PIONEER ENERGY SERVICES CORP - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - PIONEER ENERGY SERVICES CORP	exhibit322-q22020.htm
EX-32.1 - EXHIBIT 32.1 - PIONEER ENERGY SERVICES CORP	exhibit321-q22020.htm
EX-31.2 - EXHIBIT 31.2 - PIONEER ENERGY SERVICES CORP	exhibit312-q22020.htm
EX-31.1 - EXHIBIT 31.1 - PIONEER ENERGY SERVICES CORP	exhibit311-q22020.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

______________________________________________

FORM 10-Q

______________________________________________

(Mark one)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-8182

PIONEER ENERGY SERVICES CORP.

(Exact name of registrant as specified in its charter)

____________________________________________



DELAWARE		74-2088619
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1250 N.E. Loop 410, Suite 1000 San Antonio, Texas		78209
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code: (855) 884-0575



Securities registered pursuant to Section 12(b) of the Act
Title of each class	Trading Symbol(s)	Name of each exchange on which registered

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	x
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨

As of August 17, 2020, there were 1,138,185 shares of common stock, par value $0.001 per share, of the registrant outstanding.

TABLE OF CONTENTS



		Page
	PART I
Item 1.	Financial Statements and Supplementary Data	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flow	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55
Item 4.	Controls and Procedures	55

	PART II
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	60

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



	Successor			Predecessor
	June 30, 2020			December 31, 2019
	(unaudited)			(audited)
ASSETS
Cash and cash equivalents	$	15,161		$	24,619
Restricted cash	16,173			998
Receivables:
Trade, net of allowance for doubtful accounts	29,912			79,135
Unbilled receivables	6,318			12,590
Insurance recoveries	22,747			22,873
Other receivables	5,731			8,928
Inventory	13,056			22,453
Assets held for sale	7,292			3,447
Prepaid expenses and other current assets	5,649			7,869
Total current assets	122,039			182,912

Property and equipment, at cost	191,259			1,119,546
Less accumulated depreciation	5,019			648,376
Net property and equipment	186,240			471,170
Intangible assets, net of accumulated amortization	9,292			—
Deferred income taxes	9,139			11,540
Operating lease assets	5,040			7,264
Other noncurrent assets	12,050			1,068
Total assets	$	343,800		$	673,954

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	16,148		$	32,551
Deferred revenues	642			1,339
Accrued expenses:
Employee compensation and related costs	4,954			13,781
Insurance claims and settlements	22,747			22,873
Insurance premiums and deductibles	4,043			5,940
Interest	1,463			5,452
Other	15,939			9,645
Total current liabilities	65,936			91,581

Long-term debt, less unamortized discount and debt issuance costs	142,005			467,699
Noncurrent operating lease liabilities	4,098			5,700
Deferred income taxes	1,071			4,417
Other noncurrent liabilities	1,548			481
Total liabilities	214,658			569,878
Commitments and contingencies (Note 13)
Stockholders’ equity:
Predecessor common stock $.10 par value; 200,000,000 shares authorized; 79,202,216 shares outstanding at December 31, 2019	—			8,008
Successor common stock, $.001 par value; 25,000,000 shares authorized; 1,048,185 shares outstanding at June 30, 2020	1			—
Additional paid-in capital	138,958			553,210
Predecessor treasury stock, at cost; 877,047 shares at December 31, 2019	—			(5,090		)
Retained earnings (Accumulated deficit)	(9,817		)	(452,052		)
Total stockholders’ equity	129,142			104,076
Total liabilities and stockholders’ equity	$	343,800		$	673,954

See accompanying notes to condensed consolidated financial statements.

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)



	Successor			Predecessor
	One Month Ended June 30, 2020			Two Months Ended May 31, 2020			Three Months Ended June 30, 2019

Revenues	$	11,163		$	28,048		$	152,843

Costs and expenses:
Operating costs	8,743			22,025			115,970
Depreciation and amortization	5,236			13,663			22,851
General and administrative	4,213			7,392			18,028
Pre-petition restructuring charges	—			(252		)	—
Impairment	388			—			332
Bad debt expense (recovery), net	(283		)	482			(348		)
Gain on dispositions of property and equipment, net	(460		)	(272		)	(1,126		)
Total costs and expenses	17,837			43,038			155,707
Loss from operations	(6,674		)	(14,990		)	(2,864		)

Other income (expense):
Interest expense, net of interest capitalized	(2,215		)	(4,135		)	(10,105		)
Reorganization items, net	(1,144		)	(15,240		)	—
Loss on extinguishment of debt	—			(3,723		)	—
Other income (expense), net	(230		)	2,212			349
Total other expense, net	(3,589		)	(20,886		)	(9,756		)

Loss before income taxes	(10,263		)	(35,876		)	(12,620		)
Income tax (expense) benefit	446			755			(324		)
Net loss	$	(9,817	)	$	(35,121	)	$	(12,944	)

Loss per common share - Basic	$	(9.37	)	$	(0.44	)	$	(0.17	)

Loss per common share - Diluted	$	(9.37	)	$	(0.44	)	$	(0.17	)

Weighted average number of shares outstanding—Basic	1,048			79,288			78,430

Weighted average number of shares outstanding—Diluted	1,048			79,288			78,430

See accompanying notes to condensed consolidated financial statements.

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)



	Successor			Predecessor
	One Month Ended June 30, 2020			Five Months Ended May 31, 2020			Six Months Ended June 30, 2019

Revenues	$	11,163		$	142,370		$	299,411

Costs and expenses:
Operating costs	8,743			114,047			224,555
Depreciation and amortization	5,236			35,647			45,504
General and administrative	4,213			22,047			37,786
Pre-petition restructuring charges	—			16,822			—
Impairment	388			17,853			1,378
Bad debt expense (recovery), net	(283		)	1,209			(286		)
Gain on dispositions of property and equipment, net	(460		)	(989		)	(2,201		)
Total costs and expenses	17,837			206,636			306,736
Loss from operations	(6,674		)	(64,266		)	(7,325		)

Other income (expense):
Interest expense, net of interest capitalized	(2,215		)	(12,294		)	(19,990		)
Reorganization items, net	(1,144		)	(21,903		)	—
Loss on extinguishment of debt	—			(4,215		)	—
Other income (expense), net	(230		)	(3,333		)	1,033
Total other expense, net	(3,589		)	(41,745		)	(18,957		)

Loss before income taxes	(10,263		)	(106,011		)	(26,282		)
Income tax (expense) benefit	446			1,786			(1,777		)
Net loss	$	(9,817	)	$	(104,225	)	$	(28,059	)

Loss per common share - Basic	$	(9.37	)	$	(1.32	)	$	(0.36	)

Loss per common share - Diluted	$	(9.37	)	$	(1.32	)	$	(0.36	)

Weighted average number of shares outstanding—Basic	1,048			78,968			78,371

Weighted average number of shares outstanding—Diluted	1,048			78,968			78,371

See accompanying notes to condensed consolidated financial statements.

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)



	Shares				Amount						Additional Paid In Capital			Accumulated Deficit			Total Stockholders’ Equity
	Common		Treasury		Common			Treasury			Additional Paid In Capital			Accumulated Deficit			Total Stockholders’ Equity
Balance as of December 31, 2019 (Predecessor)	80,079		(877	)	$	8,008		$	(5,090	)	$	553,210		$	(452,052	)	$	104,076
Net loss	—		—		—			—			—			(69,104		)	(69,104		)
Purchase of treasury stock	—		(165	)	—			(7		)	—			—			(7		)
Equity awards vested or exercised	542		—		54			—			(54		)	—			—
Stock-based compensation expense	—		—		—			—			328			—			328
Balance as of March 31, 2020 (Predecessor)	80,621		(1,042	)	$	8,062		$	(5,097	)	$	553,484		$	(521,156	)	$	35,293
Net loss	—		—		—			—			—			(35,121		)	(35,121		)
Purchase of treasury stock	—		(100	)	—			(1		)	—			—			(1		)
Equity awards vested or exercised	363		—		36			—			(36		)	—			—
Equity awards vested in connection with the Plan	7,946		—		795			—			(795		)	—			—
Stock-based compensation expense	—		—		—			—			978			—			978
Balance as of May 31, 2020 (Predecessor)	88,930		(1,142	)	$	8,893		$	(5,098	)	$	553,631		$	(556,277	)	$	1,149
Cancellation of Predecessor equity	(88,930	)	1,142		(8,893		)	5,098			(553,631		)	556,277			(1,149		)
Balance as of May 31, 2020 (Predecessor)	—		—		$	—		$	—		$	—		$	—		$	—


Balance as of June 1, 2020 (Successor)	—		—		$	—		$	—		$	—		$	—		$	—
Issuance of Successor common stock	1,050		(1	)	1			—			18,083			—			18,084
Equity component of Convertible Notes, net of offering costs	—		—		—			—			120,875			—			120,875
Net loss	—		—		—			—			—			(9,817		)	(9,817		)
Balance as of June 30, 2020 (Successor)	1,050		(1	)	$	1		$	—		$	138,958		$	(9,817	)	$	129,142

See accompanying notes to condensed consolidated financial statements.

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)



	Shares			Amount					Additional Paid In Capital			Accumulated Deficit			Total Stockholders’ Equity
	Common	Treasury		Common		Treasury			Additional Paid In Capital			Accumulated Deficit			Total Stockholders’ Equity
Balance as of December 31, 2018 (Predecessor)	79,004	(790	)	$	7,900	$	(4,965	)	$	550,548		$	(388,425	)	$	165,058
Net loss	—	—		—		—			—			(15,115		)	(15,115		)
Purchase of treasury stock	—	(84	)	—		(120		)	—			—			(120		)
Cumulative-effect adjustment due to adoption of ASC Topic 842	—	—		—		—			—			277			277
Equity awards vested or exercised	326	—		33		—			(33		)	—			—
Stock-based compensation expense	—	—		—		—			867			—			867
Balance as of March 31, 2019 (Predecessor)	79,330	(874	)	$	7,933	$	(5,085	)	$	551,382		$	(403,263	)	$	150,967
Net loss	—	—		—		—			—			(12,944		)	(12,944		)
Purchase of treasury stock	—	(3	)	—		(5		)	—			—			(5		)
Equity awards vested or exercised	667	—		67		—			(67		)	—			—
Stock-based compensation expense	—	—		—		—			327			—			327
Balance as of June 30, 2019 (Predecessor)	79,997	(877	)	$	8,000	$	(5,090	)	$	551,642		$	(416,207	)	$	138,345

See accompanying notes to condensed consolidated financial statements.

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



	Successor			Predecessor
	One Month Ended June 30, 2020			Five Months Ended May 31, 2020			Six Months Ended June 30, 2019

Cash flows from operating activities:
Net loss	$	(9,817	)	$	(104,225	)	$	(28,059	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	5,236			35,647			45,504
Allowance for doubtful accounts, net of recoveries	(283		)	1,209			(286		)
Gain on dispositions of property and equipment, net	(460		)	(989		)	(2,201		)
Reorganization items, net	—			18,713			—
Stock-based compensation expense	—			552			1,194
Phantom stock compensation expense	—			—			51
Amortization of debt issuance costs and discount	766			1,084			1,541
Loss on extinguishment of debt	—			4,215			—
Impairment	388			17,853			1,378
Deferred income taxes	(399		)	(546		)	1,225
Change in other noncurrent assets	(36		)	(800		)	1,476
Change in other noncurrent liabilities	355			1,524			(2,493		)
Changes in current assets and liabilities:
Receivables	7,395			44,041			(14,858		)
Inventory	240			1,441			(3,864		)
Prepaid expenses and other current assets	133			1,121			(108		)
Accounts payable	1,216			(15,174		)	10,697
Deferred revenues	522			(1,219		)	(302		)
Accrued expenses	(539		)	(6,692		)	(6,849		)
Net cash provided by (used in) operating activities	4,717			(2,245		)	4,046

Cash flows from investing activities:
Purchases of property and equipment	(900		)	(10,848		)	(31,382		)
Proceeds from sale of property and equipment	752			1,665			3,439
Proceeds from insurance recoveries	—			22			588
Net cash used in investing activities	(148		)	(9,161		)	(27,355		)

Cash flows from financing activities:
Debt repayments	—			(175,000		)	—
Proceeds from debt issuance	—			195,187			—
Proceeds from DIP Facility	—			4,000			—
Repayment of DIP Facility	—			(4,000		)	—
Payments of debt issuance costs	—			(7,625		)	—
Purchase of treasury stock	—			(8		)	(125		)
Net cash provided by (used in) financing activities	—			12,554			(125		)

Net increase (decrease) in cash, cash equivalents and restricted cash	4,569			1,148			(23,434		)
Beginning cash, cash equivalents and restricted cash	26,765			25,617			54,564
Ending cash, cash equivalents and restricted cash	$	31,334		$	26,765		$	31,130

Supplementary disclosure:
Interest paid	$	9		$	8,105		$	18,832
Income tax paid	$	118		$	893		$	2,156
Reorganization items paid	$	784		$	14,947		—
Noncash investing and financing activity:
Change in capital expenditure accruals	$	(188	)	$	(1,924	)	$	(3,766	)

See accompanying notes to condensed consolidated financial statements.

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Business

Our drilling services business segments provide contract land drilling services through three domestic divisions which are located in the Marcellus/Utica, Permian Basin and Eagle Ford, and Bakken regions, and internationally in Colombia. We provide a comprehensive service offering which includes the drilling rig, crews, supplies, and most of the ancillary equipment needed to operate our drilling rigs. Our fleet is 100% pad-capable and offers the latest advancements in pad drilling. The following table summarizes our current rig fleet count and composition for each drilling services business segment:



	Multi-well, Pad-capable
	AC rigs	SCR rigs	Total
Domestic drilling	17	—	17
International drilling	—	8	8
			25

Our production services business segments provide a range of services to producers primarily in Texas, North Dakota, the Rocky Mountain region, and Louisiana. As of June 30, 2020, the fleet counts for each of our production services business segments were as follows:



	550 HP	600 HP	Total
Well servicing rigs, by horsepower (HP) rating	111	12	123
Wireline services units			82

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Pioneer Energy Services Corp. and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation have been included. We suggest that you read these unaudited condensed consolidated financial statements together with the consolidated financial statements and the related notes included in our annual report on Form 10-K for the year ended December 31, 2019. As described below, as a result of the application of fresh start accounting and the effects of the implementation of our Plan of Reorganization (as defined below), the consolidated financial statements after the Effective Date (as defined below) are not comparable with the consolidated financial statements on or before that date. See Note 3, Fresh Start Accounting, for additional information.

Chapter 11 Cases — On March 1, 2020 (the “Petition Date”), Pioneer and certain of our domestic subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). On May 11, 2020, the Bankruptcy Court confirmed the plan of reorganization (the “Plan”) that was filed with the Bankruptcy Court on March 2, 2020, and on May 29, 2020 (the “Effective Date”), the conditions to effectiveness of the plan were satisfied and we emerged from Chapter 11. See Note 2, Emergence from Voluntary Reorganization under Chapter 11, for more information.

The accompanying condensed consolidated financial statements have been prepared as if we are a going concern and in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 852, Reorganizations (ASC Topic 852). Upon emergence from bankruptcy, we adopted fresh start accounting in accordance with ASC Topic 852 and became a new entity for financial reporting purposes. As a result, the condensed consolidated financial

statements after the Effective Date are not comparable with the consolidated financial statements on or before that date as indicated by the “black line” division in the financial statements and footnote tables, which emphasizes the lack of comparability between amounts presented. References to “Successor” relate to our financial position and results of operations after the Effective Date. References to “Predecessor” refer to our financial position and results of operations on or before the Effective Date.

We evaluated the events between May 29, 2020 and May 31, 2020 and concluded that the use of an accounting convenience date of May 31, 2020 (the “Fresh Start Reporting Date”) would not have a material impact on our condensed consolidated financial statements. As such, the application of fresh start accounting was reflected in our condensed consolidated balance sheet as of May 31, 2020 and related fresh start accounting adjustments were included in our condensed consolidated statement of operations for the two and five months ended May 31, 2020. See Note 3, Fresh Start Accounting, for additional information.

Use of Estimates — In preparing the accompanying unaudited condensed consolidated financial statements, we make various estimates and assumptions that affect the amounts of assets and liabilities we report as of the dates of the balance sheets and income and expenses we report for the periods shown in the income statements and statements of cash flows. Our actual results could differ significantly from those estimates. Material estimates affecting our financial results, including those that are particularly susceptible to significant changes in the near term, relate to our application of fresh start accounting, our estimates of certain variable revenues and amortization periods of certain deferred revenues and costs associated with drilling daywork contracts, our estimates of projected cash flows and fair values for impairment evaluations, our estimate of the valuation allowance for deferred tax assets, and our estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance. For information about our use of estimates relating to fresh start accounting, see Note 3, Fresh Start Accounting.

Reclassifications — Certain amounts in the unaudited condensed consolidated financial statements for the prior periods have been reclassified to conform to the current presentation.

Subsequent Events — In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after June 30, 2020, through the filing of this Form 10-Q, for inclusion as necessary.

Recently Issued Accounting Standards

Changes to accounting principles generally accepted in the United States of America (“U.S. GAAP”) are established by the FASB in the form of Accounting Standards Updates (ASUs) to the FASB ASC. We consider the applicability and impact of all ASUs and we have determined that there are currently no new or recently adopted ASUs which we believe will have a material impact on our consolidated financial position and results of operations.

Additional Detail of Account Balances

Cash and Cash Equivalents — We had no cash equivalents at June 30, 2020. Cash equivalents at December 31, 2019 were $8.9 million, consisting of investments in highly-liquid money-market mutual funds.

Restricted Cash — Our restricted cash balance at June 30, 2020 reflects the professional fees escrow balance which will be released in accordance with the Plan. Our restricted cash balance at December 31, 2019 reflects the portion of net proceeds from the issuance of our senior secured term loan held in a restricted account until the completion of certain administrative tasks related to providing access rights to certain of our real property, a condition which is still in effect under the terms of our post-emergence debt instruments.

Other Receivables — Our other receivables primarily consist of recoverable taxes related to our international operations, as well as vendor rebates and net income tax receivables.

Prepaid Expenses and Other Current Assets — Prepaid expenses and other current assets include items such as insurance, rent deposits, software subscriptions, and other fees. We routinely expense these items in the normal course of business over the periods that we benefit from these expenses. Prepaid expenses and other current assets also include deferred mobilization costs for short-term drilling contracts and demobilization revenues recognized on drilling contracts expiring in the near term.

Other Noncurrent Assets — Other noncurrent assets primarily consist of prepaid taxes in Colombia which are creditable against future income taxes, as well as deferred mobilization costs on long-term drilling contracts, cash deposits related to the deductibles on our workers’ compensation insurance policies, the noncurrent portion of prepaid insurance premiums, unamortized debt issuance costs associated with our ABL Credit Facility and deferred compensation plan investments.

Other Accrued Expenses — Our other accrued expenses include accruals for professional fees, including those associated with fresh start accounting, and items such as sales taxes, property taxes and withholding tax liabilities related to our international operations. We routinely expense these items in the normal course of business over the periods these expenses benefit. Our other accrued expenses also includes the current portion of the lease liability associated with our long-term operating leases.

Other Noncurrent Liabilities — Our other noncurrent liabilities relate to noncurrent deferred compensation and the noncurrent portion of deferred mobilization revenues.

2. Emergence from Voluntary Reorganization under Chapter 11

Reorganization and Chapter 11 Proceedings

On March 1, 2020 (the “Petition Date”), Pioneer Energy Services Corp. (“Pioneer”) and its affiliates Pioneer Coiled Tubing Services, LLC, Pioneer Drilling Services, Ltd., Pioneer Fishing & Rental Services, LLC, Pioneer Global Holdings, Inc., Pioneer Production Services, Inc., Pioneer Services Holdings, LLC, Pioneer Well Services, LLC, Pioneer Wireline Services Holdings, Inc., Pioneer Wireline Services, LLC (collectively with Pioneer, the “Pioneer RSA Parties”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Chapter 11 proceedings were being jointly administered under the caption In re Pioneer Energy Services Corp. et al (the “Chapter 11 Cases”).

In connection with the Bankruptcy Petitions, the Pioneer RSA Parties entered into a restructuring support agreement (the “RSA”) with holders of approximately 99% in aggregate principal amount of our outstanding Term Loan (the “Consenting Term Lenders”) and holders of approximately 75% in aggregate principal amount of our Prepetition Senior Notes (the “Consenting Noteholders” and together with the Consenting Term Lenders, the “Consenting Creditors”). Pursuant to the RSA, the Consenting Creditors and the Pioneer RSA Parties made certain customary commitments to each other, including the Consenting Noteholders committing to vote for, and the Consenting Creditors committing to support, the restructuring transactions (the “Restructuring”) to be effectuated through a plan of reorganization that incorporates the economic terms included in the RSA (the “Plan”). The Pioneer RSA Parties filed the Plan with the Bankruptcy Court on March 2, 2020.

After commencement of the Chapter 11 Cases, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

On May 11, 2020, the Bankruptcy Court entered an order, Docket No. 331 (the “Confirmation Order”) confirming the Plan. On May 29, 2020 (the “Effective Date”) the conditions to effectiveness of the Plan were satisfied, and we emerged from Chapter 11.

The commencement of the Chapter 11 Cases constituted an event of default that accelerated our obligations under our Prepetition Senior Notes, the Prepetition ABL Facility, and Term Loan. Under the Bankruptcy Code, holders of our Prepetition Senior Notes and the lenders under our Term Loan and the Prepetition ABL Facility were stayed from taking any action against us as a result of this event of default. On the Effective Date, all applicable agreements governing the obligations under the Term Loan, Prepetition Senior Notes and Prepetition ABL Facility were terminated. The Term Loan and Prepetition ABL Facility were paid in full and all outstanding obligations under the Prepetition Senior Notes were canceled in exchange for 94.25% of the pro forma common equity (subject to the dilution from the Convertible Notes and new management incentive plan).

On the Effective Date, we entered into a $75 million senior secured asset-based revolving credit agreement which was later amended and reduced to $40 million in August 2020 (the “ABL Credit Facility”), and issued $129.8 million of aggregate

principal amount of 5% convertible senior unsecured pay-in-kind notes due 2025 (the “Convertible Notes”) and $78.1 million of aggregate principal amount of floating rate senior secured notes due 2025 (the “Senior Secured Notes”), all of which are further described in Note 7, Debt.

Also on the Effective Date, by operation of the Plan, all agreements, instruments, and other documents evidencing, relating to or connected with any equity interests of the Company, including the existing common stock, issued and outstanding immediately prior to the Effective Date, and any rights of any holder in respect thereof, were deemed canceled, discharged and of no force or effect. Pursuant to the Plan, we issued a total of 1,049,804 shares of our new common stock, with approximately 94.25% of such new common stock being issued to holders of the Prepetition Senior Notes outstanding immediately prior to the Effective Date. Holders of the existing common stock received an aggregate of 5.75% of the proforma common equity (subject to the dilution from the Convertible Notes and new management incentive plan), at a conversion rate of 0.0006849838 new shares for each existing share.

As part of the transactions undertaken pursuant to the Plan, we converted from a Texas corporation to a Delaware corporation, filed the Certificate of Incorporation of the Company with the office of the Secretary of State of the State of Delaware, and adopted Amended and Restated Bylaws of the Company.

Backstop Commitment Agreement

Prior to filing the Plan, we entered into a separate backstop commitment agreement with the Consenting Noteholders and certain members of our senior management (the “Backstop Commitment Agreement”), pursuant to which the Consenting Noteholders and certain members of our senior management committed to backstop approximately $118 million and $1.8 million, respectively, of new convertible bonds to be issued in a rights offering. As consideration for this commitment, we committed to make an aggregate payment of $9.4 million and $0.1 million to the Consenting Noteholders and certain members of our senior management, respectively, in the form of additional new convertible bonds, or in cash if the Backstop Commitment Agreement was terminated under certain circumstances as forth therein. As a result, we incurred a liability and expense at the time we entered into the Backstop Commitment Agreement for the aggregate amount of $9.6 million (the “Commitment Premium”) which was recognized in our Predecessor condensed consolidated financial statements as of and for the three months ended March 31, 2020. The Commitment Premium was settled in conjunction with our emergence from Chapter 11 and the issuance of the Convertible Notes.

Debtor-in-Possession Financing

On February 28, 2020, we received commitments pursuant to the Commitment Letter from PNC Bank, N.A. for a $75 million asset-based revolving loan debtor-in-possession financing facility (the “DIP Facility”) and a $75 million asset-based revolving exit financing facility. On March 3, 2020, with the approval of the Bankruptcy Court, we entered into the DIP Facility and used the proceeds thereunder to refinance all outstanding letters of credit under the Prepetition ABL Facility in connection with the termination of the Prepetition ABL Facility and to pay fees and expenses in connection with the Chapter 11 proceedings and transaction and professional fees related thereto.

The DIP Facility provided financing with a 5-month maturity, bearing interest at a rate of LIBOR plus 200 basis points per annum, and contained customary covenants and events of default. The DIP Facility was terminated upon our emergence from the Chapter 11 Cases on May 29, 2020.

Chapter 11 Accounting



	Successor		Predecessor
	One Month Ended June 30, 2020		Two Months Ended May 31, 2020			Five Months Ended May 31, 2020
Gain on settlement of liabilities subject to compromise	$	—	$	(291,378	)	$	(291,378	)
Fresh start valuation adjustments	—		284,392			284,392
Legal and professional fees	741		19,888			26,038
Unamortized debt costs on liabilities subject to compromise	—		2,003			2,003
Accelerated stock-based compensation	—		713			713
Loss (gain) on rejected leases	403		(378		)	(378		)
DIP facility costs	—		—			513
	$	1,144	$	15,240		$	21,903

Contractual interest expense on our Prepetition Senior Notes totaled $7.6 million for the five months ended May 31, 2020, which is in excess of the $3.1 million included in interest expense on our Predecessor condensed consolidated statements of operations because we discontinued accruing interest on the Petition Date in accordance with the terms of the Plan and ASC Topic 852.

3. Fresh Start Accounting

Fresh Start Accounting

In connection with our emergence from bankruptcy and in accordance with ASC Topic 852, we qualified for and adopted fresh start accounting on the Effective Date. We were required to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company, and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims.

In accordance with ASC Topic 852, with the application of fresh start accounting, we allocated the reorganization value to our individual assets and liabilities (except for deferred income taxes) based on their estimated fair values in conformity with ASC Topic 805, Business Combinations. The amount of deferred taxes was determined in accordance with ASC Topic 740, Income Taxes. The Effective Date fair values of our assets and liabilities differed materially from their recorded values as reflected on the historical balance sheets.

Reorganization Value

The reorganization value represents the fair value of the Successor Company’s total assets before considering liabilities and is intended to approximate the amount a willing buyer would pay for the Company’s assets immediately after restructuring. The reorganization value was derived from the enterprise value, which represents the estimated fair value of an entity’s long-term debt and equity. As set forth in the Plan, the enterprise value of the Successor Company was estimated to be in the range of $275 million to $335 million with a midpoint of $305 million. However, the third-party valuation advisor engaged to assist in determining the enterprise value subsequently revised this range to $249 million to $303 million, with a midpoint of $276 million, which was filed with the Bankruptcy Court in order to update the initial assumptions for current information. Based on the estimates and assumptions discussed below, we estimated the enterprise value to be the midpoint of the range of estimated enterprise value of $276 million.

The following table reconciles the enterprise value to the estimated fair value of our Successor Common Stock as of the Fresh Start Reporting Date (dollars in thousands, except per share data):



Enterprise value	$	276,000
Plus: cash and cash equivalents	10,592
Less: fair value of debt	(145,420		)
Total implied equity (prior to debt issuance costs on equity component on Convertible Notes)	141,172
Less: equity portion of Convertible Notes	(123,088		)
Fair value of Successor stockholders’ equity	$	18,084
Shares issued upon emergence	1,049,804
Per share value	$	17.23

The following table reconciles enterprise value to the reorganization value of our Successor’s assets to be allocated to our individual assets as of the Fresh Start Reporting Date (amounts in thousands):



Enterprise value	$	276,000
Plus: cash and cash equivalents	10,592
Plus: current liabilities	65,799
Plus: non-current liabilities excluding long-term debt	6,626
Less: debt issuance costs on Successor debt	(6,394		)
Reorganization value of Successor assets	$	352,623

With the assistance of our financial advisors, we determined the enterprise and corresponding equity value of the Successor using various valuation methods, including (i) discounted cash flow analysis, (ii) comparable company analysis and (iii) precedent transaction analysis. The use of each approach provides corroboration for the other approaches.

In order to estimate the enterprise value using the discounted cash flow (DCF) analysis approach, management’s estimated future cash flow projections through 2024, plus a terminal value calculated assuming a perpetuity growth rate and applying a multiple to the terminal year’s projected earnings before interest, tax, depreciation and amortization (EBITDA), were discounted to an assumed present value using our estimated weighted average cost of capital (WACC), which represents the internal rate of return (IRR).

The comparable company analysis provides an estimate of the company’s value relative to other publicly traded companies with similar operating and financial characteristics, by which a range of EBITDA multiples of the comparable companies was then applied to management’s projected EBITDA to derive an estimated enterprise value.

Precedent transaction analysis provides an estimate of enterprise value based on recent sale transactions of similar companies, by deriving the implied EBITDA multiple of those transactions, based on sales prices, which was then applied to management’s projected EBITDA.

Certain inputs and assumptions used to estimate the enterprise value are considered significant unobservable inputs which are classified as Level 3 inputs under ASC Topic 820, Fair Value Measurements and Disclosures, including management’s estimated future cash flow projections. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the enterprise value and equity value projections, are inherently subject to significant uncertainties beyond our control, and accordingly, our actual results could vary materially.

Valuation Process

The fair values of our principal assets (including inventory, drilling and production services equipment, land and buildings, and intangible assets), and our liabilities were estimated with the assistance of third-party valuation advisors. The cost, income and market approaches were utilized in estimating these fair values. As more than one approach was used in our valuation analysis, the various approaches were reconciled to determine a final value conclusion. Further, economic obsolescence was considered in determining the fair value of our inventory and property and equipment. The fair value was allocated to our individual assets and liabilities as follows:

Inventory — Inventory valued consisted of spare parts and consumables that support our international, coiled tubing and wireline operations. The fair value of the international spare parts and coiled tubing inventory was determined using the indirect method of the cost approach, with adjustments for economic obsolescence. For wireline inventory, the cost basis was adjusted to account for the changes in cost between the acquisition date and the valuation date.

Property and Equipment — Property and equipment valued consisted of leasehold improvements, machinery and equipment, transportation equipment, office furniture, fixtures and equipment, computers and software, construction-in-progress and assets held for sale. The fair value of our property and equipment was estimated using the cost approach and market approach, while the income approach was considered in the context of the economic obsolescence analysis which was applied to certain assets. As a part of the valuation process, the third-party advisors performed site inspections and utilized internal data to identify and value assets.

Land and Buildings — Land and buildings valued consisted of four facilities and the underlying land, for which the fair value was estimated using the cost approach and sales comparison (market) approach, with adjustments for economic obsolescence to certain assets.

Intangible Assets — Intangible assets valued consisted of trademark and tradename, for which the fair value was estimated using the relief-from-royalty income approach. As a part of the valuation process, the third-party advisors considered overall revenue and cash flow projections and guidance on long-term growth rates. Additionally, above or below market leases and contracts and relationships were examined and determined to have no fair value. The value of our intangible assets will be amortized using the straight-line method over the economic useful life, which we estimated to be ten years.

Senior Secured Notes — The fair value of the Senior Secured Notes was estimated by applying a stochastic interest rate model implemented within a binomial lattice framework that considers the call provisions associated with the notes and captures the decision of prepaying the notes or holding to maturity by evaluating the optimal decision at each time step constructed within the lattice model.

Convertible Notes — The fair value of the Convertible Notes was estimated by applying a binomial lattice model and a recovery rate adjustment model, which provides a quantitative method for estimating the yield for a debt or debt-like security based on an observed market yield for a security of a different seniority. Certain inputs and assumptions used to derive the fair value of the Convertible Notes are considered significant unobservable inputs which are classified as Level 3 inputs under ASC Topic 820, Fair Value Measurements and Disclosures, including the company’s stock price, the volatility and the market yield related to the Convertible Notes.

Consolidated Balance Sheet

The adjustments set forth in the following consolidated balance sheet as of May 31, 2020 reflect the effects of the transactions contemplated by the Plan and executed on the fresh start reporting date (reflected in the column entitled “Reorganization Adjustments”), and fair value and other required accounting adjustments resulting from the adoption of Fresh Start Accounting (reflected in the column entitled “Fresh Start Accounting Adjustments”).



	As of May 31, 2020
(in thousands)	Predecessor			Reorganization Adjustments				Fresh Start Accounting Adjustments				Successor
ASSETS
Cash and cash equivalents	$	21,253		$	(10,661	)	(1)	$	—			$	10,592
Restricted cash	4,452			11,721			(2)	—				16,173
Receivables:
Trade, net of allowance for doubtful accounts	33,537			—				—				33,537
Unbilled receivables	9,163			—				—				9,163
Insurance recoveries	23,636			—				—				23,636
Other receivables	5,256			1,000			(3)	—				6,256
Inventory	21,012			—				(6,883		)	(18)	14,129
Assets held for sale	1,825			—				29			(19)	1,854
Prepaid expenses and other current assets	4,817			—				952			(20)	5,769
Total current assets	124,951			2,060				(5,902		)		121,109

Property and equipment, at cost	1,082,704			—				(886,733		)	(21)	195,971
Less accumulated depreciation	655,512			—				(655,512		)	(21)	—
Net property and equipment	427,192			—				(231,221		)		195,971
Intangible assets, net of accumulated amortization	—			—				9,370			(22)	9,370
Deferred income taxes	10,897			—				(2,157		)	(23)	8,740
Operating lease assets	5,234			—				—				5,234
Other noncurrent assets	13,247			(5,023		)	(4)	3,975			(24)	12,199
Total assets	$	581,521		$	(2,963	)		$	(225,935	)		$	352,623

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	24,601		$	(9,478	)	(5)	$	—			$	15,123
Deferred revenues	121			—				—				121
Commitment premium	9,584			(9,584		)	(6)	—				—
Debtor in possession financing	4,000			(4,000		)	(7)	—				—
Accrued expenses:
Employee compensation and related costs	4,970			—				—				4,970
Insurance claims and settlements	23,517			—				—				23,517
Insurance premiums and deductibles	5,269			—				—				5,269
Interest	3,775			(3,731		)	(8)	—				44
Other	12,436			4,329			(9)	(10		)		16,755
Total current liabilities	88,273			(22,464		)		(10		)		65,799

Long-term debt, less unamortized discount and debt issuance costs	175,000			(53,831		)	(10)	20,070			(25)	141,239
Noncurrent operating lease liabilities	4,189			—				—				4,189
Deferred income taxes	4,296			—				(3,225		)	(26)	1,071
Other noncurrent liabilities	1,366			—				—				1,366
Total liabilities not subject to compromise	273,124			(76,295		)		16,835				213,664
Liabilities subject to compromise	308,422			(308,422		)	(11)	—				—
Stockholders’ equity:
Predecessor common stock	8,893			(8,893		)	(12)	—				—
Successor common stock	—			1			(13)	—				1
Predecessor additional paid-in capital	553,631			(553,631		)	(14)	—				—
Successor additional paid-in capital	—			98,413			(15)	40,545			(27)	138,958
Predecessor treasury stock, at cost	(5,098		)	5,098			(16)	—				—
Retained earnings (Accumulated deficit)	(557,451		)	840,766			(17)	(283,315		)	(28)	—
Total stockholders’ equity	(25		)	381,754				(242,770		)		138,959
Total liabilities and stockholders’ equity	$	581,521		$	(2,963	)		$	(225,935	)		$	352,623


(1)	Represents the following net change in cash and cash equivalents:



Cash proceeds from Convertible Notes	$	120,187
Cash proceeds from Senior Secured Notes	75,000
Payment to fund claims reserve	(950		)
Payment to escrow remaining professional fees	(10,771		)
Payment of professional fees	(9,468		)
Payment in full to extinguish DIP Facility	(4,000		)
Payment of accrued interest on DIP Facility	(55		)
Payment of DIP Facility fees	(177		)
Payment in full to extinguish Prepetition Term Loan	(175,000		)
Payment of accrued interest on Prepetition Term Loan	(3,677		)
Payment of prepayment penalty on Prepetition Term Loan	(1,750		)
	$	(10,661	)


(2)	Represents the following net change in restricted cash:



Payment to fund rejected leases claims reserve	$	950
Payment to escrow remaining professional fees	10,771
	$	11,721


(3)	Represents recognition of a receivable for a portion of the proceeds from the issuance of the Senior Secured Notes which was received in June 2020.


(4)	Represents the reclassification of previously paid debt issuance costs from deferred assets to offset the carrying amount of long-term debt.


(5)	Represents the payment of professional fees which were incurred prior to emergence.


(6)	Represents the settlement of the Backstop Commitment Premium upon issuance of the Convertible Notes.


(7)	Represents the payment to extinguish the DIP Facility.


(8)	Represents the payment of accrued interest on the Prepetition Term Loan and DIP Facility.


(9)	Represents the increase in accrued expenses for fees which were incurred upon our emergence from Chapter 11.


(10)	Represents the following changes in long-term debt, less unamortized discount and debt issuance costs:



Payment in full to extinguish Prepetition Term Loan	$	(175,000	)
Issuance of Senior Secured Notes at Par	78,125
Recognition of debt issue costs on Senior Secured Notes	(2,913		)
Recognition of liability component of Convertible Notes issuance	47,225
Recognition of debt issuance costs on liability component of Convertible Notes	(1,268		)
	$	(53,831	)

Due to the Convertible Notes’ embedded conversion option, the liability and equity components were reported separately, as described further in Note 7, Debt.


(11)	Represents the settlement of liabilities subject to compromise in accordance with the Plan, for which the resulting gain is as follows:



Prepetition Senior Notes	$	300,000
Accrued interest on Prepetition Senior Notes	8,422
Liabilities subject to compromise	308,422
Cash paid by holders of Prepetition Senior Notes	118,013
Issuance of equity to Prepetition Senior Notes creditors	(17,044		)
Notes Received by Prepetition Senior Note holders	(118,013		)
	$	291,378


(12)	Represents the cancellation of Predecessor common stock.


(13)	Represents the issuance of Successor common stock to prior equity holders and to settle the Prepetition Senior Notes.


(14)	Represents the cancellation of Predecessor additional paid-in capital.


(15)	The changes in Successor additional paid-in capital were as follows:



Recognition of equity component of Convertible Notes	$	82,546
Issuance of Successor common stock to Prepetition Senior Notes creditors and prior equity holders	18,083
Recognition of debt issuance costs of Convertible Notes equity component	(2,216		)
	$	98,413

Due to the Convertible Notes’ embedded conversion option, the liability and equity components were reported separately, as described further in Note 7, Debt.


(16)	Represents the cancellation of Predecessor treasury stock.


(17)	Represents the cumulative impact to Predecessor retained earnings of the reorganization adjustments described above.


(18)	Represents the fair value adjustment to inventory, as described further in the previous section under the heading “Valuation Process”.


(19)	Represents the fair value adjustment to assets held for sale, as described further in the previous section under the heading “Valuation Process”.


(20)	Represents deferred compensation associated with the excess of fair value over the par value of Convertible Notes purchased by senior management, which is compensation to the Successor and therefore was expensed in June 2020.


(21)	Represents the following fair value adjustments to property and equipment:



	Predecessor Historical Value			Fair Value Adjustment			Successor Fair Value
Drilling rigs and equipment	$	1,010,612		$	(832,294	)	$	178,318
Vehicles	41,283			(28,561		)	12,722
Building and improvements	16,619			(13,742		)	2,877
Office equipment	12,231			(11,743		)	488
Land	1,959			(393		)	1,566
	$	1,082,704		$	(886,733	)	$	195,971
Less: Accumulated Depreciation	(655,512		)	655,512			—
	$	427,192		$	(231,221	)	$	195,971


(22)	Represents the fair value adjustment to recognize the trademark and tradename of Pioneer Energy Services Corp. as an intangible, as described further in the above section under the heading “Valuation Process”.


(23)	Represents the recognition of the noncurrent deferred tax asset as a result of the cumulative tax impact of the fresh start adjustments herein.


(24)	Represents a prepaid tax asset established as part of the fresh start accounting adjustments.


(25)	Represents the following fair value adjustments to long-term debt less unamortized discount and debt issuance costs:



Fair value adjustment to the liability component of the Convertible Notes	$	23,195
Discount on Senior Secured Notes	(3,125		)
	$	20,070

Due to the Convertible Notes’ embedded conversion option, the liability and equity components were reported separately, as described further in Note 7, Debt.


(26)	Represents the derecognition of the deferred tax liability as a result of the cumulative tax impact of the fresh start adjustments herein.


(27)	Represents the fair value adjustment to the equity component of the Convertible Notes.


(28)	Represents the cumulative impact of the fresh start accounting adjustments discussed above and the elimination of Predecessor accumulated earnings.

4. Revenue from Contracts with Customers

Our production services business segments earn revenues for well servicing and wireline services pursuant to master services agreements based on purchase orders or other contractual arrangements with the client. Production services jobs are generally short-term (ranging in duration from several hours to less than 30 days) and are charged at current market rates for the labor, equipment and materials necessary to complete the job. Production services jobs are varied in nature but typically represent a single performance obligation, either for a particular job, a series of distinct jobs, or a period of time during which we stand ready to provide services as our client needs them. Revenue is recognized for these services over time, as the services are performed.

Our drilling services business segments earn revenues by drilling oil and gas wells for our clients under daywork contracts. Daywork contracts are comprehensive agreements under which we provide a comprehensive service offering, including the drilling rig, crew, supplies, and most of the ancillary equipment necessary to operate the rig. Contract modifications that extend the term of a dayrate contract are generally accounted for prospectively as a separate dayrate contract. We account for our services provided under daywork contracts as a single performance obligation comprised of a series of distinct time increments which are satisfied over time. Accordingly, dayrate revenues are recognized in the period during which the services are performed.

With most drilling contracts, we also receive payments contractually designated for the mobilization and demobilization of drilling rigs and other equipment to and from the client’s drill site. Revenues associated with the mobilization and demobilization of our drilling rigs to and from the client’s drill site do not relate to a distinct good or service and are recognized ratably over the related contract term.

The amount of demobilization revenue that we ultimately collect is dependent upon the specific contractual terms, most of which include provisions for reduced (or no) payment for demobilization when, among other things, the contract is renewed or extended with the same client, or when the rig is subsequently contracted with another client prior to the termination of the current contract. Since revenues associated with demobilization activity are typically variable, at each period end, they are estimated at the most likely amount, and constrained when the likelihood of a significant reversal is probable. Any change in the expected amount of demobilization revenue is accounted for with the net cumulative impact of the change in estimate recognized in the period during which the revenue estimate is revised.

The upfront costs that we incur to mobilize the drilling rig to our client’s initial drilling site are capitalized and recognized ratably over the term of the related contract, including any contracted renewal or extension periods, which is our estimate of the period during which we expect to benefit from the cost of mobilizing the rig. Costs associated with the final demobilization at the end of the contract term are expensed when incurred, when the demobilization activity is performed.

Contract Asset and Liability Balances and Contract Cost Assets

Contract asset and contract liability balances relate to demobilization and mobilization revenues, respectively. Demobilization revenue that we expect to receive is recognized ratably over the related contract term, but invoiced upon completion of the demobilization activity. Mobilization revenue, which is typically collected upon the completion of the initial mobilization activity, is deferred and recognized ratably over the related contract term. Contract asset and liability balances are netted at the contract level, with the net current and noncurrent portions separately classified in our condensed consolidated balance sheets, and the resulting contract liabilities are referred to herein as “deferred revenues.” When demobilization revenues are recognized prior to the activity being performed, they are not yet billable, and the resulting contract assets are included in our other current assets in our unaudited condensed consolidated financial statements.

Contract cost assets represent the costs associated with the initial mobilization required in order to fulfill the contract, which are deferred and recognized ratably over the period during which we expect to benefit from the mobilization, or the period during which we expect to satisfy the performance obligations of the related contract. Contract cost assets are presented as either current or noncurrent, according to the duration of the original contract to which it relates, and referred to herein as “deferred costs.”

Our current and noncurrent deferred revenues, contract assets and deferred costs as of June 30, 2020 and December 31, 2019 were as follows (amounts in thousands):



	Successor		Predecessor
	June 30, 2020		December 31, 2019
Current deferred revenues	$	642	$	1,339
Current deferred costs	201		1,071

Noncurrent deferred revenues	$	—	$	57
Noncurrent deferred costs	30		267

The changes in contract balances during 2020 are primarily related to the amortization of deferred revenues and costs, partially offset by increases related to two rigs deployed under new contracts in 2020. Amortization of deferred revenues and costs were as follows (amounts in thousands):



	Successor		Predecessor
	One Month Ended June 30, 2020		Five Months Ended May 31, 2020		Six Months Ended June 30, 2019
Amortization of deferred revenues	$	46	$	2,705	$	2,235
Amortization of deferred costs	39		1,876		2,096

Beginning in late March 2020, rather than terminating their contracts with us, certain of our clients elected to temporarily stack three of our rigs, placing them on an extended standby for a reduced revenue rate and the option to reactivate the rigs through the remainder of the contract term. In May 2020, one of our domestic clients elected to early terminate their contract with us and make an upfront early termination payment based on a per day rate for the respective remaining contract term, resulting in $1.6 million of revenues recognized in the Predecessor period.

5. Property and Equipment

Capital Expenditures — Capital additions during 2020 primarily related to routine expenditures that are necessary to maintain our fleets, while capital additions during 2019 also included the completion of construction on our 17^th AC drilling rig which we deployed in March 2019, and various vehicle and ancillary equipment purchases and upgrades.

Assets Held for Sale — In April 2020, we closed our coiled tubing services business and placed all $5.4 million of our coiled tubing services assets as held for sale at June 30, 2020. We have various other equipment designated as held for sale which is carried at fair value. When the net carrying value of an asset designated as held for sale exceeds its estimated fair value, which we estimate based on expected sales prices, which are classified as Level 3 inputs as defined by ASC Topic 820, Fair Value Measurements and Disclosures, we recognize the difference as an impairment charge.

Impairments — In accordance with ASC Topic 360, Property, Plant and Equipment, we monitor all indicators of potential impairments. We evaluate for potential impairment of long-lived assets when indicators of impairment are present, which may include, among other things, significant adverse changes in industry trends (including revenue rates, utilization rates, oil and natural gas market prices, and industry rig counts). In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of the assets grouped at the lowest level that independent cash flows can be identified. We perform an impairment evaluation and estimate future undiscounted cash flows for each of our asset groups separately, which are our domestic drilling services, international drilling services, well servicing and wireline services segments, and, prior to being placed as held for sale, our coiled tubing services segment. If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we determine the fair value of the asset group, and the amount of an impairment charge would be measured as the difference between the carrying amount and the fair value of the assets.

Due to the significant decline in industry conditions, commodity prices, and projected utilization of equipment, as well as the COVID-19 pandemic’s impact on our industry, our projected cash flows declined during the first quarter of 2020, and we performed recoverability testing on all our reporting units. As a result of this analysis, we incurred impairment charges of $16.4 million to reduce the carrying values of our coiled tubing assets to their estimated fair values during the three months ended March 31, 2020. For all our other reporting units, excluding coiled tubing, we determined that the sum of the estimated future undiscounted net cash flows were in excess of the carrying amounts and that no impairment existed for these reporting units at March 31, 2020. We continued to monitor potential indicators of impairment through June 30, 2020 and concluded that none of our reporting units are currently at risk of impairment.

The assumptions we use in the evaluation for impairment are inherently uncertain and require management judgment. Although we believe the assumptions and estimates used in our impairment analysis are reasonable, different assumptions and estimates could materially impact the analysis and resulting conclusions. The most significant inputs used in our impairment analysis include the projected utilization and pricing of our services, as well as the estimated proceeds upon any future sale or disposal of the assets, all of which are classified as Level 3 inputs as defined by ASC Topic 820, Fair Value Measurements and Disclosures. If commodity prices decrease or remain at current levels for an extended period of time, or if the demand for any of our services decreases below what we are currently projecting, our estimated cash flows may decrease and our estimates of the fair value of certain assets may decrease as well. If any of the foregoing were to occur, we could incur impairment charges on the related assets.

6. Leases

As a drilling and production services provider, we provide the drilling rigs and production services equipment which are necessary to fulfill our performance obligations and which are considered leases under ASU No. 2016-02, Leases, (together with its amendments, herein referred to as “ASC Topic 842”). However, ASU No. 2018-11, Leases: Targeted Improvements, allows lessors to (i) combine the lease and non-lease components of revenues when the revenue recognition pattern is the same and when the lease component, when accounted for separately, would be considered an operating lease, and (ii) account for the combined lease and non-lease components under ASC Topic 606, Revenue from Contracts with Customers, when the non-lease component is the predominant element of the combined component. We elected to apply this expedient and therefore recognize our revenues (both lease and service components) under ASC Topic 606, and present them as one revenue stream in our unaudited condensed consolidated statements of operations.

As a lessee, we lease our corporate office headquarters in San Antonio, Texas, and we conduct our business operations through 16 other regional offices located throughout the United States and internationally in Colombia. These operating locations typically include regional offices, storage and maintenance yards and employee housing sufficient to support our operations in the area. We lease most of these properties under non-cancelable term and month-to-month operating leases, many of which contain renewal options that can extend the lease term from six months to five years and some of which contain escalation clauses. We also lease various items of supplemental equipment, typically under cancelable short-term and very short term (less than 30 days) leases. Due to the nature of our business, any option to renew these short-term leases, and the options to extend certain of our long-term real estate leases, are generally not considered reasonably certain to be exercised. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease, and the lease payments during these periods are similarly excluded from the calculation of operating lease asset and lease liability balances.

The following table summarizes our lease expense recognized, excluding variable lease costs (amounts in thousands):



	Successor		Predecessor
	One Month Ended June 30, 2020		Five Months Ended May 31, 2020		Six Months Ended June 30, 2019
Long-term operating lease expense	$	151	$	1,080	$	1,671
Short-term operating lease expense	456		4,456		7,736

The following table summarizes the amount and timing of our obligations associated with our long-term operating leases (amounts in thousands):



	Successor			Predecessor
	June 30, 2020			December 31, 2019
Within 1 year	$	1,199		$	2,496
In the second year	1,004			1,933
In the third year	992			1,447
In the fourth year	864			1,117
In the fifth year	885			912
Thereafter	746			811
Total undiscounted lease obligations	$	5,690		$	8,716
Impact of discounting	(638		)	(818		)
Discounted value of operating lease obligations	$	5,052		$	7,898

Current operating lease liabilities	$	998		$	2,198
Noncurrent operating lease liabilities	4,098			5,700
	$	5,096		$	7,898

During 2020, leased assets obtained in exchange for new operating lease liabilities totaled approximately $2.1 million.

7. Debt

As of June 30, 2020, our outstanding debt obligations were as follows (amounts in thousands):



	Successor
	June 30, 2020
Convertible Notes	$	129,771
Senior Secured Notes	78,125

Due to the application of fresh start accounting, our debt obligations were recognized at fair value on our condensed consolidated balance sheet at the Fresh Start Reporting Date, as described further in Note 3, Fresh Start Accounting. Additionally, a portion of the fair value of our Convertible Notes is classified as equity, as described further below.

ABL Credit Facility

On the Effective Date, pursuant to the terms of the Plan, we entered into a senior secured asset-based revolving credit agreement in an aggregate amount of $75 million (the “ABL Credit Facility”) among us and our domestic subsidiaries as borrowers (the “Borrowers”), the lenders party thereto and PNC Bank, National Association as administrative agent and on August 7, 2020, we entered into a First Amendment to the ABL Credit Facility (together, herein referred to as the “ABL Credit Facility”) which, among other things, reduced the maximum amount of the revolving credit agreement to $40 million.

Among other things, proceeds of loans under the ABL Credit Facility may be used to pay fees and expenses associated with the ABL Credit Facility and finance ongoing working capital and general corporate needs.

The maturity date of loans made under the ABL Credit Facility is the earliest of 90 days prior to maturity of the Senior Secured Notes or the Convertible Notes (both of which are described further below) and May 29, 2025. Borrowings under the ABL Credit Facility will bear interest at a rate of (i) the LIBOR rate (subject to a floor of 0%) plus an applicable margin of 375 basis points per annum or (ii) the base rate plus an applicable margin of 275 basis points per annum.

The ABL Credit Facility limits our annual capital expenditures to 125% of the budget set forth in the projections for any fiscal year and provides that if our availability plus pledged cash of up to $3 million falls below $6 million (15% of the maximum revolver amount), we will be required to comply with a fixed charge coverage ratio of 1.0 to 1.0, all of which is defined in the ABL Credit Facility. As of June 30, 2020, we had no borrowings and approximately $7.1 million in outstanding letters of credit under the ABL Credit Facility and subject to the availability requirements in the ABL Credit Facility, based on eligible accounts receivable and inventory balances at June 30, 2020, availability under the ABL Credit Facility was $13.2 million, which our access to would be limited by (i) our requirement to maintain 15% available or comply with a fixed charge coverage ratio, as described above and (ii) the requirement to maintain availability of at least $4 million, which may include up to $2 million of pledged cash.

Convertible Notes

We entered into an indenture, dated as of the Effective Date, among the Company and Wilmington Trust, N.A., as trustee (the “Convertible Notes Indenture”), and issued $129.8 million aggregate principal amount of convertible senior unsecured

pay-in-kind notes due 2025 thereunder (the “Convertible Notes”). We received net issuance proceeds of $120.2 million, which was net of the $9.6 million Backstop Commitment Premium.

The Convertible Notes are general unsecured obligations which will mature on November 15, 2025, unless earlier accelerated, redeemed, converted or repurchased, and bear interest at a fixed rate of 5% per annum, which will be payable semi-annually in-kind in the form of an increase to the principal amount. The Convertible Notes are convertible at the option of the holders at any time into shares of our common stock and will convert mandatorily into our common stock at maturity; provided, however, that if the value of our common stock otherwise deliverable in connection with a mandatory conversion of a Convertible Note on the maturity date would be less than the principal amount of such Convertible Note plus accrued and unpaid interest, then the Convertible Note will instead convert into an amount of cash equal to the principal amount thereof plus accrued and unpaid interest. The initial conversion rate is 75 shares of common stock per $1,000 principal amount of the Convertible Notes, which in aggregate represents 9,732,825 shares of common stock and an initial conversion price of $13.33 per share. The conversion rate is subject to customary anti-dilution adjustments.

If we undergo a “fundamental change” as defined in the Convertible Notes Indenture, subject to certain conditions, holders may require us to repurchase all or any portion of their Convertible Notes for cash at an amount equal to 100% of the principal amount of the Convertible Notes to be repurchased plus any accrued and unpaid interest. In the case of certain fundamental change events that constitute merger events (as defined in the Convertible Notes Indenture), we have a superseding right to cause the mandatory conversion of all or part of the Convertible Notes into a number of shares of common stock, per $1,000 principal amount of Convertible Notes, equal to the then-current conversion rate or the cash value of such number of shares of common stock (but not less than the principal amount).

Holders of Convertible Notes are entitled to vote on all matters on which holders of our common stock generally are entitled to vote (or, if any, to take action by written consent of the holders of our common stock), voting together as a single class together with the shares of our common stock and not as a separate class, on an as-converted basis, at any annual or special meeting of holders of our common stock and each holder is entitled to such number of votes as such holder would receive on an as-converted basis on the record date for such vote.

The Convertible Notes Indenture contains customary events of default and covenants that limit our ability and the ability of certain of our subsidiaries to incur, assume or guarantee additional indebtedness and create liens and enter into mergers or consolidations.

Because the Convertible Notes contain an embedded conversion option whereby they, or a portion of them, may be settled in cash, we have separately accounted for the liability and equity components of the Convertible Notes in accordance with the accounting requirements for convertible debt instruments set forth in ASC Topic 470-20, Debt with Conversion and Other Options. The initial fair value of the Convertible Notes was estimated in accordance with the application of Fresh Start Accounting, as described further in Note 3, Fresh Start Accounting. In order to allocate the initial fair value, we first calculated the value of the liability component by estimating the fair value for the debt instrument as if it did not contain a conversion feature. The amount by which the initial fair value of the Convertible Notes exceeded the estimated fair value of the liability component represented the estimated fair value of the equity component. We also allocated the debt issuance costs incurred to the liability and equity components, for which the portion attributable to the equity component is netted with the respective equity component in additional paid-in capital.

The below table summarizes the allocation of issuance proceeds, fair value and debt issuance costs to the liability and equity components of the Convertible Notes at the Fresh Start Reporting Date (in thousands):



	Successor
	Liability Component			Equity Component			Total
Issuance proceeds, net of Backstop Commitment Premium	$	43,738		$	76,449		$	120,187

Face value	47,225			82,546			129,771
Issuance discount	23,195			40,542			63,737
Fair value	$	70,420		$	123,088		$	193,508
Debt issuance costs	(1,268		)	(2,216		)	(3,484		)
Net carrying value at Fresh Start Reporting Date	$	69,152		$	120,872		$	190,024

Senior Secured Notes

We entered into an indenture, dated as of the Effective Date, among the Company, the subsidiary guarantors party thereto and Wilmington Trust, N.A., as trustee (the “Senior Secured Notes Indenture”), and issued $78.1 million aggregate principal amount of floating rate senior secured notes due 2025 (the “Senior Secured Notes”) thereunder. The Senior Secured Notes are guaranteed on a senior secured basis by our existing subsidiaries that also guarantee our obligations under the ABL Credit Facility (the “Guarantors”) on a full and unconditional basis and are secured by a second lien on the accounts receivable and inventory and a first lien on substantially all of the other assets and properties (including the cash proceeds thereof) of the Company and the Guarantors. We received net issuance proceeds of $75 million, which was net of the original issue discount of $3.1 million.

The Senior Secured Notes will mature on May 15, 2025 and interest will accrue at the rate of LIBOR plus 9.5% per annum, with a LIBOR rate floor of 1.5%, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, commencing on August 15, 2020. With respect to any interest payment due on or prior to May 29, 2021, 50% of the interest will be payable in cash and 50% of the interest will be paid in-kind in the form of an increase to the principal amount; however, a majority in interest of the holders of the Senior Secured Notes may elect to have 100% of the interest due on or prior to May 29, 2021 payable in-kind. For all interest periods commencing on or after May 15, 2024, the interest rate for the Senior Secured Notes will be a rate equal to LIBOR plus 10.5%, with a LIBOR rate floor of 1.5%.

We may redeem all or part of the Senior Secured Notes on or after June 1, 2021 at redemption prices (expressed as percentages of the principal amount) equal to (i) 104% for the twelve-month period beginning on June 1, 2021; (ii) 102% for the twelve-month period beginning on June 1, 2022; (iii) 101% for the twelve-month period beginning on June 1, 2023 and (iii) 100% for the twelve-month period beginning June 1, 2024 and at any time thereafter, plus accrued and unpaid interest at the redemption date. Notwithstanding the foregoing, if a change of control (as defined in the Senior Secured Notes Indenture) occurs prior to June 1, 2022, we may elect to purchase all remaining outstanding Senior Secured Notes not tendered to us as described below at a redemption price equal to 103% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the applicable redemption date. If a change of control (as defined in the Senior Secured Notes Indenture) occurs, holders of the Senior Secured Notes will have the right to require us to repurchase all or any part of their Senior Secured Notes at a purchase price equal to 101% of the aggregate principal amount of the Senior Secured Notes repurchased, plus accrued and unpaid interest, if any, to the repurchase date.

The Senior Secured Notes Indenture contains a minimum asset coverage ratio of 1.5 to 1.0 as of any June 30 or December 31, beginning December 31, 2020. The Senior Secured Notes Indenture provides for certain customary events of default and contains covenants that limit, among other things, our ability and the ability of certain of our subsidiaries, to incur, assume or guarantee additional indebtedness; pay dividends or distributions on capital stock or redeem or repurchase capital stock; make investments; repay junior debt; sell stock of our subsidiaries; transfer or sell assets; enter into sale and lease back transactions; create liens; enter into transactions with affiliates; and enter into mergers or consolidations.

Debt Issuance Costs and Discount

Costs incurred in connection with the issuance of our Convertible Notes (which were allocated to the liability component, as described above) and Senior Secured Notes, as well as the issuance discounts, were capitalized and are being amortized using the effective interest method over the term of the related debt instrument. Costs incurred in connection with our ABL Credit Facility were capitalized and are being amortized using the straight-line method over the expected term of the agreement. Our unamortized debt issuance costs and discounts are presented below (amounts in thousands):



	Successor
	June 30, 2020
Unamortized discount on Convertible Notes (based on imputed interest rate of 20.9%)	$	58,680
Unamortized discount on Senior Secured Notes (based on imputed interest rate of 13.2%)	3,083
Unamortized debt issuance costs	4,153


8.	Taxes

As described in Note 2, Emergence from Voluntary Reorganization under Chapter 11, in accordance with the Plan, our Prepetition Senior Notes were exchanged for shares of our new common stock. Absent an exception, a debtor recognizes cancellation of debt income (CODI) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code (IRC) provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. As a result of the market value of equity upon emergence from Chapter 11 bankruptcy proceedings, the estimated amount of CODI for federal income tax purposes is approximately $217 million, which will reduce the value of our net operating losses by an equal amount. The actual reduction in tax attributes does not occur until the first day of our tax year subsequent to the date of emergence, or January 1, 2021. The reduction of net operating losses is expected to be fully offset by a corresponding decrease in valuation allowance.

Upon our emergence from Chapter 11, we underwent an ownership change, as defined in the IRC, which we expect will result in future annual limitations on the usage of our remaining domestic net operating losses. The majority of our remaining domestic net operating losses will begin to expire in 2030, while losses generated after 2017 are carried forward indefinitely but are limited in usage to 80% of taxable income beginning in 2021. The majority of our foreign net operating losses are carried forward indefinitely, but losses generated after 2016 are carried forward for 12 years and will begin to expire in 2029.

We provide a valuation allowance when it is more likely than not that some portion of our deferred tax assets will not be realized. We evaluated the impact of the reorganization, including the change in control, resulting from our bankruptcy emergence and determined it is more likely than not that we will not fully realize future income tax benefits related to our domestic net deferred tax assets based on the annual limitations discussed above, historical results, and expected market conditions known on the date of measurement.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous corporate income tax provisions, some of which impact our calculation of income taxes, including providing for the carryback of certain net operating losses, modifications to the net interest deduction limitations, refundable payroll tax credits, and deferment of employer social security payments. However, the provisions did not have a material impact on our Predecessor or Successor financial statements.

9. Fair Value of Financial Instruments

The FASB’s Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, defines fair value and provides a hierarchal framework associated with the level of subjectivity used in measuring assets and liabilities at fair value. Currently, our financial instruments consist primarily of cash and cash equivalents, trade and other receivables, trade payables and long-term debt. The carrying value of cash and cash equivalents, trade and other receivables, and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments. As a result of the application of fresh start accounting, we estimate that the carrying value of our long-term debt approximates fair value.

10. Earnings (Loss) Per Common Share

Basic earnings (loss) per share (EPS) is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.

Diluted EPS is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of shares issuable from stock-based compensation awards and the Convertible Notes. Potentially dilutive common shares from outstanding stock-based compensation awards are determined using the average share price for each period under the treasury stock method. Potentially dilutive shares from the Convertible Notes are determined using the if-converted method, whereby the Convertible Notes are assumed to be converted and included in the denominator of the EPS calculation and the interest expense, net of tax, recorded in connection with the Convertible Notes is added back to net income (loss).

The following presents a reconciliation of the numerators and denominators of the basic and diluted EPS computations (amounts in thousands, except per share data):



	Successor			Predecessor
	One Month Ended June 30, 2020			Two Months Ended May 31, 2020			Three Months Ended June 30, 2019
Numerator:
Net loss (numerator for basic EPS)	$	(9,817	)	$	(35,121	)	$	(12,944	)
Interest expense on Convertible Notes, net of tax	—			—			—
Numerator for diluted EPS, if-converted method	(9,817		)	(35,121		)	(12,944		)

Denominator:
Weighted-average shares (denominator for basic EPS)	1,048			79,288			78,430
Potentially dilutive shares issuable from Convertible Notes, if-converted method	—			—			—
Potentially dilutive shares issuable from outstanding stock-based compensation awards, treasury stock method	—			—			—
Denominator for diluted EPS	1,048			79,288			78,430
Loss per common share - Basic	$	(9.37	)	$	(0.44	)	$	(0.17	)
Loss per common share - Diluted	$	(9.37	)	$	(0.44	)	$	(0.17	)
Potentially dilutive securities excluded as anti-dilutive	9,733			4,103			4,858



	Successor			Predecessor
	One Month Ended June 30, 2020			Five Months Ended May 31, 2020			Six Months Ended June 30, 2019
Numerator:
Net loss (numerator for basic EPS)	$	(9,817	)	$	(104,225	)	$	(28,059	)
Interest expense on Convertible Notes, net of tax	—			—			—
Numerator for diluted EPS, if-converted method	(9,817		)	(104,225		)	(28,059		)

Denominator:
Weighted-average shares (denominator for basic EPS)	1,048			78,968			78,371
Potentially dilutive shares issuable from Convertible Notes, if-converted method	—			—			—
Potentially dilutive shares issuable from outstanding stock-based compensation awards, treasury stock method	—			—			—
Denominator for diluted EPS	1,048			78,968			78,371
Loss per common share - Basic	$	(9.37	)	$	(1.32	)	$	(0.36	)
Loss per common share - Diluted	$	(9.37	)	$	(1.32	)	$	(0.36	)
Potentially dilutive securities excluded as anti-dilutive	9,733			4,517			3,709

11. Stock-Based Compensation Plans

Prior to the Effective Date, we had various outstanding stock option, restricted stock, and restricted stock unit awards, as well as phantom stock unit awards which were classified as liability awards under ASC Topic 718, Compensation—Stock Compensation. Upon our emergence from the Chapter 11 Cases in May 2020, all unvested equity-based incentive compensation awards vested in full and settled in shares of our new post-emergence common stock.

Pursuant to the terms of the Plan, we adopted the Pioneer Energy Services Corp. 2020 Employee Incentive Plan (the “Employee Incentive Plan”) providing for the issuance from time to time, as approved by our new board of directors, of equity and equity-based awards with respect to the Common Stock in the aggregate and on a fully-diluted basis, of up to 1,198,074 shares of Common Stock, representing approximately 114% of the shares of Common Stock issued on the Effective Date, but representing 10% of the shares of Common Stock issued on the Effective Date on a fully-diluted basis. The shares of Common Stock issued under the Employee Incentive Plan in the future will dilute all of the shares of Common Stock issued on the Effective Date and all shares of Common Stock issued upon conversion of the Convertible Notes equally.

In July 2020, we issued 90,000 shares of restricted stock to our former Chief Executive Officer in connection with his resignation.

12. Segment Information

As of June 30, 2020, we have four operating segments, comprised of two drilling services business segments (domestic and international drilling) and two production services business segments (well servicing and wireline services), which reflects the basis used by management in making decisions regarding our business for resource allocation and performance assessment, as required by ASC Topic 280, Segment Reporting. In April 2020, we closed our coiled tubing services business and placed all our coiled tubing services assets as held for sale at June 30, 2020. Historical financial information for our coiled tubing services business, which had previously been presented as a separate operating segment, continues to be presented in the following tables as a component of continuing operations.

Our domestic and international drilling services segments provide contract land drilling services to a diverse group of exploration and production companies through our three drilling divisions in the US and internationally in Colombia. We provide a comprehensive service offering which includes the drilling rig, crews, supplies, and most of the ancillary equipment needed to operate our drilling rigs.

Our well servicing and wireline services segments provide a range of production services to producers primarily in Texas, North Dakota, the Rocky Mountain region, and Louisiana. Our former coiled tubing services segment also provided various production services primarily in Texas, Wyoming, and surrounding areas.

The following tables set forth certain financial information for each of our segments and corporate (amounts in thousands):



	Successor			Predecessor
	One Month Ended June 30, 2020			Two Months Ended May 31, 2020			Three Months Ended June 30, 2019
Revenues:
Domestic drilling	$	5,866		$	17,450		$	39,652
International drilling	828			1,473			25,422
Drilling services	6,694			18,923			65,074
Well servicing	3,756			6,331			29,506
Wireline services	713			2,410			47,386
Coiled tubing services	—			384			10,877
Production services	4,469			9,125			87,769
Consolidated revenues	$	11,163		$	28,048		$	152,843

Operating costs:
Domestic drilling	$	3,646		$	9,236		$	24,698
International drilling	1,063			1,538			18,555
Drilling services	4,709			10,774			43,253
Well servicing	2,810			5,926			21,038
Wireline services	1,085			3,552			41,804
Coiled tubing services	139			1,773			9,875
Production services	4,034			11,251			72,717
Consolidated operating costs	$	8,743		$	22,025		$	115,970

Gross margin:
Domestic drilling	$	2,220		$	8,214		$	14,954
International drilling	(235		)	(65		)	6,867
Drilling services	1,985			8,149			21,821
Well servicing	946			405			8,468
Wireline services	(372		)	(1,142		)	5,582
Coiled tubing services	(139		)	(1,389		)	1,002
Production services	435			(2,126		)	15,052
Consolidated gross margin	$	2,420		$	6,023		$	36,873

Identifiable Assets:
Domestic drilling⁽¹⁾	$	150,897		$	158,283		$	365,477
International drilling ^{(1) (2)}	47,541			49,611			47,158
Drilling services	198,438			207,894			412,635
Well servicing	47,832			49,388			121,180
Wireline services	22,623			23,948			94,413
Coiled tubing services	5,941			6,336			37,292
Production services	76,396			79,672			252,885
Corporate	68,966			65,057			58,149
Consolidated identifiable assets	$	343,800		$	352,623		$	723,669



	Successor		Predecessor
	One Month Ended June 30, 2020		Two Months Ended May 31, 2020		Three Months Ended June 30, 2019
Depreciation and amortization:
Domestic drilling	$	2,012	$	7,153	$	10,888
International drilling	1,076		843		1,373
Drilling services	3,088		7,996		12,261
Well servicing	1,261		3,039		4,942
Wireline services	763		2,011		3,907
Coiled tubing services	—		471		1,531
Production services	2,024		5,521		10,380
Corporate	124		146		210
Consolidated depreciation	$	5,236	$	13,663	$	22,851


Capital Expenditures:
Domestic drilling	$	484	$	621	$	3,325
International drilling	138		106		524
Drilling services	622		727		3,849
Well servicing	30		201		2,141
Wireline services	60		112		1,588
Coiled tubing services	—		3		1,287
Production services	90		316		5,016
Corporate	—		20		376
Consolidated capital expenditures	$	712	$	1,063	$	9,241



	Successor		Predecessor
	One Month Ended June 30, 2020		Five Months Ended May 31, 2020		Six Months Ended June 30, 2019
Revenues:
Domestic drilling	$	5,866	$	53,341	$	77,661
International drilling	828		15,928		47,065
Drilling services	6,694		69,269		124,726
Well servicing	3,756		31,947		55,760
Wireline services	713		35,543		93,260
Coiled tubing services	—		5,611		25,665
Production services	4,469		73,101		174,685
Consolidated revenues	$	11,163	$	142,370	$	299,411

Operating costs:
Domestic drilling	$	3,646	$	33,101	$	47,167
International drilling	1,063		13,676		35,040
Drilling services	4,709		46,777		82,207
Well servicing	2,810		26,877		39,934
Wireline services	1,085		31,836		81,151
Coiled tubing services	139		8,557		21,263
Production services	4,034		67,270		142,348
Consolidated operating costs	$	8,743	$	114,047	$	224,555



	Successor			Predecessor
	One Month Ended June 30, 2020			Five Months Ended May 31, 2020			Six Months Ended June 30, 2019
Gross margin:
Domestic drilling	$	2,220		$	20,240		$	30,494
International drilling	(235		)	2,252			12,025
Drilling services	1,985			22,492			42,519
Well servicing	946			5,070			15,826
Wireline services	(372		)	3,707			12,109
Coiled tubing services	(139		)	(2,946		)	4,402
Production services	435			5,831			32,337
Consolidated gross margin	$	2,420		$	28,323		$	74,856

Identifiable Assets:
Domestic drilling⁽¹⁾	$	150,897		$	158,283		$	365,477
International drilling ^{(1) (2)}	47,541			49,611			47,158
Drilling services	198,438			207,894			412,635
Well servicing	47,832			49,388			121,180
Wireline services	22,623			23,948			94,413
Coiled tubing services	5,941			6,336			37,292
Production services	76,396			79,672			252,885
Corporate	68,966			65,057			58,149
Consolidated identifiable assets	$	343,800		$	352,623		$	723,669

Depreciation and amortization:
Domestic drilling	$	2,012		$	18,058		$	21,433
International drilling	1,076			2,144			2,716
Drilling services	3,088			20,202			24,149
Well servicing	1,261			7,820			9,824
Wireline services	763			5,088			7,982
Coiled tubing services	—			2,164			3,059
Production services	2,024			15,072			20,865
Corporate	124			373			490
Consolidated depreciation	$	5,236		$	35,647		$	45,504


Capital Expenditures:
Domestic drilling	$	484		$	3,862		$	11,567
International drilling	138			1,273			2,282
Drilling services	622			5,135			13,849
Well servicing	30			1,918			6,036
Wireline services	60			1,684			4,423
Coiled tubing services	—			166			2,811
Production services	90			3,768			13,270
Corporate	—			21			497
Consolidated capital expenditures	$	712		$	8,924		$	27,616


(1)	Identifiable assets for our drilling segments include the impact of a $28.3 million and $38.6 million intercompany balance, as of June 30, 2020 and 2019, respectively, between our domestic drilling segment (intercompany receivable) and our international drilling segment (intercompany payable).


(2)	Identifiable assets for our international drilling segment include five drilling rigs that are owned by our Colombia subsidiary and three drilling rigs that are owned by one of our domestic subsidiaries and leased to our Colombia subsidiary.

The following is a reconciliation of consolidated gross margin of our segments reported above to loss from operations as reported on the condensed consolidated statements of operations (amounts in thousands):



	Successor			Predecessor
	One Month Ended June 30, 2020			Two Months Ended May 31, 2020			Three Months Ended June 30, 2019
Consolidated gross margin	$	2,420		$	6,023		$	36,873
Depreciation and amortization	(5,236		)	(13,663		)	(22,851		)
General and administrative	(4,213		)	(7,392		)	(18,028		)
Pre-petition restructuring charges	—			252			—
Impairment	(388		)	—			(332		)
Bad debt (expense) recovery, net	283			(482		)	348
Gain on dispositions of property and equipment, net	460			272			1,126
Loss from operations	$	(6,674	)	$	(14,990	)	$	(2,864	)



	Successor			Predecessor
	One Month Ended June 30, 2020			Five Months Ended May 31, 2020			Six Months Ended June 30, 2019
Consolidated gross margin	$	2,420		$	28,323		$	74,856
Depreciation and amortization	(5,236		)	(35,647		)	(45,504		)
General and administrative	(4,213		)	(22,047		)	(37,786		)
Pre-petition restructuring charges	—			(16,822		)	—
Impairment	(388		)	(17,853		)	(1,378		)
Bad debt (expense) recovery, net	283			(1,209		)	286
Gain on dispositions of property and equipment, net	460			989			2,201
Loss from operations	$	(6,674	)	$	(64,266	)	$	(7,325	)

13. Commitments and Contingencies

In connection with our operations in Colombia, our foreign subsidiaries routinely obtain bonds for bidding on drilling contracts, performing under drilling contracts, and remitting customs and importation duties. Based on historical experience and information currently available, we believe the likelihood of demand for payment under these bonds and guarantees is remote.

We are currently undergoing sales and use tax audits for multi-year periods. As of June 30, 2020 and December 31, 2019, our accrued liability was $2.2 million and $2.0 million, respectively, based on our estimate of the sales and use tax obligations that are expected to result from these audits. Due to the inherent uncertainty of the audit process, we believe that it is reasonably possible that we may incur additional tax assessments with respect to one or more of the audits in excess of the amount accrued. We believe that such an outcome would not have a material adverse effect on our 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 from an adverse result in all or substantially all of these cases cannot reasonably be made.

Due to the nature of our business, we are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment-related disputes. Legal costs relating to these matters are expensed as incurred. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, results of operations or cash flow from operations.

14. Guarantor/Non-Guarantor Condensed Consolidating Financial Statements

Our Prepetition Senior Notes were fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all existing 100% owned domestic subsidiaries, except for Pioneer Services Holdings, LLC. The Prepetition Senior Notes, the guarantees, and the Prepetition Senior Notes Indenture were terminated on the Effective Date pursuant to the Plan. See Note 2, Emergence from Voluntary Reorganization under Chapter 11, for more information.

Our Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by all existing 100% owned domestic subsidiaries, except for Pioneer Services Holdings, LLC.

The subsidiaries that generally operate our non-U.S. business concentrated in Colombia do not guarantee our Senior Secured Notes and did not guarantee our Prepetition Senior Notes. The non-guarantor subsidiaries do not have any payment obligations under the Senior Secured Notes, the guarantees or the Senior Secured Notes Indenture.

In the event of a bankruptcy, liquidation or reorganization of any non-guarantor subsidiary, such non-guarantor subsidiary would be obligated to pay the holders of its debt and other liabilities, including its trade creditors, before it would be able to distribute any of its assets to us. As of June 30, 2020, there were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.

As a result of the guarantee arrangements, we are presenting the following Predecessor and Successor condensed consolidating balance sheets, statements of operations and statements of cash flows of the issuer, the guarantor subsidiaries, and the non-guarantor subsidiaries.

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(unaudited, in thousands)



	Successor
	June 30, 2020
	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	12,534		$	—	$	2,627		$	—		$	15,161
Restricted cash	16,173			—		—			—			16,173
Receivables, net of allowance	413			50,286		13,707			302			64,708
Intercompany receivable (payable)	(2,786		)	30,855		(28,069		)	—			—
Inventory	—			5,321		7,735			—			13,056
Assets held for sale	—			7,292		—			—			7,292
Prepaid expenses and other current assets	2,469			2,510		265			405			5,649
Total current assets	28,803			96,264		(3,735		)	707			122,039
Net property and equipment	521			160,610		25,109			—			186,240
Investment in subsidiaries	250,356			37,491		—			(287,847		)	—
Intangible assets, net of accumulated amortization	9,292			—		—			—			9,292
Deferred income taxes	—			—		9,140			(1		)	9,139
Operating lease assets	2,800			2,177		63			—			5,040
Other noncurrent assets	1,784			82		10,184			—			12,050
Total assets	$	293,556		$	296,624	$	40,761		$	(287,141	)	$	343,800
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,643		$	7,720	$	2,785		$	—		$	16,148
Deferred revenues	—			74		163			405			642
Accrued expenses	13,886			35,994		278			(1,012		)	49,146
Total current liabilities	19,529			43,788		3,226			(607		)	65,936
Long-term debt, less unamortized discount and debt issuance costs	142,005			—		—			—			142,005
Noncurrent operating lease liabilities	2,467			1,587		44			—			4,098
Deferred income taxes	254			818		—			(1		)	1,071
Other noncurrent liabilities	159			75		—			1,314			1,548
Total liabilities	164,414			46,268		3,270			706			214,658
Total stockholders’ equity	129,142			250,356		37,491			(287,847		)	129,142
Total liabilities and stockholders’ equity	$	293,556		$	296,624	$	40,761		$	(287,141	)	$	343,800

	Predecessor
	December 31, 2019
	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	14,461		$	—	$	10,158		$	—		$	24,619
Restricted cash	998			—		—			—			998
Receivables, net of allowance	107			92,394		30,908			117			123,526
Intercompany receivable (payable)	(28,664		)	64,485		(35,821		)	—			—
Inventory	—			10,325		12,128			—			22,453
Assets held for sale	—			3,447		—			—			3,447
Prepaid expenses and other current assets	2,849			4,122		898			—			7,869
Total current assets	(10,249		)	174,773		18,271			117			182,912
Net property and equipment	2,374			441,567		27,229			—			471,170
Investment in subsidiaries	547,123			47,953		—			(595,076		)	—
Deferred income taxes	44,224			—		11,540			(44,224		)	11,540
Operating lease assets	3,114			3,581		569			—			7,264
Other noncurrent assets	506			562		—			—			1,068
Total assets	$	587,092		$	668,436	$	57,609		$	(639,183	)	$	673,954
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,811		$	24,436	$	6,304		$	—		$	32,551
Deferred revenues	—			513		826			—			1,339
Accrued expenses	10,570			44,893		2,111			117			57,691
Total current liabilities	12,381			69,842		9,241			117			91,581
Long-term debt, less unamortized discount and debt issuance costs	467,699			—		—			—			467,699
Noncurrent operating lease liabilities	2,749			2,536		415			—			5,700
Deferred income taxes	—			48,641		—			(44,224		)	4,417
Other noncurrent liabilities	187			294		—			—			481
Total liabilities not subject to compromise	483,016			121,313		9,656			(44,107		)	569,878
Total stockholders’ equity	104,076			547,123		47,953			(595,076		)	104,076
Total liabilities and stockholders’ equity	$	587,092		$	668,436	$	57,609		$	(639,183	)	$	673,954

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(unaudited, in thousands)



	Successor
	One Month Ended June 30, 2020
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	10,335		$	828		$	—		$	11,163
Costs and expenses:
Operating costs	—			7,680			1,063			—			8,743
Depreciation and amortization	124			4,036			1,076			—			5,236
General and administrative	2,429			1,703			146			(65		)	4,213
Intercompany leasing	—			(405		)	405			—			—
Impairment	—			388			—			—			388
Bad debt expense (recovery), net	—			(283		)	—			—			(283		)
Gain on dispositions of property and equipment, net	—			(460		)	—			—			(460		)
Total costs and expenses	2,553			12,659			2,690			(65		)	17,837
Income (loss) from operations	(2,553		)	(2,324		)	(1,862		)	65			(6,674		)
Other income (expense):
Equity in earnings of subsidiaries	(4,312		)	(1,656		)	—			5,968			—
Interest expense	(2,217		)	—			2			—			(2,215		)
Reorganization items, net	(741		)	(403		)	—			—			(1,144		)
Other income	6			89			(260		)	(65		)	(230		)
Total other income (expense), net	(7,264		)	(1,970		)	(258		)	5,903			(3,589		)
Income (loss) before income taxes	(9,817		)	(4,294		)	(2,120		)	5,968			(10,263		)
Income tax (expense) benefit ¹	—			(18		)	464			—			446
Net income (loss)	$	(9,817	)	$	(4,312	)	$	(1,656	)	$	5,968		$	(9,817	)


	Predecessor
	Two Months Ended May 31, 2020
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	26,575		$	1,473		$	—		$	28,048
Costs and expenses:
Operating costs	—			20,487			1,538			—			22,025
Depreciation and amortization	147			12,673			843			—			13,663
General and administrative	2,922			4,277			283			(90		)	7,392
Pre-petition restructuring charges	(252		)	—			—			—			(252		)
Intercompany leasing	—			(810		)	810			—			—
Bad debt expense (recovery), net	—			482			—			—			482
Gain on dispositions of property and equipment, net	—			(272		)	—			—			(272		)
Total costs and expenses	2,817			36,837			3,474			(90		)	43,038
Income (loss) from operations	(2,817		)	(10,262		)	(2,001		)	90			(14,990		)
Other income (expense):
Equity in earnings of subsidiaries	(202,279		)	(2,086		)	—			204,365			—
Interest expense	(4,138		)	(1		)	4			—			(4,135		)
Loss on extinguishment of debt	(3,723		)	—			—			—			(3,723		)
Reorganization items, net	217,009			(231,420		)	(829		)	—			(15,240		)
Other income	33			160			2,109			(90		)	2,212
Total other income (expense), net	6,902			(233,347		)	1,284			204,275			(20,886		)
Income (loss) before income taxes	4,085			(243,609		)	(717		)	204,365			(35,876		)
Income tax (expense) benefit ¹	(39,206		)	41,330			(1,369		)	—			755
Net income (loss)	$	(35,121	)	$	(202,279	)	$	(2,086	)	$	204,365		$	(35,121	)



	Predecessor
	Three months ended June 30, 2019
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	127,421		$	25,422		$	—		$	152,843
Costs and expenses:
Operating costs	—			97,417			18,553			—			115,970
Depreciation and amortization	210			21,268			1,373			—			22,851
General and administrative	6,907			10,579			677			(135		)	18,028
Intercompany leasing	—			(1,215		)	1,215			—			—
Bad debt expense (recovery), net	—			(348		)	—			—			(348		)
Impairment	—			332			—			—			332
Gain on dispositions of property and equipment, net	—			(1,121		)	(5		)	—			(1,126		)
Total costs and expenses	7,117			126,912			21,813			(135		)	155,707
Income (loss) from operations	(7,117		)	509			3,609			135			(2,864		)
Other income (expense):
Equity in earnings of subsidiaries	3,305			3,431			—			(6,736		)	—
Interest expense	(10,059		)	(1		)	(45		)	—			(10,105		)
Other income (expense)	91			401			(8		)	(135		)	349
Total other income (expense), net	(6,663		)	3,831			(53		)	(6,871		)	(9,756		)
Income (loss) before income taxes	(13,780		)	4,340			3,556			(6,736		)	(12,620		)
Income tax (expense) benefit ¹	836			(1,035		)	(125		)	—			(324		)
Net income (loss)	$	(12,944	)	$	3,305		$	3,431		$	(6,736	)	$	(12,944	)

¹ The income tax (expense) benefit reflected in each column does not include any tax effect of the equity in earnings (losses) of subsidiaries.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(unaudited, in thousands)



	Successor
	One Month Ended June 30, 2020
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	10,335		$	828		$	—		$	11,163
Costs and expenses:
Operating costs	—			7,680			1,063			—			8,743
Depreciation and amortization	124			4,036			1,076			—			5,236
General and administrative	2,429			1,703			146			(65		)	4,213
Intercompany leasing	—			(405		)	405			—			—
Impairment	—			388			—			—			388
Bad debt recovery, net of expense	—			(283		)	—			—			(283		)
Gain on dispositions of property and equipment, net	—			(460		)	—			—			(460		)
Total costs and expenses	2,553			12,659			2,690			(65		)	17,837
Loss from operations	(2,553		)	(2,324		)	(1,862		)	65			(6,674		)
Other income (expense):
Equity in earnings of subsidiaries	(4,312		)	(1,656		)	—			5,968			—
Interest expense	(2,217		)	—			2			—			(2,215		)
Reorganization items, net	(741		)	(403		)	—			—			(1,144		)
Other income (expense)	6			89			(260		)	(65		)	(230		)
Total other expense, net	(7,264		)	(1,970		)	(258		)	5,903			(3,589		)
Loss before income taxes	(9,817		)	(4,294		)	(2,120		)	5,968			(10,263		)
Income tax (expense) benefit ¹	—			(18		)	464			—			446
Net income (loss)	$	(9,817	)	$	(4,312	)	$	(1,656	)	$	5,968		$	(9,817	)


	Predecessor
	Five Months Ended May 31, 2020
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	126,442		$	15,928		$	—		$	142,370
Costs and expenses:
Operating costs	—			100,372			13,675			—			114,047
Depreciation and amortization	374			33,129			2,144			—			35,647
General and administrative	8,865			12,489			918			(225		)	22,047
Pre-petition restructuring charges	16,822			—			—			—			16,822
Intercompany leasing	—			(2,025		)	2,025			—			—
Impairment	—			17,853			—			—			17,853
Bad debt recovery, net of expense	—			1,209			—			—			1,209
Loss (gain) on dispositions of property and equipment, net	3			(992		)	—			—			(989		)
Total costs and expenses	26,064			162,035			18,762			(225		)	206,636
Loss from operations	(26,064		)	(35,593		)	(2,834		)	225			(64,266		)
Other income (expense):
Equity in earnings of subsidiaries	(227,497		)	(8,594		)	—			236,091			—
Interest expense	(12,315		)	—			21			—			(12,294		)
Reorganization items, net	210,346			(231,420		)	(829		)	—			(21,903		)
Loss on extinguishment of debt	(4,215		)	—			—			—			(4,215		)
Other income (expense)	(4		)	394			(3,498		)	(225		)	(3,333		)
Total other expense, net	(33,685		)	(239,620		)	(4,306		)	235,866			(41,745		)
Loss before income taxes	(59,749		)	(275,213		)	(7,140		)	236,091			(106,011		)
Income tax (expense) benefit ¹	(44,476		)	47,716			(1,454		)	—			1,786
Net income (loss)	$	(104,225	)	$	(227,497	)	$	(8,594	)	$	236,091		$	(104,225	)



	Predecessor
	Six months ended June 30, 2019
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	252,346		$	47,065		$	—		$	299,411
Costs and expenses:
Operating costs	—			189,519			35,036			—			224,555
Depreciation and amortization	490			42,298			2,716			—			45,504
General and administrative	14,903			22,025			1,128			(270		)	37,786
Intercompany leasing	—			(2,430		)	2,430			—			—
Impairment	—			1,378			—			—			1,378
Bad debt recovery, net of expense	—			(286		)	—			—			(286		)
Gain on dispositions of property and equipment, net	—			(2,105		)	(96		)	—			(2,201		)
Total costs and expenses	15,393			250,399			41,214			(270		)	306,736
Income (loss) from operations	(15,393		)	1,947			5,851			270			(7,325		)
Other income (expense):
Equity in earnings of subsidiaries	6,073			5,895			—			(11,968		)	—
Interest expense	(19,933		)	(15		)	(42		)	—			(19,990		)
Other income	297			667			339			(270		)	1,033
Total other income (expense), net	(13,563		)	6,547			297			(12,238		)	(18,957		)
Income (loss) before income taxes	(28,956		)	8,494			6,148			(11,968		)	(26,282		)
Income tax (expense) benefit ¹	897			(2,421		)	(253		)	—			(1,777		)
Net income (loss)	$	(28,059	)	$	6,073		$	5,895		$	(11,968	)	$	(28,059	)

¹ The income tax (expense) benefit reflected in each column does not include any tax effect of the equity in earnings (losses) of subsidiaries.

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Successor
	One Month Ended June 30, 2020
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities	$	(4,616	)	$	10,312		$	(979	)	$	—		$	4,717

Cash flows from investing activities:
Purchases of property and equipment	(14		)	(809		)	(77		)	—			(900		)
Proceeds from sale of property and equipment	—			752			—			—			752
	(14		)	(57		)	(77		)	—			(148		)

Cash flows from financing activities:
Intercompany contributions/distributions	16,730			(10,255		)	(6,475		)	—			—
	16,730			(10,255		)	(6,475		)	—			—

Net decrease in cash, cash equivalents and restricted cash	12,100			—			(7,531		)	—			4,569
Beginning cash, cash equivalents and restricted cash	16,607			—			10,158			—			26,765
Ending cash, cash equivalents and restricted cash	$	28,707		$	—		$	2,627		$	—		$	31,334

	Predecessor
	Five Months Ended May 31, 2020
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities	$	(127,760	)	$	132,354		$	(6,839	)	$	—		$	(2,245	)

Cash flows from investing activities:
Purchases of property and equipment	(569		)	(8,755		)	(1,524		)	—			(10,848		)
Proceeds from sale of property and equipment	—			1,819			—			(154		)	1,665
Proceeds from insurance recoveries	—			22			—			—			22
	(569		)	(6,914		)	(1,524		)	(154		)	(9,161		)

Cash flows from financing activities:
Debt repayments	(175,000		)	—			—			—			(175,000		)
Proceeds from debt issuance	195,187			—			—			—			195,187
Proceeds from DIP Facility	4,000			—			—			—			4,000
Repayment of DIP Facility	(4,000		)	—			—			—			(4,000		)
Payments of debt issuance costs	(7,625		)	—			—			—			(7,625		)
Purchase of treasury stock	(8		)	—			—			—			(8		)
Intercompany contributions/distributions	116,923			(125,440		)	8,363			154			—
	129,477			(125,440		)	8,363			154			12,554

Net decrease in cash, cash equivalents and restricted cash	1,148			—			—			—			1,148
Beginning cash, cash equivalents and restricted cash	15,459			—			10,158			—			25,617
Ending cash, cash equivalents and restricted cash	$	16,607		$	—		$	10,158		$	—		$	26,765

	Predecessor
	Six months ended June 30, 2019
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities	$	(35,104	)	$	35,209		$	3,941		$	—		$	4,046

Cash flows from investing activities:
Purchases of property and equipment	(314		)	(28,634		)	(2,434		)	—			(31,382		)
Proceeds from sale of property and equipment	—			3,376			63			—			3,439
Proceeds from insurance recoveries	—			588			—			—			588
	(314		)	(24,670		)	(2,371		)	—			(27,355		)

Cash flows from financing activities:
Purchase of treasury stock	(125		)	—			—			—			(125		)
Intercompany contributions/distributions	10,784			(10,539		)	(245		)	—			—
	10,659			(10,539		)	(245		)	—			(125		)

Net increase (decrease) in cash, cash equivalents and restricted cash	(24,759		)	—			1,325			—			(23,434		)
Beginning cash, cash equivalents and restricted cash	51,348			—			3,216			—			54,564
Ending cash, cash equivalents and restricted cash	$	26,589		$	—		$	4,541		$	—		$	31,130


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements we make in the following discussion that express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements made in good faith that are subject to risks, uncertainties and assumptions. These forward-looking statements are based on our current beliefs, intentions, and expectations and are not guarantees or indicators of future performance. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including risks and uncertainties relating to the effects of our bankruptcy on our business and relationships, the concentration of our equity ownership following bankruptcy, the application of fresh start accounting, the effect of the coronavirus (COVID-19) pandemic on our industry, general economic and business conditions and industry trends, levels and volatility of oil and gas prices, the continued demand for drilling services or production services in the geographic areas where we operate, the highly competitive nature of our business, technological advancements and trends in our industry and improvements in our competitors' equipment, the loss of one or more of our major clients or a decrease in their demand for our services, operating hazards inherent in our operations, the supply of marketable equipment within the industry, the continued availability of new components for our fleets, the continued availability of qualified personnel, the political, economic, regulatory and other uncertainties encountered by our operations, and changes in, or our failure or inability to comply with, governmental regulations, including those relating to the environment, the occurrence of cybersecurity incidents, the success or failure of future dispositions or acquisitions, future compliance with our debt agreements, and the impact of not having our common stock listed on a national securities exchange. We have discussed many of these factors in more detail elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019, as amended by Form 10-K/A for the year ended December 31, 2019, and our Quarterly Report for the quarterly period ended March 31, 2020, including under the headings “Risk Factors” in Item 1A and “Special Note Regarding Forward-Looking Statements” in the Introductory Note to Part I. These factors are not necessarily all the important factors that could affect us. Other unpredictable or unknown factors could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. All forward-looking statements speak only as of the date on which they are made and we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. We advise our stockholders that they should (1) recognize that important factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto and with our Annual Report on Form 10-K for the year ended December 31, 2019, as amended by Form 10-K/A for the year ended December 31, 2019.

Recent Developments

Reorganization and Emergence from Chapter 11

On March 1, 2020, we filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. On May 11, 2020, the Bankruptcy Court confirmed the Plan and on May 29, 2020, the conditions to effectiveness of the Plan were satisfied and the Pioneer RSA Parties emerged from Chapter 11. Our completion of the Chapter 11 Cases has allowed us to significantly reduce our level of indebtedness and our future cash interest obligations.

On the Effective Date, all applicable agreements governing the obligations under the Term Loan, Prepetition Senior Notes and Prepetition ABL Facility were terminated. The Term Loan and Prepetition ABL Facility were paid in full and all outstanding obligations under the Prepetition Senior Notes were canceled in exchange for 94.25% of the pro forma common equity. On the Effective Date, we entered into a $75 million senior secured asset-based revolving credit agreement which was later amended and reduced to $40 million in August 2020 (the “ABL Credit Facility”), and issued $129.8 million of aggregate principal amount of 5% convertible senior unsecured pay-in-kind notes due 2025 (the “Convertible Notes”) and $78.1 million of aggregate principal amount of floating rate senior secured notes due 2025 (the “Senior Secured Notes”), the proceeds of which were used to repay our outstanding Term Loan and certain related fees, all of which are described in more detail in the Liquidity and Capital Resources section below, under the headings entitled ABL Credit Facility and Debt Instruments and Compliance Requirements.

Shares of our common stock were delisted from the OTC Pink Marketplace. We anticipate the trading of our new common stock on the OTC market to commence again in the near future.

For additional information concerning our bankruptcy proceedings under Chapter 11, see Note 2, Emergence from Voluntary Reorganization under Chapter 11, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 Financial Statements.

Fresh Start Accounting — The financial statements included herein have been prepared as if we are a going concern and in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 852, Reorganizations (ASC Topic 852). In connection with our emergence from bankruptcy and in accordance with ASC Topic 852, we qualified for and adopted fresh start accounting on the Effective Date. We were required to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company, and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims.

as reflected on the historical balance sheets. For additional information about the application of fresh start accounting, see Note 3, Fresh Start Accounting, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 Financial Statements.

As a result of the application of fresh start accounting and the effects of the implementation of the Plan, our condensed consolidated financial statements after the Effective Date are not comparable with the consolidated financial statements on or before that date as indicated by the “black line” division in the financial statements and footnote tables, which emphasizes the lack of comparability between amounts presented. References to “Successor” relate to our financial position and results of operations after the Effective Date. References to “Predecessor” refer to our financial position and results of operations on or before the Effective Date.

Industry Impacts

Measures taken by federal, state and local governments, both globally and domestically, to reduce the rate of spread of COVID-19 have resulted in a decrease in general economic activity and a corresponding decrease in global and domestic energy demand, which has negatively impacted oil and gas prices, which in turn has reduced demand for, and the pricing of, products and services provided to the oil and gas industry, including the products and services which we provide. In addition, actions by OPEC and a group of other oil-producing nations led by Russia have negatively impacted crude oil prices. These events pushed crude oil storage near capacity and drove prices down significantly, as described further in the below section entitled “Market Conditions and Outlook”. To the extent these conditions continue to exist in future periods, our clients’ willingness and ability to explore for, develop and produce hydrocarbons will be adversely affected, which will reduce demand for our products and services and adversely affect our results of operations and liquidity.

We have worked to respond to the recent and current market conditions in a number of ways, including:

•

Reduced Capital Spending. We significantly reduced our initial 2020 capital expenditure budget. Currently, we expect to spend a total of $15 million to $17 million on capital expenditures during 2020; our original budget contemplated capital expenditures of approximately $40 million. We continue to closely monitor current market conditions to assess what additional changes, if any, should be made to our 2020 capital expenditures budget.

•

Closure of Under-performing Operations. In April 2020, we closed our coiled tubing operations and idled all our coiled tubing equipment, which were subsequently placed as held for sale. We have also closed or consolidated 8 operating locations within our wireline and well servicing operations and exited 13 long-term leases during 2020 as well as various other short-term leases that support our business, and renegotiated or otherwise downsized other leased locations in order to reduce overhead and improve profitability.

•

Cost-Cutting Measures. Throughout 2020, we have implemented various cost-cutting measures including, among other things, (i) a 60% reduction in our total headcount, (ii) the suspension of our Employee Incentive Plan and determining that no bonuses would be payable thereunder in respect of the first quarter of 2020, (ii) a reduction in the base salaries of each of our executive officers by 24% to 35%, (iii) certain hourly, salary and incentive compensation reductions for administrative and operations personnel throughout the company, (iv) a 20% reduction in the cash compensation of each of our non-employee directors effective until June 30, 2021 (or such other date as determined by the Board) and (v) the elimination of certain employee benefits, including matching 401(k) contributions.


•	Liquidating Non-strategic Assets. We received proceeds from sales of various assets of $2.4 million during the first six months of 2020, and we have an additional $7.3 million designated as held for sale at June 30, 2020.


•	Safety Measures. We have taken proactive steps in our field operations and corporate offices to protect the health and safety of our employees and contractors, including temperature screenings at field job sites, remote working for our office employees and we implemented procedures for hygiene and distancing at all our locations.

Company Overview

Pioneer Energy Services Corp. provides land-based drilling services and production services to a diverse group of oil and gas exploration and production companies in the United States and internationally in Colombia. Drilling services and production services are fundamental to establishing and maintaining the flow of oil and natural gas throughout the productive life of a well.

•

Drilling Services — Our current drilling rig fleet is 100% pad-capable and offers the latest advancements in pad drilling, with 17 AC rigs in the US and 8 SCR rigs in Colombia. We provide a comprehensive service offering which includes the drilling rig, crews, supplies, and most of the ancillary equipment needed to operate our drilling rigs, which are deployed through our division offices in the following regions:



		Rig Count
Domestic drilling:
Marcellus/Utica		5
Permian Basin and Eagle Ford		10
Bakken		2
International drilling		8
		25


•	Production Services — Our production services business segments provide a range of services to producers primarily in Texas, North Dakota, the Rocky Mountain region, and Louisiana.


◦	Well Servicing. Our fleet consists of 111 rigs with 550 horsepower and 12 rigs with 600 horsepower which are deployed through 5 operating locations in Texas and North Dakota.


◦	Wireline Services. Our fleet of 82 wireline units, including nine units that offer greaseless electric wireline used to reach further depths in longer laterals and two greaseless, EcoQuiet^TM units designed to reduce noise when operating in proximity to urban areas, is deployed through 7 operating locations in Texas, the Rocky Mountain region, Louisiana and North Dakota.

Pioneer Energy Services Corp. was incorporated under the laws of the State of Texas in 1979 as the successor to a business that had been operating since 1968. Since then, we have significantly expanded and transformed our business through acquisitions and organic growth. Upon emergence from Chapter 11 in May 2020, we converted from a Texas corporation to a Delaware corporation.

Our current business is comprised of two business lines — Drilling Services (consisting of Domestic Drilling and International Drilling reportable segments) and Production Services (consisting of Well Servicing and Wireline Services reportable segments). In April 2020, we closed our coiled tubing operations and idled all our coiled tubing equipment, which were subsequently placed as held for sale as of June 30, 2020. Financial information about our operating segments is included in Note 12, Segment Information, of the Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Pioneer Energy Services Corp.’s corporate office is located at 1250 N.E. Loop 410, Suite 1000, San Antonio, Texas 78209. Our phone number is (855) 884-0575 and our website address is www.pioneeres.com. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). Information on our website is not incorporated into this report or otherwise made part of this report.

Market Conditions and Outlook

Industry Overview — Demand for oilfield services offered by our industry is a function of our clients’ willingness and ability to make operating expenditures and capital expenditures to explore for, develop and produce hydrocarbons, which is primarily driven by current and expected oil and natural gas prices.

Our business is influenced substantially by exploration and production companies’ spending that is generally categorized as either a capital expenditure or an operating expenditure. Capital expenditures for the drilling and completion of exploratory and development wells in proven areas are more directly influenced by current and expected oil and natural gas prices. In contrast, operating expenditures for the maintenance of existing wells, for which a range of production services are required in order to maintain production, are relatively more stable and predictable.

Drilling and production services have historically trended similarly in response to fluctuations in commodity prices. However, because exploration and production companies often adjust their budgets for exploration and development drilling first in response to a change in commodity prices, the demand for drilling services is generally impacted first and to a greater extent than the demand for production services which is more dependent on ongoing expenditures that are necessary to maintain production. Additionally, within the range of production services businesses, those that derive more revenue from production-related activity, as opposed to completion of new wells, tend to be less affected by fluctuations in commodity prices and temporary reductions in industry activity.

However, in a severe downturn that is prolonged, both operating and capital expenditures are significantly reduced, and the demand for all our service offerings is significantly impacted. After a prolonged downturn among the production services, the demand for workover services generally improves first, followed by the demand for completion-oriented services as exploration and production companies begin to complete wells that were previously drilled but not completed during the downturn, and to complete newly drilled wells as the demand for drilling services improves during recovery.

For additional information concerning the potential effects of volatility in oil and gas prices and other industry trends, see Item 1A – “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 6, 2020, as amended by Form 10-K/A filed with the SEC on April 28, 2020.

Market Conditions and Outlook — Since January 2020, the COVID-19 pandemic and oil and natural gas market volatility have resulted in a significant decrease in oil prices and significant disruption and uncertainty in the oil and natural gas market. Beginning in March 2020, the decline in demand due to the COVID-19 pandemic coincided with the announcement of price reductions and possible production increases by members of OPEC and other oil exporting nations, including Russia. Although OPEC and other oil exporting nations ultimately agreed to cut production, the downward pressure on commodity prices has remained and could continue in the foreseeable future. These extreme supply and demand dynamics caused significant crude oil price declines, negatively impacting our industry’s oil producers who responded with significant cuts in their recent and projected spending.

Additionally, because our business depends on the level of spending by our clients, we are also affected by our clients’ ability to access the capital markets. After several consecutive years without significant improvement in commodity prices, many exploration and production companies have limited their spending to a level which can be supported by net operating cash flows alone, as access to the capital markets through debt or equity financings has become more challenging in our industry. This challenge has increased recently due to the major stock market and bond market indices experiencing elevated levels of volatility in 2020.

The trends in spot prices of WTI crude oil and Henry Hub natural gas, and the resulting trends in domestic land rig counts (per Baker Hughes) and domestic well servicing rig counts (per Guiberson/Association of Energy Service Companies) from June 2019 through June 2020 are illustrated in the graphs below.

The trends in commodity pricing and domestic rig counts from January through June 2020 are illustrated below:

The recent commodity price environment and global oversupply of oil has resulted in an oversupply of equipment in our industry, declining rig counts and dayrates, and substantially reduced activity for all our service offerings. Oil and gas exploration and production companies reduced their previously planned capital spending programs for 2020, thereby reducing demand for our services. In March 2020, many operators began to curtail operations and several of our clients terminated their drilling contracts with us in April and May 2020.

At the end of March 31, 2020, 15 of our 25 drilling rigs were earning revenues, 11 of which were under term contracts, and 3 more were under contract but with suspended operations. At the end of June 30, 2020, 10 of our 25 drilling rigs were earning revenues, 8 of which were under term contracts with an aggregate average term remaining of approximately 9 months, 2 more were under contract but with suspended operations and one additional rig was under contract which began operations in July. Utilization of our production services fleets also dropped significantly in response to recent market conditions, and in April 2020, we closed our coiled tubing operations and idled all our coiled tubing equipment, which were subsequently placed as held for sale.

We cannot predict whether or when the current imbalance in supply and demand will correct, and when and to what extent crude oil production activities will return to normalized levels. Oil and natural gas commodity prices are expected to continue to be volatile and demand for our products and services will continue to be affected if our clients continue to revise their capital budgets downward and adjust their operations in response to lower oil prices.

We are currently focusing our efforts on reducing costs and the realignment of certain businesses, while maintaining essential functions and readiness for when the market improves. We believe our high-quality equipment, services, and excellent

safety record position us well to compete when our industry recovers.

Liquidity and Capital Resources

Liquidity Overview

Our completion of the Chapter 11 Cases has allowed us to significantly reduce our level of indebtedness and our future cash interest obligations. We currently expect that cash and cash equivalents, cash generated from operations, proceeds from sales of assets, and available funds under the ABL Credit Facility are adequate to cover our liquidity requirements for at least the next 12 months. However, our ability to maintain sufficient liquidity and compliance with our debt instruments over the next 12 months is dependent upon the level of demand for, and pricing of, our products and services, the level of spending by our clients, our ability to collect our receivables and access borrowings under the ABL Credit Facility, the supply and demand for oil, oil and gas prices, general economic and market conditions and other factors which are beyond our control.

Our ability to grow, make capital expenditures and service our debt depends primarily upon the level of demand for, and pricing of, our products and services, the level of spending by our clients, our ability to collect our receivables and access borrowings under the ABL Credit Facility, the supply and demand for oil, and oil and gas prices. The market competition between OPEC and non-OPEC countries and the impact of the COVID-19 pandemic has caused significant crude oil price declines, negatively impacting our industry’s oil producers who responded with significant cuts in their recent and projected spending. A continued decrease in the demand for oil, combined with current depressed oil prices, has affected and could continue to negatively affect the amount of cash we generate and have available for capital expenditures and debt service.

The decrease in demand for our products and services has resulted in decreased availability under the ABL Credit Facility, which at June 30, 2020 was $13.2 million, which our access to would be limited by (i) our requirement to maintain 15% available or comply with a fixed charge coverage ratio and (ii) the requirement to maintain availability of at least $4 million, which may include up to $2 million of pledged cash. In addition, as a result of current market conditions, certain of our clients are facing financial pressures and liquidity issues. There can be no assurance that one or more of our clients will not delay or default on payments owed to us or file for bankruptcy protection, in which case we may be unable to collect all, or any portion, of the accounts receivable owed to us by such clients. Delays or defaults in payments of accounts receivable owed to us may also adversely affect our borrowing base and our ability to borrow under our ABL Credit Facility.

Sources of Capital Resources

Our principal sources of liquidity currently consist of:


•	cash and cash equivalents ($31.3 million as of June 30, 2020);


•	cash generated from operations; and


•	the availability under the ABL Credit Facility ($13.2 million as of June 30, 2020, as discussed below).

In the future, we may also consider equity and/or debt offerings, as appropriate, to meet our liquidity needs. However, our ability to access the capital markets by issuing debt or equity securities will be dependent on market conditions, our financial condition, and other factors beyond our control. Additionally, the ABL Credit Facility and the indentures for our Convertible Notes and Senior Secured Notes contain covenants that limit our ability to incur additional indebtedness, the incurrence of which would also first require the approval of two of our principal stockholders.

ABL Credit Facility — On the Effective Date, pursuant to the terms of the Plan, we entered into a senior secured asset-based revolving credit agreement in an aggregate amount of $75 million among us and our domestic subsidiaries as borrowers (the “Borrowers”), the lenders party thereto and PNC Bank, National Association as administrative agent and on August 7, 2020, we entered into a First Amendment to the ABL Credit Facility (together, herein referred to as the “ABL Credit Facility”) which, among other things, reduced the maximum amount of the revolving credit agreement to $40 million.

The maturity date of loans made under the ABL Credit Facility is the earliest of 90 days prior to maturity of the Senior Secured Notes or the Convertible Notes (both of which are described below in the section entitled Debt Instruments and Compliance Requirements) and May 29, 2025. Borrowings under the ABL Credit Facility will bear interest at a rate of (i)

the LIBOR rate (subject to a floor of 0%) plus an applicable margin of 375 basis points per annum or (ii) the base rate plus an applicable margin of 275 basis points per annum.

The ABL Credit Facility is guaranteed by the Borrowers and is secured by a first lien on the Borrowers’ accounts receivable and inventory, and the cash proceeds thereof, and a second lien on substantially all of the other assets and properties of the Borrowers. The ABL Credit Facility limits our annual capital expenditures to 125% of the budget set forth in the projections for any fiscal year and provides that if our availability plus pledged cash of up to $3 million falls below $6 million (15% of the maximum revolver amount), we will be required to comply with a fixed charge coverage ratio of 1.0 to 1.0, all of which is defined in the ABL Credit Facility.

As of June 30, 2020, we had no borrowings and approximately $7.1 million in outstanding letters of credit under the ABL Credit Facility and subject to the availability requirements in the ABL Credit Facility, based on eligible accounts receivable and inventory balances at June 30, 2020, availability under the ABL Credit Facility was $13.2 million, which our access to would be limited by (i) our requirement to maintain 15% available or comply with a fixed charge coverage ratio, as described above, and (ii) the requirement to maintain availability of at least $4 million, which may include up to $2 million of pledged cash.

Uses of Capital Resources

Our principal liquidity requirements are currently for:


•	working capital needs;


•	capital expenditures; and


•	debt service.

Our working capital needs typically fluctuate in relation to activity and pricing. Following a sustained period of low activity, our working capital needs generally increase as we invest in reactivating previously idle equipment and in purchases of inventory and supplies for expected increasing activity. Our capital requirements to maintain our equipment also fluctuate in relation to activity, and increase following a period of sustained low activity. Our capital requirements are also increased during periods of expansion, at which times we have been more likely to access capital through equity or debt financing. During periods of sustained low activity and pricing, when our cash flow from operations are negatively impacted, we may also access additional capital through the use of available funds under the ABL Credit Facility.

Working Capital — Our working capital and current ratio, which we calculate by dividing current assets by current liabilities, was as follows as of June 30, 2020 and December 31, 2019 (amounts in thousands, except current ratio):



	June 30, 2020		December 31, 2019		Change
Current assets	$	122,039	$	182,912	$	(60,873	)
Current liabilities	65,936		91,581		(25,645		)
Working capital	$	56,103	$	91,331	$	(35,228	)
Current ratio	1.9		2.0		(0.1		)

The decrease in our working capital during 2020 is primarily due to a decrease of $55.5 million, or 61%, in our total trade and unbilled receivables, despite a decrease of $16.4 million, or 50%, in our accounts payable and a $8.8 million decrease in accrued employee costs, all of which are primarily a result of the significant decline in demand for our service offerings which resulted in decreased revenue and related costs.

Total cash, including cash equivalents and restricted cash, increased by $5.7 million, which included $12.6 million of cash provided by the refinancing of our debt obligations upon emergence from Chapter 11, and was offset by a net investment of $9.3 million in capital expenditures.

Other decreases in our current assets during 2020 included a $9.4 million decrease in inventory primarily due to the revaluation of assets upon our adoption of fresh start accounting, a $3.2 million decrease in other receivables primarily due to an income tax refund in 2020 related to our international operations, and a $2.2 million decrease in prepaid and other current assets partially due to the usage of professional fee retainers associated with our bankruptcy proceedings.

Other changes in our current liabilities during 2020 include a $6.3 million increase in other accrued expenses due to an increase in legal and other professional fees associated with our bankruptcy proceedings and fresh start accounting, and a

$4.0 million decrease in accrued interest expense primarily because the Prepetition Senior Notes stopped accruing interest as of March 1, 2020 in accordance with the terms of the Plan.

Capital Expenditures — During the first half of 2020, we spent $11.7 million on purchases of property. Currently, we expect to spend a total of $15 million to $17 million on capital expenditures during 2020, primarily for routine expenditures which are necessary to maintain our fleets. Actual capital expenditures may vary depending on the climate of our industry and any resulting increase or decrease in activity levels, the timing of commitments and payments, availability of capital resources, and the level of investment opportunities that meet our strategic and return on capital employed criteria. We expect to fund the remaining capital expenditures in 2020 from operating cash flow in excess of our working capital requirements, although available borrowings under our ABL Credit Facility are also available, if necessary.

Debt Instruments and Compliance Requirements — On the Effective Date, we entered into a $75 million senior secured asset-based revolving credit agreement which was later amended and reduced to $40 million in August 2020 (the “ABL Credit Facility”), and issued $129.8 million of aggregate principal amount of 5% convertible senior unsecured pay-in-kind notes due 2025 (the “Convertible Notes”) and $78.1 million of aggregate principal amount of floating rate senior secured notes due 2025 (the “Senior Secured Notes”). The proceeds from the issuance of the Convertible Notes and the Senior Secured Notes were used to repay the outstanding Term Loan.

The following is a summary of our debt instruments and compliance requirements including covenants, restrictions and guarantees, as it relates to our Convertible Notes and Senior Secured Notes, and a summary of our ABL Credit Facility is included in the above section entitled ABL Credit Facility. As of June 30, 2020, we were in compliance with all covenants required by our debt instruments. However, our ability to maintain compliance with our debt instruments is dependent upon the level of demand for our products and services, the level of spending by our clients, the supply and demand for oil, oil and gas prices, general economic and market conditions and other factors which are beyond our control.

Convertible Notes Indenture and Convertible Notes due 2025. We entered into an indenture, dated as of the Effective Date, among the Company and Wilmington Trust, N.A., as trustee (the “Convertible Notes Indenture”), and issued $129.8 million aggregate principal amount of convertible senior unsecured pay-in-kind notes due 2025 thereunder.

The Convertible Notes are convertible at the option of the holders at any time into shares of our common stock and will convert mandatorily into our common stock at maturity; provided, however, that if the value of our common stock otherwise deliverable in connection with a mandatory conversion of a Convertible Note on the maturity date would be less than the principal amount of such Convertible Note plus accrued and unpaid interest, then the Convertible Note will instead convert into an amount of cash equal to the principal amount thereof plus accrued and unpaid interest. The initial conversion rate is 75 shares of common stock per $1,000 principal amount of the Convertible Notes, which in aggregate represents 9,732,825 shares of common stock and an initial conversion price of $13.33 per share. The conversion rate is subject to customary anti-dilution adjustments.

The Convertible Notes Indenture contains covenants that limit our ability and the ability of certain of our subsidiaries to incur, assume or guarantee additional indebtedness and create liens and enter into mergers or consolidations.

The Convertible Notes Indenture contains customary events of default. In the case of an event of default arising from certain events of bankruptcy, insolvency or other similar law, with respect to us or any of our significant subsidiaries, all outstanding Convertible Notes will become due and payable immediately without further action or notice. If any other event of default occurs and is continuing, then the trustee or the holders of at least 25% in aggregate principal amount of the Convertible Notes then outstanding may declare the Convertible Notes due and payable immediately.

The Convertible Notes Indenture provides, subject to certain exceptions, that for so long as our common stock is registered under the Securities Exchange Act of 1934 (the “Exchange Act”), a beneficial owner of the Convertible Notes is not entitled to receive shares of our common stock upon an optional conversion of any Convertible Notes during any period of time in which the aggregate number of shares of our common stock that may be acquired by such beneficial owner upon conversion of Convertible Notes shall, when added to the aggregate number of shares of our common stock deemed beneficially owned, directly or indirectly, by such beneficial owner and each person subject to aggregation of our common stock with such beneficial owner under Section 13 or Section 16 of the Exchange Act at such time, exceed 9.99% of the total issued and outstanding shares of our common stock. Certain of the holders of Convertible Notes opted out of this provision at the Effective Date.

Senior Secured Notes Indenture and Senior Secured Notes due 2025. We entered into an indenture, dated as of the Effective Date, among the Company, the subsidiary guarantors party thereto and Wilmington Trust, N.A., as trustee (the “Senior Secured Notes Indenture”), and issued $78.1 million aggregate principal amount of floating rate senior secured notes due 2025 thereunder. The Senior Secured Notes are guaranteed on a senior secured basis by our existing subsidiaries that also guarantee our obligations under the ABL Credit Facility (the “Guarantors”) on a full and unconditional basis and are secured by a second lien on the accounts receivable and inventory and a first lien on substantially all of the other assets and properties (including the cash proceeds thereof) of the Company and the Guarantors.

The Senior Secured Notes Indenture contains covenants that limit, among other things, our ability and the ability of certain of our subsidiaries, to incur, assume or guarantee additional indebtedness; pay dividends or distributions on capital stock or redeem or repurchase capital stock; make investments; repay junior debt; sell stock of our subsidiaries; transfer or sell assets; enter into sale and lease back transactions; create liens; enter into transactions with affiliates; and enter into mergers or consolidations. The Senior Secured Notes Indenture contains a minimum asset coverage ratio of 1.5 to 1.0 as of any June 30 or December 31, beginning December 31, 2020.

The Senior Secured Notes Indenture also provides for certain customary events of default, including, among others, nonpayment of principal or interest, breach of covenants, failure to pay final judgments in excess of a specified threshold, failure of a guarantee to remain in effect, failure of a security document to create an effective security interest in collateral, bankruptcy and insolvency events, and cross acceleration, which would permit the principal, premium, if any, interest and other monetary obligations on all the then outstanding Senior Secured Notes to be declared due and payable immediately.

Results of Operations

As a result of our emergence from Chapter 11 on May 29, 2020, our financial results for the periods prior to the Fresh Start Reporting date of May 31, 2020 are referred to as those of the “Predecessor,” and our financial results for the periods subsequent to May 31, 2020 are referred to as those of the “Successor.”

Although the Successor period(s) and the Predecessor period(s) are distinct reporting periods, we have combined the Successor and Predecessor period results during the three and six months ended June 30, 2020 in order to provide some comparability of such information to the corresponding Predecessor periods ended June 30, 2019. While this combined presentation is not presented according to generally accepted accounting principles in the United States of America (GAAP) and no comparable GAAP measures are presented, management believes that providing this financial information is the most relevant and useful method for making comparisons to the corresponding Predecessor periods as reviewing the Successor period results in isolation would not be useful in identifying trends in or reaching conclusions regarding our overall operating performance.

The following table provides certain information about our operations, including details of each of our business segments’ revenues, operating costs and gross margin for the periods indicated (amounts in thousands).



	Successor			Predecessor			Combined (Non-GAAP)			Predecessor
	One Month Ended June 30, 2020			Two Months Ended May 31, 2020			Three Months Ended June 30, 2020			Three Months Ended June 30, 2019
Revenues:
Domestic drilling	$	5,866		$	17,450		$	23,316		$	39,652
International drilling	828			1,473			2,301			25,422
Drilling services	6,694			18,923			25,617			65,074
Well servicing	3,756			6,331			10,087			29,506
Wireline services	713			2,410			3,123			47,386
Coiled tubing services	—			384			384			10,877
Production services	4,469			9,125			13,594			87,769
Consolidated revenues	$	11,163		$	28,048		$	39,211		$	152,843

Operating costs:
Domestic drilling	$	3,646		$	9,236		$	12,882		$	24,698
International drilling	1,063			1,538			2,601			18,555
Drilling services	4,709			10,774			15,483			43,253
Well servicing	2,810			5,926			8,736			21,038
Wireline services	1,085			3,552			4,637			41,804
Coiled tubing services	139			1,773			1,912			9,875
Production services	4,034			11,251			15,285			72,717
Consolidated operating costs	$	8,743		$	22,025		$	30,768		$	115,970

Gross margin:
Domestic drilling	$	2,220		$	8,214		$	10,434		$	14,954
International drilling	(235		)	(65		)	(300		)	6,867
Drilling services	1,985			8,149			10,134			21,821
Well servicing	946			405			1,351			8,468
Wireline services	(372		)	(1,142		)	(1,514		)	5,582
Coiled tubing services	(139		)	(1,389		)	(1,528		)	1,002
Production services	435			(2,126		)	(1,691		)	15,052
Consolidated gross margin	$	2,420		$	6,023		$	8,443		$	36,873

Consolidated:
Net loss	$	(9,817	)	$	(35,121	)	$	(44,938	)	$	(12,944	)
Adjusted EBITDA ⁽¹⁾	$	(1,280	)	$	633		$	(647	)	$	20,668



	Successor			Predecessor			Combined (Non-GAAP)			Predecessor
	One Month Ended June 30, 2020			Five Months Ended May 31, 2020			Six Months Ended June 30, 2020			Six Months Ended June 30, 2019
Revenues:
Domestic drilling	$	5,866		$	53,341		$	59,207		$	77,661
International drilling	828			15,928			16,756			47,065
Drilling services	6,694			69,269			75,963			124,726
Well servicing	3,756			31,947			35,703			55,760
Wireline services	713			35,543			36,256			93,260
Coiled tubing services	—			5,611			5,611			25,665
Production services	4,469			73,101			77,570			174,685
Consolidated revenues	$	11,163		$	142,370		$	153,533		$	299,411

Operating costs:
Domestic drilling	$	3,646		$	33,101		$	36,747		$	47,167
International drilling	1,063			13,676			14,739			35,040
Drilling services	4,709			46,777			51,486			82,207
Well servicing	2,810			26,877			29,687			39,934
Wireline services	1,085			31,836			32,921			81,151
Coiled tubing services	139			8,557			8,696			21,263
Production services	4,034			67,270			71,304			142,348
Consolidated operating costs	$	8,743		$	114,047		$	122,790		$	224,555

Gross margin:
Domestic drilling	$	2,220		$	20,240		$	22,460		$	30,494
International drilling	(235		)	2,252			2,017			12,025
Drilling services	1,985			22,492			24,477			42,519
Well servicing	946			5,070			6,016			15,826
Wireline services	(372		)	3,707			3,335			12,109
Coiled tubing services	(139		)	(2,946		)	(3,085		)	4,402
Production services	435			5,831			6,266			32,337
Consolidated gross margin	$	2,420		$	28,323		$	30,743		$	74,856

Consolidated:
Net loss	$	(9,817	)	$	(104,225	)	$	(114,042	)	$	(28,059	)
Adjusted EBITDA ⁽¹⁾	$	(1,280	)	$	2,723		$	1,443		$	40,590

(1) Adjusted EBITDA represents income (loss) before interest expense, income tax (expense) benefit, depreciation and amortization, pre-petition restructuring charges, impairment, reorganization items, and any loss on extinguishment of debt. Adjusted EBITDA is a non-GAAP measure that our management uses to facilitate period-to-period comparisons of our core operating performance and to evaluate our long-term financial performance against that of our peers. We believe that this measure is useful to investors and analysts in allowing for greater transparency of our core operating performance and makes it easier to compare our results with those of other companies within our industry. Adjusted EBITDA should not be considered (a) in isolation of, or as a substitute for, net income (loss), (b) as an indication of cash flows from operating activities or (c) as a measure of liquidity. In addition, Adjusted EBITDA does not represent funds available for discretionary use. Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.

A reconciliation of net loss, as reported, to Adjusted EBITDA, and to consolidated gross margin, are set forth in the following table (amounts in thousands):



	Successor			Predecessor			Combined (Non-GAAP)			Predecessor
	One Month Ended June 30, 2020			Two Months Ended May 31, 2020			Three Months Ended June 30, 2020			Three Months Ended June 30, 2019
Net loss	$	(9,817	)	$	(35,121	)	$	(44,938	)	$	(12,944	)
Depreciation and amortization	5,236			13,663			18,899			22,851
Pre-petition restructuring charges	—			(252		)	(252		)	—
Impairment	388			—			388			332
Reorganization items, net	1,144			15,240			16,384			—
Interest expense	2,215			4,135			6,350			10,105
Loss on extinguishment of debt	—			3,723			3,723			—
Income tax expense (benefit)	(446		)	(755		)	(1,201		)	324
Adjusted EBITDA	(1,280		)	633			(647		)	20,668
General and administrative	4,213			7,392			11,605			18,028
Bad debt recovery (expense), net	(283		)	482			199			(348		)
Gain on dispositions of property and equipment, net	(460		)	(272		)	(732		)	(1,126		)
Other expense (income)	230			(2,212		)	(1,982		)	(349		)
Consolidated gross margin	$	2,420		$	6,023		$	8,443		$	36,873



	Successor			Predecessor			Combined (Non-GAAP)			Predecessor
	One Month Ended June 30, 2020			Five Months Ended May 31, 2020			Six Months Ended June 30, 2020			Six Months Ended June 30, 2019
Net loss	$	(9,817	)	$	(104,225	)	$	(114,042	)	$	(28,059	)
Depreciation and amortization	5,236			35,647			40,883			45,504
Pre-petition restructuring charges	—			16,822			16,822			—
Impairment	388			17,853			18,241			1,378
Reorganization items, net	1,144			21,903			23,047			—
Interest expense	2,215			12,294			14,509			19,990
Loss on extinguishment of debt	—			4,215			4,215			—
Income tax expense (benefit)	(446		)	(1,786		)	(2,232		)	1,777
Adjusted EBITDA	(1,280		)	2,723			1,443			40,590
General and administrative	4,213			22,047			26,260			37,786
Bad debt recovery (expense), net	(283		)	1,209			926			(286		)
Gain on dispositions of property and equipment, net	(460		)	(989		)	(1,449		)	(2,201		)
Other expense (income)	230			3,333			3,563			(1,033		)
Consolidated gross margin	$	2,420		$	28,323		$	30,743		$	74,856

Consolidated gross margin — We experienced a significant decline in demand for all our service offerings as a result of the economic downturn caused by the COVID-19 pandemic and adverse global oil production and pricing decisions made by OPEC and non-OPEC countries, as described in more detail in the section above entitled, “Market Conditions and Outlook.” Our consolidated gross margin decreased by $28.4 million, or 77%, for the three months ended June 30, 2020, and decreased by $44.1 million, or 59%, for the six months ended June 30, 2020, as compared to the corresponding periods in 2019. Our production services offerings, which are heavily completion-oriented businesses, were most significantly impacted by the decline in demand, with a combined gross margin decrease of 81% for the six months ended June 30, 2020 as compared to the corresponding period in 2019. While our drilling services business were also significantly impacted, and experienced a combined 42% gross margin decrease during this same period, the impact was mitigated by the longer term nature of the operations, which are typically supported by term contracts.


•	Drilling Services — Our drilling services revenues decreased by 61% and 39% for the three and six months ended 2020, respectively, as compared to the corresponding periods in 2019, while operating costs decreased by 64% and 37%, respectively. The following table provides operating statistics for each of our drilling services segments:



	Successor			Predecessor			Combined (Non-GAAP)			Predecessor
	One Month Ended June 30, 2020			Two Months Ended May 31, 2020			Three Months Ended June 30, 2020			Three Months Ended June 30, 2019
Domestic drilling:
Average number of drilling rigs	17			17			17			17
Utilization rate	53		%	69		%	64		%	95		%
Revenue days	270			718			988			1,476

Average revenues per day	$	21,726		$	24,304		$	23,599		$	26,864
Average operating costs per day	13,504			12,864			13,038			16,733
Average margin per day	$	8,222		$	11,440		$	10,561		$	10,131

International drilling:
Average number of drilling rigs	8			8			8			8
Utilization rate	10		%	4		%	6		%	86		%
Revenue days	25			20			45			623

Average revenues per day	$	33,120		$	73,650		$	51,133		$	40,806
Average operating costs per day	42,520			76,900			57,800			29,783
Average margin per day	$	(9,400	)	$	(3,250	)	$	(6,667	)	$	11,023



	Successor			Predecessor			Combined (Non-GAAP)			Predecessor
	One Month Ended June 30, 2020			Five Months Ended May 31, 2020			Six Months Ended June 30, 2020			Six Months Ended June 30, 2019
Domestic drilling:
Average number of drilling rigs	17			17			17			17
Utilization rate	53		%	81		%	77		%	96		%
Revenue days	270			2,100			2,370			2,896

Average revenues per day	$	21,726		$	25,400		$	24,982		$	26,817
Average operating costs per day	13,504			15,762			15,505			16,287
Average margin per day	$	8,222		$	9,638		$	9,477		$	10,530

International drilling:
Average number of drilling rigs	8			8			8			8
Utilization rate	10		%	28		%	25		%	83		%
Revenue days	25			335			360			1,203

Average revenues per day	$	33,120		$	47,546		$	46,544		$	39,123
Average operating costs per day	42,520			40,824			40,942			29,127
Average margin per day	$	(9,400	)	$	6,722		$	5,602		$	9,996

Our domestic drilling average margin per day increased by 4% and decreased by 10% for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in 2019, as revenue days decreased by 33% and 18%, respectively. Average revenues per day declined during 2020 as dayrates for contracts that were renewed and renegotiated in late 2019 were reduced, the decreases of which were partially offset by the benefit of $1.2 million of additional revenues associated with the early termination of one of our domestic drilling contracts in May 2020, which is net of $0.4 million of early termination revenue recognized in the corresponding period in 2019. Additionally, beginning in late March 2020, rather than terminating their contracts with us, certain of our clients elected to temporarily stack three of our rigs, placing them on an extended standby for a reduced revenue rate and the option to reactivate the rigs through the remainder of the contract term. Although these drilling rigs earn lower standby rates as compared to daywork rates, operating costs incurred are minimal, which reduces operating costs per day and benefits overall margin per day.

Our international drilling operations experienced decreases of 93% and 70% in revenue days during the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in 2019, while average revenues and operating costs per day increased, as certain customers terminated or suspended drilling contracts in response to the recent decline in industry conditions, which also resulted in an increase in rig demobilization activity, for which revenues and costs are higher than daywork activity, and for which there are no associated revenue days. The decline in utilization combined with an increase in rig standby and demobilization costs contributed to the decreases in average margin per day.

Production Services — Our revenues and operating costs from production services decreased by $97.1 million, or 56%, and $71.0 million, or 50%, for the six months ended June 30, 2020, respectively, as compared to the corresponding period in 2019. The following table provides operating statistics for each of our production services segments:



	Successor			Predecessor			Combined (Non-GAAP)			Predecessor
	One Month Ended June 30, 2020			Two Months Ended May 31, 2020			Three Months Ended June 30, 2020			Three Months Ended June 30, 2019
Well servicing:
Average number of rigs	123			123			123			125
Utilization rate	26		%	23		%	24		%	60		%
Rig hours	7,765			12,565			20,330			51,895
Average revenue per hour	$	484		$	504		$	496		$	569

Wireline services:
Average number of units	93			93			93			95
Number of stages	92			383			475			7,514

Coiled tubing services:
Average number of units	9			9			9			9
Revenue days	—			20			20			307
Average revenue per day	$	—		$	19,200		$	19,200		$	35,430



	Successor			Predecessor			Combined (Non-GAAP)			Predecessor
	One Month Ended June 30, 2020			Five Months Ended May 31, 2020			Six Months Ended June 30, 2020			Six Months Ended June 30, 2019
Well servicing:
Average number of rigs	123			123			123			125
Utilization rate	26		%	40		%	38		%	57		%
Rig hours	7,765			56,797			64,562			98,959
Average revenue per hour	$	484		$	562		$	553		$	563

Wireline services:
Average number of units	93			93			93			100
Number of stages	92			6,510			6,602			14,209

Coiled tubing services:
Average number of units	9			9			9			9
Revenue days	—			226			226			658
Average revenue per day	$	—		$	24,827		$	24,827		$	39,005

Our well servicing rig hours decreased by 61% and 35% for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in 2019, while average revenues per hour decreased by 13% and 2%, respectively. Although overall activity declined beginning in March 2020, especially for completion services, average revenues per hour remained relatively stable until June 2020 in regions where pricing was slower to respond to economic conditions.

Our wireline services business segment experienced decreases of 94% and 26% in the number of perforating stages performed and revenue per stage, respectively, for the three months ended June 30, 2020, and decreases of 54% and 13% in the number of perforating stages performed and revenue per stage, respectively, for the six months ended June

30, 2020, as compared to the corresponding periods in 2019. Already decreasing demand for completion-related services worsened with the sharp decline in industry conditions beginning in late February, and resulted in our decision to close several underperforming operating locations in 2020.

In April 2020, we closed our coiled tubing operations and idled all our coiled tubing equipment, which were subsequently placed as held for sale. This closure, combined with the decline in demand for our coiled tubing services prior to April 2020, resulted in the 66% decrease in revenue days and the 36% decrease in average revenue per day for the six months ended June 30, 2020 as compared to the corresponding period in 2019.

Depreciation and amortization expense — Our depreciation expense decreased by $4.6 million for the six months ended June 30, 2020, primarily in our wireline services segment, as our capital expenditure discipline in recent years resulted in a greater proportion of fully depreciated equipment during 2020 as compared to the corresponding period in 2019, as well as the impact of reduced depreciation in June resulting from the reduction in values of long-lived assets from the application of fresh start accounting. The overall decrease in depreciation expense was partially offset by an increase due to the deployment of our 17th domestic AC drilling rig in March 2019 and an increase for the amortization of intangibles which were established in connection with fresh start accounting at May 31, 2020.

Pre-petition restructuring charges — All expenses and losses incurred prior to the Petition Date which were related to the Chapter 11 proceedings are presented as pre-petition restructuring charges in our Predecessor condensed consolidated statements of operations, including $9.6 million of expense incurred for the Commitment Premium pursuant to the Backstop Commitment Agreement. For more detail, see Note 2, Emergence from Voluntary Reorganization under Chapter 11, of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Impairment — Due to the significant decline in industry conditions, commodity prices, and projected utilization of equipment, as well as the COVID-19 pandemic’s impact on our industry, our projected cash flows declined during the first quarter of 2020, and we performed recoverability testing on all our reporting units. As a result of this analysis, we incurred impairment charges of $16.4 million and $1.9 million during 2020 to reduce the carrying values of our coiled tubing assets and certain held-for-sale assets, respectively, to their estimated fair values. For more detail, see Note 5, Property and Equipment, of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Reorganization items, net — Any expenses, gains, and losses incurred subsequent to and as a direct result of the Chapter 11 proceedings are presented as reorganization items in our condensed consolidated statements of operations. For more detail, see Note 2, Emergence from Voluntary Reorganization under Chapter 11, of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Interest expense — Our interest expense decreased by $5.5 million for the six months ended June 30, 2020, as compared to the corresponding period in 2019, primarily because the Prepetition Senior Notes stopped accruing interest as of March 1, 2020, in accordance with the terms of the Plan, as well as reduced interest expense in June 2020 subsequent to our emergence from Chapter 11.

Income tax expense (benefit) — Our effective tax rates differ from the applicable U.S. statutory rates primarily due to the impact of valuation allowances, including those against the losses generated in the U.S. for which no benefit was recorded because we believe it is more likely than not that the tax benefits would not be realized and the change in the valuation allowance due to the application of fresh start accounting, as well as the impact of the mix of profit and loss between federal, state and international taxing jurisdictions with different tax rates. For more information, see Note 8, Taxes, of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

General and administrative expense — Our general and administrative expense decreased by $11.5 million, or 31%, for the six months ended June 30, 2020 as compared to the corresponding period in 2019, of which $8.7 million is attributable to reduced employee costs, including a $5.8 million decrease in incentive compensation primarily associated with the termination of our previous annual and long-term cash incentive awards in 2019 and the suspension of incentive awards in early 2020.

Gain on dispositions of property and equipment, net — During the six months ended June 30, 2020 and the corresponding period in 2019, we recognized net gains of $1.4 million and $2.2 million, respectively, on the disposition or sale of various property and equipment, including drill pipe and collars and certain older and/or underutilized equipment.

Other expense (income) — The decrease in our other income for the six months ended June 30, 2020 is primarily related to $5.6 million of net foreign currency losses recognized for our Colombian operations, as compared to $0.4 million of net foreign currency losses during the corresponding period in 2019.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ from those estimates. Except for the application of fresh start accounting, there were no significant changes to our critical accounting policies since the date of our annual report on Form 10-K for the year ended December 31, 2019.

Accounting estimates — Material estimates affecting our financial results, including those that are particularly susceptible to significant changes in the near term, relate to our application of fresh start accounting, our estimates of certain variable revenues and amortization periods of certain deferred revenues and costs associated with drilling daywork contracts, our estimates of projected cash flows and fair values for impairment evaluations, our estimate of the valuation allowance for deferred tax assets, and our estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance.

•

Fresh Start Accounting. In connection with our emergence from bankruptcy and in accordance with ASC Topic 852, we qualified for and adopted fresh start accounting on the Effective Date. We were required to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company, and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims.

Fresh start accounting involved a comprehensive valuation process in which we determined the fair value of all our assets and liabilities on the Effective Date. For more information, see Note 3, Fresh Start Accounting, of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

•

Revenues. In accordance with ASC Topic 606, Revenue from Contracts with Customers, we estimate certain variable revenues associated with the demobilization of our drilling rigs under daywork drilling contracts. We also make estimates of the applicable amortization periods for deferred mobilization costs, and for mobilization revenues related to cancelable term contracts which represent a material right to our clients. These estimates and assumptions are described in more detail in Note 4, Revenue from Contracts with Customers. In order to make these estimates, management considers all the facts and circumstances pertaining to each particular contract, our past experience and knowledge of current market conditions. For more information, see Note 4, Revenue from Contracts with Customers, of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

•

Impairment Evaluation. In accordance with ASC Topic 360, Property, Plant and Equipment, we monitor all indicators of potential impairments. Due to the significant decline in industry conditions, commodity prices, and projected utilization of equipment, as well as the COVID-19 pandemic’s impact on our industry, our projected cash flows declined during the first quarter of 2020, and we performed recoverability testing on all our reporting units. As a result of this analysis, we incurred impairment charges of $16.4 million to reduce the carrying values of our coiled tubing assets to their estimated fair values during the three months ended March 31, 2020. For all our other reporting units, excluding coiled tubing, we determined that the sum of the estimated future undiscounted net cash flows were in excess of the carrying amounts and that no impairment existed for these reporting units at March 31, 2020. We continued to monitor

potential indicators of impairment through June 30, 2020 and concluded that none of our reporting units are currently at risk of impairment.

•

Deferred Tax Assets. We provide a valuation allowance when it is more likely than not that some portion of our deferred tax assets will not be realized. We evaluated the impact of the reorganization, including the change in control, resulting from our bankruptcy emergence and determined it is more likely than not that we will not fully realize future income tax benefits related to our domestic net deferred tax assets based on the annual limitations that impact us, historical results, and expected market conditions. For more information, see Note 8, Taxes, of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

•

Insurance Claim Liabilities. We use a combination of self-insurance and third-party insurance for various types of coverage. We have stop-loss coverage of $225,000 per covered individual per year under our health insurance and a deductible of $500,000 per occurrence under our workers’ compensation insurance. We have a deductible of $250,000 per occurrence under both our general liability insurance and auto liability insurance, as well as an additional annual aggregate deductible of $250,000 under our general liability insurance. At June 30, 2020, our accrued insurance premiums and deductibles include approximately $0.8 million of accruals for costs incurred under the self-insurance portion of our health insurance and approximately $2.2 million of accruals for costs associated with our workers’ compensation insurance. We accrue for these costs as claims are incurred using an actuarial calculation that is based on industry and our company’s historical claim development data, and we accrue the cost of administrative services associated with claims processing.

Recently Issued Accounting Standards

For information about recently issued accounting standards, see Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


ITEM 4.	CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020, to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In the ordinary course of business, we may make changes to our systems and processes to improve controls and increase efficiency, and make changes to our internal controls over financial reporting in order to ensure that we maintain an effective internal control environment.

During the second quarter of 2020, upon our emergence from Chapter 11, we established controls over the application of fresh start accounting. Except for such application of fresh start accounting, there has been no change in our internal control over financial reporting that occurred during the three months ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

From time to time, we are involved in routine litigation or subject to disputes or claims arising out of our business activities, including workers’ compensation claims and employment-related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, results of operations or cash flows. For information on Legal Proceedings, see Note 13, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 Financial Statements, of this Quarterly Report on Form 10-Q.

On March 1, 2020, the Pioneer RSA Parties filed a voluntary petition under chapter 11 of the United States Bankruptcy Code. On May 11, 2020, the Bankruptcy Court confirmed the Plan and on May 29, 2020, the conditions to effectiveness of the Plan were satisfied and the Pioneer RSA Parties emerged from Chapter 11. For additional information concerning our bankruptcy proceedings under Chapter 11, see Note 2, Emergence from Voluntary Reorganization under Chapter 11, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 Financial Statements, of this Quarterly Report on Form 10-Q.


ITEM 1A.	RISK FACTORS

In addition to the risk factors described below and the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Item 1A – “Risk Factors” in our Form 10-K for the year ended December 31, 2019, as amended by Form 10-K/A for the year ended December 31, 2019, which could materially affect our business, financial condition or future results.

Risks Relating to the Restructuring


•	We recently emerged from bankruptcy, which may adversely affect our business and relationships.

As a result of our bankruptcy filing and recent emergence:


•	key suppliers, vendors or other contract counterparties may terminate their relationships with us or require additional financial assurances or enhanced performance from us;


•	our ability to renew existing contracts and compete for new business may be adversely affected;


•	our ability to attract, motivate and/or retain key executives and employees may be adversely affected;


•	our competitors may take business away from us, and our ability to attract and retain customers may be negatively impacted;


•	our employees may be distracted from performance of their duties or more easily attracted to other employment opportunities; and


•	we may have difficulty obtaining the capital we need to run and grow our business.

The occurrence of one or more of these events could have a material adverse effect on our operations, financial condition and reputation.


•	Upon our emergence from Chapter 11, the composition of our stockholder base and concentration of equity ownership changed significantly.

As a result of the concentration of our equity ownership, the future strategy and plans of the Company may differ materially from those in the past. Upon our emergence from Chapter 11, twelve stockholder groups beneficially own approximately 95% (the “Significant Stockholders”) of our issued and outstanding common stock and, therefore, have significant control on the outcome of matters submitted to a vote of stockholders, including, but not limited to, electing directors and approving corporate transactions. In addition, our incurrence of additional indebtedness requires the consent of each of our current stockholders that, together with their affiliates and related funds, owns more than 17.5% of our outstanding common stock on a fully-diluted basis, and the consent of one particular stockholder is required for us to issue additional equity as long as such stockholder, together with its affiliates and related funds, owns more than 12.5% of our outstanding common stock on a fully-diluted basis. As a result, our future strategy and plans may differ

materially from those of the past. Circumstances may occur in which the interests of the Significant Stockholders could be in conflict with the interests of other stockholders, and the Significant Stockholders would have substantial influence to cause us to take actions that align with their interests. Should conflicts arise, we can provide no assurance that the Significant Stockholders would act in the best interests of other stockholders or that any conflicts of interest would be resolved in a manner favorable to our other stockholders.


•	Upon our emergence from Chapter 11, the composition of our board of directors changed significantly.

Pursuant to the Plan, the composition of our board of directors (the “Board”) changed significantly. Upon emergence, our Board consisted of five directors, only one of whom, our former Chief Executive Officer, Wm. Stacy Locke, had served on the Board prior to our emergence from Chapter 11. In July 2020, Wm. Stacy Locke resigned his officer and director positions, at which time Matthew S. Porter, a member of the Board, was also appointed to serve as Interim Chief Executive Officer. Our Board currently consists of four members.

The new directors have different backgrounds, experiences and perspectives from those individuals who previously served on our Board and, thus, may have different views on the issues that will determine our future. There is no guarantee that our new Board will pursue, or will pursue in the same manner, our current strategic plans. As a result, the future strategy and our plans may differ materially from those of the past.


•	Certain information contained in our historical financial statements will not be comparable to the information contained in our financial statements after the application of fresh start accounting.

Upon emergence from bankruptcy, we adopted fresh start accounting in accordance with ASC Topic 852 and became a new entity for financial reporting purposes. As a result, we revalued our assets and liabilities based on our estimate of our enterprise value and the fair value of each of our assets and liabilities. These estimates, projections and enterprise valuation were prepared solely for the purpose of the bankruptcy proceedings and should not be relied upon by investors for any other purpose. At the time they were prepared, the determination of these values reflected numerous estimates and assumptions, and the fair values recorded based on these estimates may not be fully realized in periods subsequent to our emergence from bankruptcy.

The condensed consolidated financial statements after the Effective Date are not comparable with the consolidated financial statements on or before that date as indicated by the “black line” division in the financial statements and footnote tables, which emphasizes the lack of comparability between amounts presented. This will make it difficult for stockholders to assess our performance in relation to prior periods. Please see Note 2, Emergence from Voluntary Reorganization under Chapter 11, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 Financial Statements for further information.

Risks Relating to Our Common Stock


•	We cannot assure you that an active trading market for our common stock will develop or be maintained, and the market price of our common stock may be volatile, which could cause the value of your investment to decline.

Our shares of common stock are not currently listed on the OTC Market Place or on any other stock exchange. We anticipate the trading of our new common stock on the OTC market to commence again in the near future.

We cannot assure you that an active public market for our common stock will develop or, if it develops, that it will be sustained. In the absence of an active public trading market, it may be difficult to liquidate your investment in our common stock.

In the event our common stock commences trading, the trading price of our common stock may fluctuate significantly. Numerous factors, including many over which we have no control, may have a significant impact on the market price of our common stock. These factors include, among other things:


•	our operating and financial performance and prospects;


•	our ability to repay our debt;


•	investor perceptions of us and the industry and markets in which we operate;


•	future sales, or the availability for sale, of equity or equity-related securities;


•	changes in earnings estimates or buy/sell recommendations by analysts;


•	conversion of our Convertible Notes;


•	limited trading volume of our common stock; and


•	general financial, domestic, economic and other market conditions.


•	In the event our common stock commences trading, the trading price of our common stock may not accurately reflect the value of our business.

Upon our emergence from Chapter 11, ownership of our common stock is highly concentrated, and there are a limited number of shares available for trading on any public market. As a result, any future reported trading prices for our common stock at any given time may not accurately reflect the underlying economic value of our business at that time. Any future reported trading prices could be higher or lower than the price a stockholder would be able to receive in a sale transaction, and there can be no assurance that there will be sufficient public trading in our common stock in the future to create a liquid trading market that accurately reflects the underlying economic value of our business.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We did not make any unregistered sales of equity securities during the quarter ended June 30, 2020. The following table provides information relating to our repurchase of common shares during the quarter ended June 30, 2020:



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 - April 30	100,228	$	0.02	—	—
May 1 - May 31	—	—		—	—


June 1 - June 30	1,387	19.12		—	—
Total	101,615	$	0.28	—	—


(1)	The shares indicated consist of shares of our common stock tendered by employees to the Company during the three months ended June 30, 2020, to satisfy the employees’ tax withholding obligations in connection with the vesting of share-based compensation awards, which we repurchased based on the fair market value on the date the relevant transaction occurred.


(2)	The calculation of the average price paid per share does not give effect to any fees, commissions or other costs associated with the repurchase of such shares.

Upon emergence from Chapter 11 on May 29, 2020 and the effectiveness of the Plan, all previously issued and outstanding equity interests were canceled and we issued a total of 1,049,804 shares of common stock, with approximately 94.25% of such new common stock being issued to the holders of existing Prepetition Senior Notes and the remaining 5.75% being issued to the holders of existing common stock prior to the Effective Date. Upon the effectiveness of the Plan, we also issued $129.8 million aggregate principal amount of Convertible Notes, which are convertible into 75 shares of common stock per $1,000 principal amount of the Convertible Notes and which on the Effective Date were convertible into approximately 9,732,825 shares of common stock.

The shares of common stock described above were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 1145 of Chapter 11 of Title 11 of the United States Code (which generally exempts from such registration requirements the issuance of securities under a plan of reorganization). The Convertible Notes described above were exempt from registration under the Securities Act pursuant to Section 4(a)(2) thereof and Regulation D promulgated thereunder.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.	OTHER INFORMATION

None.


ITEM 6.	EXHIBITS

The following exhibits are filed as part of this report:



Exhibit Number		Description

2.1*	-	Order of the Bankruptcy Court, dated May 11, 2020, confirming Pioneer’s Joint Prepackaged Plan of Reorganization under the Bankruptcy Code, together with such Joint Prepackaged Plan of Reorganization (Form 8-K dated May 11, 2020 (File No. 1-8182, Exhibit 2.1)).

3.1*	-	Certificate of Incorporation of Pioneer Energy Services Corp. (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 3.1)).

3.2*	-	Amended and Restated Bylaws of Pioneer Energy Services Corp. (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 3.2)).

4.1*	-	Specimen Common Stock Certificate (New Common Stock) (Form 8-A/A dated June 5, 2020 (File No. 1-8182, Exhibit 4.4)).

4.2*	-	Convertible Notes Indenture, dated May 29, 2020 (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 4.1)).

4.3*	-	Convertible Notes (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 4.2)).

4.4*	-	Senior Secured Notes Indenture, dated May 29, 2020 (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 4.3)).

4.5*	-	Senior Secured Notes (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 4.4)).

4.6*	-	Registration Rights Agreement, dated May 29, 2020 (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 10.3)).

10.1*	-	ABL Credit Agreement, dated May 29, 2020 (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 10.1)).

10.2*	-	Intercreditor Agreement, dated May 29, 2020 (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 10.2)).

10.3*	-	Pioneer Energy Services Corp. 2020 Employee Incentive Plan (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 10.4)).

10.4*	-	Pioneer Energy Services Corp. Key Executive Severance Plan (Form 8-K dated May 29, 2020 (File No. 1-8182, Exhibit 10.5)).

10.5*	-	First Amendment to ABL Credit Agreement, dated as of August 7, 2020, by and among Pioneer Energy Services Corp., certain of its subsidiaries party thereto, the several lenders party thereto, and PNC Bank, National Association, as administrative agent (Form 8-K dated August 7, 2020 (File No. 1-8182, Exhibit 10.1)).

10.6*+	-	Consulting Agreement, dated as of July 17, 2020, by and between Pioneer Energy Services Corp. and Matthew S. Porter (Form 8-K dated July 22, 2020 (File No. 1-8182, Exhibit 10.1)).

10.7*+	-	Separation Agreement and Release, dated as of July 17, 2020, by and between Pioneer Energy Services Corp. and Wm. Stacy Locke (Form 8-K dated July 22, 2020 (File No. 1-8182, Exhibit 10.2)).

31.1**	-	Certification by Matthew S. Porter, Interim Chief Executive Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.

31.2**	-	Certification by Lorne E. Phillips, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.

32.1#	-	Certification by Matthew S. Porter, Interim Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2#	-	Certification by Lorne E. Phillips, Executive Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	-	XBRL Instance Document



101.SCH	-	XBRL Taxonomy Schema Document

101.CAL	-	XBRL Calculation Linkbase Document

101.LAB	-	XBRL Label Linkbase Document

101.PRE	-	XBRL Presentation Linkbase Document

101.DEF	-	XBRL Definition Linkbase Document

*	Incorporated by reference to the filing indicated.
**	Filed herewith.
#	Furnished herewith.
+	Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PIONEER ENERGY SERVICES CORP.

/s/ Lorne E. Phillips

Lorne E. Phillips

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Duly Authorized Officer)

Dated: August 19, 2020

PIONEER ENERGY SERVICES CORP - FORM 10-Q - August 19, 2020

Attached files

PIONEER ENERGY SERVICES CORP Reports