Other preliminary proxy statements

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant  ☒                 Filed by a Party other than the Registrant  ☐

Check the appropriate box:

Preliminary Proxy Statement

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

Definitive Proxy Statement

Definitive Additional Materials

Soliciting Material Pursuant to §240.14a-12

Key Energy Services, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

No fee required.

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1)

Title of each class of securities to which transaction applies:

(2)

Aggregate number of securities to which transaction applies:

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

(4)

Proposed maximum aggregate value of transaction:

(5)

Total fee paid:

Fee paid previously with preliminary materials.

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

(1)

Amount Previously Paid:

(2)

Form, Schedule or Registration Statement No.:

(3)

Filing Party:

(4)

Date Filed:


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LOGO

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

Meeting Date & Time: Meeting Place: Record Date:

[●], February [●], 2020

[●] Central Time

[●] February [●], 2020

To the Stockholders of Key Energy Services, Inc.:

Notice is hereby given that a Special Meeting of Stockholders (the “Special Meeting”) of Key Energy Services, Inc. (the “Company”) will be held at [●] on [●], February [●], 2020 at [●] (Central Time). As described in more detail in the accompanying proxy statement and exhibits thereto, the Special Meeting is being held in connection with a series of out-of-court transactions that will effectuate a financial restructuring of the Company’s capital structure and indebtedness and related facilities, including the conversion of approximately $241.9 million aggregate outstanding principal of the Company’s term loans (together with accrued interest thereon) into (i) shares of the Company’s common stock, par value $0.01 (“Common Stock”), and (ii) $20 million of term loans under a new approximately $51.2 million term loan facility (the “Restructuring”), contemplated by the Restructuring Support Agreement (including the exhibit thereto, the “RSA”) entered into by the Company on January 24, 2020. At the special meeting, we will ask you to consider and take action on the following matters in connection with the Restructuring:

(1)

To approve an amendment to our Certificate of Incorporation (the “Existing Charter”) to implement a reverse stock split of our Common Stock, at a reverse split ratio of 1-for-50;

(2)

To approve an amendment to the Existing Charter to increase the number of authorized shares of stock, from 110 million to 200 million, of which 150 million will be shares of Common Stock and 50 million will be shares of our preferred stock;

(3)

To approve an amendment to the Existing Charter to provide that the number of directors on our Board of Directors (the “Board”) will initially be fixed at seven and thereafter the size of the Board will be fixed exclusively by resolution of the Board, and eliminate provisions listing the initial directors by name;

(4)

To approve an amendment to the Existing Charter to provide that, subject to the stockholders agreement between the Company and certain lenders (as described in more detail in the proxy statement, the “Stockholders Agreement”), directors will be nominated in accordance with the Company’s bylaws and to eliminate the provisions establishing the Company’s Series A Preferred Stock that entitled the holders of our Series A Preferred Stock to appoint a majority of the Board;

(5)

To approve an amendment to the Existing Charter to provide that, subject to the Stockholders Agreement, vacancies on the Board resulting from death, resignation, removal or otherwise, and newly created directorships resulting from any increase in the number of directors, will be filled solely by a majority of directors then in office (although less than a quorum) or by the sole remaining director;

(6)

To approve an amendment to the Existing Charter to permit stockholders to take action by written consent in lieu of a meeting only when certain specified stockholders (as described in more detail in the proxy statement) collectively hold more than 50% of the Common Stock;


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(7)

To approve an amendment to the Existing Charter to permit stockholders to call a special meeting of the stockholders only when certain specified stockholders (as described in more detail in the proxy statement) collectively hold more than 50% of the Common Stock;

(8)

To approve an amendment to the Existing Charter to remove the requirement that an affirmative vote of a majority of all outstanding shares of Common Stock held by stockholders of the Company other than Soter Capital LLC (“Soter”) is required to approve certain amendments to the Existing Charter or the Company’s bylaws unless such amendments are approved by the Board in accordance with the Company’s bylaws;

(9)

To approve an amendment to the Existing Charter to provide that an affirmative vote of not less than 66 2/3% of the total voting power of all outstanding classes of securities of the Company generally entitled to vote in the election of directors is required to approve certain amendments to the Restated Charter (as defined below);

(10)

To approve an amendment to the Existing Charter to provide that stockholders may amend the Company’s bylaws only with the affirmative vote of the holders of not less than 50.1% of the voting power of all outstanding securities of the Company generally entitled to vote in the election of directors;

(11)

To approve an amendment to the Existing Charter to include an exclusive forum selection clause with respect to certain derivative, fiduciary and similar actions;

(12)

To approve an amendment to the Existing Charter to “opt out” of Section 203 of the General Corporation Law of the State of Delaware, so long as certain specified stockholders (as described in more detail in the proxy statement) collectively hold more than 50% of the Common Stock;

(13)

To approve an amendment and restatement of the Existing Charter implementing the above changes and other incidental changes; and

(14)

To transact such other business as may properly come before the meeting or any adjournment thereof.

Each of the above proposals is described in more detail in the accompanying proxy statement and the exhibits thereto, and we urge you to read the proxy statement and its exhibits carefully in their entirety.

Following consideration of the transactions contemplated by the RSA, including the Restructuring, the Board unanimously adopted, authorized, approved and declared advisable (i) the Restructuring and the RSA, and (ii) the restatement of our Existing Charter (the “Restated Charter”), which is necessary to effect the Restructuring, and resolved that the Restated Charter be submitted for consideration and approval by the stockholders of the Company and recommended that the Company’s stockholders approve the Restated Charter to take effect concurrently with the consummation of the Restructuring.

As of the Record Date (as defined below), Soter beneficially owned 10,309,609 shares of our Common Stock representing approximately 50.2% of the outstanding shares, and affiliates of Soter have appointed five of our directors. As part of the RSA, Soter has agreed to vote the shares owned by Soter in favor of the Restructuring, including each of the proposals to be presented at the Special Meeting and, accordingly, proposals ONE through THIRTEEN will be approved.

Each of proposals ONE through THIRTEEN above will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware.

Each outstanding share of the Company’s Common Stock entitles the owner of record at the close of business on February [●], 2020 (the “Record Date”) to receive notice of and to vote at the Special Meeting or any adjournment or postponement of the Special Meeting. A list of all stockholders entitled to vote is available for inspection during normal business hours at our principal executive offices at 1301 McKinney St., Suite 1800, Houston, Texas 77010. This list will also be available at the Special Meeting.


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YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, WE ENCOURAGE YOU TO READ THIS PROXY STATEMENT AND SUBMIT YOUR PROXY SO THAT YOUR SHARES CAN BE VOTED AT THE SPECIAL MEETING AND TO HELP US ENSURE A QUORUM AT THE SPECIAL MEETING. YOU MAY NONETHELESS VOTE IN PERSON IF YOU ATTEND THE SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE TAKE THE TIME TO VOTE. YOU MAY VOTE YOUR SHARES BY SIGNING, DATING AND RETURNING THE ENCLOSED PAPER PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE OR VIA THE INTERNET OR BY TELEPHONE BY FOLLOWING THE INSTRUCTIONS INCLUDED IN THE ACCOMPANYING PROXY STATEMENT. IF YOU ATTEND THE SPECIAL MEETING AND WISH TO VOTE YOUR SHARES IN PERSON, YOU MAY REVOKE YOUR PROXY.

ALL STOCKHOLDERS ARE EXTENDED A CORDIAL INVITATION TO ATTEND THE MEETING.

By Order of the Board of Directors,

J. Marshall Dodson

Interim Chief Executive Officer,

Senior Vice President and

Chief Financial Officer

Key Energy Services, Inc.

1301 McKinney Street, Suite 1800

Houston, Texas 77010

Houston, Texas

February [●], 2020


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TABLE OF CONTENTS

Page

ABOUT THE SPECIAL MEETING

1

Purpose of the Special Meeting

1

Proposals to be Voted Upon at the Special Meeting

1

Recommendation of the Board

3

Background

3

Material Terms of the RSA and the Restructuring

4

Voting at the Special Meeting

6

Effect of Broker Non-Votes and Abstentions

6

Default Voting

7

How to Revoke Your Proxy

7

Quorum Requirement for the Special Meeting

7

Required Votes

7

Interests Of Certain Persons In Matters To Be Acted Upon

9

No Appraisal or Dissenters’ Rights

9

QUESTIONS AND ANSWERS REGARDING THE RESTRUCTURING AND THE SPECIAL MEETING

10

CAUTIONARY STATEMENTS REWARDING FORWARD-LOOKING STATEMENTS

14

PROPOSAL ONE: Reverse Stock Split Proposal

16

Effect of the Reverse Stock Split on our Common Stock

16

Procedures for Effecting the Reverse Stock Split

17

Vote Required

17

Recommendation

17

PROPOSAL TWO: Increase in Number of Authorized Shares Proposal

18

Vote Required

18

Recommendation

18

PROPOSAL THREE: Board Size Proposal

19

Vote Required

19

Recommendation

19

PROPOSAL Four: Director Nomination Proposal

20

Vote Required

20

Recommendation

20

PROPOSAL FIVE: Board Vacancies Proposal

21

Vote Required

21

Recommendation

21

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PROPOSAL SIX: Stockholder Written Consent Proposal

22

Vote Required

22

Recommendation

22

PROPOSAL SEVEN: Special Meeting Proposal

23

Vote Required

23

Recommendation

23

PROPOSAL EIGHT: Removal of Certain Non-Soter Stockholder Approval Rights Proposal

24

Vote Required

24

Recommendation

24

PROPOSAL NINE: Stockholder Supermajority Approval Proposal

25

Vote Required

25

Recommendation

25

PROPOSAL TEN: Amendment of Bylaws Proposal

26

Vote Required

26

Recommendation

26

PROPOSAL ELEVEN: Forum Selection Clause Proposal

27

Vote Required

27

Recommendation

28

PROPOSAL TWELVE: Delaware Section 203 Proposal

29

Vote Required

29

Recommendation

29

PROPOSAL THIRTEEN: Amendment and Restatement Proposal

30

Vote Required

30

Recommendation

30

Security Ownership of Certain Beneficial Owners and Management

31

Stock Ownership of Certain Beneficial Owners and Management

31

Section 16(A) Beneficial Ownership Reporting Compliance

33

Other Matters

34

Stockholder Proposals

34

Solicitation of Proxies

34

Stockholder List

34

Availability of Certain Documents

34

Other Matters

35

Directions to Annual Meeting

35

FINANCIAL INFORMATION

36
EXHIBIT A – Restated Charter
EXHIBIT B – Financial Information

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KEY ENERGY SERVICES, INC.

1301 McKinney Street, Suite 1800

Houston, Texas 770101

PROXY STATEMENT

SPECIAL MEETING OF STOCKHOLDERS

The Board of Directors (the “Board of Directors” or the “Board”) of Key Energy Services, Inc. (the “Company”) requests your proxy for the Special Meeting of Stockholders that will be held on February [●], 2020, at [●] Central Time, at [●] (the “Special Meeting”). By granting the proxy, you authorize the persons named on the proxy to represent you and vote your shares at the Special Meeting. Those persons will also be authorized to vote your shares to adjourn the Special Meeting from time to time and to vote your shares at any adjournments or postponements of the Special Meeting. The Board has made this proxy statement (including the exhibits attached hereto, this “Proxy Statement”) and the accompanying Notice of Special Meeting of Stockholders available on the Internet at [●]. Beginning on or about February [●], 2020, we will mail to each stockholder the proxy materials. Unless the context requires otherwise, in this Proxy Statement the terms “the Company,” “we,” “us,” “our” and similar terms refer to Key Energy Services, Inc. and its subsidiaries.

ABOUT THE SPECIAL MEETING

Purpose of the Special Meeting

The purpose of the Special Meeting is for our stockholders to consider and act upon the proposals described in this Proxy Statement (and any other matters that properly come before the Special Meeting or any adjournment or postponement thereof). The approval of the proposals described in this Proxy Statement is necessary for the Company to consummate the Restructuring as contemplated by the RSA, each as described and defined in more detail below.

As of the Record Date (as defined below), Soter Capital LLC (“Soter”) beneficially owned 10,309,609 shares of our Common Stock representing approximately 50.2% of the outstanding shares, and affiliates of Soter have appointed five of our directors. As part of the RSA, Soter has agreed to vote the shares owned by Soter in favor of the Restructuring, including each of the proposals to be presented at the Special Meeting and, accordingly, proposals ONE through THIRTEEN will be approved.

Proposals to be Voted Upon at the Special Meeting

At the Special Meeting, our stockholders will be asked to consider and vote upon the following five proposals:

•

Proposal ONE: To approve an amendment to our Certificate of Incorporation (the “Existing Charter”) to implement a reverse stock split of the Company’s common stock, par value $0.01 (“Common Stock”), at a reverse split ratio of 1-for-50 (the “Reverse Stock Split Proposal”);

•

Proposal TWO: To approve an amendment to the Existing Charter to increase the number of authorized shares of stock, from 110 million to 200 million, of which 150 million will be shares of Common Stock and 50 million will be shares of our preferred stock (the “Increase in Number of Authorized Shares Proposal”);

•

Proposal THREE: To approve an amendment to the Existing Charter to provide that the number of directors on the Board will initially be fixed at seven and thereafter the size of the Board will be fixed exclusively by resolution of the Board, and eliminate provisions listing the initial directors by name (the “Board Size Proposal”);

•

Proposal FOUR: To approve an amendment to the Existing Charter to provide that, subject to a stockholders agreement between the Company and certain lenders (as described below, the “Stockholders Agreement”), directors will be nominated in accordance with the Company’s bylaws and to eliminate the provisions establishing the Company’s Series A Preferred Stock that entitled the holders of our Series A Preferred Stock to appoint a majority of the Board (the “Director Nomination Proposal”);


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•

Proposal FIVE: To approve an amendment to the Existing Charter to provide that, subject to the Stockholders Agreement, vacancies on the Board resulting from death, resignation, removal or otherwise, and newly created directorships resulting from any increase in the number of directors, will be filled solely by a majority of directors then in office (although less than a quorum) or by the sole remaining director (the “Board Vacancies Proposal”);

•

Proposal SIX: To approve an amendment to the Existing Charter to permit stockholders to take action by written consent only when certain specified stockholders collectively hold more than 50% of the Common Stock (the “Stockholder Written Consent Proposal”);

•

Proposal SEVEN: To approve an amendment to the Existing Charter to permit stockholders to call a special meeting of the stockholders only when certain specified stockholders collectively hold more than 50% of the Common Stock (the “Special Meeting Proposal”);

•

Proposal EIGHT: To approve an amendment to the Existing Charter to remove the requirement that an affirmative vote of a majority of all outstanding shares of Common Stock held by stockholders of the Company other than Soter is required to approve certain amendments to the Existing Charter or the Company’s bylaws unless such amendments are approved by the Board in accordance with the Company’s bylaws (the “Removal of Certain Non-Soter Stockholder Approval Rights Proposal”);

•

Proposal NINE: To approve an amendment to the Existing Charter to provide that an affirmative vote of not less than 66 2/3% of the total voting power of all outstanding classes of securities of the Company generally entitled to vote in the election of directors is required to approve certain amendments to the Restated Charter (as defined below) (the “Stockholder Supermajority Approval Proposal”);

•

Proposal TEN: To approve an amendment to the Existing Charter to provide that stockholders may amend the Company’s bylaws only with the affirmative vote of the holders of not less than 50.1% of the voting power of all outstanding securities of the Company generally entitled to vote in the election of directors (the “Amendment of Bylaws Proposal”);

•

Proposal ELEVEN: To approve an amendment to the Existing Charter to include an exclusive forum selection clause with respect to certain derivative, fiduciary and similar actions (the “Forum Selection Clause Proposal”);

•

Proposal TWELVE: To approve an amendment to the Existing Charter to “opt out” of Section 203 of the General Corporation Law of the State of Delaware, so long as the Supporting Term Lenders collectively hold more than 50% of the Common Stock (the “Delaware Section 203 Proposal”); and

•

Proposal THIRTEEN: To approve an amendment and restatement of the Existing Charter (the “Restated Charter”) implementing the above changes and other incidental changes (the “Amendment and Restatement Proposal”).

In addition, any other matters that properly come before the Special Meeting or any adjournment or postponement thereof will be considered. The Board is presently aware of no other business to come before the Special Meeting.

Soter, the sole holder of the Series A Preferred Stock, will grant a written consent in connection with deleting the provisions in the Existing Charter designating the rights and preferences of the Series A Preferred Stock which is being redeemed and cancelled at no cost in connection with the Restructuring.

Each of proposals ONE through THIRTEEN above will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

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Recommendation of the Board

The Board recommends that you vote FOR each of proposals ONE through THIRTEEN, above.

Background

The Company and its wholly owned subsidiaries provide a full range of well services to major oil companies and independent oil and natural gas production companies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services, and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States.

Our core businesses depend on our customers’ willingness and ability to make expenditures to produce, develop and explore for oil and natural gas in onshore U.S. basins. Industry conditions are influenced by numerous factors, such as oil and natural gas prices, the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, political instability in oil producing countries, and available supply of and demand for the services we provide. Since the fourth quarter of 2018, when oil prices fell from the highs of 2018, we began to experience reductions in demand for our services, particularly our completion related services.

In 2019, oil prices began to recover from the lows experienced in late 2018. However, despite the increase in oil prices, we experienced a decline in revenue compared to the corresponding 2018 periods. Lower spending by our customers and increased competition, primarily in completion activities, also resulted in overall lower activity in 2019. These factors, coupled with our large outstanding debt obligations, diminished our cash position and capital resources and raised substantial doubt about our ability to continue as a going concern. Beginning in the fourth quarter of 2019, in an effort to address our capital structure, we took steps to reduce our labor costs and exited certain operations and areas to focus on certain markets. Despite efforts to reduce our operational footprint, our financial position continued to deteriorate which negatively affected the market prices for our securities, including our Common Stock.

In addition to the effects on our Common Stock, lower activity levels and reduced revenue impaired our ability to support our substantial debt obligations under our two credit facilities. The Company is a borrower under the Loan and Security Agreement, dated as of April 5, 2019 (as amended, the “ABL Facility”), by and among the Company, Bank of America, N.A., as administrative agent (the “Administrative Agent”), and all of the lenders party thereto (the “ABL Lenders”), providing for aggregate commitments from the ABL Lenders of $100 million. In addition, the Company is a borrower under the Term Loan and Security Agreement, dated as of December 15, 2016 (as amended, the “Term Loan Facility”), by and among the Company, Cortland Products Corp., as agent (in such capacity, the “Agent”) and the lenders party thereto (the “Term Loan Lenders”). As of September 30, 2019, the outstanding principal amount under our Term Loan Facility was approximately $243.13 million. In addition, as of September 30, 2019, we had no borrowings outstanding and $34.6 million in committed letters of credit outstanding under our ABL Facility.

In connection with the factors described above, on October 31, 2019, the Company announced that we had engaged external advisors to assist the Company in analyzing various strategic financial alternatives to address its capital structure and position the Company for future success. In connection with the strategic review, the Company elected not to make a scheduled interest payment due October 18, 2019 under the Term Loan Facility. The Company’s failure to make the October interest payment resulted in a default under the Term Loan Facility and a cross default under the ABL Facility (such defaults, the “Specified Defaults”). On October 29, 2019, the Company entered into (i) a forbearance agreement (as amended on December 6, 2019, January 10, 2020 and January 24, 2020, the “Term Loan Forbearance Agreement”) with the Agent and Term Loan Lenders, collectively holding over 99.5% of the principal amount of the outstanding term loans and (ii) a forbearance agreement (as amended on December 6, 2019, December 20, 2019 and January 10, 2020, the “ABL Forbearance

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Agreement” and, together with the Term Loan Forbearance Agreement, the “Forbearance Agreements”) with the Administrative Agent and all of the ABL Lenders. Pursuant to the Forbearance Agreements, including in the case of the Term Loan Forbearance Agreement, as amended by the RSA (as defined below), the lenders party thereto agreed that such lenders would forbear from exercising any default-related rights and remedies with respect to the Specified Defaults for the periods specified therein.

Following our election to not make scheduled interests payments under the Term Loan Facility, we began active discussions with our lenders to find a solution to our capital structure and to significantly reduce our debt level. Nonetheless, since then our financial situation and liquidity position has continued to deteriorate. On November 27, 2019, the New York Stock Exchange (the “NYSE”) notified the Company that the NYSE had determined to commence proceedings to delist the Common Stock from the NYSE as a result of the Company’s failure to maintain an average global market capitalization over a consecutive 30 trading-day period of at least $15 million pursuant to NYSE listing standards, and our Common Stock was subsequently delisted. On December 20, 2019, we entered into amendments to the ABL Facility and ABL Forbearance Agreement to provide for waivers of our failure to maintain minimum availability thereunder and to reduce the minimum availability we are required to maintain under the ABL Forbearance Agreement and reduce the aggregate revolving commitments under the ABL Facility from $100 million to $80 million.

In light of the continuing deterioration of our financial condition and liquidity position, and the Company’s inability to make interest or principal payments in respect of its substantial outstanding debt obligations, the Board determined that it would be necessary to convert the Company’s substantial debt obligations to common equity. Accordingly, on January 24, 2020, the Company entered into a Restructuring Support Agreement (including the exhibit thereto, the “RSA”) with the Term Loan Lenders collectively holding over 99.5% (the “Supporting Term Lenders”) of the principal amount of the Company’s outstanding term loans. The RSA contemplates a series of out-of-court transactions that will effectuate a financial restructuring of the Company’s capital structure and indebtedness and related facilities, including the conversion of approximately $241.9 million aggregate outstanding principal of the Company’s term loans (together with accrued interest thereon) into (i) newly issued shares of our Common Stock, and (ii) $20 million of term loans under a new approximately $51.2 million term loan facility (the “Restructuring”). The Restructuring is expected to reduce the Company’s long term debt by approximately 80%.

Pursuant to the RSA, among other things, the parties thereto have agreed to support and cooperate with each other in good faith, to coordinate and to use their respective commercially reasonable best efforts to consummate the Restructuring as soon as reasonably practicable on the terms set forth in the RSA. The Company currently expects to complete the restructuring by the end of February 2020.

Material Terms of the RSA and the Restructuring

Generally, the RSA and the Restructuring contemplate, among other things, the following transactions and changes to the Company’s capital structure and governance:

•

an exchange of approximately $241.9 million aggregate outstanding principal of our term loans (together with accrued interest thereon) held by Supporting Term Lenders into (i) newly issued shares of Common Stock representing 97% of the Company’s outstanding shares after giving effect to such issuance (and without giving effect to dilution by the New Warrants and MIP (each as defined below)) and (ii) $20 million of term loans under a new approximately $51.2 million term loan facility, each on a pro rata basis based on their holdings of existing term loans;

•

the distribution by the Company to its existing common stockholders of two series of warrants (the “New Warrants”);

•

the entry into a new $51.2 million term loan facility (the “New Term Facility”), of which (i) $30 million will be funded with new cash proceeds from the Supporting Term Lenders and $20 million

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will be issued in exchange for existing term loans held by the Supporting Term Lenders as described above and (ii) an approximate $1.2 million senior secured term loan tranche in respect of existing term loans held by lenders who are not Supporting Term Lenders;

•

the entry into an amended and restated ABL Facility (the “New ABL Facility”);

•

the adoption of a new management incentive plan (the “MIP”) representing up to 9% of the Company’s outstanding shares after giving effect to the issuance of new shares pursuant to the Restructuring; and

•

certain changes to the Company’s governance, including changes to the Board, amendments to the Company’s governing documents and the entry into the Stockholders Agreement.

The parties to the RSA have agreed that at the completion of the Restructuring the Board will consist of seven directors, each of whom will have one vote, comprised of: the CEO, one non-independent director selected by Soter and five directors who will meet the “independent director” requirements set forth in Section 303A of the NYSE Listed Company Manual and be selected by the Supporting Term Lenders. At the closing of the Restructuring, the Company and Supporting Term Lenders will enter into the Stockholders Agreement, which, among other things, will grant the Supporting Term Lenders certain board nomination rights based on their ongoing percentage ownership. Supporting Term Lenders holding more the 25% of the Company’s outstanding shares as of the closing of the Restructuring will be entitled to nominate two directors and Supporting Term Lenders holding between 10% and 25% of the Company’s outstanding shares as of the closing of the Restructuring will be entitled to nominate one director. All future nominees of Supporting Term Lenders, other than Soter nominees, must meet the “independent director” requirements set forth in Section 303A of the NYSE Listed Company Manual. During the time that Soter holds between 10% and 25% of the Company’s outstanding shares as of the closing of the Restructuring, Soter will be entitled to nominate one non-independent director to the Board. In addition, following the Restructuring, Supporting Term Lenders will be entitled to appoint a non-voting board observer subject to specified ownership thresholds.

The RSA also contemplates that the Company will distribute to the Company’s existing common stockholders the New Warrants at the completion of the Restructuring. The New Warrants are to be issued in two series each with a four-year exercise period. The first series will entitle the holders to purchase in the aggregate up to 10% of the Company’s common shares at the closing of the Restructuring on an as-exercised basis (after giving effect to the exercise of all New Warrants, but subject to dilution by issuances under the MIP). The aggregate exercise price of the first series of New Warrants will be equal to the aggregate outstanding principal amount of term loans under the Term Loan Facility plus accrued interest thereon at the default rate. The second series of New Warrants will entitle the holders to purchase in the aggregate up to 7.5% of the Company’s common shares at the closing of the Restructuring on an as-exercised basis (after giving effect to the exercise of all New Warrants, but subject to dilution by issuances under the MIP). Pursuant to the RSA, the aggregate strike price of the second series of New Warrants will be equal to the product of (i) the aggregate outstanding principal amount of term loans under the Term Loan Facility plus accrued interest thereon at the default rate, multiplied by (ii) 1.50.

The RSA extends the forbearances and other obligations contemplated by the Term Loan Forbearance Agreement until the RSA is validly terminated in accordance with its terms. The RSA automatically terminates upon (i) the consummation of the Restructuring, (ii) the issuance of an order enjoining the Restructuring or declaring the RSA unenforceable, or (iii) the mutual agreement of the Company and Supporting Term Lenders holding 66.6% of the term loans held by Supporting Term Lenders. The Company may also terminate the RSA (i) in the event the Restructuring has not been consummated within 75 days after the effectiveness of the RSA, and (ii) upon a determination by the Board that the Restructuring would be inconsistent with their fiduciary duties. The Supporting Term Lenders holding 66.6% of the term loans may terminate the RSA (i) in the event the Restructuring has not been consummated within 75 days after the effectiveness of the RSA, (ii) upon the occurrence of certain termination events set forth in the Term Loan Forbearance Agreement, or (iii) in the event the Company files or publicly announces that it will file, join in or support any plan of reorganization, including

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any in-court bankruptcy proceeding, other than as contemplated in the RSA. In addition, the Company and Supporting Term Lenders holding 66.6% of the term loans may each also terminate the RSA upon certain breaches of the RSA by the applicable counterparties.

Voting at the Special Meeting

The Common Stock is the only class of securities that entitles holders to vote generally at meetings of the Company’s stockholders. Each share of Common Stock outstanding on February [●], 2020 (the “Record Date”) entitles the holder to one vote at the Special Meeting. In addition, the Existing Charter grants the holder of our Series A Preferred Stock the right to consent to modifications of the rights and preferences of the Series A Preferred Stock. Soter, the sole holder of the Series A Preferred Stock, will grant a written consent in connection with deleting the provisions in the Existing Charter designating the rights and preferences of the Series A Preferred Stock which is being redeemed and cancelled at no cost in connection with the Restructuring.

If on the Record Date you hold shares of our Common Stock that are represented by stock certificates or registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, you are considered the stockholder of record with respect to those shares. As a stockholder of record, you may vote in person at the Special Meeting or by proxy. Whether or not you plan to attend the Special Meeting in person, we urge you to vote your shares by signing, dating and returning the enclosed proxy card in the enclosed postage-paid envelope or via the Internet or by telephone by following the instructions included in this Proxy Statement. If you submit a proxy but do not give voting instructions as to how your shares should be voted on a particular proposal at the Special Meeting, your shares will be voted in accordance with the recommendations of our Board stated in this Proxy Statement.

If on the Record Date you hold shares of our Common Stock in an account with a brokerage firm, bank or other nominee, then you are a beneficial owner of the shares and hold such shares in “street name,” and these proxy materials will be forwarded to you by that organization. As a beneficial owner, you have the right to direct your broker, bank or other nominee on how to vote the shares held in their account, and the nominee has enclosed or provided voting instructions for you to use in directing it how to vote your shares. The nominee that holds your shares, however, is considered the stockholder of record for purposes of voting at the Special Meeting. Because you are not the stockholder of record, you may not vote your shares in person at the Special Meeting unless you bring to the Special Meeting a letter from your broker, bank or other nominee confirming your beneficial ownership of the shares as of the Record Date. Whether or not you plan to attend the Special Meeting, we urge you to vote by following the voting instructions provided to you to ensure that your vote is counted.

A list of stockholders entitled to vote at the Special Meeting will be available for inspection during ordinary business hours for a period of ten days before the Special Meeting at our offices located at 1301 McKinney Street, Suite 1800, Houston, Texas 77010. The list will also be available for inspection at the Special Meeting.

Effect of Broker Non-Votes and Abstentions

If you are a beneficial owner and do not vote, and your broker, bank or other nominee does not have discretionary power to vote your shares, your shares may constitute “broker non-votes.” Broker non-votes occur when shares held by a broker for a beneficial owner are not voted with respect to a particular proposal and generally occur because the broker (1) does not receive voting instructions from the beneficial owner and (2) lacks discretionary authority to vote the shares. Without voting instructions from their clients, brokers and other nominees cannot vote on “non-routine” proposals, including all of the proposals described in this Proxy Statement. Accordingly, if you do not provide voting instructions to any applicable broker or nominee, your shares will not be counted for the purpose of establishing a quorum at the Special Meeting and will have the same effect as a vote AGAINST each of the proposals described in this Proxy Statement.

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The shares of a stockholder whose ballot on any or all proposals is marked as “abstain” will be included in the number of shares present at the Special Meeting to determine whether a quorum is present. If you hold your shares in your own name and abstain from voting on a proposal, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on a proposal, your broker will not have authority to vote your shares.

Default Voting

A proxy that is properly completed and submitted will be voted at the Special Meeting in accordance with the instructions on the proxy. If you properly execute and submit a proxy, but do not provide any voting instructions, your shares will be voted FOR proposals ONE through THIRTEEN.

If any other business properly comes before the stockholders for a vote at the meeting, your shares will be voted in accordance with the discretion of the holders of the proxy. The Board knows of no matters, other than those previously stated, to be presented for consideration at the Special Meeting.

How to Revoke Your Proxy

Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before its use by (1) delivering a written notice of revocation addressed to Key Energy Services, Inc., Attn: General Counsel, 1301 McKinney Street, Suite 1800, Houston, Texas 77010, (2) duly executing a proxy bearing a later date, (3) voting again by Internet or by telephone or (4) attending the Special Meeting and voting in person. Your last vote or proxy will be the vote or proxy that is counted. Attendance at the Special Meeting will not cause your previously granted proxy to be revoked unless you vote or specifically so request.

Quorum Requirement for the Special Meeting

The presence at the Special Meeting, whether in person or by valid proxy, of the persons holding a majority of shares of Common Stock outstanding on the Record Date will constitute a quorum, permitting us to conduct our business at the Special Meeting. On the Record Date, there were [●] shares of Common Stock held by [●] stockholders of record. Abstentions ( i.e., if you or your broker mark “abstain” on a proxy or voting instruction form, or if a stockholder of record attends the Special Meeting but does not vote (either before or during the Special Meeting)) will be considered to be shares present at the meeting for purposes of establishing a quorum. Without voting instructions from their clients, brokers and other nominees cannot vote on “non-routine” proposals, including all of the proposals described in this Proxy Statement. Accordingly, if you do not provide voting instructions to any applicable broker or nominee, your shares will not be counted for the purpose of establishing a quorum at the Special Meeting.

Required Votes

Proposal ONE – Reverse Stock Split Proposal. Approval of the proposal to amend the Existing Charter to implement a reverse stock split of our Common Stock, at a reverse split ratio of 1-for-50, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal

Proposal TWO – Increase in Number of Authorized Shares Proposal. Approval of the proposal to amend the Existing Charter to increase the number of authorized shares of stock, from 110 million to 200 million, of which 150 million will be shares of Common Stock and 50 million will be shares of our preferred stock, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal.

Proposal THREE – Board Size Proposal. Approval of the proposal to amend the Existing Charter to provide that the number of directors on the Board will initially be fixed at seven and thereafter the size of the Board will be fixed exclusively by resolution of the Board, and eliminate provisions listing the initial directors by name, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal.

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Proposal FOUR – Director Nomination Proposal. Approval of the proposal to amend the Existing Charter to provide that, subject to the Stockholders Agreement, directors will be nominated in accordance with the Company’s bylaws and to eliminate the provisions establishing the Company’s Series A Preferred Stock that entitled the holders of our Series A Preferred Stock to appoint a majority of the Board, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal.

Proposal FIVE – Board Vacancies Proposal. Approval of the proposal to amend the Existing Charter to provide that, subject to the Stockholders Agreement, vacancies on the Board resulting from death, resignation, removal or otherwise, and newly created directorships resulting from any increase in the number of directors, will be filled solely by a majority of directors then in office (although less than a quorum) or by the sole remaining director, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal.

Proposal SIX – Stockholder Written Consent Proposal. Approval of the proposal to amend the Existing Charter to permit stockholders to take action by written consent only when certain specified stockholders collectively hold more than 50% of the Common Stock, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal.

Proposal SEVEN – Special Meeting Proposal. Approval of the proposal to amend the Existing Charter to permit stockholders to call a special meeting of the stockholders only when certain specified stockholders collectively hold more than 50% of the Common Stock, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal.

Proposal EIGHT – Removal of Certain Non-Soter Stockholder Approval Rights Proposal. Approval of the proposal to amend the Existing Charter to remove the requirement that an affirmative vote of a majority of all outstanding shares of Common Stock held by stockholders of the Company other than Soter is required to approve certain amendments to the Existing Charter or the Company’s bylaws unless such amendments are approved by the Board in accordance with the Company’s bylaws, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal.

Proposal NINE – Stockholder Supermajority Approval Proposal. Approval of the proposal to amend the Existing Charter to provide that an affirmative vote of not less than 66 2/3% of the total voting power of all outstanding classes of securities of the Company generally entitled to vote in the election of directors is required to approve certain amendments to the Restated Charter, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal.

Proposal TEN – Amendment of Bylaws Proposal. Approval of the proposal to amend the Existing Charter to provide that stockholders may amend the Company’s bylaws only with the affirmative vote of the holders of not less than 50.1% of the voting power of all outstanding securities of the Company generally entitled to vote in the election of directors, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal.

Proposal ELEVEN – Forum Selection Clause Proposal. Approval of the proposal to amend the Existing Charter to include an exclusive forum selection clause with respect to certain derivative, fiduciary and similar actions, requires the affirmative vote of a majority of the shares of the Common Stock entitled to vote on this proposal.

Proposal TWELVE – Delaware Section 203 Proposal. Approval of the proposal to amend the Existing Charter to “opt out” of Section 203 of the General Corporation Law of the State of Delaware, so long as the Supporting Term Lenders collectively hold more than 50% of the Common Stock, requires the affirmative vote of a majority of the shares of the Common Stock entitled to vote on this proposal.

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Proposal THIRTEEN – Amendment and Restatement Proposal. Approval of the proposal to amend and restate the Existing Charter to implement the above changes and other incidental changes, requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal.

As of the Record Date, Soter beneficially owned 10,309,609 shares of our Common Stock representing approximately 50.2% of the outstanding shares, and affiliates of Soter have appointed five of our directors. As part of the RSA, Soter has agreed to vote the shares owned by Soter in favor of the Restructuring, including each of the proposals to be presented at the Special Meeting and, accordingly, proposals ONE through THIRTEEN will be approved.

Each of proposals ONE through THIRTEEN above is cross-conditioned upon the approval by our stockholders of all of the proposals. None of proposals ONE through THIRTEEN above will be deemed approved unless all of them are approved. Each of proposals ONE through THIRTEEN above will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Interests Of Certain Persons In Matters To Be Acted Upon

As of the Record Date, Soter beneficially owned 10,309,609 shares of our Common Stock representing approximately 50.2% of the outstanding shares, and affiliates of Soter have appointed five of our directors. In addition, Soter holds approximately $29.8 million of the approximately $243.13 million outstanding principal amount of the Term Loan Facility. As a result of the Restructuring, Soter will receive approximately [●] newly issued shares of Common Stock, after giving effect to the Reverse Stock Split Proposal, and $[●] million of term loans under the New Term Facility in exchange for such existing indebtedness. Soter’s existing Common Stock will be subject to the same dilution as that of our other existing stockholders. Soter has agreed in the RSA to provide $7.5 million of the $30 million of new funding under the New Term Facility. In addition, pursuant to the RSA, Soter will have the right to appoint one director of the seven person Board post-Restructuring, as described above under “Material Terms of the RSA and the Restructuring.”

The RSA also contemplates establishment of the MIP in connection with consummation of the Restructuring. Which employees will participate in the MIP has not yet been determined. Common Stock held by our existing directors and executive officers prior to the Restructuring will be subject to the same dilution as that of our other existing stockholders as a result of the Restructuring.

No Appraisal or Dissenters’ Rights

Under Delaware law, our Existing Charter and our bylaws, no appraisal or dissenters’ rights are available to our stockholders in connection with the RSA or the Restructuring regardless how they vote (or abstain from voting on) on proposals ONE through THIRTEEN.

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QUESTIONS AND ANSWERS REGARDING THE RESTRUCTURING AND THE SPECIAL MEETING

The following questions and answers are intended to address briefly some commonly asked questions regarding the Restructuring and the Special Meeting. These questions and answers may not address all questions that may be important to you as a stockholder. Please refer to the more detailed information contained elsewhere in this Proxy Statement and the exhibits to this Proxy Statement, which you should read carefully and in their entirety.

Q.

What is the purpose of the Special Meeting?

A.

The purpose of the Special Meeting is for our stockholders to consider and act upon the proposals described in this Proxy Statement (and any other matters that properly come before the Special Meeting or any adjournment or postponement thereof). The approval of the proposals described in this Proxy Statement are necessary for the Company to consummate the Restructuring as contemplated by the RSA.

Q.

What are the principal terms of the Restructuring?

A.

Generally, the RSA and the Restructuring contemplate, among other things, the following transactions and changes to the Company’s capital structure and governance:

•

an exchange of approximately $241.9 million aggregate outstanding principal of our term loans (together with accrued interest thereon) held by Supporting Term Lenders into (i) newly issued shares of Common Stock representing 97% of the Company’s outstanding shares after giving effect to such issuance (and without giving effect to dilution by the New Warrants and MIP) and (ii) $20 million of term loans under a new approximately $51.2 million term loan facility, each on a pro rata basis based on their holdings of existing term loans;

•

the distribution by the Company to its existing common stockholders of the New Warrants;

•

the entry into the New Term Facility, of which (i) $30 million will be funded with new cash proceeds from the Supporting Term Lenders and $20 million will be issued in exchange for existing term loans held by the Supporting Term Lenders as described above and (ii) an approximate $1.2 million senior secured term loan tranche in respect of existing term loans held by lenders who are not Supporting Term Lenders;

•

the entry into the New ABL Facility;

•

the adoption of the MIP representing up to 9% of the Company’s outstanding shares after giving effect to the issuance of new shares pursuant to the Restructuring; and

•

certain changes to the Company’s governance, including changes to the Board, amendments to the Company’s governing documents and the entry into the Stockholders Agreement.

Q.

Why did the Company enter into the RSA?

A.

Market conditions, coupled with our large outstanding debt obligations, have diminished our cash position and capital resources and raised substantial doubt about our ability to continue as a going concern. As a result, we entered into the RSA with the Supporting Term Lenders because we are no longer able to support our substantial debt obligations, and the related Forbearance Agreements expire on January 31, 2020. The Restructuring contemplated by the RSA provides for out-of-court transactions that will effectuate a financial restructuring of the Company’s capital structure and indebtedness and related facilities.

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Q.

What will be the effect of the Reverse Stock Split Proposal?

A.

Once the Reverse Stock Split Proposal is approved, the proposal will become effective upon the filing of the Restated Charter with the Secretary of State of the State of Delaware. At such time, every fifty shares of Common Stock issued and outstanding immediately prior to filing of the Restated Charter will be combined and converted, automatically and without any further action on the part of the stockholders, into one share of our Common Stock.

Q.

How will fractional shares resulting from the Reverse Stock Split Proposal be treated?

A.

The Company does not intend to issue fractional shares in connection with the reverse stock split. To the extent the reverse stock split would result in a stockholder being entitled to a fraction of a share, such fractional share will be rounded up to the nearest whole share of Common Stock.

Q.

How will the Reverse Stock Split Proposal impact the voting rights of stockholders?

A.

The reverse stock split will affect all of our stockholders uniformly and, in and of itself, will not change any stockholders percentage ownership interest in the Company, except to the extent that the reserve stock split results in fractional shares (in which case, the stockholder will be given one share of Common Stock for such stockholders’ fractional share). Notwithstanding the foregoing, the reverse stock split will be implemented in connection with the Restructuring pursuant to which Supporting Term Lenders are expected to be issued 97% of the outstanding shares of Common Stock.

Q.

When do you expect the Restructuring to be completed?

A.

The Company currently expects to complete the restructuring by the end of February 2020.

Q.

What are we asking you to approve?

A.

At the Special Meeting, our stockholders will be asked to consider and vote upon the following thirteen proposals:

•

Proposal ONE: To approve the Reverse Stock Split Proposal;

•

Proposal TWO: To approve the Increase in Number of Authorized Shares Proposal;

•

Proposal THREE: To approve the Board Size Proposal;

•

Proposal FOUR: To approve the Director Nomination Proposal;

•

Proposal FIVE: To approve the Board Vacancies Proposal;

•

Proposal SIX: To approve the Stockholder Written Consent Proposal;

•

Proposal SEVEN: To approve the Special Meeting Proposal;

•

Proposal EIGHT: To approve the Removal of Certain Non-Soter Stockholder Approval Rights Proposal;

•

Proposal NINE: To approve the Stockholder Supermajority Approval Proposal;

•

Proposal TEN: To approve the Amendment of Bylaws Proposal;

•

Proposal ELEVEN: To approve the Forum Selection Clause Proposal;

•

Proposal TWELVE: To approve the Delaware Section 203 Proposal; and

•

Proposal THIRTEEN: To approve the Amendment and Restatement Proposal.

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Q.

Who is entitled to vote at the Special Meeting?

A.

Only stockholders of record holding Common Stock on the Record Date are entitled to vote at the Special Meeting. On the Record Date, there were [●] shares of Common Stock held by [●] stockholders of record.

Q.

How many votes do I have?

A.

Each share of Common Stock outstanding on the Record Date entitles the holder to one vote on each proposal at the Special Meeting.

Q.

What are the Board’s recommendations?

A.

The Board recommends that you vote FOR each of proposals ONE through THIRTEEN.

Q.

What is the quorum requirement?

A.

The presence at the Special Meeting, whether in person or by valid proxy, of the persons holding a majority of shares of Common Stock outstanding on the Record Date will constitute a quorum, permitting us to conduct our business at the Special Meeting. On the Record Date, there were [●] shares of Common Stock held by [●] stockholders of record.

Q.

What vote is required to approve each proposal?

A.

Each of the proposals in this Proxy Statement requires the affirmative vote of a majority of the shares of Common Stock entitled to vote at the Special Meeting.

As of the Record Date, Soter beneficially owned 10,309,609 shares of our Common Stock representing approximately 50.2% of the outstanding shares, and affiliates of Soter have appointed five of our directors. As part of the RSA, Soter has agreed to vote the shares owned by Soter in favor of the Restructuring, including each of the proposals to be presented at the Special Meeting and, accordingly, proposals ONE through THIRTEEN will be approved.

Q.

How do I vote?

A.

If on the Record Date you hold shares of our Common Stock that are represented by stock certificates or registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, you are considered the stockholder of record with respect to those shares. As a stockholder of record, you may vote in person at the Special Meeting or by proxy. Whether or not you plan to attend the Special Meeting, we urge you to vote your shares by signing, dating and returning the enclosed proxy card in the enclosed postage-paid envelope or via the internet or by telephone by following the instructions included in this Proxy Statement.

If on the Record Date you hold shares of our Common Stock in an account with a brokerage firm, bank or other nominee, then you are a beneficial owner of the shares and hold such shares in “street name,” and these proxy materials will be forwarded to you by that organization. As a beneficial owner, you have the right to direct your broker, bank or other nominee on how to vote the shares held in their account, and the nominee has enclosed or provided voting instructions for you to use in directing it how to vote your shares. The nominee that holds your shares, however, is considered the stockholder of record for purposes of voting at the Special Meeting. Because you are not the stockholder of record, you may not vote your shares in person at the Special Meeting unless you bring to the Special Meeting a letter from your broker, bank or other nominee confirming your beneficial ownership of the shares as of the Record Date. Whether or not you plan to attend the Special Meeting, we urge you to vote by following the voting instructions provided to you to ensure that your vote is counted.

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Q.

May I change my vote?

A.

Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before its use by (1) delivering a written notice of revocation addressed to Key Energy Services, Inc., Attn: General Counsel, 1301 McKinney Street, Suite 1800, Houston, Texas 77010, (2) duly executing a proxy bearing a later date, (3) voting again by Internet or by telephone or (4) attending the Special Meeting and voting in person. Your last vote or proxy will be the vote or proxy that is counted. Attendance at the Special Meeting will not cause your previously granted proxy to be revoked unless you vote or specifically so request.

Q.

What happens if I do not provide instructions how to vote?

A.

A proxy that is properly completed and submitted will be voted at the Special Meeting in accordance with the instructions on the proxy. If you properly execute and submit a proxy, but do not provide any voting instructions, your shares will be voted FOR proposals ONE through THIRTEEN.

Q.

Will I have appraisal or dissenters rights?

A.

Under Delaware law, our Existing Charter and our bylaws, no appraisal or dissenters’ rights are available to our stockholders in connection with the RSA or the Restructuring regardless how they vote (or abstain from voting on) on proposals ONE through THIRTEEN.

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CAUTIONARY STATEMENTS REWARDING FORWARD-LOOKING STATEMENTS

In addition to statements of historical fact, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-looking statements. These “forward-looking statements” are based on our current expectations, estimates and projections about the Company and its wholly owned and controlled subsidiaries, our industry and management’s beliefs and assumptions concerning future events and financial trends affecting our financial condition and results of operations. In some cases, you can identify these statements by terminology such as “may,” “will,” “should,” “predicts,” “expects,” “believes,” “anticipates,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statements are only predictions and are subject to substantial risks and uncertainties and are not guarantees of performance. Future actions, events and conditions and future results of operations may differ materially from those expressed in these statements.

We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Proxy Statement except as required by law. All of our written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements.

Important factors that may affect our expectations, estimates or projections include, but are not limited to, the following:

•

failure to agree on final terms and documentation implementing the Restructuring under the RSA or the termination of the RSA;

•

our ability to retain employees, customers or suppliers as a result of our financial condition generally or the announcement of the RSA and the Restructuring;

•

our inability to achieve the potential benefits of the Restructuring;

•

conditions in the services and oil and natural gas industries, especially oil and natural gas prices and capital expenditures by oil and natural gas companies;

•

our ability to achieve the benefits of cost-cutting initiatives, including our plan to optimize our geographic footprint, including exiting certain locations and reducing our regional and corporate overhead costs;

•

our ability to implement price increases or maintain pricing on our core services;

•

risks that we may not be able to reduce, and could even experience increases in, the costs of labor, fuel, equipment and supplies employed in our businesses;

•

industry capacity;

•

asset impairments or other charges;

•

the low demand for our services and resulting operating losses and negative cash flows;

•

our highly competitive industry as well as operating risks, which are primarily self-insured, and the possibility that our insurance may not be adequate to cover all of our losses or liabilities;

•

significant costs and potential liabilities resulting from compliance with applicable laws, including those resulting from environmental, health and safety laws and regulations, specifically those relating to hydraulic fracturing, as well as climate change legislation or initiatives;

•

our historically high employee turnover rate and our ability to replace or add workers, including executive officers and skilled workers;

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•

our ability to implement technological developments and enhancements;

•

severe weather impacts on our business, including from hurricane activity;

•

our ability to successfully identify, make and integrate acquisitions and our ability to finance future growth of our operations or future acquisitions;

•

our ability to achieve the benefits expected from disposition transactions;

•

the loss of one or more of our larger customers;

•

our ability to generate sufficient cash flow to meet debt service obligations;

•

the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt, including our ability to comply with covenants under our debt agreements;

•

an increase in our debt service obligations due to variable rate indebtedness;

•

our inability to achieve our financial, capital expenditure and operational projections, including quarterly and annual projections of revenue and/or operating income and the possibility of our inaccurate assessment of future activity levels, customer demand,

•

pricing stability which may not materialize (whether for the Company as a whole or for geographic regions and/or business segments individually);

•

our ability to respond to changing or declining market conditions, including our ability to reduce the costs of labor, fuel, equipment and supplies employed and used in our businesses;

•

our ability to maintain sufficient liquidity; and

•

adverse impact of litigation.

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PROPOSAL ONE: Reverse Stock Split Proposal

Approval of the Reverse Stock Split Proposal would authorize an amendment to the Existing Charter to effect a reverse stock split of the Common Stock, at a reverse split ratio of 1-for-50 (the “Reverse Stock Split”), substantially concurrently with the consummation of the Restructuring. The Reverse Stock Split will have no effect on the par value per share of the Common Stock, but will have the effect of reducing the number of issued and outstanding shares of Common Stock by the 1-for-50 ratio. No fractional shares of Common Stock will be issued in connection with the Reverse Stock Split, and instead, the Company will issue one full share of Common Stock to any stockholder who would have been entitled to receive a fractional share of Common Stock.

The completion of the Restructuring would result in the issuance of a number of shares of Common Stock that would constitute the vast majority of our outstanding shares. Specifically, upon completion of the Restructuring, the Supporting Term Lenders are expected to own 97% of the outstanding shares of Common Stock after giving effect to such issuance, and holders of existing shares of Common Stock are expected to hold 3% of the Common Stock of the Company, in each case subject to potential dilution as a result of the New Warrants and the MIP. In addition, after giving effect to the Reverse Stock Split, the Restructuring contemplated by the RSA will require [●] shares to be reserved for issuance pursuant to the New Warrants and [●] shares to be reserved for issuance pursuant to the MIP. While the Increase in Number of Authorized Shares Proposal (described below) would give us enough authorized, unissued and unreserved shares of Common Stock for these purposes, absent the Reverse Stock Split we would be required to issue an extremely large number of shares of Common Stock.

In addition, as described above under “Background,” on December 23, 2019, our Common Stock was delisted from the NYSE. Our Common Stock is currently quoted on the over the counter (OTC) market. In order for our Common Stock to be relisted on the NYSE or another securities exchange, we would be required to satisfy various listing standards. For example, the NYSE listing standard requires companies to have a minimum stock price of $4.00. A decrease in the number of outstanding shares of our Common Stock resulting from the Reverse Stock Split and in connection with the Restructuring could, absent other factors, assist in ensuring that the per share market price of our Common Stock meets such minimum requirements.

The parties to the RSA have agreed to amend the Existing Charter to implement the Reverse Stock Split Proposal so as to lower the overall number of shares of Common Stock that we would otherwise have outstanding after the Restructuring. The changes contemplated by this proposal ONE are necessary to implement these governance changes. The proposed form of such amendment is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Effect of the Reverse Stock Split on our Common Stock

As a result of the Reverse Stock Split, every fifty shares of existing Common Stock will be combined into one share of Common Stock. The approximate number of outstanding shares of Common stock that would result from the 1-for-50 reverse stock split ratio (without giving effect to fractional shares), based on [●] shares of Common Stock issued and outstanding as of the Record Date (and without giving effect to the Restructuring), would be [●]. Following the Reverse Stock Split, and after giving effect to the issuance of new shares pursuant to the Restructuring, the approximate number of outstanding shares of Common Stock will be [●], of which the Supporting Term Lenders will hold 97%.

The Reverse Stock Split will affect all existing holders of our Common Stock uniformly and will not in and of itself change any stockholder’s percentage ownership interest in the Company, except to the extent that the Reverse Stock Split would otherwise result in any of our stockholders owning a fractional share (in which case the fractional amount will be rounded up to the next whole share). Following the Reverse Stock Split, shares of our Common Stock will have the same voting rights and rights to dividends and distributions and will be identical in all other respects to Common Stock now authorized.

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While the Reverse Stock Split will result in an increase in the number of authorized but unissued shares of our Common Stock, the Reverse Stock Split is not being recommended in response to any specific effort of which we are aware to obtain to control of us, nor do we have the intention of using the additional shares for anti-takeover purposes, although we could theoretically use the additional shares to make more difficult or to discourage an attempt to acquire control of the Company.

Notwithstanding the decrease in the number of outstanding shares following the Reverse Stock Split, the Board does not intend for this transaction to be the first step in a “going private transaction” within the meaning of Rule 13e-3 of the Exchange Act. Since all fractional shares of Common Stock resulting from the Reverse Stock Split will be rounded up to the nearest whole share, there will be no reduction in the number of stockholders of record and the Company will not be purchasing fractional interests created by the Reverse Stock Split.

Procedures for Effecting the Reverse Stock Split

The Reverse Stock Split will become effective automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring (the “Effective Date”). On the Effective Date, every fifty shares of Common Stock issued and outstanding immediately prior to the Effective Date will be combined and converted, automatically and without any further action on the part of the stockholders, into one share of our Common Stock. No fractional shares of Common Stock will be issued in connection with the Reverse Stock Split, however, the Company will issue one full share of Common Stock to any stockholder who would have been entitled to receive a fractional share of Common Stock.

Vote Required

Approval of this proposal ONE requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Reverse Stock Split Proposal.

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PROPOSAL TWO: Increase in Number of Authorized Shares Proposal

Currently, the Existing Charter authorizes us to issue up to 110 million shares of stock, consisting of 100 million shares of Common Stock and 10 million shares of our preferred stock. As of the Record Date, [●] shares of our Common Stock and one share of our Series A Preferred Stock were issued and outstanding, and [●] shares of our Common Stock were reserved for issuance. After giving effect to the Reverse Stock Split, [●] shares of our Common Stock will be issued and outstanding and [●] shares of our Common Stock will be reserved for issuance. Soter, the sole holder of the Series A Preferred Stock, will grant a written consent in connection with deleting the provisions in the Existing Charter designating the rights and preferences of the Series A Preferred Stock which is being redeemed and cancelled at no cost in connection with the Restructuring. In connection with the Restructuring, and as consideration for the cancellation of the outstanding principal and accrued interest of the Term Loan Facility and subject to the stockholder approval contemplated hereby, we will issue to the Supporting Term Lenders [●] million shares of Common Stock, after giving effect to the Reverse Stock Split Proposal. In addition, after giving effect to the Reverse Stock Split, the Restructuring contemplated by the RSA will require [●] shares to be reserved for issuance pursuant to the New Warrants and [●] shares to be reserved for issuance pursuant to the MIP. While the Reverse Stock Split Proposal would provide us with enough authorized, unissued and unreserved shares of Common Stock for these purposes, we are asking you to approve an amendment to the Existing Charter to increase the number of authorized shares of Common Stock from 100 million to 150 million and the authorized shares of our preferred stock from 10 million to 50 million.

The availability of authorized but unissued shares beyond that required in connection with the Restructuring will provide the Company flexibility to issue additional common equity without further approval of the Company’s stockholders. The Board believes this flexibility is appropriate for the post-Restructuring needs of the Company. We have not proposed the increase in the authorized number of shares of Common Stock with the intention of using the additional shares for anti-takeover purposes, although we could theoretically use the additional shares to make more difficult or to discourage an attempt to acquire control of the Company.

The parties to the RSA agreed that the Restated Charter would provide for an increased number of authorized shares of Common Stock from 100 million to 150 million and an increased number of authorized shares of preferred stock from 10 million to 50 million. The changes contemplated by this proposal TWO are necessary to implement these governance changes. The proposed form of such amendment is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal TWO requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Increase in Number of Authorized Shares Proposal.

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PROPOSAL THREE: Board Size Proposal

Currently, the Existing Charter names the initial slate of directors and provides that the size of the Board is as determined pursuant to the Company’s bylaws subject to certain designation rights granted to the holder of the Series A Preferred Stock, as described below under “Proposal Four: Director Nomination Proposal”. Approval of the Board Size Proposal would authorize an amendment to the Existing Charter to provide that the number of directors on the Board will initially be fixed at seven and that thereafter the size of the Board will be fixed exclusively by resolution of the Board. In addition, the Board Size Proposal will eliminate provisions listing the initial directors by name.

The parties to the RSA have agreed that at the completion of the Restructuring the Board will consist of seven directors, comprised of: the CEO, one non-independent director selected by Soter and five directors who will meet the “independent director” requirements set forth in Section 303A of the NYSE Listed Company Manual and be selected by the Supporting Term Lenders. The changes contemplated by this proposal THREE are necessary to implement these governance changes. The proposed form of such amendments is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal THREE requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Board Size Proposal.

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PROPOSAL FOUR: Director Nomination Proposal

Currently, the Existing Charter establishes the Company’s Series A Preferred Stock which gives Soter the ability to appoint a majority of the Board and further provides that Soter-appointed “Super Voting Directors” may cast two votes, rather than one vote in all manners. Approval of the Director Nomination Proposal would authorize an amendment to the Existing Charter to provide that, subject to the Stockholders Agreement, directors will be nominated in accordance with the Company’s bylaws and to eliminate the provisions establishing the Company’s Series A Preferred Stock and the concept of Super Voting Directors.

Pursuant to the RSA, the parties have agreed to enter into the Stockholders Agreement which will grant the Supporting Term Lenders certain board nomination rights based on their ongoing percentage ownership. Supporting Term Lenders holding more the 25% of the Company’s outstanding shares as of the closing of the Restructuring will be entitled to nominate two directors and Supporting Term Lenders holding between 10% and 25% of the Company’s outstanding shares as of the closing of the Restructuring will be entitled to nominate one director, each of whom will have one vote. All future nominees of Supporting Term Lenders, other than Soter nominees, must meet the “independent director” requirements set forth in Section 303A of the NYSE Listed Company Manual. During the time that Soter holds between 10% and 25% of the Company’s outstanding shares as of the closing of the Restructuring, Soter will be entitled to nominate one non-independent director to the Board. The changes contemplated by this proposal FOUR are necessary to implement these governance changes. The proposed form of such amendments is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal FOUR requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Director Nomination Proposal.

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PROPOSAL FIVE: Board Vacancies Proposal

Currently, the Company’s bylaws provide that vacancies on the Board may be filled by directors holding a majority of the total votes held by directors then in office (although less than a quorum). Approval of the Board Vacancies Proposal would authorize an amendment to the Existing Charter to provide that, subject to the Stockholders Agreement, vacancies on the Board resulting from death, resignation, removal or otherwise, and newly created directorships resulting from any increase in the number of directors, will be filled solely by a majority of directors then in office (although less than a quorum) or by the sole remaining director. The Stockholders Agreement is expected to provide that any vacancies left by any director designated or nominated by a Supporting Term Lender will be filled such Supporting Term Lender. Under Delaware law, bylaws can be amended by stockholders without action of the board of directors. Because vacancies will be governed by the Revised Charter and not the Company’s bylaws, the implementation of the Board Vacancies Proposal would prevent stockholders from filling vacancies without the approval of the Board. As such, this proposal may have an anti-takeover effect in that a person seeking to increase the size of the Board and add directors supportive of an acquisition of the Company may not unilaterally do so.

The parties to the RSA agreed that the Restated Charter would provide that, subject to the Stockholders Agreement, vacancies on the Board resulting from death, resignation, removal or otherwise, and newly created directorships resulting from any increase in the number of directors, will be filled solely by a majority of directors then in office (although less than a quorum) or by the sole remaining director. The changes contemplated by this proposal FIVE are necessary to implement these governance changes. The proposed form of such amendments is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal FIVE requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Board Vacancies Proposal.

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PROPOSAL SIX: Stockholder Written Consent Proposal

Currently, any action required by law to be taken at any annual or special meeting of stockholders of the Company, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting if consents in writing, setting forth such action so taken, are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Approval of the Stockholder Written Consent Proposal would authorize an amendment to the Existing Charter that would provide that stockholders may act by written consent only when the Supporting Term Lenders and their Permitted Transferees (to be defined in the Stockholders Agreement) collectively hold more than 50% of the Company’s outstanding shares of Common Stock. The implementation of the Stockholder Written Consent Proposal may have an anti-takeover effect in that, following such time as the Supporting Term Lenders and their Permitted Transferees cease to hold the requisite percentages of shares, a person seeking to change the composition of the Board to include directors supportive of an acquisition of the Company or to implement other changes to the Restated Charter conducive to an acquisition of the Company may be required to wait until our next annual meeting before presenting such action to our stockholders.

The parties to the RSA agreed that the Restated Charter would permit stockholders to act by written consent only when Supporting Term Lenders and their Permitted Transferees collectively hold more than 50% of the Company’s outstanding shares of Common Stock. The changes contemplated by this proposal SIX are necessary to implement such governance changes. The proposed form of such amendment is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal SIX requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Stockholder Written Consent Proposal.

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PROPOSAL SEVEN: Special Meeting Proposal

Currently, the Existing Charter expressly provides that stockholders are not entitled to call, or to require that the Board call, a special meeting of the stockholders. Approval of the Special Meeting Proposal would authorize an amendment to the Existing Charter that would provide that stockholders could call a special meeting only when the Supporting Term Lenders and their Permitted Transferees collectively hold more than 50% of the Company’s outstanding shares of Common Stock.

The parties to the RSA agreed that the Restated Charter would permit stockholders to call a special meeting so long as Supporting Term Lenders and their Permitted Transferees collectively hold more than 50% of the Company’s outstanding shares of Common Stock. The changes contemplated by this proposal SEVEN are necessary to implement such governance changes. The proposed form of such amendment is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal SEVEN requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Special Meeting Proposal.

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PROPOSAL EIGHT: Removal of Certain Non-Soter Stockholder Approval Rights Proposal

Currently, the Existing Charter provides that the affirmative vote of a majority of all outstanding shares of Common Stock held by stockholders of the Company other than Soter is required to approve certain amendments to the Existing Charter or our bylaws unless such amendments are approved by the Board in accordance with our bylaws. Approval of the Removal of Certain Non-Soter Stockholder Approval Rights Proposal would authorize an amendment to the Existing Charter that would remove these special stockholder approval rights. Upon consummation of the Restructuring, Soter will hold [●]% of the outstanding Common Stock, and thus, the protections for non-Soter stockholders are no longer necessary. If the changes contemplated by this proposal are implemented, amendments to our charter and bylaws will be governed by Delaware law and as described below under “Proposal Nine: Supermajority Stockholder Approval Rights Proposal” and “Proposal Ten: Amendment of Bylaws Proposal”.

The parties to the RSA agreed that the Restated Charter would eliminate these protections for non-Soter stockholders. The changes contemplated by this proposal EIGHT are necessary to implement such governance changes. The proposed form of such amendment is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal EIGHT requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Removal of Certain Non-Soter Stockholder Approval Rights.

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PROPOSAL NINE: Stockholder Supermajority Approval Proposal

Currently, Delaware law and the Company’s bylaws govern the vote of stockholders required to amend our Existing Charter. These provisions generally provide that the Existing Charter may be amended upon the affirmative vote of a majority of the shares of Common Stock entitled to vote on such amendment, subject to certain non-Soter approval rights described under “Proposal Eight: Removal of Certain Non-Soter Stockholder Approval Rights Proposal” and certain provisions requiring supermajority Board action under the Company’s bylaws. Approval of the Stockholder Supermajority Approval Proposal would authorize an amendment to the Existing Charter that would provide that the provisions set forth in the following Articles of the Restated Charter may not be repealed or amended in any respect, and no other provision may be adopted, amended or repealed which would have the effect of modifying or permitting the circumvention of such provisions, unless such action is approved by the affirmative vote of not less than 66 2/3% of the total voting power of all outstanding classes of securities of the Company generally entitled to vote in the election of directors, voting together as one class:

•

Article 4(B) (relating to the voting rights of holders of Common Stock);

•

Article 5 (relating to threshold required to amend the Company’s bylaws);

•

Article 6 (relating to size of the Board, term of board members, manner of director election and Board vacancies);

•

Article 7 (relating to meetings of the stockholders and stockholder action by written consent);and

•

Article 10 (related to amendments and Section 203 (as defined below)).

The supermajority vote provisions will enhance the likelihood of continued stability in the composition of our Board and its policies and may discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to reduce our vulnerability to hostile takeovers and to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and may have the effect of delaying changes in our control or management.

The parties to the RSA agreed that the Restated Charter would require a super-majority vote of the stockholders to amend the applicable provisions of the Restated Charter. The changes contemplated by this proposal NINE are necessary to implement such governance changes. The proposed form of such amendment is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal NINE requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Stockholder Supermajority Approval Proposal.

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PROPOSAL TEN: Amendment of Bylaws Proposal

Currently, subject to certain non-Soter approval rights described above under “Proposal Eight: Removal of Certain Non-Soter Stockholder Approval Rights Proposal” and certain provisions requiring supermajority Board action under the Company’s bylaws, stockholders may amend the Company’s bylaws by the majority vote of the stockholders present in person or represented by proxy at a meeting where a quorum is present. Upon consummation of the Restructuring, Soter will hold [●]% of the outstanding Common Stock, and thus, the protections for non-Soter stockholders and the supermajority requirement are no longer necessary. Approval of the Amendment of Bylaws Proposal would authorize an amendment to the Existing Charter that would provide that stockholders may amend the Company’s bylaws only with the affirmative vote of the holders of not less than 50.1% of the voting power of all outstanding securities of the Company generally entitled to vote in the election of directors. This change would have the effect of increasing the vote required for stockholder amendments to the Company’s bylaws and, by including the provision in the Restated Charter instead of the Company’s bylaws, preventing the stockholders from changing the required voting threshold without action of the Board. This change may have an anti-takeover effect in that a person seeking to amend the Company’s bylaws in a manner designed to facilitate a takeover of the Company must achieve a higher level of support from the Company’s stockholders to approve such amendment and the stockholders may not lower this required threshold without action by the Board.

The parties to the RSA agreed that the Restated Charter would provide that stockholders may amend the Company’s bylaws only with the affirmative vote of the holders of not less than 50.1% of the voting power of all outstanding securities of the Company generally entitled to vote in the election of directors. The changes contemplated by this proposal TEN are necessary to implement such governance changes. The proposed form of such amendment is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal TEN requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Amendment of Bylaws Proposal.

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PROPOSAL ELEVEN: Forum Selection Clause Proposal

Currently, the Company’s bylaws, rather than the Existing Charter, provide that the Chancery Court of the State of Delaware will be the exclusive forum for certain derivative, fiduciary and similar actions. The parties to the RSA have agreed to amend the Existing Charter to add a similar exclusive forum selection provision with respect to certain derivative, fiduciary and similar actions. Approval of the Forum Selection Proposal would authorize an amendment to the Existing Charter that would provide that, unless the Company consents to an alternative forum, the exclusive forum for specific legal actions in which the Company is involved will be in the Chancery Court of the State of Delaware. The specified actions include:

•

any derivative action or proceeding brought on behalf of the Company;

•

any action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the Company’s stockholders;

•

any action asserting a claim arising pursuant to any provision of the General Corporation Law of the State of Delaware (the “DGCL”) or of the Restated Charter or Company’s bylaws; or

•

any action asserting a claim against the Company or any director or officer of the Company governed by the internal affairs doctrine.

This provision would not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended, or any other claim for which the U.S. federal courts have exclusive jurisdiction. These provisions will provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such exclusive-forum provision.

The DGCL specifically authorizes Delaware corporations to adopt exclusive forum provisions in their charters or bylaws. The Board believes that the Company and its stockholders benefit from having intra-corporate disputes litigated in Delaware, where the Company is incorporated and whose laws govern such disputes. A forum selection provision is intended to provide a streamlined, efficient and organized process for resolution of such disputes, and addresses plaintiff forum shopping and the related practice of filing parallel lawsuits in multiple jurisdictions. However, a forum selection provision may have the effect of limiting a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or employees, which may discourage lawsuits against us and our directors, officers and employees. In addition, because the Company’s exclusive forum provision will be governed by the Revised Charter and not the Company’s bylaws, the implementation of the Forum Selection Clause Proposal would prevent stockholders from amending this provision without the approval of the Board.

The parties to the RSA agreed that the forum selection provision will be included in the Revised Charter. The changes contemplated by this proposal ELEVEN are necessary to implement these governance changes. The proposed form of such amendment is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal ELEVEN requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

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This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Forum Selection Clause Proposal.

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PROPOSAL TWELVE: Delaware Section 203 Proposal

Currently, the Company is subject to Section 203 of the DGCL (“Section 203”). Section 203 generally prohibits certain public companies from entering into a business combination (including a merger, sale of assets or transfer of stock) with an “interested stockholder” for a period of three years after the person becomes an interested stockholder, unless certain conditions apply. An “interested stockholder” is defined as a person or group of persons who beneficially acquire 15% or more of the outstanding voting stock of the corporation. Section 203 does not apply if the corporation’s board of directors preapproves the transaction by which a stockholder becomes an interested stockholder, or if, at or subsequent to the time the business combination with an interested stockholder is approved by the board of directors and it is authorized at a stockholder meeting by an affirmative two-thirds vote of the corporation’s outstanding voting stock of a corporation (excluding the stock held by the interested stockholder). Further, a stockholder who acquires 85% or more of the voting stock of a corporation (subject to certain exceptions) in the first transaction in which it becomes an interested stockholder is not subject to the three-year waiting period for any subsequent business combination. A Delaware corporation may amend its certificate of incorporation to “opt out” of Section 203’s anti-takeover protection.

Approval of the Delaware Section 203 Proposal would authorize an amendment to the Existing Charter that would provide that the Company elects to not be governed by Section 203, so long as the Supporting Term Lenders and their Permitted Transferees collectively hold more than 50% of the Common Stock of the Company. Accordingly, the protections provided by Section 203 with respect to transactions with interested stockholders would not apply, so long as the Supporting Term Lenders and their Permitted Transferees collectively hold more than 50% of the Common Stock of the Company, including in connection with a transaction with a Supporting Term Lender.

The parties to the RSA agreed that the Company would elect not to be governed by Section 203, so long as the Supporting Term Lenders and their Permitted Transferees collectively hold more than 50% of the Common Stock of the Company. The changes contemplated by this proposal TWELVE are necessary to implement these governance changes. The proposed form of such amendment is included in the proposed Restated Charter attached as Exhibit A to this Proxy Statement.

Vote Required

Approval of this proposal TWELVE requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Delaware Section 203 Proposal.

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PROPOSAL THIRTEEN: Amendment and Restatement Proposal

In addition to the other proposed amendments to the Existing Charter described in Proposals ONE through TWELVE, we are also proposing to amend and restate the Existing Charter to implement other incidental changes in connection with the Restructuring contemplated by the RSA, as reflected in the form of Restated Charter attached hereto as Exhibit A. We believe that none of these additional amendments would materially affect the rights or preferences of our stockholders.

Vote Required

Approval of this proposal THIRTEEN requires the affirmative vote of a majority of the shares of Common Stock entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have the same effect as a negative vote.

This proposal will be implemented automatically upon the filing of the Restated Charter with the Secretary of State of the State of Delaware substantially concurrently with the consummation of the Restructuring.

Recommendation

LOGO

The Board unanimously recommends that stockholders vote FOR the Amendment and Restatement Proposal.

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Security Ownership of Certain Beneficial Owners and Management

Stock Ownership of Certain Beneficial Owners and Management

This section provides information about the beneficial ownership of our Common Stock by our directors and executive officers. The number of Common Stock beneficially owned by each person is determined under the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 days through the exercise of any stock options or other rights. Unless otherwise indicated, each person has sole investment and voting power, or shares such power with his or her spouse, with respect to the shares set forth in the following table. The inclusion in this table of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares.

The address for each person identified below is care of Key Energy Services, Inc., 1301 McKinney Street, Suite 1800, Houston, Texas 77010.

Throughout this Proxy Statement, the individuals who served as our Principal Executive Officer and Principal Financial Officer during fiscal year 2019, and each of our other most highly compensated executive officers that are required to be in our executive compensation disclosures in fiscal year 2019, are referred to as the “Named Executive Officers” or “NEOs.”

Set forth below is certain information with respect to beneficial ownership of our Common Stock as of January 24, 2020 by each of our NEOs, each of our directors, as well as the directors and all executive officers as a group:

Name of Beneficial Owner

Total
Beneficial
Ownership (1)
Percent of
Outstanding
Shares (2)

Non-Management Directors:

Scott D. Vogel (3)

94,718 *

Sherman K. Edmiston III

35,343 *

H.H. Tripp Wommack III

34,386 *

Steven H. Pruett

63,343 *

Paul Bader (4)

20,833

Bryan Kelln

— *

Jacob Kotzubei

— *

Philip Norment

— *

Mary Ann Sigler

— *

Named Executive Officers:

Robert J. Saltiel (5)

83,720

J. Marshall Dodson (6)

302,989 *

Scott P. Miller (7)

23,696 *

Katherine I. Hargis (8)

127,763 *

Louis Coale (9)

48,890 *

Current Directors and Executive Officers as a group (11 Persons):

3.1 %

*

Less than 1%

(1)

Includes all shares with respect to which each director or executive officer directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares the power to vote or to direct voting of such shares and/or the power to dispose or to direct the disposition of such shares. Includes shares that may be purchased under stock options and/or warrants that are exercisable currently or within 60 days after January 24, 2020.

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(2)

An individual’s percentage ownership of Common Stock outstanding is based on 20,549,492 shares of our common stock outstanding as of January 24, 2020. Shares of Common Stock subject to stock options and warrants currently exercisable or exercisable within 60 days, are deemed outstanding for purposes of the percentage ownership of the person holding such securities but are not deemed outstanding for computing the percentage ownership of any other person.

(3)

Effective April 26, 2019, Scott Vogel resigned from the Board.

(4)

Includes 5,208 unvested restricted stock units.

(5)

Effective December 30, 2019, Robert Saltiel resigned as CEO of the Company and from the Board.

(6)

Includes 167,173 unvested restricted stock units.

(7)

Effective April 1, 2019, Scott Miller resigned. Includes 3,632 shares of Common Stock issuable upon the exercise of warrants.

(8)

Includes 69,165 unvested restricted stock units.

(9)

Includes 35,833 unvested restricted stock units.

The following table sets forth certain information regarding the beneficial ownership of Common Stock by each person, other than our directors or executive officers, who is known by us to beneficially own more than 5% of the outstanding shares of our Common Stock.

Shares Beneficially
Owned
Name and Address of Beneficial Owner Number Percent

Soter Capital, LLC (1)

360 North Crescent Drive, South Building

Beverly Hills, CA 90210

10,309,609 50.2 %

Contrarian Capital Management, L.L.C. (2)

411 West Putnam Avenue, Suite 425

Greenwich, CT 06830

1,903,736 9.3 %

Rutabaga Capital Management (3)

64 Broad Street, 3rd Floor

Boston, MA 02109

1,878,398 9.1 %

(1)

Number of shares beneficially owned is based solely on a Schedule 13D/A filed with the SEC on March 18, 2019 on behalf of each of: (i) Soter Capital, LLC, a Delaware limited liability company, (ii) Soter Capital Holdings, LLC, a Delaware limited liability company, (iii) PE Soter Holdings, LLC, a Delaware limited liability company, (iv) Platinum Equity Capital Soter Partners, L.P., a Delaware limited partnership, (v) Platinum Equity Partners III, LLC, a Delaware limited liability company, (vi) Platinum Equity Investment Holdings III, LLC, a Delaware limited liability company, (vii) Platinum Equity InvestCo, L.P., a Cayman Islands limited partnership, (viii) Platinum Equity Investment Holdings IC (Cayman), LLC, a Delaware limited liability company, (ix) Platinum InvestCo (Cayman), LLC, a Cayman Islands limited liability company (x) Platinum Equity Investment Holdings, LLC, a Delaware limited liability company, (xi) Platinum Equity Investment Holdings III Manager, LLC, a Delaware limited liability company, (xii) Platinum Equity, LLC, a Delaware limited liability company and (xiii) Tom Gores, an individual.

(2)

Number of shares beneficially owned is based solely on the Form 13F filed with the SEC on November 14, 2019 on behalf of Contrarian Capital Management, L.L.C.

(3)

Number of shares beneficially owned is based solely on the Form 13F filed with the SEC on November 14, 2019 on behalf of Rutabaga Capital Management.

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We have not made any independent determination as to the beneficial ownership of each stockholder, and are not restricted in any determination we may make by reason of inclusion of such stockholder or its shares in this table.

Section 16(A) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and persons who beneficially own more than 10% of a registered class of our equity securities, to file initial reports of ownership on Form 3 and changes in ownership on Forms 4 or 5 with the SEC. Such officers, directors and 10% stockholders also are required by SEC rules to furnish Key with copies of all Section 16(a) reports they file. Based solely on its review of the copies of such forms furnished or available to us, we believe that our directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements for the fiscal year ended December 31, 2019. In making these statements, we have relied upon an examination of the copies of Forms 3, 4 and 5, and amendments thereto, and the written representations of our directors, executive officers and 10% stockholders.

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OTHER MATTERS

Stockholder Proposals

The Company does not currently expect to hold a 2020 annual meeting of stockholders. In the event that the Company does hold an annual meeting, any stockholder of the Company who desired to submit a proposal for inclusion in the Company’s 2020 proxy materials must have been required to submit such proposal to the Company at its principal executive offices (Key Energy Services, Inc., 1301 McKinney Street, Suite 1800, Houston, Texas 77010, Attn: General Counsel) no later than November 16, 2019, unless the date of the 2020 annual meeting of stockholders is changed by more than 30 days from May 1, 2020, in which case the proposal must be received at the Company’s principal executive offices a reasonable time before the Company begins to print and mail its 2020 proxy materials. Any such stockholder proposal must meet the requirements set forth in Rule 14a-8. As of November 16, 2019, no such proposal had been received by the Company.

In addition, in the event the Company does hold an annual meeting, any stockholder of the Company who desired to submit a proposal for action at the 2020 annual meeting of stockholders, but does not wish to have such proposal included in the Company’s proxy materials, must have been required to submit such proposal to the Company at its principal executive offices (Key Energy Services, Inc., 1301 McKinney Street, Suite 1800, Houston, Texas 77010, Attn: General Counsel) between January 2, 2020 and the close of business on February 3, 2020. We will only consider proposals that meet the requirements of the applicable rules of the SEC and our bylaws. As of February  3, 2020, no such proposal had been received by the Company.

Solicitation of Proxies

Solicitation of proxies may be made via the Internet, by mail, personal interview or telephone by officers, directors and regular employees of the Company. The Company may also request banking institutions, brokerage firms, custodians, nominees and fiduciaries to forward solicitation material to the beneficial owners of the Common Stock that those companies or persons hold of record, and the Company will reimburse the forwarding expenses. The Company will bear all costs of solicitation.

Stockholder List

In accordance with the Delaware General Corporation Law, the Company will maintain at its corporate offices in Houston, Texas a list of the stockholders entitled to vote at the Special Meeting. The list will be open to the examination of any stockholder, for purposes germane to the Special Meeting, during ordinary business hours for ten days before the Special Meeting.

Availability of Certain Documents

This Proxy Statement may also refer to certain documents of the Company that are not presented herein or delivered herewith. Such documents are available without charge to any stockholder to whom this Proxy Statement is delivered, upon written request, to our General Counsel at:

Key Energy Services, Inc.

1301 McKinney Street, Suite 1800

Houston, Texas 77010

Attention: General Counsel

Stockholders residing in the same household may receive only one set of proxy materials. We will promptly deliver a separate copy of the proxy materials to such stockholders upon receipt of a written or oral request to our General Counsel at the address above, or by calling (713) 651-4300.

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If you hold your shares in street name and reside in a household that received only one copy of the proxy materials, you can request to receive a separate copy in the future by making a written or oral request to our General Counsel at the address above, or by calling (713) 651-4300. If your household is receiving multiple copies of the proxy materials, you may request that only a single set of materials be sent.

Important Notice Regarding the Availability of Proxy Materials for the Special Meeting of Stockholders to be held February [ ], 2020. The Proxy Statement is available at: [ ]

Other Matters

As of the date of this Proxy Statement, the Board does not intend to present any matters other than those described herein at the Special Meeting and is unaware of any matters to be presented by other parties. If other matters are properly brought before the meeting for action by the stockholders, proxies will be voted in accordance with the recommendation of the Board or, in the absence of such a recommendation, in accordance with the judgment of the proxy holder.

Directions to Annual Meeting

The Special Meeting of Stockholders will be held at [●].

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FINANCIAL INFORMATION

The following financial statements and related information of the Company are attached to this Proxy Statement as Exhibit B:

(i)

Audited consolidated balance sheets of the Company, as of December 31, 2018 and December 31, 2017, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the years then ended and the related notes;

(ii)

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2018 and 2017. Certain portions in this Section (ii) of this Exhibit B refer to items on our Annual Report on Form 10-K for the year ended December 31, 2018. See “Availability of Certain Documents” above;

(iii)

Condensed consolidated balance sheets of the Company, as of September 30, 2019 (unaudited) and December 31, 2018, and the related unaudited condensed consolidated statements of operations for the nine months ended September 30, 2019 and September 30, 2018, the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and September 30, 2018 and the related notes;

(iv)

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2019 and 2018. Certain portions in this Section (iv) of Exhibit B refer to items on our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019. See “Availability of Certain Documents” above; and

(v)

Quantitative and Qualitative Disclosures about Market Risk for the years ended December 31, 2018 and for the nine months ended September 30, 2019.

Representatives of the Company’s accountant, Grant Thornton LLP, will be present at the Special Meeting and will be given the opportunity to make a statement if they so desire and will be available to respond to any stockholder questions that may be asked.

OUR BOARD OF DIRECTORS ENCOURAGES STOCKHOLDERS TO ATTEND THE MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE OR VOTE OVER THE INTERNET OR BY TELEPHONE.

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Exhibit A

Restated Charter

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

KEY ENERGY SERVICES, INC.

ARTICLE 1.

NAME

The name of the corporation is Key Energy Services, Inc. (the “ Corporation ”).

ARTICLE 2.

REGISTERED OFFICE AND AGENT

The address of the Corporation’s registered office in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Corporation Trust Center, Wilmington, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.

ARTICLE 3.

PURPOSE AND POWERS

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware, as amended from time to time (the “ DGCL ”).

ARTICLE 4.

CAPITAL STOCK

(A)    Authorized Shares

(1) Classes of Stock. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 200,000,000 shares, of which 150,000,000 shares of the par value of $0.01 per share shall be designated as shares of common stock (“ Common Stock ”) and 50,000,000 shares of the par value of $0.01 per share shall be designated as shares of preferred stock (“ Preferred Stock ”). Effective as of the effective time of this Amended and Restated Certificate of Incorporation (the “ Effective Time ”), every 50 shares of Common Stock issued and outstanding immediately prior to the Effective Time shall, automatically and without any action on the part of the respective holders thereof, be combined and converted into one share of Common Stock without increasing or decreasing the par value of each share of Common Stock (the “ Reverse Split ”); provided, however, no fractional shares of Common Stock shall be issued in connection with the Reverse Split, and instead, the Corporation shall issue one full share of post-Reverse Split Common Stock to any stockholder who would have been entitled to receive a fractional share of Common Stock as a result of the Reverse Split. The Reverse Split shall occur whether or not the certificates representing such shares of Common Stock are surrendered to the Corporation or its transfer agent. The Reverse Split shall be effected on a record holder-by-record holder basis, such that any fractional shares of Common Stock resulting from the Reverse Split and held by a single record holder shall be aggregated.

(2) Preferred Stock. Shares of Preferred Stock may be issued in one or more series from time to time by the Board of Directors, and the Board of Directors is expressly authorized to fix by resolution or resolutions the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, of the shares of each series of Preferred Stock, including without limitation the following:

(a)

the distinctive serial designation of such series which shall distinguish it from other series;

(b)

the number of shares included in such series;


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(c)

the dividend rate (or method of determining such rate) payable to the holders of the shares of such series, any conditions upon which such dividends shall be paid and the date or dates upon which such dividends shall be payable;

(d)

whether dividends on the shares of such series shall be cumulative and, in the case of shares of any series having cumulative dividend rights, the date or dates or method of determining the date or dates from which dividends on the shares of such series shall be cumulative;

(e)

the amount or amounts which shall be payable out of the assets of the Corporation to the holders of the shares of such series upon voluntary or involuntary liquidation, dissolution or winding up the Corporation, and the relative rights of priority, if any, of payment of the shares of such series;

(f)

the price or prices at which, the period or periods within which and the terms and conditions upon which the shares of such series may be redeemed, in whole or in part, at the option of the Corporation or at the option of the holder or holders thereof or upon the happening of a specified event or events;

(g)

the obligation, if any, of the Corporation to purchase or redeem shares of such series pursuant to a sinking fund or otherwise and the price or prices at which, the period or periods within which and the terms and conditions upon which the shares of such series shall be redeemed or purchased, in whole or in part, pursuant to such obligation;

(h)

whether or not the shares of such series shall be convertible or exchangeable, at any time or times at the option of the holder or holders thereof or at the option of the Corporation or upon the happening of a specified event or events, into shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation, and the price or prices or rate or rates of exchange or conversion and any adjustments applicable thereto;

(i)

whether or not the holders of the shares of such series shall have voting rights, in addition to the voting rights provided by law, and if so the terms of such voting rights; and

(j)

any other powers, preferences and rights and qualifications, limitations and restrictions not inconsistent with the DGCL.

Unless otherwise provided in the certificate of designations or the resolution or resolutions of the Board of Directors or a duly authorized committee thereof establishing the terms of a series of Preferred Stock, no holder of any share of Preferred Stock shall be entitled as of right to vote on any amendment or alteration of the Certificate of Incorporation to authorize or create, or increase the authorized amount of, any other class or series of Preferred Stock or any alteration, amendment or repeal of any provision of any other series of Preferred Stock.

Except as otherwise required by the DGCL or provided in the resolution or resolutions of the board of directors or a duly authorized committee thereof or other document establishing the terms of a series of Preferred Stock (including this Certificate of Incorporation or any certificate of designation relating to any series of Preferred Stock), no holder of Common Stock, as such, shall be entitled to vote on any amendment or alteration of the Certificate of Incorporation that alters, amends or changes the powers, preferences, rights or other terms of one or more outstanding series of Preferred Stock.

Subject to the rights of the holders of any series of Preferred Stock, the number of authorized shares of any class or series of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of such class or series, voting together as a single class, irrespective of the provisions of Section 242(b)(2) of the DGCL or any corresponding provision hereafter enacted, and no vote of the holders of any of the Common Stock or the Preferred Stock voting separately as a class shall be required therefor, unless a vote of any such holder is required pursuant to this Certificate of Incorporation (including any certificate of designation relating to any series of Preferred Stock).

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(B) Voting Rights. Each holder of Common Stock, as such, shall be entitled to one vote for each share of Common Stock held of record by such holder on all matters on which stockholders generally are entitled to vote.

ARTICLE 5.

BYLAWS

The Board of Directors shall have the power to adopt, amend or repeal the bylaws of the Corporation (the “ Bylaws ”).

The stockholders may adopt, amend or repeal the Bylaws only with the affirmative vote of the holders of not less than 50.1% of the voting power of all outstanding securities of the Corporation generally entitled to vote in the election of directors, voting together as a single class.

ARTICLE 6.

BOARD OF DIRECTORS

(A) Power of the Board of Directors. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors.

(B) Number of Directors. The number of directors which shall constitute the Board of Directors shall, as of the date this Certificate of Incorporation becomes effective, be seven and, thereafter, shall be fixed exclusively by one or more resolutions adopted from time to time solely by the affirmative vote of a majority of the Board of Directors.

(C) Election of Directors. Subject to the stockholders agreement, dated as of [●], 2020, among the Corporation and certain holders of Common Stock identified therein (the “ Stockholders Agreement ”), the terms and manner of election of directors shall be fixed by the Bylaws of the Corporation. Notwithstanding the foregoing, whenever the holders of any one or more series of Preferred Stock issued by the Corporation shall have the right, voting separately as a series or separately as a class with one or more such other series, to elect directors at an annual or special meeting of stockholders, the election, term of office, removal, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation (including any designation relating to any series of Preferred Stock) applicable thereto. There shall be no cumulative voting in the election of directors. Election of directors need not be by written ballot unless the Bylaws so provide.

(D) Vacancies. Subject to the Stockholders Agreement, vacancies on the Board of Directors resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the number of directors shall, except as otherwise required by the DGCL, be filled solely by a majority of the directors then in office (although less than a quorum) or by the sole remaining director, and each director so elected shall hold office for a term that shall coincide with the term to which such director shall have been elected.

ARTICLE 7.

MEETINGS OF STOCKHOLDERS

(A) Annual Meetings. An annual meeting of stockholders for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting shall be held at such place, on such date, and at such time as the Board of Directors shall determine.

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(B) Special Meetings. Special meetings of the stockholders may be called only by the Board of Directors acting pursuant to a resolution adopted by a majority of the Board of Directors. Notwithstanding the foregoing, prior to the Trigger Date, holders of a majority of the outstanding Common Stock may call a special meeting of the stockholders. “ Trigger Date ” means the date on which the Consenting Term Lenders cease to collectively own at least a majority of the outstanding shares of Common Stock. “ Consenting Term Lenders ” means each of the holders of Common Stock party to the Stockholders Agreement together with their Permitted Transferees as defined therein.

(C) Action by Written Consent. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with the DGCL, as amended from time to time, and this Article 7 and may not be taken by written consent of stockholders without a meeting. Notwithstanding the foregoing, prior to the Trigger Date, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken by written consent of the stockholders, acting together as a single class, without a meeting, but only if (i) such consent or consents are signed by or on behalf of the holders of outstanding shares of stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and (ii) such consent or consents are delivered to the Corporation in accordance with the DGCL.

ARTICLE 8.

INDEMNIFICATION

(A) Right to Indemnification. The Corporation shall indemnify each director to the fullest extent permitted by the DGCL (as it presently exists or may hereafter be amended but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior to such amendment). Expenses reasonably incurred by a director in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized by law. The right to indemnification conferred in this Article 8 shall be a contract right.

(B) Limited Liability. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction for which the director derived any improper personal benefit.

(C) Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of such person’s status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the DGCL.

(D) Nonexclusivity of Rights. The rights and authority conferred in this Article 8 shall not be exclusive of any other right that any person may otherwise have or hereafter acquire.

(E) Preservation of Rights . If the DGCL is amended after the filing of this Certificate of Incorporation of which this Article 8 is a part to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent

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permitted by the DGCL, as so amended. Any repeal or modification of this Article 8 by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.

ARTICLE 9.

FORUM SELECTION

Unless the Corporation consents in writing to the selection of an alternative forum, the Chancery Court of the State of Delaware (the “ Court of Chancery ”) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or agent of the Corporation to the Corporation or the Corporation’s stockholders, (c) any action asserting a claim arising pursuant to any provision of the DGCL or of this Certificate of Incorporation or the Bylaws (in each case, as they may be amended from time to time), or (d) any action asserting a claim against the Corporation or any director or officer of the Corporation governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. This Article 9 shall not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended, or any other claim for which the federal courts have exclusive jurisdiction. Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of this provision. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and, to the fullest extent permitted by law, to have consented to the provisions of this Article 9.

ARTICLE 10.

MISCELLANEOUS

(A) Amendments. The Corporation reserves the right to amend this Certificate of Incorporation in any manner permitted by the DGCL and all rights and powers conferred upon stockholders, directors and officers herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles 4(B), 5, 6, 7 and this Article 10 may not be repealed or amended in any respect, and no other provision may be adopted, amended or repealed which would have the effect of modifying or permitting the circumvention of the provisions set forth in any of Articles 4(B), 5, 6, 7 or this Article 10, unless such action is approved by the affirmative vote of the holders of not less than 66 2/3% of the total voting power of all outstanding classes of stock of the Corporation generally entitled to vote in the election of directors, voting together as a single class.

(B) Section 203 of the DGCL. Prior to the Trigger Date, the Corporation elects not to be governed by Section 203 of the DGCL, and the restrictions contained in Section 203 shall not apply to the Corporation. From and after the Trigger Date, the Corporation shall be governed by Section 203 so long as Section 203 by its terms would apply to the Corporation.

[ signature page follows ]

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IN WITNESS WHEREOF , said Corporation has caused this Certificate of Incorporation to be executed by its duly authorized officer this [●] th day of February, 2020.

KEY ENERGY SERVICES, INC.

By:

Name:

Title:


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Exhibit B

Financial Information

(i)

Audited consolidated balance sheets of the Company, as of December 31, 2018 and December 31, 2017, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the years then ended and the related notes.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Key Energy Services, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Key Energy Services, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years ended December 31, 2018 (Successor) and December 31, 2017 (Successor), the period December 16, 2016 through December 31, 2016 (Successor), and the period January 1, 2016 through December 15, 2016 (Predecessor), and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years ended December 31, 2018 (Successor) and December 31, 2017 (Successor), the period December 16, 2016 through December 31, 2016 (Successor), and the period January 1, 2016 through December 15, 2016 (Predecessor), in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 15, 2019 expressed an unqualified opinion.

Basis for opinion

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2006.

Houston, Texas

March 15, 2019

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Key Energy Services, Inc.

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Key Energy Services, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated March 15, 2019 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Houston, Texas

March 15, 2019

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Key Energy Services, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

December 31,
2018 2017
ASSETS

Current assets:

Cash and cash equivalents

$ 50,311 $ 73,065

Restricted cash

— 4,000

Accounts receivable, net of allowance for doubtful accounts of $1,056 and $875

74,253 69,319

Inventories

15,861 20,942

Other current assets

18,073 19,477

Total current assets

158,498 186,803

Property and equipment, gross

439,043 413,127

Accumulated depreciation

(163,333 ) (85,813 )

Property and equipment, net

275,710 327,314

Intangible assets, net

404 462

Other assets

8,562 14,542

TOTAL ASSETS

$ 443,174 $ 529,121

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable

$ 13,587 $ 13,697

Other current liabilities

87,377 87,579

Current portion of long-term debt

2,500 2,500

Total current liabilities

103,464 103,776

Long-term debt

241,079 243,103

Workers’ compensation, vehicular and health insurance liabilities

24,775 25,393

Other non-current liabilities

28,336 28,166

Commitments and contingencies

Equity:

Preferred stock, $0.01 par value; 10,000,000 authorized and one share issued and outstanding

— —

Common stock, $0.01 par value; 100,000,000 shares authorized, 20,363,198 and 20,217,641 outstanding

204 202

Additional paid-in capital

264,945 259,314

Retained earnings deficit

(219,629 ) (130,833 )

Total equity

45,520 128,683

TOTAL LIABILITIES AND EQUITY

$ 443,174 $ 529,121

See the accompanying notes which are an integral part of these consolidated financial statements

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CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

Successor Predecessor
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Period from
December 16,
2016 through
December 31,
2016
Period from
January 1,
2016 through
December 15,
2016

REVENUES

$ 521,695 $ 436,165 $ 17,830 $ 399,423

COSTS AND EXPENSES:

Direct operating expenses

406,396 332,332 16,603 362,825

Depreciation and amortization expense

82,639 84,542 3,574 131,296

General and administrative expenses

91,626 115,284 6,501 163,257

Impairment expense

— 187 — 44,646

Operating loss

(58,966 ) (96,180 ) (8,848 ) (302,601 )

Reorganization items, net

— 1,501 — (245,571 )

Interest expense, net of amounts capitalized

34,163 31,797 1,364 74,320

Other (income) loss, net

(2,354 ) (7,187 ) 32 (2,443 )

Loss before income taxes

(90,775 ) (122,291 ) (10,244 ) (128,907 )

Income tax (expense) benefit

1,979 1,702 — (2,829 )

NET LOSS

$ (88,796 ) $ (120,589 ) $ (10,244 ) $ (131,736 )

Loss per share:

Basic and diluted

$ (4.38 ) $ (6.00 ) $ (0.51 ) $ (0.82 )

Weighted Average Shares Outstanding:

Basic and diluted

20,250 20,105 20,090 160,587

See the accompanying notes which are an integral part of these consolidated financial statements

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

Successor Predecessor
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Period from
December 16,
2016 through
December 31,
2016
Period from
January 1,
2016 through
December 15,
2016

NET LOSS

$ (88,796 ) $ (120,589 ) $ (10,244 ) $ (131,736 )

Other comprehensive income (loss):

Foreign currency translation income (loss)

— (239 ) 239 3,346

Total other comprehensive income (loss)

— (239 ) 239 3,346

COMPREHENSIVE LOSS

$ (88,796 ) $ (120,828 ) $ (10,005 ) $ (128,390 )

See the accompanying notes which are an integral part of these consolidated financial statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Successor Predecessor
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Period from
December 16,
2016 through
December 31,
2016
Period from
January 1,
2016 through
December 15,
2016

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$ (88,796 ) $ (120,589 ) $ (10,244 ) $ (131,736 )

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization expense

82,639 84,542 3,574 131,296

Impairment expense

— 187 — 44,646

Bad debt expense

286 1,420 168 2,532

Accretion of asset retirement obligations

164 221 34 570

Loss from equity method investments

— 560 — 466

Amortization and write-off of deferred financing costs and premium on debt

476 476 17 4,414

Deferred income tax expense (benefit)

— (35 ) — 787

(Gain) loss on disposal of assets, net

(9,618 ) (27,583 ) (12 ) 4,707

Share-based compensation

5,910 7,591 — 5,740

Reorganization items, non-cash

— — — (261,806 )

Changes in working capital:

Accounts receivable

(5,220 ) 669 855 41,574

Other current assets

6,486 7,764 607 52,010

Accounts payable and accrued liabilities

(564 ) (13,017 ) 3,729 (135,557 )

Share-based compensation liability awards

253 — — (227 )

Other assets and liabilities

6,139 6,427 855 102,135

Net cash used in operating activities

(1,845 ) (51,367 ) (417 ) (138,449 )

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

(37,535 ) (16,079 ) (375 ) (8,481 )

Proceeds from sale of assets

15,403 32,992 124 15,025

Net cash provided by (used in) investing activities

(22,132 ) 16,913 (251 ) 6,544

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayments of long-term debt

(2,500 ) (2,500 ) — (313,424 )

Proceeds from long-term debt

— — — 250,000

Proceeds from stock rights offering

— — — 109,082

Payment of deferred financing costs

— (350 ) — (2,040 )

Repurchases of common stock

(280 ) (697 ) — (167 )

Proceeds from exercise warrants

3 — — —

Net cash provided by (used in) financing activities

(2,777 ) (3,547 ) — 43,451

Effect of changes in exchange rates on cash

— (146 ) — (20 )

Net decrease in cash, cash equivalents and restricted cash

(26,754 ) (38,147 ) (668 ) (88,474 )

Cash, cash equivalents, and restricted cash, beginning of period

77,065 115,212 115,880 204,354

Cash, cash equivalents, and restricted cash, end of period

$ 50,311 $ 77,065 $ 115,212 $ 115,880

See the accompanying notes which are an integral part of these consolidated financial statements

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share data)

COMMON STOCKHOLDERS Total
Common Stock Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
(Deficit)
Number of
Shares
Amount
at par

BALANCE AT DECEMBER 31, 2015 (Predecessor)

157,543 $ 15,754 $ 966,637 $ (43,740 ) $ (798,361 ) $ 140,290

Foreign currency translation

— — — 3,346 — 3,346

Common stock purchases

(569 ) (57 ) (110 ) — — (167 )

Share-based compensation

3,579 358 5,382 — — 5,740

Distributions to holders of Predecessor common stock

— — (17,463 ) — — (17,463 )

Other

— — (10 ) — — (10 )

Net loss

— — — — (131,736 ) (131,736 )

BALANCE AT DECEMBER 15, 2016 (Predecessor)

160,553 16,055 954,436 (40,394 ) (930,097 ) —

Cancellation of Predecessor equity

(160,553 ) (16,055 ) (954,436 ) 40,394 930,097 —

BALANCE AT DECEMBER 15, 2016 (Predecessor)

— $ — $ — $ — $ — $ —

Shares issued in rights offering

11,769 $ 118 $ 108,866 $ — $ — $ 108,984

Shares withheld to satisfy tax withholding obligations

(8 ) — (210 ) — — (210 )

Issuance of shares pursuant to the Plan

8,316 83 139,505 — — 139,588

Issuance of warrants pursuant to the Plan

— — 3,768 — — 3,768

BALANCE AT DECEMBER 16, 2016 (Successor)

20,077 201 251,929 — — 252,130

Foreign currency translation

— — — 239 — 239

Share-based compensation

19 — 492 — — 492

Net loss

— — — — (10,244 ) (10,244 )

BALANCE AT DECEMBER 31, 2016 (Successor)

20,096 201 252,421 239 (10,244 ) 242,617

Foreign currency translation

— — — (239 ) — (239 )

Common stock purchases

(56 ) (1 ) (696 ) — — (697 )

Share-based compensation

177 2 7,589 — — 7,591

Net loss

— — — — (120,589 ) (120,589 )

BALANCE AT DECEMBER 31, 2017 (Successor)

20,217 202 259,314 — (130,833 ) 128,683

Common stock purchases

(48 ) — (280 ) — — (280 )

Exercise of warrants

— — 3 — — 3

Share-based compensation

194 2 5,908 — — 5,910

Net loss

— — — — (88,796 ) (88,796 )

BALANCE AT DECEMBER 31, 2018 (Successor)

20,363 $ 204 $ 264,945 $ — $ (219,629 ) $ 45,520

See the accompanying notes which are an integral part of these consolidated financial statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Key Energy Services, Inc., and its wholly owned subsidiaries (collectively, “Key,” the “Company,” “we,” “us,” “its,” and “our”) provide a full range of well services to major oil companies, independent oil and natural gas production companies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services, and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States. We previously had operations in Mexico, which was sold during the fourth quarter of 2016, and Canada and Russia, which were sold in the second and third quarters of 2017, respectively.

Basis of Presentation

The consolidated financial statements included in this Annual Report on Form 10-K present our financial position, results of operations and cash flows for the periods presented in accordance with GAAP.

The preparation of these consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii) provide allowances for our uncollectible accounts receivable, (viii) value our asset retirement obligations, and (ix) value our equity-based compensation. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improved information not previously available. Because of the limitations inherent in this process, our actual results may differ materially from these estimates. We believe that our estimates are reasonable.

On October 24, 2016, Key and certain of our domestic subsidiaries filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware pursuant to a prepackaged plan of reorganization (“the Plan”). The Plan was confirmed by the Bankruptcy Court on December 6, 2016, and the Company emerged from the bankruptcy proceedings on December 15, 2016 (“the Effective Date”).

Upon emergence on the Effective Date, the Company adopted fresh start accounting which resulted in the creation of a new entity for financial reporting purposes. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, the Consolidated Financial Statements on or after December 16, 2016 are not comparable with the Consolidated Financial Statements prior to that date. Refer to “ Note 3. Fresh Start Accounting ” for additional information.

References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to December 15, 2016. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company on and prior to December 15, 2016.

We have evaluated events occurring after the balance sheet date included in this Annual Report on Form 10-K for possible disclosure as a subsequent event. Management monitored for subsequent events through the date that these financial statements were issued.

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Principles of Consolidation

Within our consolidated financial statements, we include our accounts and the accounts of our majority-owned or controlled subsidiaries. We eliminate intercompany accounts and transactions. When we have an interest in an entity for which we do not have significant control or influence, we account for that interest using the cost method. When we have an interest in an entity and can exert significant influence but not control, we account for that interest using the equity method.

Acquisitions

From time to time, we acquire businesses or assets that are consistent with our long-term growth strategy. Results of operations for acquisitions are included in our financial statements beginning on the date of acquisition and are accounted for using the acquisition method. For all business combinations (whether partial, full or in stages), the acquirer records 100% of all assets and liabilities of the acquired business, including goodwill, at their fair values; including contingent consideration. Final valuations of assets and liabilities are obtained and recorded as soon as practicable no later than one year from the date of the acquisition.

Revenue Recognition

We recognize revenue when all of the following criteria have been met: (i) contract with a customer is identified, (ii) performance obligations in the contract is identified, (iii) transaction price is determined (iv) transaction price is allocated to the performance obligations and (v) revenue is recognized when (or as) the performance obligation(s) are satisfied.

•

Identifying the contract with the customer ensures that there is an understanding between the company and the customer, about the specific nature and terms of a transaction, has been finalized.

•

At the inception of a contract, the company assesses the goods or services promised in a contract with a customer, and identifies a performance obligation for each promise to transfer to the customer either: (i) a good or service (or a bundle of goods or services) that is distinct or (ii) a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

•

The transaction price is the amount of consideration to which a company expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. The transaction price may include fixed amounts, variable amounts, or both. By its nature, variable amounts of a transaction price have inherent uncertainty as the amount ultimately expected to be realized is not determinable at the outset of a contract. However, the company shall estimate the amount of variable consideration at contract inception, subject to certain limitations.

•

Once the separate performance obligations are identified and the transaction price has been determined, the company allocates the transaction price to the performance obligations. This is generally done in proportion to their standalone selling prices. As a result, any discount within the contract is generally allocated proportionally to all of the separate performance obligations in the contract.

•

Revenue is only recognized when it satisfies an identified performance obligation by transferring a promised good or service to a customer. A good or service is considered transferred when the customer obtains control.

While not typical for our business, our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to

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customers or using expected cost-plus margin. For combined products and services within a contract, we account for individual products and services separately if they are distinct- i.e. if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services within a contract based on the prices at which we separately sell our services. For items that are not sold separately, we estimate the standalone selling prices using the expected cost-plus margin approach.

Cash and Cash Equivalents

We consider short-term investments with an original maturity of less than three months to be cash equivalents. As of December 31, 2018, all of our obligations under our ABL Facility and Term Loan Facility were secured by most of our assets, including assets held by our subsidiaries, which includes our cash and cash equivalents. We restrict investment of cash to financial institutions with high credit standing and limit the amount of credit exposure to any one financial institution.

We maintain our cash in bank deposit and brokerage accounts which exceed federally insured limits. As of December 31, 2018, accounts were guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 and substantially all of our accounts held deposits in excess of the FDIC limits.

We believe that the cash held by our other foreign subsidiaries could be repatriated for general corporate use without material withholdings. From time to time and in the normal course of business in connection with our operations or ongoing legal matters, we are required to place certain amounts of our cash in deposit accounts with restrictions that limit our ability to withdraw those funds. Our restricted cash is primarily used to maintain compliance with our ABL Facility.

Certain of our cash accounts are zero-balance controlled disbursement accounts that do not have right of offset against our other cash balances. We present the outstanding checks written against these zero-balance accounts as a component of accounts payable in the accompanying consolidated balance sheets.

Accounts Receivable and Allowance for Doubtful Accounts

We establish provisions for losses on accounts receivable if we determine that there is a possibility that we will not collect all or part of the outstanding balances. We regularly review accounts over 150 days past due from the invoice date for collectability and establish or adjust our allowance as necessary using the specific identification method. If we exhaust all collection efforts and determine that the balance will never be collected, we write off the accounts receivable and the associated provision for uncollectible accounts.

From time to time we are entitled to proceeds under our insurance policies for amounts that we have reserved in our self-insurance liability. We present these insurance receivables gross on our balance sheet as a component of other assets, separate from the corresponding liability.

Concentration of Credit Risk and Significant Customers

Our customers include major oil and natural gas production companies, independent oil and natural gas production companies, and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial position should be considered in light of the fluctuations in demand experienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets

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occur. These fluctuations can impact our results of operations and financial position as supply and demand factors directly affect utilization and hours which are the primary determinants of our net cash provided by operating activities.

During the year ended 2017 and the period from January 1, 2016 through December 15, 2016, Chevron Texaco Exploration and Production accounted for approximately12% and 14% of our consolidated revenue, respectively. During the period from January 1, 2016 through December 15, 2016, OXY USA Inc. accounted for approximately 13% of our consolidated revenue. No other customer accounted for more than 10% of our consolidated revenue during the years ended December 31, 2018 and 2017, the period from December 16, 2016 through December 31, 2016 and the period from January 1, 2016 through December 15, 2016. No customers accounted for more than 10% of our total accounts receivable as of December 31, 2018 and 2017.

Inventories

Inventories, which consist primarily of equipment parts and spares for use in our operations and supplies held for consumption, are valued at the lower of average cost or market.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided for our assets over the estimated depreciable lives of the assets using the straight-line method. Depreciation expense for the years ended December 31, 2018 and 2017, the period from December 16, 2016 through December 31, 2016 and the period from January 1, 2016 through December 15, 2016 were $82.6 million, $84.5 million, $3.6 million and $129.5 million, respectively. We depreciate our operational assets over their depreciable lives to their salvage value, which is a value higher than the assets’ value as scrap. Salvage value approximates 10% of an operational asset’s acquisition cost. When an operational asset is stacked or taken out of service, we review its physical condition, depreciable life and ultimate salvage value to determine if the asset is operable and whether the remaining depreciable life and salvage value should be adjusted. When we scrap an asset, we accelerate the depreciation of the asset down to its salvage value. When we dispose of an asset, a gain or loss is recognized.

As of December 31, 2018, the estimated useful lives of our asset classes are as follows:

Description

Years

Well service rigs and components

3-15

Oilfield trucks, vehicles and related equipment

4-7

Fishing and rental tools, coiled tubing units and equipment, tubulars and pressure control equipment

3-10

Disposal wells

15

Furniture and equipment

3-7

Buildings and improvements

15-30

A long-lived asset or asset group should be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. For purposes of testing for impairment, we group our long-lived assets along our lines of business based on the services provided, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We would record an impairment charge, reducing the net carrying value to estimated fair value, if the asset group’s estimated future cash flows were less than its net carrying value. Events or changes in circumstance that cause us to evaluate our fixed assets for recoverability and possible impairment may include changes in market

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conditions, such as adverse movements in the prices of oil and natural gas, or changes of an asset group, such as its expected future life, intended use or physical condition, which could reduce the fair value of certain of our property and equipment. The development of future cash flows and the determination of fair value for an asset group involves significant judgment and estimates. See “Note 10. Property and Equipment,” for further discussion.

Asset Retirement Obligations

We recognize a liability for the fair value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset. We depreciate the additional cost over the estimated useful life of the assets. Our obligations to perform our asset retirement activities are unconditional, despite the uncertainties that may exist surrounding an individual retirement activity. Accordingly, we recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. In determining the fair value, we examine the inputs that we believe a market participant would use if we were to transfer the liability. We probability-weight the potential costs a third-party would charge, adjust the cost for inflation for the estimated life of the asset, and discount this cost using our credit adjusted risk free rate. Significant judgment is involved in estimating future cash flows associated with such obligations, as well as the ultimate timing of those cash flows. If our estimates of the amount or timing of the cash flows change, such changes may have a material impact on our results of operations. See “Note 14. Asset Retirement Obligations.”

Deposits

Due to capacity constraints on equipment manufacturers, we are sometimes required to make advanced payments for certain oilfield service equipment and other items used in the normal course of business. As of the years ended December 31, 2018 and 2017, deposits totaled $1.3 million and $1.2 million, respectively. Deposits consist primarily of deposit requirements of insurance companies and payments made related to high demand long-lead time items.

Capitalized Interest

Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest rate based on related debt until the underlying assets are placed into service. The capitalized interest is added to the cost of the assets and amortized to depreciation expense over the useful life of the assets, and is included in the depreciation and amortization line in the accompanying consolidated statements of operations.

Deferred Financing Costs

Deferred financing costs associated with long-term debt are carried at cost and are amortized to interest expense using the effective interest method over the life of the related debt instrument. When the related debt instrument is retired, any remaining unamortized costs are included in the determination of the gain or loss on the extinguishment of the debt. We record gains and losses from the extinguishment of debt as a part of continuing operations. In accordance with ASU 2015-03, we record debt financing costs as a reduction of our long-term debt. See “Note 16. Long-term Debt,” for further discussion.

Valuation of Tangible and Finite-Lived Intangible Assets

Our fixed assets and finite-lived intangibles are tested for potential impairment when circumstances or events indicate a possible impairment may exist. These circumstances or events are referred to as “trigger events”

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and examples of such trigger events include, but are not limited to, an adverse change in market conditions, a significant decrease in benefits being derived from an acquired business, a change in the use of an asset, or a significant disposal of a particular asset or asset class.

If a trigger event occurs, an impairment test is performed based on an undiscounted cash flow analysis. To perform an impairment test, we make judgments, estimates and assumptions regarding long-term forecasts of revenues and expenses relating to the assets subject to review. Market conditions, energy prices, estimated depreciable lives of the assets, discount rate assumptions and legal factors impact our operations and have a significant effect on the estimates we use to determine whether our assets are impaired. If the results of the undiscounted cash flow analysis indicate that the carrying value of the assets being tested for impairment are not recoverable, then we record an impairment charge to write the carrying value of the assets down to their fair value. Using different judgments, assumptions or estimates, we could potentially arrive at a materially different fair value for the assets being tested for impairment, which may result in an impairment charge.

Internal-Use Software

We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the software’s estimated useful life, generally five to seven years. Costs incurred related to selection or maintenance of internal-use software are expensed as incurred.

Litigation

When estimating our liabilities related to litigation, we take into account all available facts and circumstances in order to determine whether a loss is probable and reasonably estimable.

Various suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental United States and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. See “Note 17. Commitments and Contingencies.”

Environmental

Our operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants, and regulated substances. These operations are subject to various federal, state and local laws and regulations intended to protect the environment. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. We record liabilities on an undiscounted basis when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. While our litigation reserves reflect the application of our insurance coverage, our environmental reserves do not reflect management’s assessment of the insurance coverage that may apply to the matters at issue. See “Note 17. Commitments and Contingencies.”

Self-Insurance

We are primarily self-insured against physical damage to our equipment and automobiles as well as workers’ compensation claims. The accruals that we maintain on our consolidated balance sheet relate to these

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deductibles and self-insured retentions, which we estimate through the use of historical claims data and trend analysis. To assist management with the liability amount for our self-insurance reserves, we utilize the services of a third party actuary. The actual outcome of any claim could differ significantly from estimated amounts. We adjust loss estimates in the calculation of these accruals, based upon actual claim settlements and reported claims. See “Note 17. Commitments and Contingencies.”

Income Taxes

We account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences. Management determines our current tax liability as well as taxes incurred as a result of current operations, yet deferred until future periods. Current taxes payable represent our liability related to our income tax returns for the current year, while net deferred tax expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidated balance sheets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatment of certain items for tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred.

We record valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. Evidence supporting this ability can include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions in the financial statements at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the domestic and international tax jurisdictions in which we operate.

If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could have potentially material negative impacts on our earnings. See “Note 15. Income Taxes” for further discussion of accounting for income taxes, changes in our valuation allowance, components of our tax rate reconciliation and realization of loss carryforwards.

Earnings Per Share

Basic earnings per common share is determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the treasury stock and “as if converted” methods. See “Note 12. Earnings Per Share.”

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Share-Based Compensation

We issue or have issued time-based vesting and performance-based vesting stock options, time-based vesting and performance-based vesting restricted stock units, and restricted stock awards to our employees as part of those employees’ compensation and as a retention tool for non-employee directors. We calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of forfeitures. The grant-date fair value of our time-based restricted stock units and restricted stock awards is determined using our stock price on the grant date. The grant-date fair value of our performance-based restricted stock units is determined using our stock price on the grant date assuming a 1.0x payout target, however, a maximum 2.0x payout could be achieved if certain EBITDA-based performance measures are met. The fair value of our stock option awards are estimated using a Black-Scholes fair value model.

The valuation of our stock options requires us to estimate the expected term of award, which we estimate using the simplified method, as we do not have sufficient historical exercise information. Additionally, the valuation of our stock option awards is also dependent on historical stock price volatility. In view of the limited amount of time elapsed since our reorganization, volatility is calculated based on historical stock price volatility of our peer group with a lookback period equivalent to the expected term of the award. Fair value of performance-based stock options and restricted stock units is estimated in the same manner as our time-based awards and assumes that performance goals will be achieved and the awards will vest. If the performance based awards do not vest, any previously recognized compensation costs will be reversed. We record share-based compensation as a component of general and administrative or direct operating expense based on the role of the applicable individual. See “Note 20. Share-Based Compensation.”

Foreign Currency Gains and Losses

With respect to our former operations in Russia, which were sold in the third quarter of 2017, where the local currency was the functional currency, assets and liabilities were translated at the rates of exchange in effect on the balance sheet date, while income and expense items were translated at average rates of exchange during the period. The resulting gains or losses arising from the translation of accounts from the functional currency to the U.S. dollar were included as a separate component of stockholders’ equity in other comprehensive income until a partial or complete sale or liquidation of our net investment in the foreign entity.

From time to time our former foreign subsidiaries may have entered into transactions that are denominated in currencies other than their functional currency. These transactions were initially recorded in the functional currency of that subsidiary based on the applicable exchange rate in effect on the date of the transaction. At the end of each month, those transactions were remeasured to an equivalent amount of the functional currency based on the applicable exchange rates in effect at that time. Any adjustment required to remeasure a transaction to the equivalent amount of the functional currency at the end of the month was recorded in the income or loss of the foreign subsidiary as a component of other income, net.

Comprehensive Loss

We display comprehensive loss and its components in our financial statements, and we classify items of comprehensive income (loss) by their nature in our financial statements and display the accumulated balance of other comprehensive income (loss) separately in our stockholders’ equity.

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Leases

We lease real property and equipment through various leasing arrangements. When we enter into a leasing arrangement, we analyze the terms of the arrangement to determine whether the lease should be accounted for as an operating lease or a capital lease.

We periodically incur costs to improve the assets that we lease under these arrangements. If the value of the leasehold improvements exceeds our threshold for capitalization, we record the improvement as a component of our property and equipment and amortize the improvement over the useful life of the improvement or the lease term, whichever is shorter.

Certain of our operating lease agreements are structured to include scheduled and specified rent increases over the term of the lease agreement. These increases may be the result of an inducement or “rent holiday” conveyed to us early in the lease, or are included to reflect the anticipated effects of inflation. We recognize scheduled and specified rent increases on a straight-line basis over the term of the lease agreement. In addition, certain of our operating lease agreements contain incentives to induce us to enter into the lease agreement, such as up-front cash payments to us, payment by the lessor of our costs, such as moving expenses, or the assumption by the lessor of our pre-existing lease agreements with third parties. Any payments made to us or on our behalf represent incentives that we consider to be a reduction of our rent expense, and are recognized on a straight-line basis over the term of the lease agreement.

Recent Accounting Developments

ASU 2018-02. In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . This standard allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”) that was enacted on December 22, 2017. We adopted this guidance as of January 1, 2018. The adoption of this standard did not have an impact on our consolidated financial statements.

ASU 2016-18. In November 2016, the FASB issued ASU, 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash . This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted the new standard effective January 1, 2018 and other than the revised statement of cash flows presentation of restricted cash, the adoption of this standard did not have an impact on our consolidated financial statements.

ASU 2016-15 . In August 2016 the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments , that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. We adopted the new standard effective January 1, 2018 and the adoption of this standard did not have a material impact on our consolidated financial statements.

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ASU 2016-13. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments that will change how companies measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount. The amendments in this update will be effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018. The Company is evaluating the effect of this standard on our consolidated financial statements.

ASU 2016-02 . In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which will replace the existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Additional disclosure requirements include qualitative disclosures along with specific quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for the Company for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. As part of our assessment work to-date, we have formed an implementation work team, conducted training for the relevant staff regarding the potential impacts of the new ASU and are continuing our contract analysis and policy review. We have engaged external resources to assist us in our efforts to complete the analysis of potential changes to current accounting practices. Additionally, we have created additional internal controls over financial reporting and made changes in business practices and processes related to the ASU. Key has elected the new prospective “Comparatives Under 840” transition method as defined in ASU 2018-11 and adopted the new standard as of January 1, 2019. Applying the Comparatives Under 840 transition method, the adoption of the new standard will require a cumulative effect adjustment to retained earnings, which we believe will be immaterial.

ASU 2014-09 . In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) . The objective of this ASU is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 must be adopted using either a full retrospective method or a modified retrospective method. We adopted the new standard effective January 1, 2018 using the full retrospective method and the adoption of this standard did not have a material impact on our consolidated financial statements.

NOTE 2.

EMERGENCE FROM VOLUNTARY REORGANIZATION

On October 24, 2016, Key and certain of our domestic subsidiaries filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware pursuant to a prepackaged plan of reorganization. The Plan was confirmed by the Bankruptcy Court on December 6, 2016, and the Company emerged from the bankruptcy proceedings on December 15, 2016.

On the Effective Date, the Company:

•

Reincorporated the Successor Company in the state of Delaware and adopted an amended and restated certificate of incorporation and bylaws;

•

Appointed new members to the Successor Company’s board of directors to replace directors of the Predecessor Company;

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•

Issued to the Predecessor Company’s former stockholders, in exchange for the cancellation and discharge of the Predecessor Company’s common stock:

•

815,887 shares of the Successor Company’s common stock;

•

919,004 warrants to expire on December 15, 2020, and 919,004 warrants to expire on December 15, 2021, each exercisable for one share of the Successor Company’s common stock;

•

Issued to former holders of the Predecessor Company’s 6.75% senior notes, in exchange for the cancellation and discharge of such notes, 7,500,000 shares of the Successor Company’s common stock;

•

Issued 11,769,014 shares of the Successor Company’s common stock to certain participants in rights offerings conducted pursuant to the Plan;

•

Issued to Soter Capital LLC (“Soter”) the sole share of the Successor Company’s Series A Preferred Stock, which confers certain rights to elect directors (but has no economic rights);

•

Entered into a new $80 million ABL Facility (which was increased to $100 million on February 3, 2017) and a $250 million Term Loan Facility upon termination of the Predecessor Company’s asset-based revolving credit facility and term loan facility;

•

Entered into a Registration Rights Agreement with certain stockholders of the Successor Company;

•

Adopted the 2016 Incentive Plan for officers, directors and employees of the Successor Company and its subsidiaries; and

•

Entered into a corporate advisory services agreement between the Successor Company and Platinum Equity Advisors, LLC (“Platinum”) pursuant to which Platinum will provide certain business advisory services to the Company.

The foregoing is a summary of the substantive provisions of the Plan and related transactions and is not intended to be a complete description of, or a substitute for a full and complete reading of, the Plan and the other documents referred to above.

NOTE 3.

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.

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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.

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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

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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.

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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

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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

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Reorganization and Fresh Start Adjustments

Reorganization Adjustments (in thousands)

A.

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 )

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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).

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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.

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Key Energy Services, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

NOTE 4.

LIABILITIES SUBJECT TO COMPROMISE

Pursuant to ASC 852 liabilities subject to compromise in chapter 11 cases are distinguished from liabilities of non-filing entities, liabilities not expected to be compromised and from post-petition liabilities. The amount of liabilities subject to compromise represent the Company’s estimate, where an estimate is determinable, of known or potential prepetition claims to be addressed in connection with the bankruptcy proceedings. Such liabilities are reported at the Company’s current estimate, of the allowed claim amounts even though the claims may be settled for lesser amounts.

Prior to settlements pursuant to the Plan, liabilities subject to compromise was comprised of the following (in thousands):

2021 Notes

$ 675,000

2021 Notes Interest

29,616

Predecessor Term Loan Facility

288,876

Severance

1,980

Lease and claim rejections

1,055

Total

$ 996,527

NOTE 5.

REORGANIZATION ITEMS

ASC 852 requires that the financial statements for periods subsequent to the filing of the Chapter 11 cases distinguish transactions and events that are directly associated with the reorganization of the ongoing operations of the business. Revenues, expenses, realized gains and losses, adjustments to the expected amount of allowed claims for liabilities subject to compromise and provisions for losses that can be directly associated with the reorganization and restructuring of the business have been reported as “Reorganization items, net” in the Consolidated Statements of Operations.

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Key Energy Services, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes reorganizations items (in thousands):

Successor Predecessor
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Period from
January 1, 2016
through
December 15,
2016

Gain on debt discharge

$ — $ — $ (578,699 )

Settlement/Rejection damages

— — (770 )

Fresh-start asset revaluation (gain) loss, net

— 10 299,583

Professional fees

— 1,491 15,156

Write-off of deferred financing costs, debt premiums and debt discounts

— — 19,159

Total reorganization items, net

$ — $ 1,501 $ (245,571 )

With the exception of $1.5 million and $15.2 million in professional fees for the year ended December 31, 2017 and the period from December 16, 2016 to December 31, 2016, respectively, and $1.0 million in settlement and rejection damages for the period from December 16, 2016 to December 31, 2016, reorganization items are non-cash expenses.

NOTE 6.

REVENUE FROM CONTRACTS WITH CUSTOMERS

On January 1, 2018, we adopted ASC 606 using the full retrospective method applied to those contracts that were not completed as of December 15, 2016. As noted in prior periods, we emerged from voluntary reorganization under Chapter 11 of the United States Bankruptcy Code on December 15, 2016 and therefore applied fresh-start accounting and adopted ASC 606 in effect at the fresh-start accounting date. As a result of electing to use the full retrospective adoption approach as described above, results for reporting periods beginning after December 15, 2016 are presented under ASC 606.

The adoption of ASC 606 did not have a material impact on our consolidated financial statements, and we did not record any adjustments to opening retained earnings as of December 15, 2016, because our services and rental contracts are principally charged on an hourly or daily rate basis and are primarily short-term in nature, typically less than 30 days.

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The following table presents our revenues disaggregated by revenue source (in thousands). Sales taxes are excluded from revenues.

Successor Predecessor
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Period from
December 16,
2016 through
December 31,
2016
Period from
January 1, 2016
through
December 15,
2016

Rig Services

$ 296,969 $ 248,830 $ 8,549 $ 222,877

Fishing and Rental Services

64,691 59,172 3,389 55,790

Coiled Tubing Services

71,013 41,866 1,392 30,569

Fluid Management Services

89,022 80,726 3,208 76,008

International

— 5,571 1,292 14,179

Total

$ 521,695 $ 436,165 $ 17,830 $ 399,423

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Disaggregation of Revenue

We have disaggregated our revenues by our reportable segments including Rig Services, Fishing & Rental Services, Coiled Tubing Services and Fluid Management Services.

Rig Services

Our Rig Services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, well maintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gas producers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes and capabilities, allowing us to service all types of oil and gas wells.

We recognize revenue within the Rig Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue as the services are provided, typically daily, as we have the right to invoice the customer for the services performed. Rig Services are billed monthly. Payment terms for Rig Services are usually 30 days from invoice receipt.

Fishing and Rental Services

We offer a full line of services and rental equipment designed for use in providing drilling and workover services. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk ® pipe-handling units and services), pressure-control equipment, pumps, power swivels, reversing units, foam air units.

We recognize revenue within the Fishing and Rental Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue as the services are provided, typically daily, as we have the right to invoice the customer for the services performed. Fishing and Rental Services are billed and paid monthly. Payment terms for Fishing and Rental Services are usually 30 days from invoice receipt.

Coiled Tubing Services

Coiled Tubing Services involve the use of a continuous metal pipe spooled onto a large reel, which is then deployed into oil and natural gas wells to perform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemical treatments. Coiled tubing is also used for a number of horizontal well applications such as milling temporary isolation plugs that separate frac zones, and various other pre- and post-hydraulic fracturing well preparation services.

We recognize revenue within the Coiled Tubing Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue, typically daily, as the services are provided as we have the right to invoice the customer for the services performed. Coiled Tubing Services are billed and paid monthly. Payment terms for Coiled Tubing Services are usually 30 days from invoice receipt.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fluid Management Services

We provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover and maintenance activities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site and transported for disposal in saltwater disposal wells owned by us or a third party.

We recognize revenue within the Fluid Management Services segment by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred as the services are rendered to the customer. Specifically, we recognize revenue as the services are provided, typically daily, as we have the right to invoice the customer for the services performed. Fluid Management Services are billed and paid monthly. Payment terms for Fluid Management Services are usually 30 days from invoice receipt.

International

Our former International segment included our former operations in Mexico, Canada and Russia. Our services in Mexico and Russia consisted of rig-based services such as the maintenance, workover, and recompletion of existing oil wells, completion of newly-drilled wells, and plugging and abandonment of wells at the end of their useful lives. We also had a technology development and control systems business based in Canada, which was focused on the development of hardware and software related to oilfield service equipment controls, data acquisition and digital information flow.

We recognized revenue within the International segment by measuring progress toward satisfying the performance obligation in a manner that best depicted the transfer of goods or services to the customer. The control over services was transferred as the services were rendered to the customer. Specifically, we recognized revenue as the services were provided, typically daily, as we had the right to invoice the customer for the services performed. Services within the international segment were billed and paid monthly. Payment terms for services within the International segment were usually 30 days from invoice receipt.

Arrangements with Multiple Performance Obligations

While not typical for our business, our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost-plus margin. For combined products and services within a contract, we account for individual products and services separately if they are distinct- i.e. if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services within a contract based on the prices at which we separately sell our services. For items that are not sold separately, we estimate the standalone selling prices using the expected cost-plus margin approach.

Contract Balances

Under our revenue contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our revenue contracts do not give rise to contract assets or liabilities under ASC 606.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within general and administrative expenses.

The majority of our services are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

Additionally, our payment terms are short-term in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Further, in many of our service contracts we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided). For those contracts, we have utilized the practical expedient in ASC 606-10-55-18 exempting the Company from disclosure of the entity to recognize revenue in the amount to which the Company has a right to invoice.

Accordingly, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

NOTE 7.

OTHER BALANCE SHEET INFORMATION

The table below presents comparative detailed information about other current assets at December 31, 2018 and 2017 (in thousands):

December 31,
2018 2017

Other current assets:

Prepaid current assets

$ 11,207 $ 9,598

Reinsurance receivable

6,365 7,328

Other

501 2,551

Total

$ 18,073 $ 19,477

The table below presents comparative detailed information about other non-current assets at December 31, 2018 and 2017 (in thousands):

December 31,
2018 2017

Other non-current assets:

Reinsurance receivable

$ 6,743 $ 7,768

Deposits

1,309 1,246

Other

510 5,528

Total

$ 8,562 $ 14,542

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Key Energy Services, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The table below presents comparative detailed information about other current liabilities at December 31, 2018 and 2017 (in thousands):

December 31,
2018 2017

Other current liabilities:

Accrued payroll, taxes and employee benefits

$ 19,346 $ 19,874

Accrued operating expenditures

15,861 11,644

Income, sales, use and other taxes

8,911 12,151

Self-insurance reserves

25,358 26,761

Accrued interest

7,105 6,605

Accrued insurance premiums

5,651 4,077

Unsettled legal claims

4,356 4,747

Accrued severance

83 250

Other

706 1,470

Total

$ 87,377 $ 87,579

The table below presents comparative detailed information about other non-current liabilities at December 31, 2018 and 2017 (in thousands):

December 31,
2018 2017

Other non-current liabilities:

Asset retirement obligations

$ 9,018 $ 8,931

Environmental liabilities

2,227 1,977

Accrued sales, use and other taxes

17,024 17,142

Other

67 116

Total

$ 28,336 $ 28,166

NOTE 8.

OTHER (INCOME) LOSS, NET

The table below presents comparative detailed information about our other income and expense for the years ended December 31, 2018 and 2017, the period from December 16, 2016 through December 31, 2016 and the period from January 1, 2016 through December 15, 2016 (in thousands):

Successor Predecessor
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Period from
December 16,
2016 through
December 31,
2016
Period from
January 1,
2016 through
December 15,
2016

Interest income

$ (820 ) $ (711 ) $ (20 ) $ (407 )

Foreign exchange (gain) loss

(2 ) (33 ) 17 1,005

Other, net

(1,532 ) (6,443 ) 35 (3,041 )

Total

$ (2,354 ) $ (7,187 ) $ 32 $ (2,443 )

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Key Energy Services, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 9.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The table below presents a rollforward of our allowance for doubtful accounts for the years ended December 31, 2018 and 2017, the period from December 16, 2016 through December 31, 2016 and the period from January 1, 2016 through December 15, 2016 (in thousands):

Balance at
Beginning
of Period
Charged to
Expense
Deductions Balance at
End of
Period

Successor:

As of December 31, 2018

$ 875 $ 286 $ (105 ) $ 1,056

As of December 31, 2017

168 1,420 (713 ) 875

As of December 31, 2016

— 168 — 168

Predecessor:

As of December 15, 2016

20,915 2,532 (20,404 ) 3,043

In connection with the application of fresh start accounting on December 15, 2016, the carrying value of trade receivables was adjusted to fair value, eliminating the reserve for doubtful accounts. See “ Note 3. Fresh Start Accounting ” for more details.

NOTE 10.

PROPERTY AND EQUIPMENT

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

December 31,
2018 2017

Major classes of property and equipment:

Oilfield service equipment

$ 284,943 $ 260,396

Disposal wells

30,863 29,633

Motor vehicles

44,286 43,366

Furniture and equipment

6,469 5,456

Buildings and land

65,328 66,964

Work in progress

7,154 7,312

Gross property and equipment

439,043 413,127

Accumulated depreciation

(163,333 ) (85,813 )

Net property and equipment

$ 275,710 $ 327,314

Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest rate based on related debt until the underlying assets are placed into service. Capitalized interest for the years ended December 31, 2018 and 2017, the period from December 16, 2016 through December 31, 2016 and the period from January 1, 2016 through December 15, 2016 was zero. As of December 31, 2018 and 2017, we have no capital lease obligations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11.

INTANGIBLE ASSETS

The components of our intangible assets as of December 31, 2018 and 2017 are as follows (in thousands):

December 31,
2018 2017

Gross carrying value

$ 520 $ 520

Accumulated amortization

(116 ) (58 )

Net carrying value

$ 404 $ 462

Amortization expense for our intangible assets with determinable lives was as follows (in thousands):

Successor Predecessor
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Period from
December 16,
2016 through
December 31,
2016
Period from
January 1,
2016 through
December 15,
2016

Noncompete agreements

$ — $ — $ — $ 179

Patents and trademarks

58 58 — 40

Customer relationships and contracts

— — — 1,239

Developed technology

— — — 340

Total intangible asset amortization expense

$ 58 $ 58 $ — $ 1,798

The weighted average remaining amortization periods and expected amortization expense for the next five years for our definite lived intangible assets are as follows (in thousands):

Weighted
average remaining
amortization
period (years)
Expected Amortization Expense
2019 2020 2021 2022 2023

Trademarks

7.0 $ 58 $ 58 $ 58 $ 58 $ 58

Total expected intangible asset amortization expense

$ 58 $ 58 $ 58 $ 58 $ 58

NOTE 12.

EARNINGS PER SHARE

The following table presents our basic and diluted earnings per share (“EPS ” ) for the years ended December 31, 2018, 2017 and 2016 (in thousands, except per share amounts):

Successor Predecessor
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Period from
December 16,
2016 through
December 31,
2016
Period from
January 1, 2016

through
December 15,
2016

Basic and diluted EPS Calculation:

Numerator