash equivalents and cash - restricted reported within the consolidated balance sheets to the same such amounts shown in the consolidated statements of cash flows (in thousands):

		December 31,
		2019				2018
Cash and cash equivalents		$	5,224			$	8,083
Cash - restricted		73				73
Cash and cash equivalents and cash - restricted as shown in the consolidated statement of cash flows		$	5,297			$	8,156

Revenue Recognition

The Company accounts for revenues under Accounting Standards Codification (ASC) Topic - 606 - Revenue from Contracts with Customers effective January 1, 2018, the core principle of which is that a company should recognize revenue to match the delivery of goods or services to customers to the consideration the company expects to be entitled in exchange for transferring goods or services to a customer. 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 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 three service lines, well servicing, coiled tubing and fluid logistics. The Company's well servicing line consists primarily of maintenance, workover, completion, plugging and abandonment, and tubing testing services. The Company's coiled tubing line consists of maintenance, workover and completion services. The Company's fluid logistics line provides supporting services to the well servicing line as well as direct sales to customers for fluid management and movement. The Company generally establishes a master services agreement with each customer and provides associated services on a work order basis in increments of days, by the hour for services performed or on occasion, bid/turnkey pricing. Services provided under the well servicing, coiled tubing and the fluid logistics segments are short in duration and generally completed within 30 days.

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

The Company does not have any revenue expected to be recognized in the future related to remaining performance obligations or contracts with variable consideration related to undelivered performance obligations. There was no revenue recognized in the current period from performance obligations satisfied in previous periods. The Company's significant judgments made in connection with the adoption of ASC 606 included the determination of when the Company satisfies its performance obligation to customers and the applicability of the as invoiced practical expedient.

Accounts Receivable and Allowance for Doubtful Accounts

46

---

Table of Contents

Accounts receivable are based on earned revenues. The Company provides an allowance for doubtful accounts, which is based on a review of outstanding receivables, historical collection information, and existing economic conditions. Provisions for doubtful accounts are recorded when it becomes evident that the customer will not be likely to make the required payments at either contractual due dates or in the future. The accounts are written off against the provision when it becomes evident that the account is not collectible.

The following reflects changes in the Company's allowance for doubtful accounts:

        

Balance as of December 31, 2017	$	1,581
Provision	120
Bad debt write-off	(515		)
Balance as of December 31, 2018	1,186
Provision	3,170
Bad debt write-off	—
Balance as of December 31, 2019	$	4,356

Property and Equipment

Property and equipment are recorded at cost or fair value (as part of purchase accounting or fresh start accounting). Improvements or betterments that extend the useful life of the assets are capitalized. Expenditures for maintenance and repairs are charged to expense when incurred. The costs of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the period of disposal. Gains or losses resulting from property disposals are credited or charged to operations. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets.

Intangible Assets

The Company's major classes of intangible assets consisted of its customer relationships, trade names and one covenant not to compete.

The Company expenses costs associated with extensions or renewals of intangible assets. There were no such extensions or renewals in the years ended December 31, 2019 and 2018. Amortization expense is calculated using the straight-line method.

Impairment of Long-Lived Assets

Long-lived assets include property and equipment and intangible assets. The Company tests its long-lived assets whenever events and changes in circumstances indicate the carrying amount of its net assets may not be recoverable. When an indicator of possible impairment exists, the Company uses estimated future undiscounted cash flows to assess recoverability of its long-lived assets. Impairment is indicated when future cash flows are less than the carrying amount of the assets. An impairment loss would be recorded in the period in which it is determined the carrying amount is not recoverable. The impairment loss is the amount by which the carrying amount exceeds the fair market value. The Company evaluated their long-lived assets for recoverability and determined that no impairment was indicated at December 31, 2019.

Goodwill

During the third quarter ended September 30, 2019, the Company adopted the guidance contained in ASU No. 2017-04, “Intangibles-Goodwill and Other ASC Topic 350: Simplifying the Test for Goodwill Impairment,” which removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Goodwill impairment is the amount by which the Company’s reporting unit carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. To estimate the fair value of the Company’s invested capital, the Company used both a market approach based on the guideline companies’ method (“Market Comparable Approach”), and an income approach based on a discounted cash flow analysis.

The Market Comparable Approach estimates fair value using market multiples calculated from a set of comparable public companies. In performing the valuations, significant assumptions utilized include unobservable Level 3 inputs including cash flows, long-term growth rates reflective of management’s forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. Discount rates are based on the development of a weighted average cost of capital using guideline public company data, factoring in current market data and any Company specific risk factors. The value indicated by both methods was weighted to arrive at a concluded value.

Deferred Financing Costs

The Company amortizes deferred financing costs over the period of the debt agreements on an effective interest basis, as a component of interest expense. The deferred financing costs are generally recorded on the consolidated balance sheet as a reduction to the respective long term debt, except for those deferred financing costs related to the Revolving Loan which is recorded as an

47

---

Table of Contents

other asset. Amortization of deferred financing costs was $1.7 million and $1.0 million for years ended December 31, 2019 and 2018, respectively.

Share-Based Compensation

The Company measures share-based compensation cost as of the grant date based on the estimated fair value of the award and recognizes compensation expense on a straight-line basis over the requisite service period. The Company classifies stock awards as either an equity award or a liability award. Equity classified awards are valued as of the grant date using market price. Liability classified awards are re-measured at fair value at the end of each reporting date until settled. Forfeitures are recognized as they occur.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the period that includes the statutory enactment date. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company records uncertain tax positions at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with tax authorities.

The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of tax expense.

Earnings per Share (EPS)

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 EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options and unvested restricted stock units, were exercised and converted into common stock. Diluted EPS is computed by dividing net income (loss) available to common stockholders by the weighted average common stock outstanding during the period, increased by the number of additional common shares that would have been outstanding if the potential common shares had been issued and were dilutive.

Environmental

The Company is subject to extensive federal, state, and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the adverse environmental effects of the disposal or release of hazardous substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated. There were no material environmental liabilities as of December 31, 2019 or December 31, 2018.

Litigation and Self-Insurance

The Company estimates its reserves related to litigation and self-insured risks based on the facts and circumstances specific to the litigation and self-insured claims and its past experience with similar claims. The Company maintains accruals in the consolidated balance sheets to cover self-insurance retentions. Please see Note 10- Commitments and Contingencies for further discussion.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", or ASU 2016-13, which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for annual periods beginning after December 15, 2018. In May and April 2019, the FASB issued ASU No. 2019-05 and ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" which further clarifies the ASU 2016-13. In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)” which delayed, for smaller reporting companies, the mandatory effective date for interim and annual reporting periods beginning after December 15, 2022. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

48

---

Table of Contents

In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment", or ASU 2017-04, which addresses concerns over the cost and complexity of the two-step goodwill impairment test by removing the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 will be effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. During the third quarter of 2019, the Company adopted the guidance contained in ASU No. 2017-04, which removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Goodwill impairment is the amount by which the Company’s single reporting unit carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. To estimate the fair value of the Company’s equity, the Company used both a market approach based on the guideline companies’ method (“Market Comparable Approach”), and an income approach based on a discounted cash flow analysis.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The guidance is effective for all entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The Company determined that the adoption of this standard as of January 1, 2020 would not have a material impact on its financial statements.

5. Acquisition of Cretic Energy Services, LLC

On November 16, 2018, the Company acquired 100% of the outstanding units of Cretic Energy Services, LLC (Cretic). The acquisition of Cretic was accounted for as a business combination using the acquisition method of accounting. The aggregate purchase price was $69.1 million in cash (including $2.2 million cash acquired).

The purchase price paid in the acquisition has been allocated to record the acquired assets and assumed liabilities based on their fair value. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that consideration paid exceeded the fair value of the net assets acquired. Therefore, as of the time of the Cretic acquisition, goodwill of $19.7 million was recorded. The goodwill recorded was primarily attributable to synergies related to the Company’s coiled tubing business strategy that were expected to arise from the Cretic acquisition and was attributable to the Company’s coiled tubing segment. As discussed in Note 6, the Company recognizing a goodwill impairment charge of $19.2 million for the year ended December 31, 2019.

Proforma Results from the Cretic Acquisition (unaudited)

The Cretic acquisition contributed revenue and net loss of $5.9 million and $(1.1) million, respectively, to the results of the Company from the date of acquisition through December 31, 2018. The following unaudited consolidated pro forma information is presented as if the Cretic acquisition had occurred on January 1, 2018 (in thousands):

		Pro Forma
		Year ended
		December 31, 2018
Revenue		$	241,220
Net loss		$	(36,048	)

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

6. Goodwill and Other Intangible Assets

Goodwill

Goodwill totaled $0.0 million and $19.7 million at December 31, 2019 and 2018, respectively. The goodwill related to the acquisition of Cretic, which was attributable to the Company's coiled tubing reporting unit, and is deductible for tax purposes. A measurement period adjustment settled a dispute with the seller over the amount of debt assumed in the purchase of Cretic as of

49

---

Table of Contents

the acquisition date. During the third quarter of 2019, the Company recognized a measurement period adjustment of $0.5 million related to the acquisition of Cretic. The measurement period adjustment related to certain finance leases of $1.0 million being assigned back to the seller along with property and equipment of $0.8 million and a cash payment received from the seller of $0.3 million.

The Company completed a goodwill impairment test as of September 30, 2019. The Company’s forecasted future cash flow declined from prior estimates because the Company experienced challenging sales trends and a downturn in the coiled tubing segment. These declining cash flows in our coiled tubing segment during 2019 and lower than previously forecasted cash flows, resulted in the Company recognizing a goodwill impairment charge of $19.2 million for the year ended December 31, 2019.

The following table sets forth the changes in goodwill (in thousands):

	Goodwill
Balance at December 31, 2018	$	19,700
Measurement period adjustment	(478		)
Impairment	(19,222		)
Balance at December 31, 2019	$	—

Other Intangible Assets

The following sets forth the identified intangible assets by major asset class (in thousands):

	Useful Life (years)		Gross Carrying Value				Accumulated Amortization				Net Book Value
December 31, 2019
Customer relationships	6-15		$	11,378			$	(2,079	)		$	9,299
Trade names	10-15		3,072				(515		)		2,557
Covenants not to compete	4		1,505				(1,022		)		483
			$	15,955			$	(3,616	)		$	12,339
December 31, 2018
Customer relationships	6-15		$	11,378			$	(832	)		$	10,546
Trade names	10-15		3,072				(496		)		2,576
Covenants not to compete	4		1,505				(647		)		858
			$	15,955			$	(1,975	)		$	13,980

Amortization expense for the years ended December 31, 2019 and 2018 was $1.6 million and $1.2 million, respectively. Future amortization of these intangibles will be as follows:

2020		$	1,630
2021		1,360
2022		1,253
2023		1,253
2024		1,197
Thereafter		5,646
		$	12,339

50

---

7. Property and Equipment

Property and equipment consisted of the following (in thousands):

			December 31,
			2019				2018
Well servicing equipment	9-15 years		$	132,562			$	128,647
Autos and trucks	5-10 years		20,627				32,132
Autos and trucks - finance lease	5-10 years		22,136				20,416
Disposal wells	5-15 years		3,835				3,977
Building and improvements	5-30 years		6,216				5,705
Furniture, fixtures, and other	3-15 years		3,154				2,797
Land			647				868
			189,177				194,542
Accumulated depreciation			(63,768		)		(45,934		)
			$	125,409			$	148,608

Depreciation expense was $27.7 million and $29.3 million for the years ended December 31, 2019 and 2018, respectively. Depreciation of assets held under finance leases was $4.5 million and $3.4 million for the years ended December 31, 2019 and 2018, respectively, and is included in depreciation and amortization expense in the accompanying condensed consolidated statements of operations. Gain that resulted from the sale of property and equipment was $4.6 million and $1.3 million for the years ended December 31, 2019 and 2018, respectively, which are included in direct operating costs, within each reporting segment.

8. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	December 31,
	2019				2018
Accrued wages	$	1,192			$	3,028
Accrued insurance	6,981				5,228
Accrued deferred interest	2,081				2,098
Accrued property taxes	1,470				1,064
Other accrued expenses	1,010				2,930
Total accrued expenses	$	12,734			$	14,348

51

---

Table of Contents

9. Long-Term Debt

Long-term debt consisted of the following (in thousands):

	December 31,
	2019				2018
Term Loan Agreement of $47.4 million and $60.0 million, plus $12.4 million and $6.0 million of accrued interest paid-in-kind and net of debt discount of $2.3 million and $3.6 million as of December 31, 2019 and December 31, 2018, respectively	$	57,506			$	62,335
PIK Notes, plus $0.9 million of accrued interest paid-in-kind, and including $6.0 million accretion of interest and conversion premium as of December 31, 2019	58,646				—
Bridge Loan of $50.0 million, net of debt discount of $0.4 million as of December 31, 2018	—				49,568
Revolving Loan Agreement	4,000				—
Finance leases	10,045				13,319
Insurance notes	4,498				5,194
Total debt	134,695				130,416
Less: Current portion	(72,059		)		(59,321		)
Total long-term debt	$	62,636			$	71,095

Term Loan Agreement

On April 13, 2017, the Company entered into the Term Loan Agreement. FES LLC is the borrower, or the Borrower, under the Term Loan Agreement. The Borrower’s obligations have been guaranteed by FES Ltd. and by TES, CCF and FEI, each direct subsidiaries of the Borrower and indirect subsidiaries of FES Ltd. The Term Loan Agreement, as amended, provided for a term loan of $60.0 million, excluding paid-in-kind interest. Subject to certain exceptions and permitted encumbrances, the obligations under the Term Loan Agreement are secured by a first priority security interest in substantially all the assets of the Company other than accounts receivable, cash and related assets, which constitute priority collateral under the Revolving Loan Agreement (described below). The Term Loan Agreement has a stated maturity date of April 13, 2021.

Borrowings under the Term Loan Agreement bear interest at a rate equal to five percent (5%) per annum payable quarterly in cash, or the Cash Interest Rate, plus (ii) an initial paid-in-kind interest rate of seven percent (7%) commencing April 13, 2017 to be capitalized and added to the principal amount of the term loan or, at the election of the Borrower, paid in cash. The paid-in-kind interest increases by two percent (2%) twelve months after April 13, 2017 and every twelve months thereafter until maturity. Upon and after the occurrence of an event of default, the Cash Interest Rate will increase by two percentage points per annum. During the years ended December 31, 2019 and 2018, $6.4 million and $6.0 million of interest was paid-in-kind, respectively. At December 31, 2019 and 2018, the paid-in-kind interest rate was 11% and 9%, respectively.

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

Amendment to Term Loan Agreement and Joinder

In connection with the Cretic Acquisition, on November 16, 2018, the Company, as a guarantor, FES LLC, as borrower, and certain of their subsidiaries, as guarantors, entered into Amendment No. 1 to Loan and Security Agreement and Pledge and Security Agreement (the “Term Loan Amendment”) with the lenders party thereto and Wilmington Trust, National Association, as agent (the “Term Loan Agent”), pursuant to which the Term Loan Agreement, was amended to, among other things, permit (i) debt under the Revolving Loan Agreement (described below) and the liens securing the obligations thereunder, (ii) the incurrence of add-on term loans under the Term Loan Agreement in an aggregate principal amount of $10.0 million and (iii) the incurrence of one-year “last-out” bridge loans under the Term Loan Agreement in an aggregate principal amount of $50.0 million (the “Bridge Loan”).

In addition, on November 16, 2018, Cretic entered into joinder documentation pursuant to which it became a guarantor under the Term Loan Agreement and a pledgor under the Pledge and Security Agreement referred to in the Term Loan Agreement.

52

---

Table of Contents

Revolving Loan Agreement

In connection with the Cretic Acquisition, on November 16, 2018, the Company and certain of its subsidiaries, as borrowers, entered into a Credit Agreement (the “Revolving Loan Agreement”) with the lenders party thereto and Regions Bank, as administrative agent and collateral agent (the “Revolver Agent”). The Revolving Loan Agreement provides for $35 million of revolving loan commitments, subject to a borrowing base comprised of 85% of eligible accounts receivable, 90% of eligible investment grade accounts receivable and 100% of eligible cash, less reserves. The loans under the Revolving Loan Agreement are due in January 2021, accrue interest at a floating rate of LIBOR plus 2.50% - 3.25%, or a base rate plus 1.50% - 2.25%, with the margin based on the fixed charge coverage ratio from time to time. The Company is in violation of certain provisions of the Revolving Loan Agreement related to the Going Concern Opinion, which cause the loan to be in default. A limited waiver was obtained as described below, providing relief of this provision extending, through June 30, 2020, of the requirement to provide an unqualified opinion of the Company’s consolidated financial statements. Due to limitations of the waiver, which only included a time extension and not unconditional relief of providing an unqualified opinion from the independent auditors on the Company’s financial statements, the Company will not be able to remedy the violation once the waiver term expires, and there is no assurance that additional waivers can be obtained. As a result of the Company’s violation of the Revolving Loan Agreement provisions and only a conditional waiver obtained, the Company has recorded the outstanding balance of this note as a current liability as of December 31, 2019.

The Revolving Loan Agreement is secured on a first lien basis by substantially all assets of the Company and its subsidiaries, subject to an intercreditor agreement between the Revolver Agent and the Term Loan Agent which provides that the priority collateral for the Revolving Loan Agreement consists of accounts receivable, cash and related assets, and that the other assets of the Company and its subsidiaries constitute priority collateral for the Term Loan Agreement. At December 31, 2019, we had $4.0 million borrowings outstanding, $7.2 million in letters of credit outstanding and availability of $4.1 million.

February and March 2020 Revolving Loan Amendments, Term Loan Amendment and Term Loan Waiver

On February 3, 2020 the Company and Regions Bank entered into an amendment to its Revolving Loan effective December 31, 2019, which among other things, reinstated a minimum excess line availability covenant for the monthly periods from December 2019 through July 2020 and removed the requirement to test for the purpose of a financial covenant, the fixed charge coverage ratio for the monthly periods from December 2019 through June 2020.

On March 20, 2020, the Company and certain of its subsidiaries, as borrowers, entered into the Third Amendment and Temporary Limited Waiver to Credit Agreement (the “March 2020 Revolving Loan Amendment”) with the lenders party thereto and the Revolver Agent. Pursuant to the March 2020 Revolving Loan Amendment, the requirement for the Company to deliver an unqualified audit opinion for the fiscal year ended December 31, 2019 was waived until June 30, 2020 (the “Revolving Loan Agreement Temporary Waiver”). In addition, the commitments under the Revolving Loan Agreement were reduced from $35.0 million to $27.5 million, and interest under the Revolving Loan Agreement was increased from a range of LIBOR plus 2.50% to 3.25% or base rate plus 1.50% to 2.25% based on the fixed charge coverage ratio from time to time, to LIBOR plus 4.25% or base rate plus 3.25%.

On March 20, 2020, the Company, as a guarantor, FES LLC, as borrower, and certain of their subsidiaries, as guarantors, obtained a corresponding waiver under the Term Loan Agreement for the requirement to deliver an unqualified audit opinion for the fiscal year ended December 31, 2019.

On March 23, 2020, the Company, as a guarantor, FES LLC, as borrower, and certain of their subsidiaries, as guarantors, entered into Amendment No. 3 to Loan and Security Agreement (the “March 2020 Term Loan Amendment”) with the lenders party thereto and the Term Loan Agent. Pursuant to the March 2020 Term Loan Amendment, there will be no cross-default to the Revolving Loan Agreement resulting from the expiration of the Revolving Loan Agreement Temporary Waiver.

5% Subordinated Convertible PIK Notes

On March 4, 2019, the Company issued $51.8 million aggregate original principal amount of 5.00% Subordinated Convertible PIK Notes due June 30, 2020 (the “PIK Notes”). On March 4, 2019, the Company, as Issuer, and Wilmington Trust, National Association, as Trustee, entered into an Indenture governing the terms of the PIK Notes.

The PIK Notes bear interest at a rate of 5.00% per annum. Interest on the PIK Notes will be accrued and payable, or capitalized to principal if not permitted to be paid in cash, semi-annually in arrears on June 30 and December 31 of each year, commencing on June 30, 2019. The Company capitalized the PIK Note interest totaling $0.9 million on July 1, 2019 and $1.3 million on January 1, 2020, which corresponds to the date the interest was determined to be paid.

The PIK Notes are the unsecured general subordinated obligations of the Company and are subordinated in right of payment to any existing and future secured or unsecured senior debt of the Company. The payment of the principal of, premium, if any, and interest on the PIK Notes will be subordinated to the prior payment in full of all of the Company’s existing and future senior indebtedness. In the event of a liquidation, dissolution, reorganization or any similar proceeding, obligations on the PIK Notes will be paid only after senior indebtedness has been paid in full. Pursuant to the Indenture, the Company is not permitted to (1)

53

---

Table of Contents

make cash payments to pay principal of, premium, if any, and interest on or any other amounts owing in respect of the PIK Notes, or (2) purchase, redeem or otherwise retire the PIK Notes for cash, if any senior indebtedness is not paid when due or any other default on senior indebtedness occurs and the maturity of such indebtedness is accelerated in accordance with its terms unless, in any case, the default has been cured or waived, and the acceleration has been rescinded or the senior indebtedness has been repaid in full.

The Indenture also provides that upon a default by the Company in the payment when due of principal of, or premium, if any, or interest on, indebtedness in the aggregate principal amount then outstanding of $5.0 million or more, or acceleration of the Company’s indebtedness so that it becomes due and payable before the date on which it would otherwise have become due and payable, and if such default is not cured or waived within 30 days after notice to the Company by the Trustee or by holders of at least 25% in aggregate principal amount of the PIK Notes then outstanding, the principal of, (and premium, if any) and accrued and unpaid interest on, the PIK Notes may be declared immediately due and payable.

The PIK Notes are redeemable in whole or from time to time in part at the Company’s option at a redemption price equal to the sum of (i) 100.0% of the principal amount of the PIK Notes to be redeemed and (ii) accrued and unpaid interest thereon to, but excluding, the redemption date, which amounts may be payable in cash or in shares of the Company’s common stock, (subject to limitations, if any, in the documentation governing the Company’s senior indebtedness). If redeemed for the Company’s common stock the holder will receive a number of shares of the Company’s common stock calculated based on the Fair Market Value of a share of the Company’s common stock at such time, in each case less a 15% discount per share. The 15% discount represents an implied conversion premium at issuance which will be settled in common stock at the date of conversion.  As such, the face value of the PIK Notes will be accreted to the settlement amount at June 30, 2020.  For the year ended December 31, 2019, the Company recorded $4.2 million in interest expense related to the accretion of the conversion premium.

The Indenture contains provisions permitting the Company and the trustee in certain circumstances, without the consent of the holders of the PIK Notes, and in certain other circumstances, with the consent of the holders of not less than a majority in aggregate principal amount of the PIK Notes at the time outstanding to execute supplemental indentures modifying the terms of the Indenture and the PIK Notes as described It is also provided in the Indenture that, subject to certain exceptions, the holders of a majority in aggregate principal amount of the PIK Notes at the time outstanding may on behalf of the holders of all the PIK Notes waive any past default or event of default under the Indenture and its consequences.

The Indenture provides for mandatory conversion of the PIK Notes at maturity (or such earlier date as the Company shall elect to redeem the PIK Notes), or upon a marketed public offering of the Company’s common stock or a Change of Control, in each case as defined in the Indenture, at a conversion rate per $100 principal amount of PIK Notes into a number of shares of the Company’s common stock calculated based on the Fair Market Value of a share of the Company’s common stock at such time, in each case less a 15% discount per share.

Fair Market Value means fair market value as determined by (A) in the case of a marketed public offering, the offering price per share paid by public investors in such marketed public offering, (B) in the case of a Change of Control, the value of the consideration paid per share by the acquirer in the Change of Control transaction, or (C) in the case of mandatory conversion at the Maturity Date (or such earlier date as the Company shall elect to redeem the PIK Notes), such value as shall be determined by a nationally recognized investment banking firm engaged by the Board of Directors of the Company.

The Company used the gross proceeds of $51.8 million that it received from the issuance of the PIK Notes to repay all of the outstanding principal and accrued and unpaid interest on the Bridge Loan.

Interest on the Bridge Loan prior to its repayment accrued at a rate of 14% (5% cash interest plus 9% PIK interest). The payment obligations of the Borrower under the Bridge Loan have been fully satisfied as of March 4, 2019.

The exchange of the Bridge Loan for the PIK Notes was recognized as a modification of the Term Loan as the amended Term Loan, resulting from the exchange, was not substantially different from the Term Loan. As such, the net carrying value of the Term Loan was not adjusted and a new effective interest that equates the revised cash flows of the modified Term Loan to the existing carrying value of the Term Loan was computed and applied prospectively. Costs incurred with third parties of approximately $1.6 million, related to the issuance of the PIK Notes, were recognized in interest expense for the year ended December 31, 2019.

Effective November 14, 2019, each of Ascribe Capital LLC and Solace Capital Partners LP, on behalf of each of their funds that is a holder of PIK Notes issued under the Indenture which in the aggregate hold $48.9 million of face value of the PIK Notes as of December 31, 2019, agreed to extend the maturity date under the Indenture to November 30, 2020 of those  PIK Notes, the Excess PIK Notes, for which there are not at June 30, 2020 sufficient authorized shares of common stock of the Company to effect the mandatory conversion of the Excess PIK Notes, after giving effect to the conversion of PIK Notes held by other holders of PIK Notes who have not agreed to a maturity date extension or conversion deferral.  Each also agreed to defer the mandatory conversion feature under the Indenture for such Excess PIK Notes until after the Company’s stockholders have authorized sufficient additional shares of the Company’s common stock to permit such conversion.

Insurance Notes

54

---

Table of Contents

During 2019 and 2018, the Company entered into insurance promissory notes for the payment of insurance premiums at an interest rate of 4.68% and 3.27% respectively, with an aggregate principal amount outstanding of approximately $4.5 million and $5.2 million as of December 31, 2019 and 2018, respectively. The amount outstanding could be substantially offset by the cancellation of the related insurance coverage which is classified in prepaid insurance. These notes are or were payable in nine monthly installments with maturity dates of August 15, 2020 and July 15, 2019, respectively.

10. Commitments and Contingencies

Concentrations of Credit Risk

Financial instruments which subject the Company to credit risk consist primarily of cash balances maintained in excess of federal depository insurance limits and trade receivables. Insurance coverage is currently $250,000 per depositor at each financial institution, and the Company's non-interest bearing cash balances exceeded federally insured limits. The Company restricts investment of temporary cash investments to financial institutions with high credit standings.

The Company’s customer base consists primarily of multi-national and independent oil and natural gas producers. The Company does not require collateral on its trade receivables. For the year ended December 31, 2019 the Company’s largest customer, five largest customers, and ten largest customers constituted approximately 10%, 36%, and 45% of total revenues, respectively. For the year ended December 31, 2018, the Company's largest customer, five largest customers, and ten largest customers constituted approximately 14%, 44%, and 55% of total revenues, respectively. The loss of any one of the Company's top five customers would 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 December 31, 2019, the Company's largest customer, five largest customers, and ten largest customers constituted approximately 19%, 34%, and 40% of trade accounts receivable, respectively. As of December 31, 2018, the Company's largest customer, five largest customers, and ten largest customers constituted approximately 5%, 28%, and 31% of trade accounts receivable, respectively. The Company continually evaluates its reserves for potential credit losses and establishes reserves for such losses.

Employee Benefit Plan

The Company has a 401(k) retirement plan for substantially all of its employees based on certain eligibility requirements. The Company may provide profit sharing contributions to the plan at the discretion of management. No such discretionary contributions have been made since inception of the plan.

Litigation

The Company is subject to various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that any of the currently existing claims and actions, separately or in the aggregate, will have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows. It is reasonably possible that cases could be resolved and result in liabilities that exceed the amounts currently reserved; however, we cannot reasonably estimate a range of loss based on the status of the cases. If one or more negative outcomes were to occur relative to these matters, the aggregate impact to the Company’s financial condition could be material.

Self-Insurance

The Company is self-insured under its Employee Group Medical Plan for the first $150 thousand per individual.

As of December 31, 2019, the Company has a per occurrence $2.0 million deductible for general liability. The Company has an additional premium payable clause under its lead of $10.0 million limit excess policy that states in the event losses exceed $2.0 million, an additional loss premium of 15% will be payable for losses in excess of $2.0 million. The additional loss premium is payable at the time when the insurers pay for the loss and will be payable over a period agreed by the insurers.

As of December 31, 2018, the Company was self-insured with a retention for the first $250 thousand in general liability. The Company has an additional premium payable clause under its lead $10.0 million limit excess policy that states in the event losses exceed $1.0 million, an additional loss premium of 15% to 17% will be payable for losses in excess of $1.0 million. The additional loss premium is payable at the time when the insurers pay for the loss and will be payable over a period agreed by the insurers.

The Company has accrued liabilities totaling $7.0 million and $5.2 million as of December 31, 2019 and December 31, 2018, respectively, for the projected additional premium and self-insured portion of these insurance claims as of the financial statement dates. This accrual includes claims made as well as an estimate for claims incurred but not reported by using third party data and claims history as of the financial statement dates.

Other

55

---

Table of Contents

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

11. Leases

The Company adopted a comprehensive new lease accounting standard, ASC 842, effective January 1, 2019. The details of the significant changes to the Company's accounting policies resulting from the adoption of the new standard are set out below. The Company adopted the standard on a prospective basis using the optional modified retrospective transition method; accordingly, the comparative information as of and for the year ended December 31, 2018 has not been adjusted and continues to be reported under the previous lease standard. Under the new lease standard, assets and liabilities that arise from all leases are required to be recognized on the balance sheet for lessees. Previously, only capital leases, which are now referred to as finance leases, were recorded on the balance sheet.

Beginning January 1, 2019, for all leases with a term in excess of 12 months, the Company recognized a lease liability equal to the present value of the lease payments and a right-of-use asset representing our right to use the underlying asset for the lease term. For operating leases, lease expense for lease payments is recognized on a straight-line basis over the lease term, while finance leases include both an operating expense and an interest expense component. For all leases with a term of 12 months or less, the Company elected the practical expedient to not recognize lease assets and liabilities. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. The Company has a significant number of short-term leases including month-to-month agreements that continue in perpetuity until the lessor or the Company terminates the lease agreement.

The Company is a lessee for operating leases, primarily related to real estate, salt water disposal wells and equipment. The vast majority of the Company's operating leases have remaining lease terms of 10 years or less, some of which include options to extend the leases, and some of which include options to terminate the leases. The Company generally does not include renewal or termination options in the assessment of leases unless extension or termination is deemed to be reasonably certain. The accounting for some leases may require significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rates to utilize in the net present value calculation of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination options. Incremental borrowing rate is determined by utilizing a fully collateralized rate for a fully amortizing loan with the same term as the operating lease. Salt water disposal well locations have fixed or both fixed and variable lease amounts where the variable lease payments are based on the volume of fluids injected into to the well and/or sales of products by the Company. The Company also has some lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

The Company is a lessee for finance leases related to autos and trucks and well servicing equipment. The vast majority of the Company's finance leases have remaining lease terms of three years or less, all of which include options to terminate the leases after one year and do not include options to extend the lease. For all finance leases, the Company is subject to a residual value guarantee established by the lessor and based upon the calculated net book value of the vehicle as of the date of early termination of the lease. The loans are collateralized by equipment purchased with the proceeds of such loans. For finance leases, the Company uses discount rates similar to incremental borrowing rates available for comparable equipment financing in the net present value calculation of lease payments. The Company's vehicle finance lease agreements contain lease and non-lease components, which are accounted for separately.

The following tables illustrate the financial impact of the Company's leases as of and for the year ended December 31, 2019, along with other supplemental information about the Company's leases (in thousands, except years and percentages):

	Year Ended December 31, 2019
Components of lease expense:
Finance lease cost:
Amortization of right-of-use assets	$	4,495
Interest on lease liabilities	529
Operating lease cost:
Lease expense (1)	1,838
Short-term lease cost	1,787
Total lease cost	$	8,649

⁽¹⁾ Includes variable lease costs of $284 thousand for the year ended December 31, 2019.

56

---

Table of Contents

	December 31, 2019
Components of balance sheet:
Operating leases:
Operating lease right-of-use assets (non-current)	$	6,235
Current portion of operating lease liabilities	$	1,476
Long-term operating lease liabilities, net of current portion	$	4,759
Finance leases:
Property and equipment, net	$	14,467
Current portion of long-term debt	$	4,915
Long-term debt, net of current portion and debt discount	$	5,130

	Year Ended December 31, 2019
Other supplemental information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	3,625
Operating cash flows for finance leases - interest	$	529
Financing cash flows for finance leases	$	5,038
Noncash activities from right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	7,390
Finance leases	$	2,754
Weighted-average remaining lease term:
Operating leases	7.6 years
Finance leases	3.1 years
Weighted-average discount rate:
Operating leases	7.1		%
Finance leases	5.1		%

The following table summarizes the maturity of the Company's debt, operating and finance leases as of December 31, 2019 (in thousands):

	Debt				Operating Leases - Related Party				Operating Leases - Other				Finance Leases
2020	$	61,198			$	27			$	2,037			$	5,226
2021	59,800				—				1,042				3,886
2022	—				—				879				1,292
2023	—				—				749				162
2024	—				—				677				—
Thereafter	—				—				2,749				—
Total minimum payments	120,998				27				8,133				10,566
Less imputed interest	—				(1		)		(1,924		)		(521		)
Less debt discount	(2,348		)		—				—				—
Debt premium	6,000				—				—				—
Total debt and lease liabilities per balance sheet	$	124,650			$	26			$	6,209			$	10,045

57

---

Table of Contents

    

The Company adopted ASC 842 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption. Future annual minimum lease payments and capital lease commitments as of December 31, 2018 were as follows (in thousands):

	Operating Leases - Related Party				Operating Leases - Other				Capital Leases
2020	$	30			$	986			$	4,334
2021	8				946				3,375
2022	—				781				1,051
2023	—				386				—
Thereafter	—				1,350				—
Total	$	38			$	4,449			$	8,760

12. Supplemental Cash Flow Information

	Year Ended December 31,
	2019				2018
	(in thousands)
Cash paid for
Interest	$	4,324			$	3,989
Income tax	—				—
Supplemental schedule of non-cash investing and financing activities
Finance leases on equipment	$	2,754			$	3,829
Change in accounts payable related to capital expenditures	$	—			$	(599	)

13. Related Party Transactions

During the years ended December 31, 2019 and 2018 the Company incurred related party expenses, primarily related to rent, of $0.9 million and $1.1 million, respectively.

There was no related party revenue for the years ended December 31, 2019 and 2018.

As of December 31, 2019 and 2018, there were no related party accounts receivable or accounts payable.

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. As of December 31, 2019, Ascribe and/or one or more of its affiliates was owed approximately $16.2 million of the aggregate principal amount of the Term Loan Agreement and approximately $28.7 million of the aggregate principle amount of the PIK Notes. As of December 31, 2019, Solace and/or one of its affiliates was owed approximately $14.8 million of the aggregate principal amount of the term loan covered by the Term Loan Agreement and approximately $21.1 million of the aggregate principal amount of the PIK Notes. Moreover, an affiliate of Solace and affiliates of Ascribe are parties to certain registration rights agreement by and among the Company and certain stockholders of the Company.

14. Earnings (loss) per Share

58

---

Table of Contents

The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share amounts):     

	Year Ended December 31,
	2019				2018
Basic and diluted:
Net loss	$	(68,399	)		$	(32,607	)
Weighted-average common shares	5,472				5,368
Basic and diluted net loss per share	$	(12.50	)		$	(6.07	)

There were 171,716 and 329,240 unvested restricted stock units that were not included in the calculation of diluted EPS for the years ended December 31, 2019 and 2018, respectively, because their effect would have been antidilutive.

15. Business Segment Information

The Company has three reportable segments organized based on its products and services—well servicing, coiled tubing and fluid logistics. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Upon the acquisition of Cretic, the Company evaluated its segment information and determined that coiled tubing represented a separate segment under current facts.

Well Servicing

The Company's well servicing segment utilizes a fleet of well servicing rigs, which was comprised of workover rigs and swabbing rigs, in addition to coiled tubing spreads and other related assets and equipment to provide the following services:(i) well maintenance, including remedial repairs and removal and replacement of downhole production equipment, (ii) well workovers, including significant downhole repairs, re-completions and re-perforations, (iii) completion and swabbing activities, (iv) plugging and abandonment services, and (v) pressure testing of oil and natural gas production tubing and scanning tubing for pitting and wall thickness using tubing testing units.

Coiled Tubing

The coiled tubing segment utilizes our fleet of coiled tubing units to provide a range of services accomplishing a wide variety of goals including horizontal completions, well bore clean-outs and maintenance, nitrogen services, thru-tubing services, formation stimulation using acid and other chemicals, and other pre- and post-hydraulic fracturing well preparation services.

Fluid Logistics

The Company's fluid logistics segment utilizes a fleet of fluid transport trucks and related assets, including specialized vacuum, high-pressure pump and tank trucks, frac tanks, water wells, salt water disposal wells and facilities, and related equipment to provide services such as transportation, storage and disposal of a variety of drilling and produced fluids used in, and generated by, oil and natural gas production. These services are required in most workover and completion projects and are routinely used in the daily operation of producing wells.

59

---

Table of Contents

The following table sets forth certain financial information with respect to the Company’s reportable segments for the years ended December 31, 2019 and 2018 (in thousands):

	Well Servicing				Coiled Tubing				Fluid Logistics				Consolidated
Year ended December 31, 2019
Operating revenues	$	91,521			$	52,335			$	44,566			$	188,422
Direct operating costs	72,980				51,982				34,635				159,597
Segment profits	$	18,541			$	353			$	9,931			$	28,825
Depreciation and amortization	$	9,697			$	10,745			$	8,962			$	29,404
Capital expenditures (1)	$	6,042			$	6,709			$	2,678			$	15,429
Total assets	$	65,401			$	70,506			$	44,504			$	180,411
Long lived assets	$	50,609			$	59,094			$	33,537			$	143,240
Year ended December 31, 2018
Revenues	$	83,035			$	39,572			$	58,291			$	180,898
Direct operating costs	67,889				32,384				46,552				146,825
Segment profits	$	15,146			$	7,188			$	11,739			$	34,073
Depreciation and amortization	$	10,324			$	6,480			$	13,739			$	30,543
Capital expenditures (1)	$	5,080			$	12,961			$	4,044			$	22,085
Total assets	$	79,236			$	113,008			$	50,955			$	243,199
Long lived assets	$	52,314			$	84,588			$	45,386			$	182,288
(1) Capital expenditures listed above include all cash and non-cash additions to property and equipment, including finance leases and fixed assets recorded in accounts payable at year-end.

 

	Year Ended December 31,
	2019				2018
Reconciliation of Operating Loss As Reported:
Segment profits	$	28,825			$	34,073
Less:
Impairment of goodwill	19,222				—
General and administrative expense	24,065				25,390
Depreciation and amortization	29,404				30,543
Operating loss	(43,866		)		(21,860		)
Other income (expenses), net	(24,677		)		(11,150		)
Pre-tax loss	$	(68,543	)		$	(33,010	)
	December 31,
	2019				2018
Reconciliation of Total Assets As Reported:
Total reportable segments	$	180,411			$	243,199
Parent	9,854				13,186
Total assets	$	190,265			$	256,385

16. Revenue

The following tables show revenue disaggregated by primary geographical markets and major service lines for the years

60

---

Table of Contents

ended December 31, 2019 and 2018 (in thousands):

		Year ended December 31, 2019
Primary Geographical Markets		Well Servicing				Coiled Tubing				Fluid Logistics				Total
South Texas		$	64,336			$	16,652			$	22,300			$	103,288
East Texas (1)		5,089				—				1,941				7,030
Central Texas		—				—				10,842				10,842
West Texas		22,096				35,683				9,483				67,262
Total		$	91,521			$	52,335			$	44,566			$	188,422
		Year ended December 31, 2018
Primary Geographical Markets		Well Servicing				Coiled Tubing				Fluid Logistics				Total
South Texas		$	41,505			$	34,137			$	28,745			$	104,387
East Texas (1)		4,536				—				3,040				7,576
Central Texas		—				—				14,028				14,028
West Texas		36,994				5,435				12,478				54,907
Total		$	83,035			$	39,572			$	58,291			$	180,898
(1) Includes revenues from the Company's operations in Pennsylvania.

17. Income Taxes

Income tax benefit included in the consolidated statements of operations consisted of the following (in thousands):

	Year Ended December 31,
	2019				2018
Current:
Federal	$	—			$	—
State	(32		)		104
Foreign	—				(485		)
Total current income tax (benefit) expense	(32		)		(381		)
Deferred:
Federal	(112		)		—
State	—				(22		)
Foreign	—				—
Total deferred income tax (benefit) expense	(112		)		(22		)
Total income tax (benefit) expense	$	(144	)		$	(403	)

61

---

Table of Contents

The differences between income taxes expected at the U.S. federal statutory income tax rate of 21% and the reported income tax benefit are summarized as follows (in thousands):

	Year Ended December 31,
	2019				2018
Income tax benefit at statutory rate	$	(14,394	)		$	(6,932	)
Nondeductible expenses	2,181				258
Change in deferred tax valuation allowance	20,989				(1,636		)
Change in uncertain tax position	(8,282		)		8,270
Foreign taxes	—				(472		)
State taxes	(467		)		46
Other	(171		)		63
	$	(144	)		$	(403	)

Significant components of our deferred tax assets and liabilities are as follows (in thousands):

	December 31,
	2019				2018
Deferred tax assets:
Net operating loss carryforwards	$	22,610			$	6,993
Foreign tax credits	796				796
Acquisition expenses	491				855
Share-based compensation	418				141
Bad debts	965				252
Accrued expenses	1,546				2,529
Tax over book depreciation	4,195				7,019
Intangible assets	3,835				—
Operating lease liabilities	1,331				—
Disallowed interest expense	3,855				—
Other	171				102
Total deferred tax assets	40,213				18,687
Less: valuation allowance	(38,721		)		(17,732		)
Total deferred tax assets, net	$	1,492			$	955
Deferred tax liabilities:
Book over tax depreciation	$	(356	)		$	(137	)
Intangible assets	—				(1,175		)
Operating lease right of use assets	$	(1,381	)		$	—
Total deferred tax liabilities	$	(1,737	)		$	(1,312	)
Net deferred tax liability	$	(245	)		$	(357	)

As of December 31, 2019, the Company had net operating loss (“NOL”) carryforwards for federal income tax purposes of approximately $106.6 million, of which $52.0 million will begin to expire in 2033 if not utilized to offset taxable income, and $54.6 million may be carried forward indefinitely. Future changes in ownership, as defined by Section 382 of the IRC, could limit the amount of NOL carryforwards used in any one year.

In general, under Sections 382 and 383 of the IRC, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and certain tax credits, to offset future taxable income and tax. Generally, an ownership change occurs if the aggregate stock ownership of certain stockholders changes by more than 50 percentage points over such stockholders’ lowest percentage of ownership during the testing period (generally three years). In connection with our emergence from Chapter 11 proceedings in 2017, we experienced an ownership change for the purposes of Section 382. The ownership change did not result in the expiration of any pre-change NOLs. However, any subsequent ownership changes under the provisions of Section 382 could further adversely affect the use of our NOLs in future periods.

62

---

Table of Contents

At December 31, 2019 and 2018, the Company placed a valuation allowance of $38.7 million and $17.7 million, respectively, against the entirety of its net deferred tax asset balance, as the Company has not determined that it is more likely than not to be realized. The change in the valuation allowance was $21.0 million for the year ended December 31, 2019.

During the year ended December 31, 2018, the Company derecognized $39.4 million of NOLs as an uncertain tax position (representing $8.3 million of deferred tax asset). The uncertain tax position resulted from an administrative error when our 2017 federal income tax return was filed, which inadvertently omitted an election out of the provisions of Section 382(l)(5). The Company filed for 9100 relief, requesting an extension of time to file the missing election. While the Company believed we had a strong set of facts, the decision to grant relief was at the discretion of the IRS. Based on this, we could not conclude “more likely than not” and the deferred tax asset was derecognized as of December 31, 2018. On September 12, 2019 the IRS granted the request and an amended 2017 federal income tax return was filed in accordance with the granted relief. As a result, the Company reinstated $39.4 million of NOL carryforwards, representing a deferred tax asset of $8.3 million at December 31, 2019.

The Company files U.S. federal, U.S. state, and foreign tax returns, and is generally no longer subject to tax examinations for fiscal years prior to 2015.

18. Share-Based Compensation

Management Incentive Plan

The Management Incentive Plan became effective on April 13, 2017.

The compensation committee, or the Compensation Committee, of the board of directors of the FES Ltd., or the Board, administers the Management Incentive Plan. The Compensation Committee has broad authority under the Management Incentive Plan to, among other things: (i) select participants; (ii) determine the terms and conditions, not inconsistent with the Management Incentive Plan, of any award granted under the Management Incentive Plan; (iii) determine the number of shares to be covered by each award granted under the Management Incentive Plan; and (iv) determine the fair market value of awards granted under the Management Incentive Plan, subject to certain exceptions.

Persons eligible to receive awards under the Management Incentive Plan include officers and employees of the Company. The types of awards that may be granted under the Management Incentive Plan include stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares and other forms of stock based awards.

The maximum number of shares of common stock that may be issued or transferred pursuant to awards under the Management Incentive Plan is 750,000, which number may be increased with the approval of FES Ltd.’s stockholders. If any outstanding award granted under the Management Incentive Plan expires or is terminated or canceled without having been exercised or settled in full, or if shares of common stock acquired pursuant to an award subject to forfeiture are forfeited, the shares of common stock allocable to the terminated portion of such award or such forfeited shares will revert to the Management Incentive Plan and will be available for grant under the Management Incentive Plan as determined by the Compensation Committee in consultation with the Chairman of the Board, subject to certain restrictions.

In the event of any change in the outstanding shares of common stock by reason of a stock split, stock dividend or other non-recurring dividends or distributions, recapitalization, merger, consolidation, spin-off, combination, repurchase or exchange of stock, reorganization, liquidation, dissolution or other similar corporate transaction, an equitable adjustment will be made in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Management Incentive Plan. Such adjustment may include an adjustment to the maximum number and kind of shares of stock or other securities or other equity interests as to which awards may be granted under the Management Incentive Plan, the number and kind of shares of stock or other securities or other equity interests subject to outstanding awards and the exercise price thereof, if applicable.

Restricted Stock Unit activity under the Management Incentive Plan was as follows (in thousands):

63

---

		Number of Shares			Weighted Average Grant Date Fair Value
Unvested as of December 31, 2017		363,600			$	11.00
Granted		86,400			$	4.70
Vested		(103,680	)		$	9.92
Forfeited		(17,080	)		$	11.00
Unvested as of December 31, 2018		329,240			$	9.68
Granted		—			$	—
Vested		(85,534	)		$	11.00
Forfeited		(71,990	)		$	5.14
Unvested as of December 31, 2019		171,716			$	11.00

Share based compensation expense recognized under the Management Incentive Plan was $0.9 million and $1.1 million during the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, unrecognized compensation cost was approximately $1.7 million to be recognized over approximately 1.7 years.

19. Equity Securities

The Company's common stock carries the following rights:

•     Voting. Holders of common stock are entitled to one vote per share of common stock owned as of the relevant record date on all matters submitted to a vote of stockholders. Except as otherwise required by Delaware law, holders of common stock (as well as holders of any preferred stock of FES Ltd. entitled to vote with such common stockholders) vote together as a single class on all matters presented to the stockholders for their vote or approval, including the election of directors. The election of directors is determined by a plurality of the votes cast by the stockholders present in person or represented by proxy at the meeting and entitled to vote thereon. All other matters are determined by the vote of a majority of the votes cast by the stockholders present in person or represented by proxy at the meeting and entitled to vote thereon, unless the matter is one upon which, by applicable law, the rules or regulations of any stock exchange applicable to FES Ltd., the Certificate of Incorporation of FES Ltd., or the Certificate of Incorporation, or the Second Amended and Restated Bylaws of FES Ltd., or the Bylaws, a different vote is required, in which case such provision shall govern and control the decision of such matter.

•     Dividends. Subject to provisions of applicable law and the Certificate of Incorporation, dividends may be declared by and at the discretion of the Board at any meeting and may be paid in cash, in property, or in shares of stock of FES Ltd.

•     Liquidation, dissolution or winding up. Except as otherwise required by the Certificate of Incorporation or the Bylaws, in the event of the liquidation, dissolution or winding-up of FES Ltd., holders of common stock will have all rights and privileges typically associated with such securities as set forth in the General Corporation Law of the State of Delaware in relation to rights upon liquidation.

•     Restrictions on transfer. Common stock is not subject to restrictions on transfer as a result of the Certificate of Incorporation or the Bylaws. Nevertheless, there may be restrictions imposed by applicable securities laws or by the terms of other agreements entered into in the future. The Bylaws permit FES Ltd. to place restrictive legends on its share certificates in order to ensure compliance with these restrictions.

•     Other rights. Holders of common stock have no preemptive, redemption, conversion or sinking fund rights.

The rights, preferences, and privileges of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock that may be issued by FES Ltd.

20. Subsequent Events

Mergers

On December 23, 2019, the Company announced that it had entered into an Agreement and Plan of Merger dated as of December 19, 2019 (as amended, supplemented, and modified from time to time, the “Merger Agreement”) with Superior Energy Services, Inc., a Delaware corporation (“Superior”), New NAM, Inc., a Delaware corporation and a newly formed, wholly owned

64

---

Table of Contents

subsidiary of Superior which, prior to the completion of the mergers, will hold the Superior’s North American Business and its associated assets and liabilities (“NAM”), Spieth Newco, Inc., a Delaware corporation and a newly formed, wholly owned subsidiary of the Company (“Newco”), Spieth Merger Sub, Inc., a Delaware corporation and a newly formed, wholly owned subsidiary of Newco (“NAM Merger Sub”), and Fowler Merger Sub, Inc., a Delaware corporation and a newly formed, wholly owned subsidiary of Newco (“Forbes Merger Sub”), pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, NAM Merger Sub will merge with and into NAM (the “NAM Merger”) and Forbes Merger Sub will merge with and into the Company (the “Forbes Merger,” and together with the NAM Merger, the “Mergers”), with each of NAM and the Company continuing as surviving entities and wholly owned subsidiaries of Newco.

Effective immediately prior to the record date for the special meeting of the Company’s stockholders, Ascribe Capital LLC and its affiliates (collectively, the “Ascribe Entities”), and Solace Capital Partners, L.P. and its affiliates (collectively, “Solace”) have each agreed to exchange a portion of the Company’s 5.00% Subordinated Convertible PIK Notes due June 30, 2020 (the “Forbes Convertible PIK Notes”), including all accrued interest thereon, then held by them in exchange for shares of the Company’s common stock (the “Forbes PIK Exchange”). Immediately prior to the effective time of the Mergers, the balance of the aggregate principal amount of Forbes Convertible PIK Notes that is held by the Ascribe Entities and Solace will be contributed to Newco in exchange for shares of Newco Class A common stock (the “Forbes PIK Contribution”). Prior to the effective time of the Mergers, the Company will cause the aggregate principal amount of the Forbes Convertible PIK Notes outstanding at such time that is not held by the Ascribe Entities or Solace to convert into shares of the Company’s common stock in accordance with the Indenture governing the Forbes Convertible PIK Notes (the “Forbes PIK Conversion”). Immediately prior to the effective time of the Mergers, the Company will cause the aggregate principal amount outstanding under its Term Loan Agreement, together with accrued interest thereon, that is held by the Ascribe Entities and Solace as of immediately prior to the closing of the Mergers to be exchanged for approximately $30 million in newly issued mandatory convertible preferred shares of Newco (the “Preferred Stock”). The Preferred Stock will be entitled to cash dividends at a rate of 5% per annum, payable semi-annually, and will be subject to mandatory conversion on the third anniversary of the closing of the Mergers into a number of shares of Newco Class A common stock equal to 20% of the outstanding shares of Newco common stock outstanding at the closing of the Mergers on a fully diluted basis.

At the effective time of the Mergers, the holders of the Company’s common stock (i) issued and outstanding immediately prior to the effective time of the Mergers, which will include the Company’s restricted stock units granted under the Company’s equity compensation plans (“Forbes Outstanding Common Stock”), (ii) that are issuable upon consummation of the Forbes PIK Exchange, (iii) that are issuable upon the consummation of the Forbes PIK Contribution and (iv) that are issuable upon the Forbes PIK Conversion, collectively, will have the right to receive a number of shares of Newco Class A common stock that is equal to 35% of the shares of Newco common stock issued and outstanding after giving effect to the Mergers (the “Forbes Exchange Ratio”), subject to adjustment as described below. The balance of the Newco common stock issued and outstanding after giving effect to the Mergers will be owned by a subsidiary of Superior. If, immediately prior to the completion of the Mergers, the Company’s net debt (as defined in the Merger Agreement) exceeds $3.0 million (the “Forbes target net debt”), then the Forbes Exchange Ratio will be decreased on a pro rata basis by 0.25% for each $700,000 of the Company’s net debt in excess of the Company’s target net debt (provided that such decrease will not exceed 0.73%). The shares of Newco Class A common stock received by the holders of the Company’s common stock and Forbes Convertible PIK Notes in the Forbes Merger are referred to as the “Forbes Merger Consideration”. An aggregate of 1.5% of the Forbes Merger Consideration will be allocated, pro rata, to the holders of Forbes Outstanding Common Stock, and an aggregate of 98.5% of the Forbes Merger Consideration will be allocated, pro rata, to (x) the holders of Forbes Convertible PIK Notes exchanged pursuant to the Forbes PIK Exchange, (y) the holders of Forbes Convertible PIK Notes contributed pursuant to the Forbes PIK Contribution, and (z) the holders of Forbes Convertible PIK Notes converted pursuant to the Forbes PIK Conversion. After the mandatory conversion of the Preferred Stock, former stockholders of the Company, holders of Forbes Convertible PIK Notes, and holders of Preferred Stock would, collectively, own a 48% economic interest in the common stock of Newco, with the balance held indirectly by Superior.

The Merger Agreement, and the transactions contemplated thereby, have been approved by the Company’s Board of Directors, the special committee of the Company’s Board of Directors, and the Superior Board of Directors. Newco filed a preliminary proxy statement/prospectus on February 13, 2020. In connection with the Merger Agreement, certain stockholders of the Company, including the Ascribe Entities and Solace, entered into voting and support agreements. The Company stockholders that are party to the voting agreements have committed to vote the shares of the Company’s common stock they beneficially own in favor of the adoption of the Merger Agreement and any other matters necessary for the consummation of the transaction contemplated by the Merger Agreement, including the Mergers. Following the exchange described above, Ascribe and Solace will have the ability to approve the Merger Agreement and the Forbes Merger without the vote of any other stockholder.

The mergers are expected to close in the second quarter of 2020, subject to the satisfaction or waiver of customary closing conditions, including approval of the Merger Agreement by the Company’s stockholders and satisfaction of certain financing conditions.

Economic Developments

65

---

Table of Contents

The Company is monitoring the recent reductions in commodity prices driven by the potential impact of the COVID-19 virus, along with global supply and demand dynamics and the recent oil price war triggered by Russia and Saudi Arabia. The Company determined that these triggering events will require the Company to test its long-lived assets for recoverability in subsequent periods. It is reasonably possible that the carrying value of certain assets may not be recoverable. The extent to which these events may impact the Company’s business will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to the Company’s operations is uncertain and the Company will continue to assess the financial impact.

Other Events

In January 2020, a well control incident occurred on a producing well operated by a third party. Three fatalities and one injury are documented. The Company was one of the contractors engaged to perform a workover operation on the subject well.  Lawsuits have been filed against the operator of the well and the engaged contractors, including Forbes. The Company has filed claims with its insurance carriers and has received the customary acknowledgments and reservations of rights from the carriers, and will assert indemnification claims against the operator and the engaged contractors. The Company is cooperating with regulatory investigations and is engaged in the above lawsuits, both of which are in early stages, and as a result, is unable to estimate a possible range of loss, if any, at this time.

66

---

Table of Contents

Item 9. Changes in or Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company's management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of December 31, 2019. 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 SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of December 31, 2019, the Company's chief executive officer and chief financial officer concluded that, as of such date, the Company's disclosure controls and procedures over financial reporting were effective.

Management's Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a)-15(f) or Rule15d-15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of the Company's financial reporting for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes maintaining records that, in reasonable detail, accurately and fairly reflect the Company's transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the Company's financial statements in accordance with U.S. generally accepted accounting principles; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with authorizations of the Company’s management and board of directors; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on the Company's financial statements would be prevented or detected on a timely basis.

The Company's management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation of the Company's internal control over financial reporting as of December 31, 2019, the Company's chief executive officer and chief financial officer concluded that, as of such date, the Company's internal control over financial reporting is effective.

Pursuant to Regulation S-K Item 308(b), this Annual Report on Form 10-K does not include an attestation report of our Company's independent registered public accounting firm regarding internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fourth quarter of 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

    

Item 9B.	Other Information

Entry into Material Definitive Agreements

On March 20, 2020, the Company and certain of its subsidiaries, as borrowers, entered into the Third Amendment and Temporary Limited Waiver to Credit Agreement (the “March 2020 Revolving Loan Amendment”), with the lenders party thereto and the Revolver Agent. Pursuant to the March 2020 Revolving Loan Amendment, the requirement for the Company to deliver an unqualified audit opinion for the fiscal year ended December 31, 2019 was waived until June 30, 2020 (the “Revolving Loan Agreement Temporary Waiver”). In addition, the commitments under the Revolving Loan Agreement were reduced from $35 million to $27.5 million, and interest under the Revolving Loan Agreement was increased from a range of LIBOR plus 2.50% to 3.25% or base rate plus 1.50% to 2.25% based on the fixed charge coverage ratio from time to time, to LIBOR plus 4.25% or base rate plus 3.25%. The March 2020 Revolving Loan Amendment was conditioned upon, and was entered into concurrently with, a

67

---

Table of Contents

waiver of the requirement under the Term Loan Agreement that the Company deliver an unqualified audit opinion for the fiscal year ended December 31, 2019.

On March 23, 2020, the Company, as a guarantor, FES LLC, as borrower, and certain of their subsidiaries, as guarantors, entered into Amendment No. 3 to Loan and Security Agreement (the “March 2020 Term Loan Amendment”) with the lenders party thereto and the Term Loan Agent. Pursuant to the March 2020 Term Loan Amendment, there will be no cross-default to the Revolving Loan Agreement resulting from the expiration of the Revolving Loan Agreement Temporary Waiver.

68

---

Table of Contents

PART III

 

Item 10.	Directors, Executive Officers and Corporate Governance

The information required under this item will be filed in a definitive proxy statement within 120 days after December 31, 2019 pursuant to General Instruction G(3) of Form 10-K.

Item 11.	Executive Compensation

The information required under this item will be filed in a definitive proxy statement within 120 days after December 31, 2019 pursuant to General Instruction G(3) of Form 10-K.

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required under this item will be filed in a definitive proxy statement within 120 days after December 31, 2019 pursuant to General Instruction G(3) of Form 10-K.

Item 13.	Certain Relationships and Related Transaction, and Director Independence

The information required under this item will be filed in a definitive proxy statement within 120 days after December 31, 2019 pursuant to General Instruction G(3) of Form 10-K.

Item 14.	Principal Accounting Fees and Services

The information required under this item will be filed in a definitive proxy statement within 120 days after December 31, 2019 pursuant to General Instruction G(3) of Form 10-K.

69

---

Table of Contents

PART IV

Item 15.	Exhibits, Financial Statement Schedules

(a)	The following items are filed as part of this report:

1.	Financial Statements. The financial statements and information required by Item 8 appear on pages 38 through 66 of this report. The Index to Consolidated Financial Statements appears on page 38.

2.	Financial Statement Schedules. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.

3.	Exhibits. The Exhibits set forth below.

Number			Description of Exhibits
3.1	—		Certificate of Incorporation of Forbes Energy Services Ltd. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 8-A filed April 18, 2017).
3.2	—		Second Amended and Restated Bylaws of Forbes Energy Services Ltd. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A filed April 18, 2017).
4.1	—		Specimen Certificate for the Company’s common stock, $0.01 par value (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed April 18, 2017).
4.2	—		Indenture, dated as of March 4, 2019 between Forbes Energy Services Ltd. and Wilmington Trust, National Association, as trustee (including form of Note) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed March 4, 2018).
4.3*	—		Description of Forbes Energy Services Ltd.'s Securities registered under Section 12 of the Securities Exchange Act of 1934
10.1	—		Registration Rights Agreement by and among Forbes Energy Services Ltd. and certain holders identified therein dated as of April 13, 2017 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form 8-A filed April 18, 2017).
10.2	—		Loan and Security Agreement, dated as of April 13, 2017, by and among Forbes Energy Services LLC, as borrower, Forbes Energy International, LLC, TX Energy Services, LLC, C.C. Forbes, LLC and Forbes Energy Services Ltd., as guarantors, Wilmington Trust, N.A., as agent, and certain lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 18, 2017).
10.3	—		Agreement regarding Cash Collateral and Letters of Credit dated as of April 13, 2017 by and among Forbes Energy Services LLC, Forbes Energy International, LLC, TX Energy Services, LLC, C.C. Forbes, LLC, Forbes Energy Services Ltd. and Regions Bank (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 18, 2017).
10.4	—		Forbes Energy Services Ltd. 2017 Management Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed April 18, 2017).
10.5	—		Amended and Restated Employment Agreement effective April 13, 2017, by and between John E. Crisp and Forbes Energy Services LLC (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed April 18, 2017).
10.6	—		Amended and Restated Employment Agreement effective April 13, 2017, by and between L. Melvin Cooper and Forbes Energy Services LLC (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed April 18, 2017).
10.7	—		Employment Agreement effective April 13, 2017, by and between Steve Macek and Forbes Energy Services LLC (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed April 18, 2017).

70

---

Table of Contents

10.8	—		Form of Time-Based Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed May 15, 2017).
10.9	—		Form of Exit Financing Time-Based Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q filed May 15, 2017.
10.10	—		Form of Performance-Based Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q filed May 15, 2017).
10.11	—		Merger Agreement, dated as of November 16, 2018, by and among Forbes Energy Services LLC, as buyer, Cobra Transitory Sub LLC, as Merger Sub, Cretic Energy Services, LLC, as the Company and Catapult Energy Services Group, LLC, as the Holders Representative and Paying Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 23, 2018).
10.12	—		Revolving Loan Agreement, dated November 16, 2018, by and among the Company and certain of its subsidiaries, as borrowers, the lenders party thereto and Regions Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed November 23, 2018).
10.13	—		Amendment No. 1 to Loan and Security Agreement and Pledge and Security Agreement, dated as of November 16, 2018, by and among Forbes Energy Services LLC, as borrower, Forbes Energy International, LLC, TX Energy Services, LLC, C.C. Forbes, LLC and Forbes Energy Services Ltd., as guarantors, Wilmington Trust, N.A., as agent, and certain lenders party thereto (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed November 23, 2018).
10.14	—		Employment Agreement, effective November  16, 2018, by and between Joe Michetti and Forbes Energy Services LLC (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed November 23, 2018).
10.15	—		Extension and Deferral Agreement dated November 14, 2019 by and among Forbes Energy Services Ltd and certain PIK Note holders (incorporated by reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q filed November 14, 2019).
10.16	—		Agreement and Plan of Merger dated as of December 18, 2019, by and among Superior Energy Services, Inc., New NAM Inc, Forbes Energy Services Ltd., Spieth Merger Sub, Inc. and Fowler Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company's current report on Form 8-K filed December 23, 2019).
10.17	—		Amendment No. 1 to Agreement and Plan of Merger, dated February 20, 2020, by and among Superior Energy Services, Inc., New NAM Inc, Forbes Energy Services Ltd., Spieth Merger Sub, Inc. and Fowler Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company's current report on Form 8-K filed February 26, 2020).
10.18*	—		Amendment No. 2 to Loan and Security Agreement and Pledge and Security Agreement, dated as of May 28, 2019, by and among Forbes Energy Services LLC, the guarantors party thereto hereto, the lenders party thereto, and Wilmington Trust, National Association, as agent for the secured parties.
10.19*	—		First Amendment to Credit Agreement, dated as of May 28, 2019, by and among Forbes Energy Services Ltd., the borrowers party thereto, the lenders party thereto, and Regions Bank, as administrative agent and collateral agent for the lenders.
10.20*	—		Second Amendment to Credit Agreement, dated as of February 3, 2020, by and among Forbes Energy Services Ltd., the borrowers party thereto, the lenders party thereto, and Regions Bank, as administrative agent and collateral agent for the lenders.
10.21*	—		Third Amendment to Credit Agreement, dated as of March 20, 2020, by and among Forbes Energy Services Ltd., the borrowers party thereto, the lenders party thereto, and Regions Bank, as administrative agent and collateral agent for the lenders.

71

---

Table of Contents

10.22*	—		Amendment No. 3 to Loan and Security Agreement and Pledge and Security Agreement, dated as of March 23, 2020, by and among Forbes Energy Services LLC, the guarantors party thereto hereto, the lenders party thereto, and Wilmington Trust, National Association, as agent for the secured parties.
21.1*	—		Subsidiaries of Forbes Energy Services Ltd.
23.1*	—		Consent of BDO USA, LLP
31.1*	—		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2*	—		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1*	—		Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	—		Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	—		Interactive Data Files

 

 ____________________

*	Filed herewith.

Item 16. Form 10-K Summary

    

None.

72

---

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Alice, the State of Texas, on March 23, 2020.

 

	FORBES ENERGY SERVICES LTD.
	By:	/S/    JOHN E. CRISP
		John E. Crisp
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/    JOHN E. CRISP      (John E. Crisp)		Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer)		March 23, 2020
/s/    L. MELVIN COOPER       (L. Melvin Cooper)		Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)		March 23, 2020
/s/    LAWRENCE FIRST        (Lawrence First)		Director		March 23, 2020
/s/    BRETT G. WYARD        (Brett G. Wyard)		Director		March 23, 2020
/s/    ROME G. ARNOLD III        (Rome G. Arnold III)		Director		March 23, 2020
/s/    PAUL S. BUTERO         (Paul S. Butero)		Director		March 23, 2020

73