KLX Energy Services Holdings, Inc. 10-K

Item 8. FINANCIAL STATEMENTS Index to Consolidated Financial Statements KLX Energy Services Holdings, Inc. Report of Independent Registered Public Accounting Firm 63 Consolidated Balance Sheets as of January 31, 2021 and 2020 64 Consolidated Statements of Operations for the Years Ended January 31, 2021 and 2020 65 Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2021 and 2020 66 Consolidated Statements of Cash Flows for the Years Ended January 31, 2021 and 2020 67 Notes to Consolidated Financial Statements 68 62 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of KLX Energy Services Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of KLX Energy Services Holdings, Inc. and subsidiaries (the "Company") as of January 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows, for each of the two years in the period ended January 31, 2021, 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 January 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended January 31, 2021, in conformity with accounting principles generally accepted in the United States of America. 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 Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the 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/ Deloitte & Touche LLP Tampa, Florida April 28, 2021 We have served as the Company's auditor since 2018. 63 Table of Contents KLX Energy Services Holdings, Inc. Consolidated Balance Sheets (In millions of U.S. dollars and shares, except per share data) January 31, 2021 January 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 47.1 $ 123.5 Accounts receivable–trade, net of allowance of $ 6.5 and $ 12.9 67.0 79.2 Inventories, net 20.8 12.0 Other current assets 15.8 13.8 Total current assets 150.7 228.5 Property and equipment, net 203.7 306.8 Goodwill — 28.3 Intangible assets, net 2.5 45.8 Other assets 5.8 14.0 Total assets $ 362.7 $ 623.4 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 39.4 $ 31.4 Accrued interest 7.2 7.2 Accrued liabilities 29.2 26.2 Current portion of capital lease obligations 1.9 — Total current liabilities 77.7 64.8 Long-term debt 243.9 243.0 Long-term capital lease obligations 4.4 — Other non-current liabilities 4.6 3.4 Commitments, contingencies and off-balance sheet arrangements (Note 11) Stockholders’ equity: Common stock, $ 0.01 par value; 110.0 authorized; 8.6 and 5.0 issued (1) 0.1 0.1 Additional paid-in capital 469.1 416.6 Treasury stock, at cost, 0.3 shares and 0.1 shares (1) ( 4.0 ) ( 3.6 ) Accumulated deficit ( 433.1 ) ( 100.9 ) Total stockholders’ equity 32.1 312.2 Total liabilities and stockholders' equity $ 362.7 $ 623.4 (1) Common stock and treasury stock were retroactively adjusted for the Company's 1-for-5 Reverse Stock Split effective July 28, 2020. See Note 1. See accompanying notes to consolidated financial statements. 64 Table of Contents KLX Energy Services Holdings, Inc. Consolidated Statements of Operations (In millions of U.S. dollars, except per share amounts) Year Ended January 31, 2021 January 31, 2020 Revenues $ 276.8 $ 544.0 Costs and expenses: Cost of sales 314.8 470.0 Selling, general and administrative 88.8 100.0 Research and development costs 0.7 2.7 Impairment and other charges 213.9 47.0 Bargain purchase gain ( 40.3 ) — Operating loss ( 301.1 ) ( 75.7 ) Non-operating expense: Interest expense, net 30.7 29.2 Loss before income tax ( 331.8 ) ( 104.9 ) Income tax expense (benefit) 0.4 ( 8.5 ) Net loss $ ( 332.2 ) $ ( 96.4 ) Net loss per share-basic (1) $ ( 50.86 ) $ ( 21.61 ) Net loss per share-diluted (1) $ ( 50.86 ) $ ( 21.61 ) (1) Basic and diluted net loss per share were retroactively adjusted for the Company’s 1-for-5 Reverse Stock Split effective July 28, 2020. See Note 1. See accompanying notes to consolidated financial statements. 65 Table of Contents KLX Energy Services Holdings, Inc. Consolidated Statements of Stockholders' Equity Years Ended January 31, 2021 and 2020 ( In millions of U.S. dollars and shares ) Common Stock Additional Paid-in Capital Treasury Stock Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at January 31, 2019 4.5 $ — $ 345.2 $ — $ ( 4.5 ) $ 340.7 Sale of stock under employee stock purchase plan — — 1.8 — — 1.8 Restricted stock, net of forfeitures 0.1 — 18.2 ( 1.0 ) — 17.2 Purchase of treasury stock — — — ( 1.2 ) — ( 1.2 ) Red Bone acquisition price shares reserved 0.2 — 36.4 — — 36.4 Issuance of shares as a component of Tecton acquisition price 0.1 — 12.1 — — 12.1 Issuance of shares as a component of Motley acquisition price 0.1 0.1 2.9 — — 3.0 Escrowed shares related to Tecton acquisition — — — ( 1.4 ) — ( 1.4 ) Net loss — — — — ( 96.4 ) ( 96.4 ) Balance at January 31, 2020 5.0 0.1 416.6 ( 3.6 ) ( 100.9 ) 312.2 Restricted stock, net of forfeitures — — 17.8 ( 0.1 ) — 17.7 Purchase of treasury stock — — — ( 0.3 ) — ( 0.3 ) Red Bone acquisition price shares reserved 0.2 — — — — — QES acquisition price shares issuance 3.4 — 34.7 — — 34.7 Net loss — — — — ( 332.2 ) ( 332.2 ) Balance at January 31, 2021 8.6 $ 0.1 $ 469.1 $ ( 4.0 ) $ ( 433.1 ) $ 32.1 See accompanying notes to consolidated financial statements. 66 Table of Contents KLX Energy Services Holdings, Inc. Consolidated Statements of Cash Flows (In millions of U.S. dollars) Year Ended January 31, 2021 January 31, 2020 Cash flows from operating activities: Net loss $ ( 332.2 ) $ ( 96.4 ) Adjustments to reconcile net loss to net cash flows (used in) provided by operating activities Depreciation and amortization 61.7 64.1 Deferred income taxes ( 0.1 ) ( 8.9 ) Impairment and other charges 213.9 47.0 Non-cash compensation 17.8 18.5 Amortization of deferred financing fees 1.3 1.1 Provision for inventory reserve 3.0 2.6 Change in allowance for doubtful accounts ( 6.9 ) 9.8 (Gain) loss on disposal of property, equipment and other ( 1.7 ) 5.0 Bargain purchase gain ( 40.3 ) — Changes in operating assets and liabilities: Accounts receivable 31.4 39.9 Inventories ( 0.1 ) 3.6 Other current and non-current assets 7.4 ( 9.0 ) Accounts payable ( 16.1 ) ( 13.8 ) Other current and non-current liabilities ( 4.0 ) ( 5.4 ) Net cash flows (used in) provided by operating activities ( 64.9 ) 58.1 Cash flows from investing activities: Purchases of property and equipment ( 12.2 ) ( 70.8 ) Proceeds from sale of property and equipment 4.3 0.7 Acquisitions, net of cash acquired ( 4.0 ) ( 27.6 ) Net cash flows used in investing activities ( 11.9 ) ( 97.7 ) Cash flows from financing activities: Purchase of treasury stock ( 0.4 ) ( 1.2 ) Shares cancelled by employees for taxes — ( 1.0 ) Cash proceeds from stock issuance — 1.5 Payments on capital lease obligations ( 1.1 ) — Change to financed payables 1.9 — Net cash flows provided by (used in) financing activities 0.4 ( 0.7 ) Net decrease in cash and cash equivalents ( 76.4 ) ( 40.3 ) Cash and cash equivalents, beginning of period 123.5 163.8 Cash and cash equivalents, end of period $ 47.1 $ 123.5 Supplemental disclosures of cash flow information: Cash paid during period for: Income taxes paid, net of refunds $ ( 0.5 ) $ 1.0 Interest 29.4 29.4 Supplemental schedule of non-cash activities: Change in deposits on capital expenditures $ ( 5.6 ) $ ( 9.8 ) Accrued capital expenditures 1.7 4.5 See accompanying notes to consolidated financial statements. 67 Table of Contents KLX Energy Services Holdings, Inc. Notes to Consolidated Financial Statements (In millions of U.S. dollars) NOTE 1 - Description of Business and Significant Accounting Policies Description of Business KLX Energy Services Holdings, Inc. (the “Company”, “KLXE” or “KLX Energy Services”) is a growth-oriented provider of diversified oilfield services to leading onshore oil and natural gas exploration and production (“E&P”) companies operating in both conventional and unconventional plays in all of the active major basins throughout the United States. The Company delivers mission critical oilfield services focused on drilling, completion, production and intervention activities for the most technically demanding wells in over 50 service and support facilities located throughout the United States. The Company offers a complementary suite of proprietary products and specialized services that is supported by technically skilled personnel and a broad portfolio of innovative in-house manufacturing, repair and maintenance capabilities. KLXE’s primary services include coiled-tubing, directional drilling, hydraulic fracturing rentals, fishing, pressure control, wireline, rig-assisted snubbing, fluid pumping, flowback, testing and well control services. KLXE’s primary rentals and products include hydraulic fracturing stacks, blow out preventers, tubulars, downhole tools, dissolvable plugs, composite plugs and accommodation units. On July 24, 2020, KLXE stockholders approved an amendment to the amended and restated certificate of incorporation of KLXE (the “Reverse Stock Split Amendment”) to effect a reverse stock split of KLXE common stock at a ratio within a range of 1-for-5 and 1-for-10 (the “Reverse Stock Split”), as determined by KLXE’s board of directors (the “Board”). The Board subsequently resolved to implement the Reverse Stock Split at a ratio of 1-for-5. On July 28, 2020, KLX Energy Services, Krypton Intermediate, LLC, an indirect wholly owned subsidiary of KLXE, Krypton Merger Sub, Inc., an indirect wholly owned subsidiary of KLXE (“Merger Sub”), and Quintana Energy Services Inc. (“QES”) completed the previously announced acquisition of QES, by means of a merger of Merger Sub with and into QES, with QES surviving the merger as a subsidiary of KLXE (the “Merger”). On July 28, 2020, immediately prior to the consummation of the Merger, the Reverse Stock Split Amendment became effective and thereby effectuated the 1-for-5 Reverse Stock Split of the Company’s issued and outstanding common stock. Basis of Presentation The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP”). The consolidated financial statements include all accounts of KLXE and its subsidiaries. All intercompany transactions and account balances have been eliminated upon consolidation. The consolidated financial statements for Fiscal 2019 and for the period from February 1, 2020 to July 28, 2020 reflect only the historical results of the Company prior to the completion of the Merger. The accompanying consolidated financial statements present the consolidated KLXE and QES financial position as of January 31, 2021. The consolidated statement of operations and the consolidated statement of cash flows for the year ended January 31, 2021 includes QES’s results for the period July 29, 2020 through January 31, 2021. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates. 68 Table of Contents Segment Reporting The Company changed its presentation of reportable segments related to the allocation of corporate overhead costs to reflect the presentation used by the company's chief operational decision-making group ("CODM") to make decisions about resources to be allocated to the Company’s reportable segments and to assess segment performance. Historically, and through July 31, 2020, the Company’s total corporate overhead costs were allocated and reported within each reportable segment. During the third quarter of 2020, the Company changed the corporate overhead allocation methodology to only include corporate costs incurred on behalf of its operating segments, which includes accounts payable, accounts receivable, insurance, audit, supply chain, health, safety and environmental and others. The remaining unallocated corporate costs are reported as a reconciling item in the Company’s segment reporting disclosures. See Note 15 for additional information. The change is reflected retroactively in the accompanying financial statements which resulted in a decrease to the total corporate overhead costs allocated to our three reportable segments for the year ended January 31, 2021, and 2020 of $ 62.0 and $ 54.7 , respectively. In conjunction with the change in presentation of reportable segments, the Company also changed its presentation of segment assets. Historically, and through July 31, 2020, the Company’s corporate assets were allocated and reported within each reportable segment. During the third quarter of 2020, the Company changed the presentation of total assets to present corporate assets separately as a reconciling item in its segment reporting disclosures. As a result of the change in presentation, the total corporate assets allocated to the Company’s three reportable segments decreased by $ 51.9 and $ 139.1 as of January 31, 2021 and 2020, respectively. The Company also changed its presentation of service offering revenues. Historically, and through July 31, 2020, the Company’s service offering revenues included revenues from the completion, production and intervention market types within segment reporting. During the third quarter of 2020, the Company changed the presentation of its service offering revenues by separately reporting a drilling market type revenue, which includes directional drilling, drilling accommodation units and related drilling support services. The reclassifications are retroactively reported in the Company’s segment reporting disclosures to reflect the drilling revenue change and use of the information by the Company’s CODM. For the year ended January 31, 2021 and 2020, the total drilling revenues reported within segment reporting was $ 46.7 and $ 44.4 , respectively. These current period changes in the Company’s corporate allocation method and service offering revenue disclosures have no net impact to the consolidated financial statements. The change better reflects the CODM’s philosophy on assessing performance and allocating resources as well as improves the Company’s comparability to its peer group. Business Combinations We completed our acquisition of QES on July 28, 2020. QES's results of operations have been included in our financial results for the period subsequent to the acquisition date. Under the acquisition method of accounting, we allocate the fair value of purchase consideration transferred to the tangible assets and intangible assets acquired, if any, and liabilities assumed based on their estimated fair values on the date of the acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. The estimated fair value of the assets acquired, net of liabilities assumed, exceeded the purchase consideration, resulting in a bargain purchase gain. When determining the fair value of assets acquired and liabilities assumed, we make significant estimates and assumptions. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. 69 Table of Contents During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to bargain purchase gain if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred. Revenue Recognition Revenue is recognized upon the customer obtaining control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC Topic 606, the following five steps are performed: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. Revenue is recognized in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Service revenues are recorded over time throughout and for the duration of the service period pursuant to a master services agreement (“MSA”) combined with a completed field ticket or a work order. Revenues from product sales are recognized when the customer obtains control of the product, which occurs at a point in time, typically upon delivery in accordance with the terms of the field ticket or work order. Income Taxes The Company accounts for deferred income taxes through the asset and liability method. Under this method, a deferred tax liability or asset is recognized for the expected future tax consequences resulting from the differences in financial reporting bases and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is recorded if it is more likely than not that some or all of the deferred tax assets will not be realized. The Company recognizes accrued interest and penalties related to uncertain tax positions, if any, as a component of income tax expense. Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents consist of cash on hand, and certificates of deposits. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash and cash equivalents in various financial institutions, which at times may exceed federally insured amounts. Management believes that this risk is not significant. Accounts Receivable, Net The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. The allowance for doubtful accounts at January 31, 2021 and 2020 was $ 6.5 and $ 12.9 , respectively. Activity in our allowance for doubtful accounts during the years ended January 31, 2021 and 2020 is set forth in the table below: 70 Table of Contents Allowance of doubtful accounts Balance at beginning of period Charged (credited) to costs and expenses Deductions (1) Balance at end of period 2021 $ 12.9 $ 2.0 $ ( 8.4 ) $ 6.5 2020 $ 3.1 $ 11.6 $ ( 1.8 ) $ 12.9 (1) Accounts receivable balances written off during the period, net of recoveries. Inventories Inventories, made up primarily of dissolvable plugs, supplies, finished goods and other consumables used to perform services for customers. The Company values inventories at the lower of cost or net realizable value. Reserves for excess and obsolete inventory were approximately $ 2.4 and $ 1.5 as of January 31, 2021 and 2020, respectively. Property and Equipment, Net Property and equipment are stated at cost and depreciated generally under the straight-line method over their estimated useful lives of one to forty years (or the lesser of the term of the lease for leasehold improvements, as appropriate). Goodwill and Intangible Assets, Net Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other, goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment. Acquired intangible assets with definite lives are amortized over their individual useful lives. As of January 31, 2021, the Company had three reporting units, which were determined based on the guidelines contained in FASB ASC Topic 350, Subtopic 20, Section 35. Each reporting unit constitutes a business, for which there is discrete financial information available that is regularly reviewed by the CODM. Goodwill is tested at least annually as of December 31, and the Company’s management assesses whether there has been any impairment in the value of goodwill by comparing the fair value of the reporting unit to its net carrying value. If the carrying value exceeds its estimated fair value, an impairment loss is recognized for the difference up to the carrying value of goodwill. In this event, the asset is written down accordingly. The fair value is determined using valuation techniques based on estimates, judgments and assumptions that the Company’s management believes are appropriate in the circumstances. For the years ended January 31, 2021 and 2020, the Company determined goodwill was impaired and recorded goodwill impairment charges of $ 28.3 and $ 47.0 , respectively. See Note 7 for additional information. Long‑Lived Assets Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are tested for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the asset’s carrying value exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. For the years ended January 31, 2021 and 2020, there were $ 180.4 and $ 0.0 impairments of long lived assets. See Note 7 for additional information. 71 Table of Contents Debt Issuance Costs The Company capitalizes certain third-party fees directly related to the issuance of debt and amortizes these costs over the life of the debt using the effective interest method. Debt issuance costs related to the Company’s $ 100.0 senior secured asset-based lending facility are presented net of amortization as a non-current asset. Debt issuance costs related to the Company’s $ 250.0 principal amount of 11.5 % senior secured notes due 2025 is presented net of amortization as an offset to the liability. Amortized debt issuance costs are included in interest expense and totaled $ 1.3 and $ 1.1 for the years ended January 31, 2021 and 2020, respectively. Common Stock Equivalents The Company has potential common stock equivalents related to its outstanding restricted stock awards and restricted stock units. These potential common stock equivalents are not included in diluted loss per share for any period presented in which there is a net loss because the effect would have been anti‑dilutive. Stock-Based Compensation The Company accounts for share-based compensation arrangements in accordance with the provisions of FASB ASC 718, whereby share-based compensation cost is measured on the date of grant, based on the calculated fair value of the award and recognized as selling, general and administrative expenses in the consolidated statement of operations over the requisite service period. Compensation cost recognized during the year ended January 31, 2021 and 2020 primarily related to grants of restricted stock and restricted stock units granted or approved by the Company’s Compensation Committee. See “Note 13 - Stock-Based Compensation” for additional information related to stock-based compensation. The Company has established a qualified ESPP, the terms of which, when active, allow for qualified employees (as defined in the ESPP) to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85 % of the closing price on the last business day of each semi-annual stock purchase period. The fair value of the employee purchase rights represents the difference between the closing price of the Company’s shares on the date of purchase and the purchase price of the shares. The Company’s first option period began on January 1, 2019. The ESPP did not have enough shares reserved to satisfy outstanding options to purchase during the offering period ended June 30, 2020, therefore, the Company refunded participants’ contributions. In addition, the Company agreed with QES to temporarily suspend the ESPP due to the Merger. The ESPP was still suspended as of January 31, 2020. The value of the rights granted during the years ended January 31, 2021 and 2020 was $ 0.0 and $ 0.3 , respectively. See “Note 13 - Stock-Based Compensation” for additional information related to the ESPP. Concentration of Risk The Company provides products and services to energy industry customers who focus on developing and producing oil and gas onshore in North America. The Company’s management performs ongoing credit evaluations on the financial condition of all of its customers and maintains allowances for uncollectible accounts receivable based on expected collectability. Credit losses have historically been within management’s expectations and the provisions established. Significant customers change from year to year depending on the level of E&P activity and the use of the Company’s services. During the years ended January 31, 2021 and 2020, no single customer accounted for more than 10% of the Company’s revenues. 72 Table of Contents NOTE 2 - Recent Accounting Pronouncements In March 2020, FASB issued accounting standard update, ("ASU") 2020-04, Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”). The amendments in this ASU are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments in this ASU are effective for all entities, if elected, through December 31, 2022. While the exact impact of this standard is not known, the guidance is not expected to have a material impact on the Company’s consolidated financial statements. In December 2019, FASB issued ASU 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify aspects of income tax approach for intra-period tax allocations when there is a loss from continuing operations and income or a gain from other items, and to provide a general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. Topic 740 also provides guidance to simplify how an entity recognizes a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, and evaluations of when step ups in the tax basis of goodwill should be considered part of a business combination. Companies should also reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The guidance is effective for the Company for the fiscal year beginning February 1, 2022. While the exact impact of this standard is not known, the guidance is not expected to have a material impact on the Company’s consolidated financial statements. In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments. This ASU is intended to update the measurement of credit losses on financial instruments. This update improves financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope by using the Current Expected Credit Losses (“CECL”) model. This guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. The new accounting standard introduces the CECL methodology for estimating allowances for credit losses. The Company is an oilfield service company and as of January 31, 2021 had a third-party accounts receivable balance, net of allowance, of $ 67.0 . Topic 326 is not expected to have a material impact on the Company’s consolidated financial statements. In February 2016, FASB issued ASU 2016-02, Leases (“Topic 842”), which supersedes ASC Topic 840, Leases. Topic 842 requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. Topic 842 will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In November 2019, FASB deferred the effective date for implementation of Topic 842 by one year and, in June 2020, FASB deferred the effective date by an additional year. The guidance under Topic 842 is effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Earlier adoption is permitted. To assess the impact of this guidance, the Company has established a cross functional implementation project team and is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio under the new standard. The Company is in the process of developing its new accounting policies and determining the potential aggregate impact this guidance is likely to have on its consolidated financial statements as of its adoption date. 73 Table of Contents NOTE 3 - Business Combinations QES Merger On July 28, 2020, the Company completed the Merger with QES, a diversified provider of oilfield services to onshore oil and natural gas E&P companies operating in the United States. The Merger purchase price was approximately $ 44.4 , which was comprised of 3.4 million shares of the Company’s common stock and cash paid to settle QES debt. Based on the Company’s preliminary purchase price allocation, the purchase price was less than the fair value of the identifiable assets acquired, which resulted in a $ 40.3 bargain purchase gain being recorded on the consolidated statements of operations for the year ended January 31, 2021. In connection with the closing of the Merger, $ 9.7 in outstanding borrowings and associated fees and expenses of QES's five-year asset-based revolving credit agreement (the “QES ABL Facility”) were paid off. In addition, the Company assumed certain QES compensation agreements, including restricted stock units ("RSU"), with an estimated fair value of $ 2.0 . Based on the service period related to the period prior to the acquisition date, $ 0.4 was allocated to the purchase price, and $ 1.6 relating to post-acquisition services will be recorded as operating expenses over the remaining requisite service periods. As of the Merger date, each unvested QES RSU was converted into a replacement KLXE RSU award at a conversion rate of 0.0969 and valued on July 28, 2020. The Merger was accounted for as a purchase under FASB ASC 805, Business Combinations (“ASC 805”). The results of operations for the acquisition are included in the accompanying consolidated statements of operations from the respective date of acquisition. The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company’s acquisition have been prepared on a preliminary basis with information currently available and are subject to change. The Company expects to finalize its analysis by the second quarter of fiscal 2021. The following table summarizes the fair values of assets acquired and liabilities assumed in the Merger in accordance with ASC 805: QES Cash $ 8.7 Accounts receivable-trade 12.2 Inventories 11.8 Other current and non-current assets 7.4 Property and equipment 84.5 Accounts payable ( 27.1 ) Other current and non-current liabilities ( 12.8 ) Bargain purchase ( 40.3 ) Total purchase price (1) $ 44.4 (1) The total consideration the Merger was approximately $ 44.4 , which was comprised of 3.4 million shares of the Company’s common stock and cash paid to settle QES debt. The Company has substantially integrated portions of the QES business and, as a result, it is not practicable to report stand-alone revenues and operating (loss) earnings of the QES business since the Merger date. Unaudited Supplemental Pro Forma Information The unaudited supplemental pro forma financial information has been provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by combining the companies for the periods presented, or of the results that may be achieved by the combined companies in the future. Further, results may vary significantly from the results reflected in the following unaudited supplemental pro forma financial information because of future events and transactions, as well as other factors. The unaudited supplemental pro forma financial information does not include adjustments to reflect the impact of other cost savings or synergies that may result from the Merger. 74 Table of Contents On a pro forma basis to give effect to the Merger, as if it occurred on February 1, 2019, revenues, net loss and loss per diluted share for the years ended January 31, 2021 and 2020 would have been as follows: Unaudited Pro Forma Year Ended January 31, 2021 2020 Revenues $ 370.4 $ 1,010.1 Net loss 386.6 167.6 Loss per diluted share ( 46.58 ) ( 21.77 ) 2019 Acquisitions On March 15, 2019, the Company acquired Tecton Energy Services (“Tecton”), a provider of flowback and production testing services, operating primarily in the Rocky Mountains. On March 19, 2019, the Company acquired Red Bone Services LLC (“Red Bone”), a provider of fishing and thru-tubing services in the Mid-Continent. The aggregate acquisition price of the acquisitions was approximately $ 74.6 , comprised of approximately $ 47.0 in shares of the Company’s common stock issuable over time at a fixed price and approximately $ 27.6 in cash to the sellers and for the retirement of debt. The Company issued shares in a subsidiary company to effect the Red Bone acquisition, which were exchanged for KLXE common stock over specified dates between the acquisition date and Fiscal 2020. Based on the Company’s final purchase price allocation, the excess of the purchase price over the fair value of the identifiable assets acquired approximated $ 51.2 , of which $ 19.4 was allocated to intangible assets consisting of customer contracts and relationships and covenants not to compete, and $ 31.8 was allocated to goodwill. The useful life assigned to the customer contracts and relationships is 10 years, and the covenants not to compete are being amortized over their contractual periods of 1.5 and 3 years for Tecton and Red Bone, respectively. The Tecton and Red Bone acquisitions were accounted for as purchases under ASC 805. The results of operations for the acquisitions are included in the accompanying consolidated statements of operations from the respective dates of acquisition. The following table summarizes the fair values of assets acquired and liabilities assumed in the Tecton and Red Bone acquisitions in accordance with ASC 805: Tecton Red Bone Accounts receivable-trade $ 2.1 $ 7.2 Inventories — 2.7 Other current and non-current assets 0.2 — Property and equipment 2.8 23.6 Goodwill 15.0 16.8 Identified intangibles 6.2 13.2 Accounts payable and accrued liabilities ( 2.1 ) ( 4.2 ) Other current and non-current liabilities ( 1.6 ) ( 7.3 ) Total consideration paid $ 22.6 $ 52.0 The Company has substantially integrated Red Bone and, as a result, it is not practicable to report stand-alone revenues and operating earnings of the acquired business since the acquisition date. The amount of Tecton revenues included in the Company’s results was approximately $ 21.8 for the year ended January 31, 2020. Unaudited Supplemental Pro Forma Information On a pro forma basis to give effect to the Tecton and Red Bone acquisitions, as if they occurred on February 1, 2018, revenues, net (loss) earnings and (loss) earnings per diluted share for the years ended January 31, 2020 and 2019 would have been as follows: 75 Table of Contents Unaudited Pro Forma Year Ended January 31, 2020 2019 Revenues $ 551.7 $ 566.2 Net (loss) earnings ( 95.9 ) 19.9 (Loss) earnings per diluted share ( 21.50 ) 4.45 Motley Services Acquisition On November 5, 2018, the Company acquired Motley Services, LLC (“Motley”), a premier provider of well completion and intervention services for complex, long lateral, horizontal wells, for $ 140.0 in cash (net of cash acquired) and $ 9.0 of shares of the Company’s common stock payable to certain employees of Motley. The final $ 3.0 installment of the consideration was settled in cash during the year ended January 30, 2021. NOTE 4 - Merger and Integration Costs Merger and integration costs were recorded separately from the acquisition of assets and assumptions of liabilities in the Merger. Merger costs consist of legal and professional fees and accelerated stock compensation expense incurred in connection with the Merger (“Merger costs”). Integration costs consist of expenses to relocate corporate headquarters, integrate the QES business, reduce headcount, and consolidate service and support facilities following the Merger (“Integration costs”). Merger and Integration costs totaled $ 39.7 for the year ended January 31, 2021. $ 3.4 were recorded to cost of sales in the consolidated statement of operations for the year ended January 31, 2021. Additionally, $ 31.0 were recorded to selling, general and administrative in the consolidated statement of operations for the year ended January 31, 2021. Lease termination costs of $ 5.3 were recorded to impairment and other charges in the consolidated statement of operations for the year ended January 31, 2021. As of January 31, 2021, and 2020, accrued lease termination costs were: Beginning Balance as of January 31, 2020 $ — Charged (credited) to costs and expenses 5.3 Deductions ( 1.9 ) Ending balance as of January 31, 2021 $ 3.4 As the Company continues to integrate the QES business, there will be further charges in future periods relating to, among other things, fixed assets, facilities, workforce reductions and other assets. The following table presents Merger and Integration costs that were recorded for the year ended January 31, 2021 in the consolidated statement of operations: Year Ended January 31, 2021 Merger costs $ 27.8 Integration costs 11.9 Total Merger and Integration Costs $ 39.7 NOTE 5 - Inventories, net Inventories consisted of the following: 76 Table of Contents January 31, 2021 January 31, 2020 Supplies $ 13.5 $ 5.6 Plugs 4.6 6.1 Consumables 2.8 1.0 Work-in-progress — 0.2 Other 2.3 0.6 Subtotal 23.2 13.5 Inventory reserve ( 2.4 ) ( 1.5 ) Total inventories $ 20.8 $ 12.0 Inventories are made up primarily of composite and dissolvable plugs, supplies and consumables used to perform services for customers. The Company values inventories at the lower of cost or net realizable value. Inventory reserves were approximately $ 2.4 and $ 1.5 as of January 31, 2021 and 2020, respectively. During the third quarter of 2020, the Company identified certain excess inventory of $ 1.2 , which was written off to cost of sales in the consolidated statement of operations. Activity in the reserve for inventory accounts during the years ended January 31, 2021 and 2020 is set forth in the table below: Reserve for inventory Balance at beginning of period Charged to costs and expenses Deductions (1) Balance at end of period 2021 $ 1.5 $ 1.8 $ ( 0.9 ) $ 2.4 2020 $ 2.0 $ 2.6 $ ( 3.1 ) $ 1.5 (1) Reserve for inventory balances written off during the period, net of recoveries. NOTE 6 - Property and Equipment, Net Property and equipment consisted of the following: Useful Life (Years) January 31, 2021 January 31, 2020 Land, buildings and improvements 1 — 40 $ 43.7 $ 38.2 Machinery 1 — 20 221.8 257.9 Furniture and equipment 1 — 15 183.2 216.7 Total property and equipment 448.7 512.8 Less accumulated depreciation 245.0 206.0 Property and equipment, net $ 203.7 $ 306.8 Depreciation expense was $ 57.7 and $ 60.2 for the years ended January 31, 2021 and 2020, respectively. Assets Held for Sale As of January 31, 2021, the Company’s consolidated balance sheet includes assets classified as held for sale of $ 4.4 . The assets held for sale are reported within other current assets on the consolidated balance sheet and represent the value of six facilities. In light of the current market environment and as part of the ongoing integration of the QES business, the Company has consolidated operations within certain geographies rendering these locations unnecessary to support the efficient operations of the Company. These assets are being actively marketed for sale as of January 31, 2021 and are recorded at the lower of their carrying value or fair value less costs to sell. Subsequent to January 31, 2021, the Company has completed the sale of four operational facilities with a carrying value of $ 3.0 for total sales proceeds of $ 3.5 . 77 Table of Contents NOTE 7 - Goodwill and Intangible Assets, Net The following sets forth the intangible assets by major asset class, all of which were acquired through business purchase transactions: January 31, 2021 January 31, 2020 Useful Life (Years) Original Cost Accumulated Amortization Net Book Value Original Cost Accumulated Amortization Net Book Value Customer contracts and relationships (1) 10 $ 5.7 $ 3.2 $ 2.5 $ 43.0 $ 2.4 $ 40.6 Covenants not to compete 1.5 - 3 0.5 0.5 — 4.7 1.9 2.8 Developed technologies 15 — — — 3.3 0.9 2.4 Total intangible assets $ 6.2 $ 3.7 $ 2.5 $ 51.0 $ 5.2 $ 45.8 (1) The customer contracts and relationships intangible asset’s useful life was reduced from 20 to 10 years as of July 31, 2020. Amortization expense associated with intangible assets was $ 4.0 and $ 3.9 for the year ended January 31, 2021 and 2020, respectively. During the year ended January 31, 2021, accelerated amortization of $ 2.7 was recognized related to the Company’s customer contracts and relationships long-lived intangible. Due to the accelerated amortization of intangible assets, the Company does not expect to recognize future material amortization expense related to intangible assets. Actual future amortization expense may be different due to future acquisitions, impairments, changes in amortization periods or other factors. During the second quarter 2020 review of the customer relationship intangible assets, an analysis of the future contributions to revenue from these customers resulted in forecast declines of approximately 50 %. As a result of the review, the Company recognized a charge of $ 2.7 reflecting accelerated amortization to reduce the carrying value of its customer relationships intangible. The accelerated amortization charge is included in the consolidated statement of operations for the year ended January 31, 2021. Goodwill and indefinite life intangible assets are tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. The oilfield service industry experienced an abrupt deterioration in demand during the second half of 2019, which continued into 2020. During the first quarter of 2020, the novel coronavirus (“COVID-19”) pandemic emerged and applied significant downward pressure on the global economy and oil demand and prices, leading North American operators to announce significant cuts to planned 2020 capital expenditures. The combination of the COVID-19 pandemic and supply concerns drove a steep drop in oil prices, which led to decreases in demand for the Company’s services and lower current and expected revenues for the Company. Based on the impairment indicators above, the Company performed a goodwill and long-lived asset impairment analysis as of the April 30, 2020. The results of the impairment analysis concluded that the carrying amount of the long-lived assets exceeded the relative fair values of two of the reporting units asset groups. As a result, the Company recorded a $ 180.4 long-lived asset impairment charge, $ 39.2 related to intangible assets and $ 141.2 related to property and equipment, which is included in the consolidated statement of operations for the year ended January 31, 2021. This charge reflects $ 91.3 and $ 89.1 of the long-lived assets attributable to the Southwest and Northeast/Mid-Con segments, respectively. Determining fair value requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating profit margins, weighted average cost of capital, terminal growth rates, future market share and future market conditions, among others. The Company’s cash flow projections were a significant input into the April 30, 2020 fair values. See Note 10 for additional information regarding the fair value determination. If the Company continues to be unable to achieve projected results or long-term projections are adjusted downward, it could negatively impact future valuations of the Company’s long-lived assets. 78 Table of Contents The valuation of the Company and its reportable segments’ goodwill impairment test was estimated using the guideline public company analysis and the discounted cash flow analysis, which were equally weighted in the fair value analysis. See Note 10 for additional information regarding the fair value determination. The results of the goodwill impairment test as of April 30, 2020 indicated that goodwill was impaired because the carrying value of the Rocky Mountains reporting unit exceeded its relative fair value. Accordingly, the Company recorded a $ 28.3 goodwill impairment charge, which is included in the consolidated statement of operations for the year ended January 31, 2021. This charge reflects the full value of the goodwill attributable to the Rocky Mountains segment, leaving the Company with no goodwill as of January 31, 2021. The Company recorded a $ 47.0 goodwill impairment charge during the year ended January 31, 2020, which is included in the consolidated statements of operations. The charges reflect the full value of the goodwill attributable to the Northeast/Mid-Con and Southwest segments. The changes in the carrying amount of goodwill for the years ended January 31, 2021 and 2020 are as follows: Balance, January 31, 2019 $ 43.2 Acquisitions 31.8 Purchase price adjustments 0.3 Goodwill impairment ( 47.0 ) Balance, January 31, 2020 28.3 Goodwill impairment ( 28.3 ) Balance, January 31, 2021 $ — NOTE 8 - Accrued Liabilities Accrued liabilities consisted of the following: January 31, 2021 January 31, 2020 Accrued salaries, vacation and related benefits $ 14.3 $ 13.9 Accrued property taxes 1.8 2.3 Accrued incentive compensation 1.9 2.3 Other accrued liabilities 11.2 7.7 Total accrued liabilities $ 29.2 $ 26.2 79 Table of Contents NOTE 9 - Long-Term Debt Long-term debt consisted of the following: January 31, 2021 January 31, 2020 Senior Secured Notes $ 250.0 $ 250.0 Less unamortized debt issuance costs 6.1 7.0 Total debt obligations, net of debt issuance costs 243.9 243.0 Capital leases 6.3 — Less: current portion of capital lease obligations ( 1.9 ) — Total long-term debt and capital lease obligations 248.3 243.0 As of January 31, 2021, long-term debt consisted of $ 250.0 principal amount of 11.5 % senior secured notes due 2025 (the “Notes”) offered pursuant to Rule 144A under the Securities Act of 1933 (as amended, the “Securities Act”) and to certain non-U.S. persons outside the United States in compliance with Regulation S under the Securities Act. On a net basis, after taking into consideration the debt issuance costs for the Notes, total debt as of January 31, 2021 was $ 243.9 . The Notes bear interest at an annual rate of 11.5 %, payable semi-annually in arrears on May 1 and November 1. Interest expense amounted to $ 30.7 and $ 29.2 for the years ended January 31, 2021 and 2020, respectively. Accrued interest as of January 31, 2021 and 2020 was $ 7.2 for both periods. As of January 31, 2021, the Company also had a $ 100.0 asset-based revolving credit facility pursuant to a senior secured credit agreement dated August 10, 2018 (the “ABL Facility”). The ABL Facility became effective on September 14, 2018 and matures in September 2023. On October 22, 2018, the ABL Facility was amended primarily to permit the Company to issue the Notes and acquire Motley and the definition of the required ratio (as defined in the ABL Facility) was also amended as a result of the Notes issuance. Unamortized deferred costs for the ABL Facility of $ 0.7 and $ 0.9 were recorded in other non-current assets as of January 31, 2021 and 2020, respectively. Borrowings under the ABL Facility bear interest at a rate equal to LIBOR plus the applicable margin (as defined in the ABL Facility). There were no outstanding amounts under the ABL Facility as of January 31, 2021 or 2020. The ABL Facility is tied to a borrowing base formula and has no maintenance financial covenants as long as the minimum level of borrowing availability is maintained. During the third quarter of 2020, the Company included the acquired QES current asset collateral into the borrowing base formula used to calculate the Company’s borrowing availability. Availability under the ABL Facility is determined by the borrowing base formula calculated based on a percentage of our accounts receivable and inventory, net of a consolidated fixed charge coverage ratio (“FCCR”) holdback of $ 10.0 . The ABL Facility is secured by, among other things, a first priority lien on the Company’s accounts receivable and inventory and contains customary conditions precedent to borrowing and affirmative and negative covenants. Availability under the ABL Facility was $ 34.9 , net of $ 10.0 FCCR holdback, as of January 31, 2021. The ABL Facility includes a financial covenant which requires the Company’s consolidated fixed charge coverage ratio (“FCCR”) to be at least 1.0 to 1.0 if availability falls below the greater of $ 10.0 or 15 % of the borrowing base. At all times during the year ended January 31, 2021, availability exceeded this threshold, and the Company was not subject to this financial covenant. As of January 31, 2021, the FCCR was below 1.0 to 1.0. The Company was in full compliance with its credit facility as of January 31, 2021. The Company uses standby letters of credit to facilitate commercial transactions with third parties and to secure our performance to certain vendors. Total letters of credit outstanding under the ABL Facility were $ 6.7 at January 31, 2021. To the extent liabilities are incurred as a result of the activities covered by the letters of credit, such liabilities are included on the accompanying consolidated balance sheets. 80 Table of Contents Maturities of long-term debt are as follows: Years ended January 31, 2022 $ — 2023 — 2024 — 2025 — 2026 250.0 Thereafter — Total maturities of Long-term debt $ 250.0 Capital Lease Obligations The Company acquired QES's long-term capital lease agreements in the Merger. The leases are for a manufacturing and office facility supporting completion operations in Oklahoma City, Oklahoma and Elk City, Oklahoma. The capital lease for the facility in Oklahoma City, Oklahoma commenced in December 2006 and is payable monthly in amounts ranging from $ 28,000 to $ 35,000 over the 20 year lease term. The lease for the facility in Elk City, Oklahoma commenced in April 2007 is payable monthly in amounts ranging from $ 25,000 to $ 29,000 over the 20 year lease term. During Fiscal 2020, the Company leased certain vehicles, machinery and service equipment under capital leases. The capital lease obligations for these assets have lease terms ranging from 36 months to 55 months, and the interest rates range between 3.0 % to 7.0 %. As of January 31, 2021, the future minimum lease payments acquired under the Company’s capital leases are as follows (in millions of dollars): Years ended January 31, 2022 $ 2.3 2023 2.1 2024 1.1 2025 0.6 2026 0.6 Thereafter 0.6 Total capital lease payments 7.3 Less: imputed interest 1.0 Total maturities of capital lease obligations $ 6.3 The interest expense associated with the capital lease payments during the year ended January 31, 2021 and 2020 totaled $ 0.3 and $ 0.0 , respectively. NOTE 10 - Fair Value Information All financial instruments are carried at amounts that approximate estimated fair value. The fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. Assets measured at fair value are categorized based upon the lowest level of significant input to the valuations. Level 1 – quoted prices in active markets for identical assets and liabilities. 81 Table of Contents Level 2 – quoted prices for identical assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical assets and liabilities. Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions. The carrying amounts of cash and cash equivalents, accounts receivable-trade and accounts payable represent their respective fair values due to their short-term nature. There was no debt outstanding under the ABL Facility as of January 31, 2021. The fair value of the Notes, based on market prices for publicly traded debt, which the Company classifies as Level 2 inputs, was $ 132.5 and $ 202.5 as of January 31, 2021 and 2020, respectively. During the year ended January 31, 2021, goodwill and long-lived assets, including certain property and equipment and purchased intangibles subject to amortization, were impaired as a result of the interim goodwill and long-lived asset impairment tests performed as of April 30, 2020. The goodwill Level 3 fair value was determined using the average of the guideline public company analysis and the discounted cash flow analysis, both of which were unobservable. The long-lived asset Level 3 fair value was determined using the discounted cash flow analysis using the market and income approaches, both of which were unobservable. Fair value is measured as of the impairment date. The carrying value and fair values of the impaired assets as of April 30, 2020 was $ 194.0 and $ 52.8 for property and equipment, net, $ 28.3 and $ 0.0 for goodwill, and $ 39.2 and $ 0.0 for intangible assets, net, respectively. See Note 7 for a discussion of the changes in goodwill and long-lived asset values due to impairment charges recorded during the year ended January 31, 2021. NOTE 11 - Commitments, Contingencies and Off-Balance-Sheet Arrangements Lease Commitments The Company finances its use of certain facilities and equipment under committed lease arrangements provided by various institutions. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on the consolidated balance sheets. At January 31, 2021, future minimum lease payments under these arrangements approximated $ 72.1 , of which $ 21.6 is related to long-term real estate leases. Rent expense for the years ended January 31, 2021 and 2020 was $ 39.3 and $ 44.3 , respectively. Future payments under operating leases with terms greater than one year as of January 31, 2020 are as follows: Years ended January 31, 2022 $ 22.6 2023 19.7 2024 16.0 2025 10.3 2026 2.4 Thereafter 1.1 Total future operating lease payments $ 72.1 Environmental Regulations & Liabilities The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for the protection of the environment. The Company continues to monitor the status of these laws and regulations. However, the Company cannot predict the future impact of such laws and regulations, as well as standards and requirements, on its business, which are subject to change and can have retroactive effectiveness. Currently, the Company has not been fined, cited or notified of any 82 Table of Contents environmental violations or liabilities that would have a material adverse effect on its consolidated financial statement position, results of operations, liquidity or capital resources. However, management does recognize that by the very nature of its business, material costs could be incurred in the future to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions that may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. Litigation During the year ended January 31, 2020, the Company discovered a credit card theft of approximately $ 2.6 (which is included in cost of sales for the year ended January 31, 2020) and promptly reported the theft to its insurers and law enforcement. The Company also filed suit against several third parties to recover damages related to the theft. During the year ended January 31, 2021, the Company received an insurance reimbursement of $ 2.5 from insurance providers (which is included in cost of sales for the year ended January 31, 2021). The Company implemented additional expenditure controls to reduce the likelihood of similar thefts in the future, such as daily limits on all fuel cards and additional credit card activity reviews by management. The Company is at times either a plaintiff or a defendant in various legal actions arising in the normal course of business, the outcomes of which, in the opinion of management, neither individually nor in the aggregate are likely to result in a material adverse effect on the Company’s consolidated financial statements, except as noted herein. On March 9, 2021, the Company filed claims in the District Court of Harris, County Texas against Magellan E&P Holdings, Inc. ("Magellan"), Redmon-Keys Insurance Group, Inc. ("Redmon") and Certain Underwriters at Lloyd's ("Underwriters") to recover $ 4.6 owed on invoices duly issued by the Company for services rendered on behalf of defendants in response to an offshore well blowout near Bob Hall Pier in Corpus Christi, Texas. Magellan did not dispute the invoices or the charges therein but alleged an inability to pay prior to obtaining funding from Underwriters under Magellan's Owner's Extra Expense ("OEE") policy. An OEE policy is an industry norm to provide insurance coverage in the event of a blowout. Magellan's OEE policy has a limit of $ 20 . We believe that total invoices issued to Magellan by its blowout vendors total $ 14.3 and are within policy limits. The Company's Texas court action includes claims against Magellan and as an additional insured under the OEE policy and also against Redmon-Keys as Magellan's broker who issued the additional insured certificate to the Company. On March 19, 2021, Underwriters filed a declaratory judgment action in the United States District Court for the Southern District of Texas seeking a declaration that approximately $ 7.4 of the total $ 14.3 in blowout related expenses fall outside of policy coverage referencing a date on which they believe coverage ceased to apply. The Company disputes Underwriters allegations on coverage and will likely litigate the issue in one or more court actions. Nonetheless, we note here that approximately $ 2.3 or half of the Company's total $ 4.6 in invoice to Magellan relate to services rendered and materials provided prior to the coverage dispute date alleged by Underwriters. In its declaratory judgment action, Underwriters further alleged that it had made some payments to Magellan. As Magellan had not made onward payments to the Company, the Company filed a request for a Temporary Restraining Order ("TRO") against Magellan in its Texas state court lawsuit. On March 30, 2021, hours before the TRO hearing, Magellan filed for bankruptcy pursuant to Chapter 7 of the U.S. bankruptcy code. The Company believes that the OEE policy is now an asset of the Chapter 7 estate. The bankruptcy proceedings are in their initial stages. At this time, the Company has reserved the full amount of its invoices totaling $ 4.6 as a prudent action in light of the Chapter 7 filing. However, we believe that the proceeds from the OEE policy will ultimately be allocated to the blowout creditors and will be offering our support to the U.S. Trustee in its pursuit of full recovery under the OEE policy from Underwriters. Indemnities, Commitments and Guarantees 83 Table of Contents During its ordinary course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, as well as indemnities to other parties to certain acquisition agreements. The duration of these indemnities, commitments and guarantees varies and, in certain cases, is indefinite. Many of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments the Company could be obligated to make. However, the Company is unable to estimate the maximum amount of liability related to its indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events that are not reasonably determinable. Management believes that any liability for these indemnities, commitments and guarantees would not be material to the accompanying consolidated financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees. The Company has employment agreements with certain key members of management expiring on various dates. The Company’s employment agreements generally provide for certain protections in the event of a change of control. These protections generally include the payment of severance and related benefits under certain circumstances in the event of a change of control. NOTE 12 - Employee Retirement Plans The Company sponsors a qualified, defined contribution savings and investment plan, covering substantially all employees. The KLX Energy Services Holdings, Inc. Retirement Plan ("KLX 401(k) Plan") was established pursuant to Section 401(k) of the Internal Revenue Code. Under the terms of this plan, covered employees may contribute up to 100 % of their annual compensation, limited to certain statutory maximum contributions. Following the Merger, the Company continued to sponsor the legacy QES 401(k) Plan and the KLX 401(k) Plan through the end of their respective Plan year – December 31, 2020. Pursuant to the KLX 401(k) Plan, the Company had a non-discretionary match with a matching percentage of 100 % of the first 3 % of employee contributions and 50 % on the next 2 % of employee contributions, and the matching contribution vested immediately. Pursuant to the QES 401(k) Plan, the Company’s matching was discretionary with a matching percentage of 50 % of the first 6 % of employee contributions. Given the QES match was discretionary, it was suspended prior to the Merger through August 7, 2020. On December 31, 2020, the KLX 401(k) Plan was terminated and its assets were transferred to the QES 401(k) Plan, which was renamed the KLX Energy Services Holdings, Inc. 401(k) Plan. On a go forward basis, participants are vested in discretionary matching contributions in an amount equal to 50 % of the first 6 % of an employee’s eligible compensation that is contributed to the 401(k) Plan based on a 3 year vesting schedule. Total expense for the Plans was $ 1.9 and $ 4.1 for the years ended January 31, 2021 and 2020, respectively. NOTE 13 - Stock-Based Compensation The Company has a Long-Term Incentive Plan (“LTIP”) under which the compensation committee of the Board (the “Compensation Committee”) has the authority to grant stock options, stock appreciation rights, restricted stock, restricted stock units or other forms of equity-based or equity-related awards. Compensation cost for the LTIP grants is generally recorded on a straight-line basis over the vesting term of the shares based on the grant date value using the closing trading price. Compensation cost recognized during the year ended January 31, 2021 and 2020 related to grants of restricted stock granted by or approved by the Compensation Committee. Certain grants of restricted stock to directors and management accelerated in connection with the Merger on July 28, 2020, resulting in approximately $ 15.1 of stock-based compensation expense during the year ended January 31, 2021. As a result, stock-based compensation was $ 17.8 and $ 18.2 for the year ended January 31, 2021 and 2020, respectively. Unrecognized compensation cost related to restricted stock awards made by the Company was $ 3.7 at January 31, 2021. As of the date of the QES acquisition, each unvested QES restricted stock unit award was converted into a replacement KLXE restricted stock unit award at a conversion rate of 0.0969 . Approximately 2.0 million 84 Table of Contents shares of QES common stock subject to awards outstanding were converted to 0.2 million shares of common stock assumed by KLXE. The Company also has a qualified Employee Stock Purchase Plan, the terms of which allow for qualified employees (as defined in the ESPP) to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85 % of the closing price on the last business day of each semi-annual stock purchase period. The fair value of the employee purchase rights represents the difference between the closing price of the Company’s shares on the date of purchase and the purchase price of the shares. Because the ESPP did not have enough shares reserved to satisfy outstanding options to purchase during the offering period ended June 30, 2020, the Company refunded participants’ contributions. In addition, the Company agreed with QES to temporarily suspend the ESPP due to the Merger. As a result, compensation cost was $ 0.0 and $ 0.3 for the year ended January 31, 2021 and 2020, respectively. The Company’s stockholders approved an amendment to the ESPP at the Company’s annual meeting on July 24, 2020, for an increase of 0.3 million shares to the ESPP’s share reserve. As of January 31, 2021 the ESPP plan remained suspended. The following table summarizes shares of restricted stock awards that were granted, vested, forfeited and outstanding. Year ended January 31, 2021 Year ended January 31, 2020 Number of Shares (in thousands) Weighted Average Grant Date Fair Value per Share Weighted Average Remaining vesting Period (in years) Number of Shares (in thousands) (1) Weighted Average Grant Date Fair Value per Share (1) Weighted Average Remaining vesting Period (in years) Outstanding, beginning of period 473 $ 118.75 2.63 493 $ 143.55 3.54 Shares granted including QES 401 7.39 124 41.05 Shares vested ( 398 ) 58.61 ( 126 ) 142.50 Shares forfeited ( 228 ) 134.91 ( 18 ) 99.75 Outstanding, end of period 248 $ 20.14 1.61 473 $ 118.75 2.63 (1) The number of shares and weighted average grant date fair value per share were retroactively adjusted for the Company’s 1-for-5 Reverse Stock Split effective July 28, 2020. See Note 1. NOTE 14 - Income Taxes Income tax expense (benefit) consisted of the following: Year Ended January 31, 2021 2020 Current: Federal $ — $ — State 0.5 0.4 Total current income tax expense 0.5 0.4 Deferred: Federal — ( 8.0 ) State ( 0.1 ) ( 0.9 ) Total deferred income tax expense (benefit) ( 0.1 ) ( 8.9 ) Total income tax expense (benefit) $ 0.4 $ ( 8.5 ) 85 Table of Contents Year Ended January 31, 2021 2020 Income tax provision computed at the statutory federal rate $ ( 69.7 ) $ ( 22.0 ) State income taxes, net of federal tax benefit ( 12.0 ) ( 1.8 ) Change in valuation allowance 71.2 7.2 Non-taxable/non-deductible items 0.1 0.1 Stock based compensation 4.8 0.1 Non-deductible meals and entertainment 0.5 0.9 Officer compensation 1.6 2.9 Tax credits — ( 0.2 ) Goodwill impairment 3.5 3.9 Acquisition costs 0.4 0.4 Total income tax expense (benefit) $ 0.4 $ ( 8.5 ) Income tax expense was $ 0.4 for the year ended January 31, 2021, relating to the Texas franchise tax, which reflects an effective tax rate of approximately ( 0.11 )%. The Company did not recognize a tax benefit on its year-to-date losses due to the full valuation allowance recorded against its net deferred tax assets. The prior year income tax benefit of $ 8.5 relates to the reduction of the valuation allowance relative to acquired Red Bone and Tecton’s deferred tax liabilities via purchase accounting of approximately $ 8.9 , which was partially offset by state tax expense of $ 0.4 . The tax effects of temporary differences and carryforwards that give rise to deferred income tax assets and liabilities consisted of the following: Year Ended January 31, 2021 Year Ended January 31, 2020 Deferred tax assets: Accrued liabilities $ 6.7 $ 5.9 Intangible assets 126.4 77.3 Net operating loss carryforward 128.4 36.4 Inventory capitalization 0.6 0.6 Interest expense limitation — 8.7 Other — 2.2 $ 262.1 $ 131.1 Deferred tax liability: Bargain purchase gain ( 9.7 ) — Other ( 1.2 ) — Depreciation ( 17.6 ) ( 56.2 ) ( 28.5 ) ( 56.2 ) Net deferred tax asset before valuation allowance $ 233.6 $ 74.9 Valuation allowance ( 233.5 ) ( 74.9 ) Net deferred tax asset $ 0.1 $ — Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, the Company looked to the future reversal of existing taxable temporary differences, taxable income in carryback years and the feasibility of tax planning strategies and estimated future taxable income. The need for a valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates. 86 Table of Contents The Company's cumulative loss position was significant negative evidence in assessing the need for a valuation allowance on its deferred tax assets. As of January 31, 2021, the Company determined that it could not sustain a conclusion that it was more likely than not that it would realize any of its deferred tax assets as a result of historical losses, the difficulty of forecasting future taxable income, and other factors. Given the weight of objectively verifiable historical losses from the Company's operations, it has recorded a full valuation allowance on its deferred tax assets, exclusive of $ 0.1 relating to the Texas franchise tax to which the Company expects to fully realize. The Company intends to maintain a full valuation allowance until sufficient positive evidence exists to support its reversal. As of January 31, 2021 and 2020, the Company recorded valuation allowances of $( 233.5 ) and $( 74.9 ), respectively. The change in the valuation allowance from January 31, 2020, was an increase of $ 158.6 which is comprised of $ 71.2 current year activity and $ 87.4 from QES. The Company had an ownership change during the year. Internal Revenue Code (IRC) Section 382 provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership. The Company's annual limitation of tax-effected federal net operating loss utilization under Section 382, is approximately $ 0.1 . As of January 31, 2021, the Company had tax-effected U.S. federal net operating loss carryforwards of $ 81.8 , which includes $ 70.0 of net operating losses subject to an IRC Section 382 limitation, exclusive of QES pre-merger net operating losses. The Company also had tax-effected state net operating loss carryforwards of $ 11.3 as of January 31, 2021, which begin to expire for tax years ending in 2024. As of January 31, 2020, the Company had $ 33.5 of tax-effected U.S. federal net operating losses and $ 2.9 of tax-effected state net operating losses. In addition, on July 28, 2020, the Company completed the all stock merger with QES, in which QES became a wholly owned subsidiary of the Company, triggering an ownership change under IRC Section 382. On the merger date, QES estimated a tax-effected $ 35.3 federal net operating loss carryforward. The ownership change results in an annual limitation of tax-effected federal net operating loss utilization of approximately $ 0.1 under Section 382. The Company has recorded a valuation allowance on the net operating loss balance as it believes that it is more likely than not that the deferred tax asset will not be realized. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based not only on the technical merits of the tax position based on tax law, but also the past administrative practices and precedents of the taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company had no unrecognized tax benefits for years ended January 31, 2021 and 2020. The Company is subject to taxation in the United States and various states. Tax years that remain subject to examinations by major tax jurisdictions are generally open for tax years ending in 2019 and after. In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act, which was enacted on March 27, 2020 in the United States, includes measures to assist companies, including temporary changes to income and non-income-based tax laws. The Company has deferred the employer portion of FICA tax payments of $ 3.8 through December 31, 2020. This deferral is included on the consolidated balance sheet. Accrued and other non-current liabilities each have a balance of $ 1.9 . These payments are due in two installments: half on December 31, 2021; and half on December 31, 2022. The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others. NOTE 15 - Segment Reporting The Company is organized on a geographic basis. The Company’s reportable segments, which are also its operating segments, are comprised of the Southwest Region (the Permian Basin and the Eagle Ford Shale), the Rocky Mountains Region (the Bakken, Williston, DJ, Uinta, Powder River, Piceance and Niobrara basins) and the Northeast/Mid-Con Region (the Marcellus and Utica Shale as well as the Mid-Continent STACK and SCOOP and Haynesville Shale). The segments regularly report their results of operations and make requests 87 Table of Contents for capital expenditures and acquisition funding to the CODM. As a result, the CODM has determined the Company has three reportable segments. The following table presents revenues and operating (loss) earnings by reportable segment: Year Ended January 31, 2021 January 31, 2020 Revenues Southwest $ 83.6 $ 177.9 Rocky Mountains 99.3 216.4 Northeast/Mid-Con 93.9 149.7 Total revenues 276.8 544.0 Operating (loss) earnings (1)(2) Southwest ( 120.0 ) ( 37.4 ) Rocky Mountains ( 43.4 ) 32.7 Northeast/Mid-Con ( 116.0 ) ( 16.3 ) Corporate and other (1) ( 62.0 ) ( 54.7 ) Bargain purchase gain 40.3 — Total operating loss ( 301.1 ) ( 75.7 ) Interest expense, net 30.7 29.2 Loss before income tax $ ( 331.8 ) $ ( 104.9 ) (1) Historically, and through July 31, 2020, the Company ’ s total corporate overhead costs were allocated and reported within each reportable segment. During the third quarter of 2020, the Company changed the corporate overhead allocation methodology to include corporate costs incurred on behalf of its operating segments, which includes accounts payable, accounts receivable, insurance, audit, supply chain, health, safety and environmental and others. The remaining unallocated corporate costs are reported as a reconciling item. The change better reflects the CODM’s philosophy on assessing performance and allocating resources, as well as improve comparability to the Company ’ s peer group. (2) Operating loss for the year ended January 31, 2021 includes impairment and other charges of $ 213.9 of which $ 92.3 was attributable to the Southwest segment, $ 28.3 was attributable to the Rocky Mountains segment, $ 90.9 was attributable to the Northeast/Mid-Con segment and $ 2.4 was attributable to Corporate and other. The following table presents revenues by service offering by reportable segment: Years Ended January 31, 2021 January 31, 2020 Southwest Rocky Mountains Northeast /Mid-Con Total Southwest Rocky Mountains Northeast /Mid-Con Total Drilling $ 19.9 $ 3.2 $ 23.6 $ 46.7 $ 9.5 $ 0.4 $ 34.5 $ 44.4 Completion 44.7 56.7 42.6 144.0 120.7 128.6 44.8 294.1 Production 7.9 25.9 11.6 45.4 20.5 56.3 36.2 113.0 Intervention 11.1 13.5 16.1 40.7 27.2 31.1 34.2 92.5 Total revenues $ 83.6 $ 99.3 $ 93.9 $ 276.8 $ 177.9 $ 216.4 $ 149.7 $ 544.0 The following table presents total assets by segment: January 31, 2021 (1) January 31, 2020 Southwest $ 91.6 $ 153.3 Rocky Mountains 121.1 186.8 Northeast/Mid-Con 98.1 144.2 Total 310.8 484.3 Corporate and other 51.9 139.1 Total assets $ 362.7 $ 623.4 88 Table of Contents (1) See Note 7 for a discussion of the goodwill and long-lived asset impairment charge recorded during the year ended January 31, 2021. The following table presents capital expenditures by reportable segment: Years Ended January 31, 2021 January 31, 2020 Southwest $ 3.5 $ 18.2 Rocky Mountains 4.2 22.6 Northeast/Mid-Con 2.9 25.3 Corporate and other 1.6 4.7 Total capital expenditures $ 12.2 $ 70.8 NOTE 16 - Net Loss Per Common Share On July 28, 2020, immediately prior to consummation of the Merger, the Reverse Stock Split Amendment became effective and thereby effectuated the 1-for-5 Reverse Stock Split of the Company’s issued and outstanding common stock. Basic net loss per common share is computed using the weighted average common shares outstanding during the period. Diluted net loss per common share is computed by using the weighted average common shares outstanding, including the dilutive effect of restricted shares based on an average share price during the period. For the year ended January 31, 2021 and 2020, 0.3 and 0.5 million shares of the Company’s common stock, respectively, were excluded from the determination of diluted net loss per common share because their effect would have been anti-dilutive. The computations of basic and diluted net loss per share for the years ended January 31, 2021 and 2020 are as follows: Years Ended January 31, 2021 January 31, 2020 Net loss $ ( 332.2 ) $ ( 96.4 ) (Shares in millions) (2) Basic weighted average common shares 6.5 4.5 Effect of dilutive securities - dilutive securities — — Diluted weighted average common shares 6.5 4.5 Basic net loss per common share (1) (2) $ ( 50.86 ) $ ( 21.61 ) Diluted net loss per common share (1) (2) $ ( 50.86 ) $ ( 21.61 ) (1) On July 28, 2020, each issued and outstanding share of QES common stock was automatically converted into the right to receive 0.0969 shares of KLXE common stock, which reflects adjustment for the 1-for-5 Reverse Stock Split of the KLXE common stock effected immediately prior to the consummation of the Merger. (2) Shares and per share data have been retroactively adjusted to reflect the Company ’ s 1-for-5 Reverse Stock Split effective July 28, 2020. 89 Table of Contents NOTE 17 - SUBSEQUENT EVENT Amended and Restated LTIP On February 12, 2021, the stockholders of KLXE approved the KLX Energy Services Holdings, Inc. Long-Term Incentive Plan (Amended and Restated as of December 2, 2020) (the “Amended and Restated LTIP”), which, among other things: (i) increases the total number of shares of Company Common Stock, par value $ 0.01 per share, reserved for issuance under the Amended and Restated LTIP by 632,051 shares. A description of the Amended and Restated LTIP is included in the Company’s proxy statement, filed with the Securities and Exchange Commission on January 11, 2021. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.