KLX ENERGY SERVICES HOLDINGS, INC. You should read the following discussion of our results of operations and financial condition together with our audited consolidated financial statements and accompanying notes included elsewhere in this Transition Report on Form 10-K as well as the discussion in "Item 1. Business." This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on our current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those we discuss in "Item 1A. Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements." The following discussion and analysis addresses the results of our operations for the eleven months endedDecember 31, 2021 , as compared to the eleven months endedDecember 31, 2020 . In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods. The previously announced merger ofKrypton Merger Sub, Inc. , an indirect wholly owned subsidiary of KLXE ("Merger Sub"), with and into Quintana Energy Services Inc. ("QES"), with QES surviving the merger as a subsidiary of KLXE (the "Merger") closed onJuly 28, 2020 . Unless otherwise noted or the context requires otherwise, references herein toKLX Energy Services with respect to time periods prior toJuly 28, 2020 includeKLX Energy Services and its consolidated subsidiaries and do not include QES and its consolidated subsidiaries, while references herein toKLX Energy Services with respect to time periods from and afterJuly 28, 2020 include QES and its consolidated subsidiaries.
Company History
KLX Energy Services was initially formed from the combination of seven private oilfield service companies acquired during 2013 and 2014. Each of the acquired businesses was regional in nature and brought one or two specific service capabilities toKLX Energy Services . Once the acquisitions were completed, we undertook a comprehensive integration of these businesses to align our services, our people and our assets across all the geographic regions where we maintain a presence. InNovember 2018 , we expanded our completion and intervention service offerings through the acquisition ofMotley Services, LLC ("Motley"), a premier provider of large diameter coiled tubing services, further enhancing our completions business. We successfully completed the integration of the Motley business during Fiscal 2018. OnMarch 15, 2019 , the Company acquired Tecton Energy Services ("Tecton"), a leading provider of flowback, drill-out and production testing services, operating primarily in the greaterRocky Mountains . InMarch 2019 , the Company acquiredRed Bone Services LLC ("Red Bone"), a premier provider of oilfield services primarily in the Mid-Continent, providing fishing, non-hydraulic fracturing high pressure pumping, thru-tubing and certain other services. We successfully completed the integration of the Tecton and Red Bone businesses during Fiscal 2019. We acquired QES during the second quarter of 2020 and, by doing so, helped establish KLXE as an industry leading provider of asset-light oilfield solutions across the full well lifecycle to the major onshore oil and gas producing regions ofthe United States . OnJuly 26, 2020 , the Company's Board approved a 1-for-5 reverse stock split to stockholders that became effective at12:01 a.m. onJuly 28, 2020 (the "Reverse Stock Split"). OnJuly 28, 2020 , we successfully completed the all-stock Merger with QES. The Merger of KLXE and QES provided increased scale to serve a blue-chip customer base across the onshore oil and gas basins inthe United States . The Merger combined two strong company cultures comprised of highly talented teams with shared commitments to safety, performance, customer service and profitability. The combination leveraged two of the largest fleets of coiled tubing and wireline assets, with KLXE becoming a leading provider of large diameter coiled tubing and wireline services and one of the largest independent providers of directional drilling to the U.S. market.
After closing the Merger, the Company has been focused on integrating personnel, facilities, processes and systems across all functional areas of the organization.
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As of December 31, 2021 , the Company implemented approximately $50.4 of
annualized cost savings. We are diligently focused on generating additional cost
savings from the Merger and to date have realized such savings through
eliminating KLXE's legacy corporate headquarters in Wellington , Florida ,
rationalizing associated corporate functions to Houston , and capturing
operational synergies in the areas of personnel, facilities and rolling stock.
Additional synergies may be realized as management continues to rationalize
operational facilities and align common roles, processes and systems throughout
each function and region. The Merger also enhanced the Company's ability to
effect further industry consolidation. Looking ahead, the Company expects to
pursue strategic, accretive consolidation opportunities that further strengthen
the Company's competitive positioning and capital structure and drive
efficiencies, accelerate growth and create longterm stockholder value.
Company Overview
We serve many of the leading companies engaged in the exploration and development of onshore conventional and unconventional oil and natural gas reserves inthe United States . Our customers are primarily large independent and major oil and gas companies. We currently support these customer operations from over 60 service facilities located in the key major shale basins. We operate in three segments on a geographic basis, including theSouthwest Region (thePermian Basin ,Eagle Ford Shale and theGulf Coast as well as in industrial and petrochemical facilities), theRocky Mountains Region (the Bakken,Williston , DJ, Uinta,Powder River , Piceance and Niobrara basins) and theNortheast/Mid-Con Region (the Marcellus andUtica Shale as well as the Mid-Continent STACK and SCOOP andHaynesville Shale ). Our revenues, operating earnings and identifiable assets are primarily attributable to these three reportable geographic segments. While we manage our business based upon these geographic groupings, our assets and our technical personnel are deployed on a dynamic basis across all of our service facilities to optimize utilization and profitability. These expansive operating areas provide us with access to a number of nearby unconventional crude oil and natural gas basins, both with existing customers expanding their production footprint and third parties acquiring new acreage. Our proximity to existing and prospective customer activities allows us to anticipate or respond quickly to such customers' needs and efficiently deploy our assets. We believe that our strategic geographic positioning will benefit us as activity increases in our core operating areas. Our broad geographic footprint provides us with exposure to the ongoing recovery in drilling, completion, production and intervention related service activity and will allow us to opportunistically pursue new business in basins with the most active drilling environments. We work with our customers to provide engineered solutions across the lifecycle of the well by streamlining operations, reducing non-productive time and developing cost effective solutions and customized tools for our customers' most challenging service needs, including their most technically complex extended reach horizontal wells. We believe future revenue growth opportunities will continue to be driven by increases in the number of new customers served and the breadth of services we offer to existing and prospective customers. We offer a variety of targeted services that are differentiated by the technical competence and experience of our field service engineers and their deployment of a broad portfolio of specialized tools and proprietary equipment. Our innovative and adaptive approach to proprietary tool design has been employed by our in-house R&D organization and, in selected instances, by our technology partners to develop tools covered by 28 patents and 7 pending patent applications, which we believe differentiates us from our regional competitors and also allows us to deliver more focused service and better outcomes in our specialized services than larger national competitors that do not discretely dedicate their resources to the services we provide. We utilize contract manufacturers to produce our products, which, in many cases, our engineers have developed from input and requests from our customers and customer-facing managers, thereby maintaining the integrity of our intellectual property while avoiding manufacturing startup and maintenance costs. This approach leverages our technical strengths, as well as those of our technology partners. These services and related products are modest in cost to the customer relative to other well construction expenditures but have a 51 -------------------------------------------------------------------------------- high cost of failure and are, therefore, mission critical to our customers' outcomes. We believe our customers have come to depend on our decades of field experience to execute on some of the most challenging problems they face. We believe we are well positioned as a company to service customers when they are drilling and completing complex wells, and remediating both newer and older legacy wells. We invest in innovative technology and equipment designed for modern production techniques that increase efficiencies and production for our customers. North American unconventional onshore wells are increasingly characterized by extended lateral lengths, tighter spacing between hydraulic fracturing stages, increased cluster density and heightened proppant loads. Drilling and completion activities for wells in unconventional resource plays are extremely complex, and downhole challenges and operating costs increase as the complexity and lateral length of these wells increase. For these reasons, E&P companies with complex wells increasingly prefer service providers with the scale and resources to deliver best-in-class solutions that evolve in real-time with the technology used for extraction. We believe we offer best-in-class service execution at the wellsite and innovative downhole technologies, positioning us to benefit from our ability to service the most technically complex wells where the potential for increased operating leverage is high due to the large number of stages per well. We endeavor to create a next generation oilfield services company in terms of management controls, processes and operating metrics, and have driven these processes down through the operating management structure in every region, which we believe differentiates us from many of our competitors. This allows us to offer our customers in all of our geographic regions discrete, comprehensive and differentiated services that leverage both the technical expertise of our skilled engineers and our in-house R&D team.
Depreciation and Amortization
The Company changed its presentation of depreciation and amortization expense in the first quarter of 2021. Depreciation and amortization expense is presented separately from cost of sales and selling, general, and administrative expenses. Prior period results have been reclassified to conform with current presentation. During the quarter endedOctober 31, 2021 , as a result of increased usage from improving drilling activity levels and changes in the manner and conditions in which various types of our small tools are used, we updated the estimated useful lives of such tools to one to three years, resulting in approximately$0.2 of incremental monthly depreciation on a prospective basis.
Segment Reporting
The Company changed its presentation of reportable segments related to the
allocation of corporate overhead costs to reflect the presentation used by the
Company's chief operational decision-making group ("CODM") to make decisions
about resources to be allocated to the Company's reportable segments and to
assess segment performance. Historically, and through July 31, 2020 , the
Company's total corporate overhead costs were allocated and reported within each
reportable segment. During the third quarter of 2020, the Company changed the
corporate overhead allocation methodology to only include corporate costs
incurred on behalf of its operating segments, which includes accounts payable,
accounts receivable, insurance, audit, supply chain, health, safety and
environmental and others. The remaining unallocated corporate costs are reported
as a reconciling item in the Company's segment reporting disclosures. The change
is reflected retroactively in the accompanying financial statements, which
resulted in a decrease to the total corporate overhead costs allocated to our
three reportable segments for the eleven months ended December 31, 2020 of
$20.2 .
In conjunction with the change in presentation of reportable segments, the
Company also changed its presentation of segment assets. Historically, and
through July 31, 2020 , the Company's corporate assets were allocated and
reported within each reportable segment. During the third quarter of 2020, the
Company changed the presentation of total assets to present corporate assets
separately as a reconciling item in its segment reporting disclosures. As a
result of the change in presentation, the total corporate assets allocated
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to the Company's three reportable segments decreased by
The Company also changed its presentation of service offering revenues. Historically, and throughJuly 31, 2020 , the Company's service offering revenues included revenues from the completion, production and intervention market types within segment reporting. During the third quarter of 2020, the Company changed the presentation of its service offering revenues by separately reporting a drilling market type revenue, which includes directional drilling, drilling accommodation units and related drilling support services. The reclassifications are retroactively reported in the Company's segment reporting disclosures to reflect the drilling revenue change and use of the information by the Company's CODM. For the eleven months endedDecember 31, 2020 , the total drilling revenues reported within segment reporting was$39.1 . These current period changes in the Company's corporate allocation method and service offering revenue disclosures have no net impact to the consolidated financial statements. The change better reflects the CODM's philosophy on assessing performance and allocating resources as well as improves the Company's comparability to its peer group. OnSeptember 3, 2021 , the Board of the Company adopted the Fourth Amended and Restated Bylaws of the Company, effective as of such date, to change the Company's fiscal year-end fromJanuary 31 to December 31 , effective beginning with the year endedDecember 31, 2021 . As a result, the Company's current fiscal year 2021 was shortened from 12 months to 11 months and ended onDecember 31, 2021 . The Company has undertaken this change in an effort to normalize our fiscal year-end and improve comparability with our peers.
See Note 16. "Segment Reporting" to our audited consolidated financial statements included elsewhere in this Transition Report on Form 10-K.
Recent Trends and Outlook
Demand for services in the oil and natural gas industry is cyclical and subject to sudden and significant volatility. During the first quarter of 2020, the emergence of COVID-19, and the global pandemic caused thereby, placed significant downward pressure on the global economy and oil demand and prices, leading North American operators to announce significant cuts to planned 2020 capital expenditures and causing the continued acceleration of upstream oil and gas bankruptcies. Market demand for our services during 2021 was challenged due to the COVID-19 pandemic and macro supply and demand concerns. The oilfield service industry continued to experience a deterioration in demand during early 2021. However, WTI's average daily price per barrel increased by approximately$31.92 , or 85.1%, to$69.41 per barrel ("Bbl") during the eleven months endedDecember 31, 2021 , compared to the eleven months endedDecember 31 , 2020's average daily price per barrel of$37.49 . As ofDecember 31, 2021 ,U.S. rig count had reached 586, an increase of 52.6% sinceJanuary 31, 2021 . Despite the market headwinds experienced in the fiscal year endedJanuary 31, 2021 , the Company remained focused on building a leaner and more profitable set of service offerings, which allowed us to make meaningful positive impacts to our revenue, operating margins, cash flows and Adjusted EBITDA. We have taken, and are continuing to take, steps to reduce costs, including reductions in capital expenditures, as well as other workforce rightsizing and ongoing cost initiatives. The extent and duration of the continued global impact of the COVID-19 pandemic remains unknown but is improving as we enter 2022. While economic activity has increased from theApril 2020 lows, and signs of a potential global economic recovery have emerged, driven by the rollout of COVID-19 vaccines, fiscal and monetary stimulus policies, and pent-up demand for goods and services, concerns about a COVID-19 resurgence, and the appearance of new variants, have hindered the pace of a full return of social and commercial activity.
In February of 2021, we experienced a material slow down due to the
unprecedented North American Winter Storm Uri, one of the costliest winter
storms in
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--------------------------------------------------------------------------------shut in wells and delayed work causing us at least seven days of lost revenue, primarily in the Permian and the Mid-continent regions.
Looking ahead to the year endingDecember 31, 2022 , provided that the impact of the COVID-19 pandemic lessens, economic activity continues to increase, and commodity prices remain strong but volatile, we anticipate that our customers will sustain activity in order to hold their production flat to 2021 exit levels, with capital and operating expense spending expected to outpace 2021 levels. So far in the year endingDecember 31, 2022 , WTI prices have increased an incremental 36.0% fromJanuary 1 to March 1 and market uncertainty has increased due to the conflict betweenRussia andUkraine . In response,U.S. operators have continued to increase drilling and completion activity levels relative to where the market exited 2021. As ofMarch 1, 2022 ,U.S. rig count was up to 650, an increase of 10.9% sinceDecember 31, 2021 . Additionally, we have continued to seeU.S. shale operators consolidate within certain basins, particularly the Permian and Rockies, and many operators announced that they were targeting oil and gas production at the end of 2021 to be consistent with production levels at year end 2020.
How We Generate Revenue and the Costs of Conducting Our Business
Our business strategy seeks to generate attractive returns on capital by providing differentiated services and prudently applying our cash flow to select targeted opportunities, with the potential to deliver high returns that we believe offer superior margins over the long-term and short payback periods. Our services generally require equipment that is less expensive to maintain and is operated by a smaller staff than many other oilfield service providers. As part of our returns-focused approach to capital spending, we are focused on efficiently utilizing capital to develop new products. We support our existing asset base with targeted investments in R&D, which we believe allows us to maintain a technical advantage over our competitors providing similar services using standard equipment. Demand for services in the oil and natural gas industry is cyclical and subject to sudden and significant volatility. We remain focused on serving the needs of our customers by providing a broad portfolio of product service lines across all major basins, while preserving a solid balance sheet, maintaining sufficient operating liquidity and prudently managing our capital expenditures. We believe our operating cost structure is now materially lower than during historical financial reporting periods and the realization of the$50.4 of expected cost synergies associated with the Merger will only further reduce our cost structure and afford us greater flexibility to respond to changing industry conditions. The implementation of integrated, company-wide management information systems and processes provides more transparency to current operating performance and trends within each market where we compete and help us more acutely scale our cost structure and pricing strategies on a market-by-market basis. As ofDecember 31, 2021 , the QES integration and the implementation of all synergies was complete. The potential for further cost savings remains as we continue to refine and optimize the business. We believe our ability to differentiate ourselves on the basis of quality provides an opportunity for us to gain market share and increase our share of business with existing customers. We believe we have strong management systems in place, which will allow us to manage our operating resources and associated expenses relative to market conditions. Historically, we believe our services generated margins superior to our competitors based upon the differential quality of our performance, and that these margins would contribute to future cash flow generation. The required investment in our business includes both working capital (principally for accounts receivable, inventory and accounts payable growth tied to increasing activity) and capital expenditures for both maintenance of existing assets and ultimately growth when economic returns justify the spending. Our required maintenance capital expenditures tend to be lower than other oilfield service providers due to the generally asset-light nature of our services, the lower average age of our assets and our ability to charge back a portion of asset maintenance to customers for a number of our assets. 54 --------------------------------------------------------------------------------
Results of Operations
Eleven Months Ended
Revenue. The following table provides revenues by segment for the periods
indicated:
Eleven Months Ended
December 31, 2021 December 31, 2020 % Change
Revenue:
Rocky Mountains $ 118.2 $ 88.8 33.1 %
Southwest 160.9 72.7 121.3 %
Northeast/Mid-Con 157.0 85.9 82.8 %
Total revenue $ 436.1 $ 247.4 76.3 %
For the eleven months ended December 31, 2021 , revenues of $436.1 increased by
$188.7 , or 76.3%, as compared with the same period of the prior year. Southwest
segment revenue increased by $88.2 , or 121.3%, Rocky Mountains segment revenue
increased by $29.4 , or 33.1%, and Northeast/Mid-Con segment revenue increased by
$71.1 , or 82.8%. On a product line basis, drilling, completion, production and
intervention services contributed approximately $123.2 , $210.3 , $59.7 , and
$42.9 , respectively, to the revenues for the eleven months ended December 31,
2021 and $39.1 , $128.9 , $41.6 and $37.8 , respectively, for the same period of
the prior year. The overall increase in revenues reflects the recovery in
economic activity and increase in WTI prices during the transition period.
Cost of sales. For the eleven months ended December 31, 2021 , cost of sales was
$389.9 , or 89.4% of sales, as compared to the same period in the prior year of
$230.5 , or 93.2% of sales. Cost of sales as a percentage of revenues decreased
primarily due to the increase in revenues from an increase in activity which was
larger than the corresponding increase in costs.
Selling, general and administrative expenses ("SG&A"). SG&A expenses during the
eleven months ended December 31, 2021 , were $54.6 , or 13% of revenues, as
compared with $78.2 , or 31.6% of revenues, in the same period of the prior year.
SG&A decreased primarily due to merger and integration costs being included in
the prior period. R&D costs during the eleven months ended December 31, 2021
were $0.6 , as compared to the same period of the prior year of $0.7 , reflecting
our continued focus on maintaining an in-house R&D function while scaling costs
to adjust to current levels of customer demand. Eleven months ended December 31,
2020 SG&A expenses include six months of incremental activity related to the
Merger, that wasn't included in prior fiscal year results.
Operating loss. The following is a summary of operating loss by segment:
Eleven Months Ended
December 31, 2021 December 31, 2020 % Change
Operating loss:
Rocky Mountains $ (13.4) $ (44.2) 69.7 %
Southwest (15.4) (118.8) 87.0 %
Northeast/Mid-Con (8.7) (109.2) 92.0 %
Corporate and other (26.6) (20.2) (31.7) %
Total operating loss(1) $ (64.1) $ (292.4) 78.1 %
(1) Includes bargain purchase gain of
For the eleven months endedDecember 31, 2021 , operating loss was$64.1 , as compared to operating loss of$292.4 in the same period of the prior year, largely driven by an improvement in revenues due to increased activity during the transition period and a favorable comparison with the eleven months endedDecember 31, 2020 , due to this period including the initial economic contraction caused by the COVID-19 pandemic as well as non-recurring items related to the Merger and impairment charges. For the eleven months endedDecember 31, 2021 andDecember 31, 2020 , there were$0.8 and$213.5 in impairments of long-lived assets. 55 --------------------------------------------------------------------------------
For the eleven months ended
For the eleven months endedDecember 31, 2021 ,Rocky Mountains segment operating loss was$(13.4) , Northeast/Mid-Con segment operating loss was$(8.7) and Southwest segment operating loss was$(15.4) , in each case primarily driven by increasing revenues being outpaced by increasing costs to provide the Company's products and services. Income tax expense. Income tax expense was$0.3 for the eleven months endedDecember 31, 2021 , as compared to income tax expense of$0.3 in the prior eleven-month period, and was comprised primarily of state and local taxes. The Company did not recognize a tax benefit on its year-to-date losses because it has a valuation allowance against its deferred tax balances. Net loss. Net loss for the eleven months endedDecember 31, 2021 was$93.8 , as compared to$320.5 in the prior eleven-month period, primarily due to increased demand and one-off items in prior period related to the Merger and Integration.
Liquidity and Capital Resources
Overview
We require capital to fund ongoing operations, including maintenance expenditures on our existing fleet and equipment, organic growth initiatives, debt service obligations, investments and acquisitions. Our primary sources of liquidity to date have been capital contributions from our equity and note holders, borrowings under the Company's ABL Facility and cash flows from operations. AtDecember 31, 2021 , we had$28.0 million of cash and cash equivalents and$32.4 million available on the ABL Facility, net of$10.0 FCCR holdback, which resulted in a total liquidity position of$60.4 million . We recently have taken several actions to continue to improve our liquidity position, including closing ourFlorida legacy corporate headquarters and relocating all key functions toHouston , elimination of redundancies and duplicative functions throughout our operations following the merger with QES, equity issuances under our ATM program and monetized non-core and obsolete assets. We actively manage our capital spending and are focused primarily on required maintenance spending. Additionally, despite the continuing COVID-19 pandemic, increasing oil prices have resulted in an increase in demand for our services and a slight improvement in our operating cash flow in each of the third and fourth quarters of 2021. We believe based on our current forecasts, our cash on hand, the ABL Facility availability, together with our cash flows, will provide us with the ability to fund our operations, including planned capital expenditures, for at least the next twelve months. We have substantial indebtedness. As ofDecember 31, 2021 , we had total outstanding long-term indebtedness of$274.8 million under our ABL Facility and Senior Notes as described in greater detail under "- ABL Facility" and "-Senior Notes" below. Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend on our future operating performance and ability to refinance our debt as it becomes due. Our future operating performance and ability to refinance such indebtedness will be affected by prevailing economic and political conditions, the level of drilling, completion, production and intervention services activity for North American onshore oil and natural gas resources, the continuation of the COVID-19 pandemic, the willingness of capital providers to lend to our industry and other financial and business factors, many of which are beyond our control. Our ability to refinance our debt will depend on the condition of the public and private debt markets and our financial condition at such time, among other things. Any refinancing of our debt could be at higher interest rates and may require us to comply with covenants, which could further restrict our business operations. A rising interest rate environment could have an adverse impact on the price of our shares, or our ability to issue equity or incur debt to refinance our existing indebtedness, for acquisitions or other purposes. In addition, incurring additional debt in excess of our existing outstanding indebtedness would result in increased 56 --------------------------------------------------------------------------------
interest expense and financial leverage, and issuing common stock may result in dilution to our current stockholders.
Our ABL Facility matures inSeptember 2023 and we intend to work with our existing lenders or other sources of capital to seek to refinance the ABL Facility. If we are unable to refinance the ABL Facility over the next twelve months and uncertainty around our ability to refinance our existing long-term debt still exists, that could result in our auditors issuing a "going concern" or like qualification or exception as early as our audit opinion with respect to the fiscal year endingDecember 31, 2022 . The delivery of an audit opinion with such a qualification would result in an event of default under our ABL Facility. If an event of default occurs, the lenders under the ABL Facility would be entitled to accelerate any outstanding indebtedness, terminate all undrawn commitments and enforce liens securing our obligations under the ABL Facility. Further, the acceleration of indebtedness under our ABL Facility could cause an event of default under our Senior Notes, entitling the requisite holders of the Senior Notes to accelerate our indebtedness in respect thereof and enforce liens securing our obligations under the Senior Notes. If our lenders or noteholders accelerate our obligations under the affected debt agreements, we may not have sufficient liquidity to repay all of our outstanding indebtedness then due and payable. In light of our substantial leverage position, as market conditions warrant and subject to our contractual restrictions, liquidity position and other factors, we may access the public or private debt and equity markets or seek to recapitalize, refinance or otherwise restructure our capital structure. Some of these alternatives may require the consent of current lenders, stockholders or noteholders, and there is no assurance that we will be able to execute any of these alternatives on acceptable terms or at all.
ABL Facility
We entered into a$100.0 ABL Facility onAugust 10, 2018 . The ABL Facility became effective onSeptember 14, 2018 and is scheduled to mature inSeptember 2023 . Borrowings under the ABL Facility bear interest at a rate equal to LIBOR (as defined in the ABL Facility) plus the applicable margin (as defined). Availability under the ABL Facility is tied to a borrowing base formula and the ABL Facility has no maintenance financial covenants as long as we maintain a minimum level of borrowing availability. During the third quarter of 2020, the Company included the acquired QES current asset collateral into the borrowing base formula used to calculate the KLXE borrowing availability. The ABL Facility is secured by, among other things, a first priority lien on our accounts receivable and inventory and contains customary conditions precedent to borrowing and affirmative and negative covenants.$30.0 was outstanding under the ABL Facility as ofDecember 31, 2021 . The effective interest rate under the ABL Facility was approximately 4.75% onDecember 31, 2021 . The financial services industry and market participants continue to work towards transitioning away from interbank offered rates ("IBOR"), including the LIBOR, which are in the process of being phased out. This phasing out will have an impact on the ABL Facility (defined below) that utilizes LIBOR as a benchmark. To transition from IBOR Reference Rate, the ABL Facility agreement between the Company andJP Morgan Chase & Co. ("JP Morgan"), which currently has borrowings outstanding of$30.0 , will be amended to adopt an alternate rate effective on or beforeJune 30, 2023 . Until the ABL Facility agreement is amended to allow for Secured Overnight Financing Rate ("SOFR") as the replacement to LIBOR, the Alternate Base Rate ("ABR"), is the default rate that JP Morgan has agreed to use as the LIBOR replacement. The ABL Facility includes a financial covenant which requires the Company's consolidated FCCR to be at least 1.0 to 1.0 if availability falls below the greater of$10.0 or 15% of the borrowing base. At all times during the eleven months endedDecember 31, 2021 , availability exceeded this threshold, and the Company was not subject to this financial covenant. As ofDecember 31, 2021 , the FCCR was below 1.0 to 1.0. The Company was in full compliance with its credit facility as ofDecember 31, 2021 . 57 -------------------------------------------------------------------------------- The ABL Facility includes financial, operating and negative covenants that limit our ability to incur indebtedness, to create liens or other encumbrances, to make certain payments and investments, including dividend payments, to engage in transactions with affiliates, to engage in sale/leaseback transactions, to guarantee indebtedness and to sell or otherwise dispose of assets and merge or consolidate with other entities. It also includes a covenant to deliver annual audited financial statements that are not qualified by a "going concern" or like qualification or exception. A failure to comply with the obligations contained in the ABL Facility could result in an event of default, which could permit acceleration of the debt, termination of undrawn commitments and enforcement against any liens securing the debt.
Senior Notes
In conjunction with the acquisition of Motley in 2018, we issued$250.0 principal amount of 11.5% senior secured notes due 2025 (the "Notes") offered pursuant to Rule 144A under the Securities Act of 1933 (as amended, the "Securities Act") and to certain non-U.S. persons outsidethe United States in compliance with Regulation S under the Securities Act. On a net basis, after taking into consideration the debt issuance costs for the Notes, total debt as ofDecember 31, 2021 was$244.8 . The Notes bear interest at an annual rate of 11.5%, payable semi-annually in arrears onMay 1 andNovember 1 . Accrued interest as ofDecember 31, 2021 was$4.8 . The Indenture contains customary affirmative and negative covenants restricting, among other things, the Company's ability to incur indebtedness and liens, pay dividends or make other distributions, make certain other restricted payments or investments, sell assets, enter into restrictive agreements, enter into transactions with the Company's affiliates, and merge or consolidate with other entities or sell substantially all of the Company's assets. The Indenture also contains customary events of default including, among other things, the failure to pay interest for 30 days, failure to pay principal when due, failure to observe or perform any other covenants or agreement in the Indenture subject to grace periods, cross-acceleration to indebtedness with an aggregate principal amount in excess of$50 million , material impairment of liens, failure to pay certain material judgments and certain events of bankruptcy.
Capital Expenditures
Our capital expenditures were$11.0 during the eleven months endedDecember 31, 2021 , compared to$11.8 in the eleven months endedDecember 31, 2020 . We expect to incur between$25.0 and$30.0 in capital expenditures for the year endingDecember 31, 2022 , based on current industry conditions and our significant investments in capital expenditures over the past several years. The nature of our capital expenditures is comprised of a base level of investment required to support our current operations and amounts related to growth and Company initiatives. Capital expenditures for growth and Company initiatives are discretionary. We continually evaluate our capital expenditures, and the amount we ultimately spend will depend on a number of factors, including expected industry activity levels and Company initiatives.
Equity Distribution Agreement
OnJune 14, 2021 , the Company entered into an Equity Distribution Agreement (the "Equity Distribution Agreement") withPiper Sandler & Co. as sales agent (the "Agent"). Pursuant to the terms of the Equity Distribution Agreement, the Company may sell from time to time through the Agent (the "ATM Offering") the Company's common stock, par value$0.01 per share, having an aggregate offering price of up to$50.0 (the "Common Stock"). Any Common Stock offered and sold in the ATM Offering will be issued pursuant to the Company's shelf registration statement on Form S-3 (Registration No. 333-256149) filed with theSEC onMay 14, 2021 and declared effective onJune 11, 2021 (the "Registration Statement"), the prospectus supplement relating to the ATM Offering filed with theSEC onJune 14, 2021 and any applicable additional prospectus supplements 58 -------------------------------------------------------------------------------- related to the ATM Offering that form a part of the Registration Statement. Sales of Common Stock under the Equity Distribution Agreement may be made in any transactions that are deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act. The Equity Distribution Agreement contains customary representations, warranties and agreements by the Company, indemnification obligations of the Company and the Agent, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. Under the terms of the Equity Distribution Agreement, the Company will pay the Agent a commission equal to 3% of the gross sales price of the Common Stock sold. The Company plans to use the net proceeds from the ATM Offering, after deducting the Agent's commissions and the Company's offering expenses, for general corporate purposes, which may include, among other things, paying or refinancing all or a portion of the Company's then-outstanding indebtedness, and funding acquisitions, capital expenditures and working capital. During the eleven months endedDecember 31, 2021 , the Company sold 1,380,505 shares of Common Stock for gross proceeds of approximately$6.6 and paid legal and administrative fees of$0.8 .
Cash Flows
AtDecember 31, 2021 , we had$28.0 of cash and cash equivalents. Cash on hand atDecember 31, 2021 decreased by$19.1 during the transition period, mainly due to$55.6 of cash flows used by operating activities, partially offset by$4.5 of cash flows provided by investing activities and$30.0 provided by borrowings on ABL. Our liquidity requirements consist of working capital needs, debt service obligations and ongoing capital expenditure requirements. Our primary requirements for working capital are directly related to the activity level of our operations. Net working capital as ofDecember 31, 2021 was$40.5 , an increase of$5.5 during the transition period. Net working capital is calculated as current assets, excluding cash, less current liabilities, excluding accrued interest, operating lease obligations and finance lease obligations. As ofDecember 31, 2021 , total current assets excluding cash increased by$33.1 and total current liabilities increased by$27.6 . The increase in current assets was primarily related to accounts receivable-trade, net increase of$36.2 , and inventory, increase of$1.6 , partially offset by a$4.7 decrease in other current assets. The increase in total current liabilities was due to a$32.7 increase in accounts payable, offset by a$5.1 decrease in accrued liabilities.
The following table sets forth our cash flows for the periods presented below:
Eleven Months Ended
December 31, 2021 December 31, 2020
Net cash used in operating activities $ (55.6) $ (62.0)
Net cash provided by (used in) investing activities 4.5 (12.1)
Net cash provided by financing activities 32.0 0.9
Net change in cash (19.1) (73.2)
Cash balance end of period $ 28.0 $ 46.3
Net cash used in operating activities
Net cash used in operating activities was$55.6 for the eleven months endedDecember 31, 2021 , as compared to net cash used in operating activities of$62.0 for the eleven months endedDecember 31, 2020 . The increase in operating cash flows was primarily attributable to the increase in revenues across all operating segments and most service and related product lines driven by a broader recovery in industry activity. However, our negative operating margin for the transition period, combined with the above-mentioned decrease in net working capital, contributed to an operating loss for the eleven months endedDecember 31, 2021 . 59 --------------------------------------------------------------------------------
Net cash provided by (used in) investing activities
Net cash provided by investing activities was$4.5 for the eleven months endedDecember 31, 2021 , as compared to net cash used in investing activities of$12.1 for the eleven months endedDecember 31, 2020 . The cash flow provided by investing activities for the eleven months endedDecember 31, 2021 was primarily driven by proceeds from sale of property and equipment driven by cost reduction initiatives, partially offset by maintenance capital spending tied to the operation of our existing asset base.
Net cash provided by financing activities
Net cash provided by financing activities was$32.0 for the eleven months endedDecember 31, 2021 , compared to net cash provided by financing activities of$0.9 for the eleven months endedDecember 31, 2020 . During the eleven months endedDecember 31, 2021 , the Company borrowed$30.0 under the ABL facility and sold stock as part of its Equity Distribution Agreement for proceeds of$5.8 , partially offset by payments on capital lease obligations and repayment of a note, at$2.6 and$0.9 , respectively.
Off-Balance Sheet Arrangements
Indemnities, Commitments and Guarantees
In the normal course of our business, we make certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to other parties to certain acquisition agreements. The duration of these indemnities, commitments and guarantees varies and, in certain cases, is indefinite. Many of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events that are not reasonably determinable. Our management believes that any liability for these indemnities, commitments and guarantees would not be material to our financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our financial statements.
Emerging Growth Company Status
We are an "emerging growth company" and are entitled to take advantage of
certain relaxed disclosure requirements. We intend to operate under certain
reduced reporting requirements and exemptions, including the longer phase-in
periods for the adoption of new or revised financial accounting standards, until
we are no longer an emerging growth company. Our election to use the phase-in
periods permitted by this election may make it difficult to compare our
consolidated financial statements to those of non-emerging growth companies and
other emerging growth companies that have opted out of the longer phase-in
periods and who will comply
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with new or revised financial accounting standards. If we were to subsequently
elect instead to comply with these public company effective dates, such election
would be irrevocable.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current creditworthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain an allowance
for estimated credit losses based upon our historical experience and any
specific customer collection issues that we have identified. The allowance for
doubtful accounts at December 31, 2021 and December 31, 2020 was $6.2 and $2.9 ,
respectively.
Business Combinations
We completed our acquisition of QES on
Under the acquisition method of accounting, we allocate the fair value of purchase consideration transferred to the tangible assets and intangible assets acquired, if any, and liabilities assumed based on their estimated fair values on the date of the acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. The estimated fair value of the assets acquired, net of liabilities assumed, exceeds the purchase consideration, resulting in a bargain purchase gain. When determining the fair value of assets acquired and liabilities assumed, we make significant estimates and assumptions. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to bargain purchase gain if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred.
UnderFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350, Intangibles-Goodwill and Other, goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment. Acquired intangible assets with definite lives are amortized over their individual useful lives.
As of
Goodwill is tested at least annually as ofDecember 31 , and the Company's management assesses whether there has been any impairment in the value of goodwill by comparing the fair value of the reporting unit to its net carrying value. If the carrying value exceeds its estimated fair value, an impairment loss is recognized for the difference up to the carrying value of goodwill. In this event, the asset is written down accordingly. The fair value is determined using valuation techniques based on estimates, judgments and assumptions that the Company's management believes are appropriate in the circumstances. For the eleven months endedDecember 31, 2021 andDecember 31, 2020 , the Company recorded goodwill impairment charges of$0.0 and$28.3 , respectively. See Note 7 for additional information. Leases 61
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The Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases ASC
Topic 842 effective February 1, 2021 . We elected the modified retrospective
transition method under ASC Topic 842 and as such information prior to February
1, 2021 has not been restated and continues to be reported under the accounting
standards in effect for the period (ASC Topic 840-Leases). We carried forward
the historical lease classifications and assessment of initial direct costs,
account for lease and non-lease components as a single component, and exclude
leases with an initial term of less than 12 months in the lease assets and
liabilities. For leases entered into after February 1, 2021 , the Company
determines if an arrangement is a lease at inception and evaluates identified
leases for operating or finance lease treatment. Operating or finance lease
right-of-use assets and liabilities are recognized at the commencement date
based on the present value of lease payments over the lease term. We use our
incremental borrowing rate based on the information available at the
commencement date in determining the present value of lease payments. Lease
terms may include options to renew; however, we typically cannot determine our
intent to renew a lease with reasonable certainty at inception.
LongLived Assets
Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are tested for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the asset's carrying value exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. For the eleven months endedDecember 31, 2021 andDecember 31, 2020 , there were$0.5 and$180.4 impairments of long lived assets. See Note 7 for additional information.
Revenue Recognition
Revenue is recognized upon the customer obtaining control of promised goods or
services, in an amount that reflects the consideration which is expected to be
received in exchange for those goods or services. To determine revenue
recognition for arrangements within the scope of ASC Topic 606, the following
five steps are performed: (i) identify the contract(s) with a customer; (ii)
identify the performance obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) the Company
satisfies a performance obligation. Revenue is recognized in the amount of the
transaction price that is allocated to the respective performance obligation
when (or as) the performance obligation is satisfied. Service revenues are
recorded over time throughout and for the duration of the service period
pursuant to a master services agreement ("MSA") combined with a completed field
ticket or a work order. Revenues from product sales are recognized when the
customer obtains control of the product, which occurs at a point in time,
typically upon delivery in accordance with the terms of the field ticket or work
order.
Recent Accounting Pronouncements
See Note 2 "Recent Accounting Pronouncements" to our consolidated financial
statements for a discussion of recently issued accounting pronouncements. As an
"emerging growth company" under the Jumpstart Our Business Startups Act (the
"JOBS Act"), we are offered an opportunity to use an extended transition period
for the adoption of new or revised financial accounting standards. We operate
under the reduced reporting requirements and exemptions, including the longer
phase-in periods for the adoption of new or revised financial accounting
standards, until we are no longer an emerging growth company. Our election to
use the phase-in periods permitted by this election may make it difficult to
compare our financial statements to those of non-emerging growth companies and
other emerging growth companies that have opted out of the longer phase-in
periods under Section 107 of the JOBS Act and who will comply with new or
revised financial accounting standards. If we were to subsequently elect instead
to comply with these public company effective dates, such election would be
irrevocable pursuant to Section 107 of the JOBS Act.
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--------------------------------------------------------------------------------How We Evaluate Our Operations
Key Financial Performance Indicators
We recognize the highly cyclical nature of our business and the need for metrics to (1) best measure the trends in our operations and (2) provide baselines and targets to assess the performance of our managers.
The measures we believe most effective to achieve the above stated goals include:
•Revenue
•Adjusted Earnings before interest, taxes, depreciation and amortization
("EBITDA"): Adjusted EBITDA is a supplemental non-Generally Accepted Accounting
Principles ("GAAP") financial measure that is used by management and external
users of our financial statements, such as industry analysts, investors, lenders
and rating agencies. Adjusted EBITDA is not a measure of net earnings or cash
flows as determined by GAAP. We define Adjusted EBITDA as net earnings (loss)
before interest, taxes, depreciation and amortization, further adjusted for (i)
goodwill and/or long-lived asset impairment charges, (ii) stock-based
compensation expense, (iii) restructuring charges, (iv) transaction and
integration costs related to acquisitions and (v) other expenses or charges to
exclude certain items that we believe are not reflective of ongoing performance
of our business.
•Adjusted EBITDA Margin: Adjusted EBITDA Margin is defined as Adjusted EBITDA, as defined above, as a percentage of revenue.
We believe Adjusted EBITDA is useful because it allows us to supplement the GAAP measures in order to evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above in arriving at Adjusted EBITDA (Loss) because these amounts can vary substantially from company to company within our industry depending upon accounting methods, book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net (loss) earnings as determined in accordance with GAAP, or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
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