FRESH START ACCOUNTING

In accordance ASC 852 Reorganizations (“ASC 852”), fresh-start accounting was required upon the Company’s emergence from Chapter 11 because (i) the holders of existing voting shares of the Predecessor received less than 50% of the voting shares of the Successor and (ii) the reorganization value of the Predecessor assets immediately prior to confirmation of the Plan was less than the total of all post-petition liabilities and allowed claims.

All conditions required for the adoption of fresh-start accounting were met when the Company’s Plan of Reorganization became effective, December 15, 2016. The implementation of the Plan and the application of fresh-start accounting materially changed the carrying amounts and classifications reported in the Company’s consolidated financial statements and resulted in the Company becoming a new entity for financial reporting purposes. As a result of the application of fresh-start accounting and the effects of the implementation of the Plan, the financial statements after December 15, 2016 are not comparable with the financial statements on and prior to December 15, 2016.

Upon the application of fresh-start accounting, the Company allocated the reorganization value to its individual assets and liabilities in conformity with ASC 805, Business Combinations (“ASC 805”). Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets is reported as goodwill.

Reorganization Value - Under ASC 852, the Successor Company must determine a value to be assigned to the equity of the emerging company as of the date of adoption of fresh-start accounting. To facilitate this calculation, the Company estimated the enterprise value of the Successor Company by relying on a discounted cash flow (“DCF”) analysis under the income approach. The Company also considered the guideline public company and guideline transactions methods under the market approach as reasonableness checks to the indications from the income approach.

Enterprise value represents the fair value of an entity’s interest-bearing debt and stockholders’ equity. In the disclosure statement associated with the Plan, which was confirmed by the Bankruptcy Court, the Company estimated a range of enterprise values between $425 million and $475 million, with a midpoint of $450 million. The Company deemed it appropriate to use the midpoint between the low end and high end of the range to determine the final enterprise value of $450 million utilized for fresh-start accounting. The enterprise value plus excess cash adjustments of approximately $52 million less the fair value of debt of $250 million, resulted in equity value of the Successor of $252.1 million.

To estimate enterprise value utilizing the DCF method, the Company established an estimate of future cash flows for the period ranging from 2016 to 2025 and discounted the estimated future cash flows to present value. The expected cash flows for the period 2016 to 2025 were based on the financial projections and assumptions utilized in the disclosure statement. The expected cash flows for the period 2016 to 2025 were derived from earnings forecasts and assumptions regarding growth and margin projections, as applicable. A terminal value was included, based on the cash flows of the final year of the forecast period.

The discount rate of 14.5% was estimated based on an after-tax weighted average cost of capital (“WACC”) reflecting the rate of return that would be expected by a market participant. The WACC also takes into consideration a company specific risk premium reflecting the risk associated with the overall uncertainty of the financial projections used to estimate future cash flows.

The guideline public company and guideline transaction analysis identified a group of comparable companies and transactions that have operating and financial characteristics comparable in certain respects to the Company, including, for example, comparable lines of business, business risks and market presence. Under these methodologies, certain financial multiples and ratios that measure financial performance and value are calculated for each selected company or transactions and then compared to the implied multiples from the DCF analysis. The Company considered enterprise value as a multiple of each selected company and transactions publicly available earnings before interest, taxes, depreciation and amortization (“EBITDA”).

The estimated enterprise value and the equity value are highly dependent on the achievement of the future financial results contemplated in the projections that were set forth in the Plan. The estimates and assumptions made in the valuation are inherently subject to significant uncertainties. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would have significantly affected the reorganization value include the assumptions regarding revenue growth, operating expenses, the amount and timing of capital expenditures and the discount rate utilized.

Fresh-start accounting reflects the value of the Successor Company as determined in the confirmed Plan. Under fresh-start accounting, asset values are remeasured and allocated based on their respective fair values in conformity with the purchase method of accounting for business combinations in ASC 805. Liabilities existing as of the Effective Date, other than deferred taxes were recorded at the present value of amounts expected to be paid using appropriate risk adjusted interest rates. Deferred taxes were determined in conformity with applicable accounting standards. Predecessor accumulated depreciation, accumulated amortization, accumulated other comprehensive loss and retained deficit were eliminated.

The significant assumptions related to the valuations of assets and liabilities in connection with fresh-start accounting include the following:

Machinery and Equipment

To estimate the fair value of machinery and equipment, the Company considered the income approach, the cost approach, and the sales comparison (market) approach. The primary approaches that were relied upon to value these assets were the cost approach and the market approach. Although the income approach was not applied to value the machinery and equipment assets individually, the Company did consider the earnings of the enterprise of which these assets are a part. When more than one approach is used to develop a valuation, the various approaches are reconciled to determine a final value conclusion.

The typical starting point or basis of the valuation estimate is replacement cost new (RCN), reproduction cost new (CRN), or a combination of both. Once the RCN and CRN estimates are adjusted for physical and functional conditions, they are then compared to market data and other indications of value, where available, to confirm results obtained by the cost approach.

Where direct RCN estimates were not available or deemed inappropriate, the CRN for machinery and equipment was estimated using the indirect (trending) method, in which percentage changes in applicable price indices are applied to historical costs to convert them into indications of current costs. To estimate the CRN amounts, inflation indices from established external sources were then applied to historical costs to estimate the CRN for each asset.

The market approach measures the value of an asset through an analysis of recent sales or offerings of comparable property, and takes into account physical, functional and economic conditions. Where direct or comparable matches could not be reasonably obtained, the Company utilized the percent of cost technique of the market approach. This technique looks at general sales, sales listings, and auction data for each major asset category. This information is then used in conjunction with each asset’s effective age to develop ratios between the sales price and RCN or CRN of similar asset types. A market-based depreciation curve was developed and applied to asset categories where sufficient sales and auction information existed.

Where market information was not available or a market approach was deemed inappropriate, the Company developed a cost approach. In doing so, an indicated value is derived by deducting physical deterioration from the RCN or CRN of each identifiable asset or group of assets. Physical deterioration is the loss in value or usefulness of a property due to the using up or expiration of its useful life caused by wear and tear, deterioration, exposure to various elements, physical stresses, and similar factors.

Functional and economic obsolescence related to these was also considered. Functional obsolescence due to excess capital costs was eliminated through the direct method of the cost approach to estimate the RCN. Functional obsolescence was applied in the form of a cost-to-cure penalty to certain personal property assets needing significant capital repairs. Economic obsolescence was also applied to stacked and underutilized assets based on the status of the asset. Economic obsolescence was also considered in situations in which the earnings of the applicable business segment in which the assets are employed suggest economic obsolescence. When penalizing assets for economic obsolescence, an additional economic obsolescence penalty was levied , while considering scrap value to be the floor value for an asset.

Land and Building

In establishing the fair value of the real property assets, each of the three traditional approaches to value: the income approach, the market approach and the cost approach was considered. The Company primarily relied on the market and cost approaches.

Land - In valuing the fee simple interest in the land, the Company utilized the sales comparison approach (market approach). The sales comparison approach estimates value based on what other purchasers and sellers in the market have agreed to as the price for comparable properties. This approach is based on the principle of substitution, which states that the limits of prices, rents and rates tend to be set by the prevailing prices, rents and rates of equally desirable substitutes. In conducting the sales comparison approach, data was gathered on comparable properties and adjustments were made for factors including market conditions, size, access/frontage, zoning, location, and conditions of sale. Greatest weight was typically given to the comparable sales in proximity and similar in size to each of the owned sites. In some cases, market participants were contacted to augment the analysis and to confirm the conclusions of value.

Building & Site Improvements - In valuing the fee simple interest in the real property improvements, the Company utilized the direct and indirect methods of the cost approach. For the direct method cost approach analysis, the starting point or basis of the cost approach is the RCN. In order to estimate the RCN of the buildings and site improvements, various factors were considered including building size, year built, number of stories, and the breakout of the space, property history, and maintenance history. We used the data collected to calculate the RCN of the buildings using recognized estimating sources for developing replacement, reproduction, and insurable value costs.

In the application of the indirect method cost approach, the first step is to estimate a CRN for each improvement via the indirect (trending) method of the cost approach. To estimate the CRN amounts, the Company applied published inflation indices obtained from third party sources to each asset’s historical cost to convert the known cost into an indication of current cost. As historical cost was used as the starting point for estimating RCN, we only considered this approach for assets with historical records.

Once the RCN and CRN of the improvements was computed, the Company estimated an allowance for physical depreciation for the buildings and land improvements based upon its respective age.

Intangible Assets

The financial information used to estimate the fair values of intangible assets was consistent with the information used in estimating the Company’s enterprise value. Trademarks and tradenames were valued primarily utilizing the relief from royalty method of the income approach. The resulting value of the intangible assets based on the application of this approach was $520. Significant inputs and assumptions included remaining useful lives, the forecasted revenue streams, applicable royalty rates, tax rates, and applicable discount rates. Customer relationships were considered in the analysis, but based on the valuation under the excess earnings methodology, no value was attributed to customer relationships.

Debt

The fair value of debt was $250 million of which $2.5 million represents the current portion. The fair value of debt was determined using an income approach based on market yields for comparable securities. The fair value with respect to the Term Loan was estimated to approximate par value.

Asset Retirement Obligations

The fair value of the asset retirement obligations was determined by using estimated plugging and abandonment costs as of December 15, 2016, adjusted for inflation using an annual average of 1.26% and then discounted at the appropriate credit-adjusted risk free rate ranging from 2.2% to 2.9% depending on the life of the well. The fair value of asset retirement obligations was estimated at $9.1 million.

Income Taxes

The amount of deferred income taxes recorded was determined in accordance with ASC 740, Income Taxes (“ASC 740”).

Warrants

Pursuant to the Plan and on the Effective Date, the Company issued two series of warrants to the former holders of the Predecessor Company's common stock. One series of warrants will expire on December 15, 2020 and the other series of warrants will expire on December 15, 2021. Each warrant is exercisable for one share of the Company’s common stock, par value $0.01. At issuance, the warrants were recorded at fair value, which was determined using the Black-Scholes option pricing model with the assumptions detailed in the following table. The warrants are equity classified and, at issuance, were recorded as an increase to additional paid-in capital in the amount of $3.8 million.

Assumptions for Black-Scholes option pricing model:



Volatility	60.0% to 62.0%
Risk-free Interest Rate	1.86% to 2.10%
Time Until Expiration	4 years to 5 years

The following fresh-start condensed consolidated balance sheet presents the implementation of the Plan and the adoption of fresh-start accounting as of December 15, 2016. Reorganization adjustments have been recorded within the condensed consolidated balance sheet to reflect the effects of the Plan, including discharge of liabilities subject to compromise and the adoption of fresh-start accounting in accordance with ASC 852 (in thousands).



	Predecessor Company			Reorganization Adjustments (A)				Fresh Start Adjustments				Successor Company
ASSETS
Current assets:
Cash and cash equivalents	$	38,751		$	52,437		B	$	—			$	91,188
Restricted cash	19,292			5,400			C	—				24,692
Accounts receivable, net	72,560			(210		)	D	—				72,350
Inventories	22,900			—				383			N	23,283
Other current assets	27,648			(2,295		)	E	—				25,353
Total current assets	181,151			55,332				383				236,866
Property and equipment, gross	2,235,828			—				(1,827,392		)	O	408,436
Accumulated depreciation	(1,523,585		)	—				1,523,585			O	—
Property and equipment, net	712,243			—				(303,807		)		408,436
Other intangible assets, net	3,596			—				(3,076		)	P	520
Other assets	17,428			—				369			Q	17,797
TOTAL ASSETS	$	914,418		$	55,332			$	(306,131	)		$	663,619
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	12,338		$	—			$	—			$	12,338
Other current liabilities	99,524			(1,032		)	F	(264		)	R	98,228
Current portion of long-term debt	(3,099		)	5,599			G	—				2,500
Total current liabilities	108,763			4,567				(264		)		113,066
Long-term debt	—			245,460			H	—				245,460
Workers’ compensation, vehicular and health insurance liabilities	23,126			—				—				23,126
Deferred tax liabilities	35			—				—				35
Other non-current liabilities	35,754			332			I	(6,284		)	S	29,802
Liabilities subject to compromise	996,527			(996,527		)	J	—				—
Equity:
Common stock	16,055			(15,854		)	K	—				201
Additional paid-in capital	969,915			252,516			L	(970,502		)	T	251,929
Accumulated other comprehensive loss	(40,394		)	—				40,394			T	—
Retained earnings (deficit)	(1,195,363		)	564,838			M	630,525			T	—
Total equity	(249,787		)	801,500				(299,583		)		252,130
TOTAL LIABILITIES AND EQUITY	$	914,418		$	55,332			$	(306,131	)		$	663,619

Reorganization and Fresh Start Adjustments

Reorganization Adjustments (in thousands)

Represents amounts recorded on the Effective Date for the implementation of the Plan, including the settlement of liabilities subject to compromise, issuance of new debt and repayment of old debt, reinstatement of contract rejection obligations, write-off of debt issuance costs, proceeds received from the rights offering, distributions of Successor common stock and the Warrants, the cancellation of the Predecessor common stock, and the cancellation of the Predecessor stock incentive plan.



B.	The Effective Date cash activity from the implementation of the Plan and the Rights Offering are as follows:
	Sources:
		Proceeds from Rights Offering	$	108,984
		Overfunding of Rights Offering to be returned	98
		Total Sources	$	109,082
	Uses:
		Payment of Predecessor Term Loan Facility	$	(38,876	)
		Payment of interest on Predecessor Term Loan Facility	(4,277		)
		Payment of bank fees	(2,126		)
		Transfer to restricted cash to fund professional fee escrow	(5,400		)
		Payment of professional fees	(5,656		)
		Payment of letters of credit fees and fronting fees of Predecessor ABL Facility	(260		)
		Equity Holder Cash-Out Subscription	200
		Payment to Equity Holders who chose to cash out	(200		)
		Payment to non-qualified holders of the 2021 Notes	(25		)
		Payment of contract rejection damage claim	(25		)
		Total Uses	$	(56,645	)
		Net sources of cash	$	52,437



C.	Transfer of cash and cash equivalents to fund professional fee escrow cash account as required by the Plan.

D.	Satisfaction of payroll withholdings related to accelerated vesting of Predecessor restricted stock units and awards.

E.	Elimination of Predecessor Directors and Officers ("D&O") insurance policies and release of prepaid professional retainer net of capitalized ABL Facility related fee:
	Predecessor D&O insurance	$	(2,203	)
	Release of professional retainer	(150		)
	Payment of ABL Facility related fee	58
	Total	$	(2,295	)



F.	Decrease in accrued current liabilities consists of the following:
	Reinstate rejection damage and other claims from Liabilities Subject to Compromise (short-term)	$	2,677
	Accrual for success fees incurred upon emergence	3,786
	Over funding of Rights Offering to be returned	98
	Payment of interest on Predecessor Term Loan Facility	(4,277		)
	Payment of professional fees and the application of retainer balances	(3,056		)
	Payment of letters of credit fees and fronting fees on the Predecessor ABL Facility	(260		)
	Total	$	(1,032	)



G.	Elimination of debt issuance costs on Predecessor ABL Facility and record current portion of Term Loan Facility:
	Predecessor ABL Facility issuance costs	$	3,099
	Current portion of Term Loan Facility	2,500
	Total	$	5,599



H.	Represents Term Loan Facility, at fair value, net of deferred finance costs on ABL Facility:
	Long-term debt	$	250,000
	Less: current portion	(2,500		)
	Bank fees on the ABL Facility	(2,040		)
	Total	$	245,460



I.	Reinstate rejection damage and other claims from Liabilities Subject to Compromise.

J.	Liabilities Subject to Compromise were settled as follows in accordance with the Plan:
	Write-off of Liabilities Subject to Compromise	$	996,527
	Term Loan Facility	(250,000		)
	Payment of Predecessor Term Loan Facility principal	(38,876		)
	Contract rejection damage and other claims to be satisfied in cash (long and short-term)	(3,010		)
	Payment of contract rejection damage claim	(25		)
	Payment to non-qualified holders of the 2021 Notes	(25		)
	Issuance of Successor common stock to satisfy 2021 Notes claims	(125,892		)
	Gain due to settlement of Liabilities Subject to Compromise	$	578,699



K.	Represents the cancellation of Predecessor common stock (par value of $16,055) and the distribution of Successor common stock (par value of $201).


L.	Consists of the net impact of the following:
	Predecessor additional paid in capital:
	Elimination of par value of Predecessor common stock	$	16,055
	Compensation expense related to acceleration of Predecessor restricted stock units and awards	1,996
	Warrants issued to holders of Predecessor common stock	(3,768		)
	Issuance of Successor common stock to holders of Predecessor common stock	(13,695		)
	Total	$	588

	Successor additional paid in capital:
	Issuance of common stock for the Rights Offering	$	108,866
	Issuance of Successor common stock to satisfy 2021 Notes claims	125,817
	Issuance of Successor common stock to holders of Predecessor common stock	13,687
	Warrants issued to holders of Predecessor common stock	3,768
	Shares withheld to satisfy payroll tax obligations	(210		)
	Total	251,928
	Net impact of Predecessor and Successor additional paid in capital	$	252,516



M.	Reflects the cumulative impact of the reorganization adjustments discussed above:
	Reorganization items:
	Gain due to settlement of Liabilities Subject to Compromise	$	578,699
	Success fees incurred upon emergence	(6,536		)
	Write of deferred issuance costs of Predecessor ABL Facility	(3,099		)
	Total	$	569,064

	Other:
	Elimination of Predecessor D&O prepaid insurance	$	(2,203	)
	Bank fees and charges	(27		)
	Compensation expense related to acceleration of Predecessor restricted stock awards	(1,996		)
	Total	$	(4,226	)

	Net cumulative impact of the reorganization adjustments	$	564,838

N.	A fresh start adjustment to increase the net book value of inventories to their estimated fair value, based upon current replacement costs.



O.	An adjustment to adjust the net book value of property and equipment to estimated fair value.
	The following table summarizes the components of property and equipment, net as of the Effective Date, both before (Predecessor) and after (Successor) fair value adjustments:

		Successor Fair Value		Predecessor Historical Cost
	Oilfield service equipment	$	267,648	$	1,660,592
	Disposal wells	23,288		74,008
	Motor vehicles	39,322		262,370
	Furniture and equipment	8,835		129,084
	Buildings and land	65,525		103,635
	Work in progress	3,818		6,139
	Gross property and equipment	408,436		2,235,828
	Accumulated depreciation	—		(1,523,585		)
	Net property and equipment	$	408,436	$	712,243



P.	An adjustment the net book value of other intangible assets to estimated fair value.

	The following table summarizes the components of other intangible assets, net as of the Effective Date, both before (Predecessor) and after (Successor) fair value adjustments:

		Successor Fair Value		Predecessor Historical Cost
	Non-compete agreements	$	—	$	1,535
	Patents, trademarks and tradenames	520		400
	Customer relationships and contracts	—		40,640
	Developed technology	—		4,778
	Gross carrying value	520		47,353
	Accumulated amortization	—		(43,757		)
	Net other intangible assets	$	520	$	3,596



Q.	Represents fair value adjustment related to assets held for sale.


R.	Reduction in other current liabilities relates to the elimination of the current portion of deferred rent liabilities.

S.	Reduction in other long term liabilities relates to the elimination of the non-current portion of deferred rent liabilities totaling $3,429 and reduction in asset retirement obligation to reflect estimated fair value totaling $2,855.

T.	Reflects the cumulative impact of the fresh start accounting adjustments discussed above and the elimination of the Predecessor Company's accumulated other comprehensive loss:

	Property and equipment fair value adjustment	$	(303,807	)
	Assets held for sale fair value adjustment	369
	Elimination of deferred rent liability	3,693
	ARO fair value adjustment	2,855
	Inventory fair value adjustment	383
	Intangible assets fair value adjustment	(3,076		)
	Elimination of Predecessor accumulated other comprehensive loss	(40,394		)
	Elimination of Predecessor additional paid in capital	970,502
	Elimination of Predecessor retained deficit	$	630,525