UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERSeptember 30, 20192020
OR
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| | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 001-38347
Nine Energy Service, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 80-0759121 |
(State or other jurisdiction of incorporation or organization)
| (I.R.S. Employer Identification No.)
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2001 Kirby Drive, Suite 200
Houston, TX 77019
(Address of principal executive offices) (zip code)
(281) 730-5100
(Registrant’s telephone number, including area code)
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| | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | NINE | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | | Accelerated filer | ☐☒ |
Non-accelerated filer | x☐ | | Smaller reporting company | ☐☒ |
| | | Emerging growth company | x☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding at November 8, 20192, 2020 was 30,569,546.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans, and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q; we disclaim any obligation to update these statements unless required by law, and we caution you not to place undue reliance on them. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved.
We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, 2018.2019 and “Risk Factors” in Item 1A of Part II in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. These factors, some of which are beyond our control, include the following:
•the level of capital spending and well completions by the onshore oil and natural gas industry;
•oil and natural gas commodity prices;
•general economic conditions;
•the impact of the coronavirus pandemic on our business and the business of our customers, including the effects of the resulting excess supply of oil;
•geopolitical factors, including actions by the Organization of the Petroleum Exporting Countries (“OPEC”) and other significant oil-producing countries and the ability of such producers to agree to and maintain oil price and production controls;
•our ability to employ, or maintain the employment of, a sufficient number of key employees, technical personnel, and other skilled and qualified workers;
•our ability to implement price increases or maintain existing prices on our products and services;
•pricing pressures, reduced sales, or reduced market share as a result of intense competition in the markets for our composite and dissolvable plug products;
•our ability to accurately predict customer demand;
•conditions inherent in the oilfield services industry, such as equipment defects, liabilities arising from accidents or damage involving our fleet of trucks or other equipment, explosions and uncontrollable flows of gas or well fluids, and loss of well control;
•our ability to implement new technologies and services;
•seasonal and adverse weather conditions;
•our ability to maintain compliance with the New York Stock Exchange continued listing requirements and avoid the delisting of our common stock;
•changes in laws or regulations regarding issues of health, safety, and protection of the environment, including those relating to hydraulic fracturing, greenhouse gases, and climate change; and
•our ability to successfully integrate the assets and operations that we acquired with our acquisition of Magnum Oil Tools International, LTD Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd.its affiliates (the “Magnum Acquisition”) and realize anticipated revenues, cost savings, or other benefits of such acquisition.
Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial, or that could apply to any company could also materially adversely affect our business, financial condition, or future results.
These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
| | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
Assets | |
| | |
| Assets | | | |
Current assets | |
| | |
| Current assets | | | |
Cash and cash equivalents | $ | 93,321 |
| | $ | 63,615 |
| Cash and cash equivalents | $ | 80,338 | | | $ | 92,989 | |
Accounts receivable, net | 118,428 |
| | 154,783 |
| Accounts receivable, net | 34,805 | | | 96,889 | |
Income taxes receivable | | Income taxes receivable | 1,246 | | | 660 | |
Inventories, net | 66,475 |
| | 91,435 |
| Inventories, net | 52,683 | | | 60,945 | |
Prepaid expenses and other current assets | 14,312 |
| | 15,717 |
| Prepaid expenses and other current assets | 19,526 | | | 17,434 | |
Notes receivable from shareholders (Note 9) | — |
| | 7,626 |
| |
Total current assets | 292,536 |
| | 333,176 |
| Total current assets | 188,598 | | | 268,917 | |
Property and equipment, net | 198,879 |
| | 211,644 |
| Property and equipment, net | 108,986 | | | 128,604 | |
Definite-lived intangible assets, net | 159,526 |
| | 173,451 |
| |
Intangible assets, net | | Intangible assets, net | 136,615 | | | 148,991 | |
Goodwill | 316,469 |
| | 307,804 |
| Goodwill | 0 | | | 296,196 | |
Indefinite-lived intangible assets | 108,711 |
| | 108,711 |
| |
Other long-term assets | 5,462 |
| | 6,386 |
| Other long-term assets | 4,260 | | | 8,187 | |
Total assets | $ | 1,081,583 |
| | $ | 1,141,172 |
| Total assets | $ | 438,459 | | | $ | 850,895 | |
Liabilities and Stockholders’ Equity | | | | Liabilities and Stockholders’ Equity | | | |
Current liabilities | | | | Current liabilities | |
Accounts payable | $ | 32,027 |
| | $ | 46,132 |
| Accounts payable | $ | 10,022 | | | $ | 35,490 | |
Accrued expenses | 40,473 |
| | 61,434 |
| Accrued expenses | 23,236 | | | 24,730 | |
Current portion of long-term debt | | Current portion of long-term debt | 844 | | | 0 | |
Current portion of capital lease obligations | 973 |
| | 665 |
| Current portion of capital lease obligations | 1,067 | | | 995 | |
Income taxes payable | 308 |
| | 57 |
| |
Total current liabilities | 73,781 |
| | 108,288 |
| Total current liabilities | 35,169 | | | 61,215 | |
Long-term liabilities | | | | Long-term liabilities | |
Long-term debt | 391,539 |
| | 424,978 |
| Long-term debt | 343,036 | | | 392,059 | |
Deferred income taxes | 3,039 |
| | 5,915 |
| Deferred income taxes | 0 | | | 1,588 | |
Long-term capital lease obligations | 2,458 |
| | 2,330 |
| Long-term capital lease obligations | 1,391 | | | 2,201 | |
Other long-term liabilities | 3,987 |
| | 4,838 |
| Other long-term liabilities | 5,264 | | | 3,955 | |
Total liabilities | 474,804 |
| | 546,349 |
| Total liabilities | 384,860 | | | 461,018 | |
Commitments and contingencies (Note 10) |
|
| |
|
| Commitments and contingencies (Note 10) | | | |
Stockholders’ equity | | | | Stockholders’ equity | |
Common stock (120,000,000 shares authorized at $.01 par value; 30,582,584 and 30,163,408 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively) | 306 |
| | 302 |
| |
Common stock (120,000,000 shares authorized at $0.01 par value; 31,570,926 and 30,555,677 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively) | | Common stock (120,000,000 shares authorized at $0.01 par value; 31,570,926 and 30,555,677 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively) | 316 | | | 306 | |
Additional paid-in capital | 755,349 |
| | 746,428 |
| Additional paid-in capital | 766,402 | | | 758,853 | |
Accumulated other comprehensive loss | (4,582 | ) | | (4,843 | ) | Accumulated other comprehensive loss | (4,731) | | | (4,467) | |
Accumulated deficit | (144,294 | ) | | (147,064 | ) | Accumulated deficit | (708,388) | | | (364,815) | |
Total stockholders’ equity | 606,779 |
| | 594,823 |
| Total stockholders’ equity | 53,599 | | | 389,877 | |
Total liabilities and stockholders’ equity | $ | 1,081,583 |
| | $ | 1,141,172 |
| Total liabilities and stockholders’ equity | $ | 438,459 | | | $ | 850,895 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
condensed consolidated financial statements.
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share amounts)
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues | $ | 202,305 |
| | $ | 218,427 |
| | $ | 669,527 |
| | $ | 597,726 |
| Revenues | | | | | | | |
Service | | Service | $ | 35,639 | | | $ | 161,632 | | | $ | 187,713 | | | $ | 519,072 | |
Product | | Product | 13,882 | | | 40,673 | | | 61,167 | | | 150,455 | |
| | | 49,521 | | | 202,305 | | | 248,880 | | | 669,527 | |
Cost and expenses | | | | | | | | Cost and expenses | | | | | | | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 166,849 |
| | 165,882 |
| | 529,994 |
| | 467,700 |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | |
Service | | Service | 38,445 | | | 134,984 | | | 179,508 | | | 420,445 | |
Product | | Product | 14,038 | | | 31,865 | | | 55,686 | | | 109,549 | |
General and administrative expenses | 19,222 |
| | 21,816 |
| | 60,979 |
| | 51,837 |
| General and administrative expenses | 10,701 | | | 19,222 | | | 38,380 | | | 60,979 | |
Depreciation | | Depreciation | 7,763 | | | 12,196 | | | 24,753 | | | 39,572 | |
Amortization of intangibles | | Amortization of intangibles | 4,091 | | | 4,609 | | | 12,376 | | | 13,925 | |
Impairment of goodwill | | Impairment of goodwill | 0 | | | 0 | | | 296,196 | | | 0 | |
(Gain) loss on revaluation of contingent liabilities | (5,771 | ) | | 45 |
| | (20,701 | ) | | 1,715 |
| (Gain) loss on revaluation of contingent liabilities | 297 | | | (5,771) | | | 781 | | | (20,701) | |
Loss on sale of subsidiaries | 15,834 |
| | — |
| | 15,834 |
| | — |
| Loss on sale of subsidiaries | 0 | | | 15,834 | | | 0 | | | 15,834 | |
Depreciation | 12,196 |
| | 13,661 |
| | 39,572 |
| | 39,982 |
| |
Amortization of intangibles | 4,609 |
| | 1,857 |
| | 13,925 |
| | 5,653 |
| |
Gain on sale of property and equipment | (466 | ) | | (1,190 | ) | | (799 | ) | | (1,701 | ) | Gain on sale of property and equipment | (535) | | | (466) | | | (2,900) | | | (799) | |
Income (loss) from operations | (10,168 | ) | | 16,356 |
| | 30,723 |
| | 32,540 |
| Income (loss) from operations | (25,279) | | | (10,168) | | | (355,900) | | | 30,723 | |
Interest expense | 9,843 |
| | 1,756 |
| | 29,940 |
| | 6,763 |
| Interest expense | 9,130 | | | 9,843 | | | 28,144 | | | 29,940 | |
Interest income | (111 | ) | | (188 | ) | | (439 | ) | | (450 | ) | Interest income | (43) | | | (111) | | | (593) | | | (439) | |
Gain on extinguishment of debt | | Gain on extinguishment of debt | (15,798) | | | 0 | | | (37,501) | | | 0 | |
Other income | | Other income | (29) | | | 0 | | | (29) | | | 0 | |
Income (loss) before income taxes | (19,900 | ) | | 14,788 |
| | 1,222 |
| | 26,227 |
| Income (loss) before income taxes | (18,539) | | | (19,900) | | | (345,921) | | | 1,222 | |
Provision (benefit) for income taxes | 727 |
| | 1,130 |
| | (1,548 | ) | | 1,875 |
| Provision (benefit) for income taxes | (37) | | | 727 | | | (2,348) | | | (1,548) | |
Net income (loss) | $ | (20,627 | ) | | $ | 13,658 |
| | $ | 2,770 |
| | $ | 24,352 |
| Net income (loss) | $ | (18,502) | | | $ | (20,627) | | | $ | (343,573) | | | $ | 2,770 | |
Earnings (loss) per share | | | | | | | | Earnings (loss) per share | |
Basic | $ | (0.70 | ) | | $ | 0.57 |
| | $ | 0.09 |
| | $ | 1.05 |
| Basic | $ | (0.62) | | | $ | (0.70) | | | $ | (11.56) | | | $ | 0.09 | |
Diluted | $ | (0.70 | ) | | $ | 0.56 |
| | $ | 0.09 |
| | $ | 1.03 |
| Diluted | $ | (0.62) | | | $ | (0.70) | | | $ | (11.56) | | | $ | 0.09 | |
Weighted average shares outstanding | | | | | | | | Weighted average shares outstanding | |
Basic | 29,361,633 |
| | 23,971,032 |
| | 29,288,113 |
| | 23,264,014 |
| Basic | 29,849,753 | | | 29,361,633 | | | 29,708,673 | | | 29,288,113 | |
Diluted | 29,361,633 |
| | 24,389,295 |
| | 29,397,636 |
| | 23,603,922 |
| Diluted | 29,849,753 | | | 29,361,633 | | | 29,708,673 | | | 29,397,636 | |
Other comprehensive income (loss), net of tax | | | | | | | | Other comprehensive income (loss), net of tax | |
Foreign currency translation adjustments, net of $0 tax in each period | $ | (179 | ) | | $ | 207 |
| | $ | 261 |
| | $ | (437 | ) | Foreign currency translation adjustments, net of $0 tax in each period | $ | 132 | | | $ | (179) | | | $ | (264) | | | $ | 261 | |
Total other comprehensive income (loss), net of tax | (179 | ) | | 207 |
| | 261 |
| | (437 | ) | Total other comprehensive income (loss), net of tax | 132 | | | (179) | | | (264) | | | 261 | |
Total comprehensive income (loss) | $ | (20,806 | ) | | $ | 13,865 |
| | $ | 3,031 |
| | $ | 23,915 |
| Total comprehensive income (loss) | $ | (18,370) | | | $ | (20,806) | | | $ | (343,837) | | | $ | 3,031 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
condensed consolidated financial statements.
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity |
| Shares | | Amounts | | | | |
Balance, June 30, 2020 | 31,652,635 | | | $ | 317 | | | $ | 764,382 | | | $ | (4,863) | | | $ | (689,886) | | | $ | 69,950 | |
Issuance of common stock under stock compensation plan, net of forfeitures | (80,882) | | | (1) | | | 1 | | | — | | | — | | | 0 | |
Stock-based compensation expense | — | | | — | | | 2,020 | | | — | | | — | | | 2,020 | |
Exercise of stock options | — | | | — | | | — | | | — | | | — | | | 0 | |
Vesting of restricted stock | (827) | | | — | | | (1) | | | — | | | — | | | (1) | |
Other comprehensive income | — | | — | | | — | | | 132 | | | — | | | 132 | |
Net loss | — | | — | | | — | | | — | | | (18,502) | | | (18,502) | |
Balance, September 30, 2020 | 31,570,926 | | | $ | 316 | | | $ | 766,402 | | | $ | (4,731) | | | $ | (708,388) | | | $ | 53,599 | |
| | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity |
| Shares | | Amounts | | | Shares | | Amounts | |
Balance, June 30, 2019 | 30,683,009 |
| | $ | 307 |
| | $ | 752,072 |
| | $ | (4,403 | ) | | $ | (123,667 | ) | | $ | 624,309 |
| Balance, June 30, 2019 | 30,683,009 | | | $ | 307 | | | $ | 752,072 | | | $ | (4,403) | | | $ | (123,667) | | | $ | 624,309 | |
Issuance of common stock under stock compensation plan | (98,954 | ) | | (1 | ) | | 1 |
| | — |
| | — |
| | — |
| |
Issuance of common stock under stock compensation plan, net of forfeitures | | Issuance of common stock under stock compensation plan, net of forfeitures | (98,954) | | | (1) | | | 1 | | | — | | | — | | | 0 | |
Stock-based compensation expense | — |
| | — |
| | 3,286 |
| | — |
| | — |
| | 3,286 |
| Stock-based compensation expense | — | | | — | | | 3,286 | | | — | | | — | | | 3,286 | |
Exercise of stock options | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Exercise of stock options | — | | | — | | | — | | | — | | | — | | | 0 | |
Vesting of restricted stock | (1,471 | ) | | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) | Vesting of restricted stock | (1,471) | | | — | | | (10) | | | — | | | — | | | (10) | |
Other comprehensive loss | — |
| | — |
| | — |
| | (179 | ) | | — |
| | (179 | ) | Other comprehensive loss | — | | — | | | — | | | (179) | | | — | | | (179) | |
Net loss | — |
| | — |
| | — |
| | — |
| | (20,627 | ) | | (20,627 | ) | Net loss | — | | — | | | — | | | — | | | (20,627) | | | (20,627) | |
Balance, September 30, 2019 | 30,582,584 |
| | $ | 306 |
| | $ | 755,349 |
| | $ | (4,582 | ) | | $ | (144,294 | ) | | $ | 606,779 |
| Balance, September 30, 2019 | 30,582,584 | | | $ | 306 | | | $ | 755,349 | | | $ | (4,582) | | | $ | (144,294) | | | $ | 606,779 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity |
| Shares | | Amounts | | | |
Balance, December 31, 2019 | 30,555,677 | | | $ | 306 | | | $ | 758,853 | | | $ | (4,467) | | | $ | (364,815) | | | $ | 389,877 | |
Issuance of common stock under stock compensation plan, net of forfeitures | 1,164,797 | | | 11 | | | (11) | | | — | | | — | | | 0 | |
Stock-based compensation expense | — | | | — | | | 7,717 | | | — | | | — | | | 7,717 | |
Exercise of stock options | — | | | — | | | — | | | — | | | — | | | 0 | |
Vesting of restricted stock | (149,548) | | | (1) | | | (157) | | | — | | | — | | | (158) | |
Other comprehensive loss | — | | — | | | — | | | (264) | | | — | | | (264) | |
Net loss | — | | — | | | — | | | — | | | (343,573) | | | (343,573) | |
Balance, September 30, 2020 | 31,570,926 | | | $ | 316 | | | $ | 766,402 | | | $ | (4,731) | | | $ | (708,388) | | | $ | 53,599 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity |
| Shares | | Amounts | | | | |
Balance, December 31, 2018 | 30,163,408 | | | $ | 302 | | | $ | 746,428 | | | $ | (4,843) | | | $ | (147,064) | | | $ | 594,823 | |
Issuance of common stock under stock compensation plan, net of forfeitures | 489,529 | | | 5 | | | (5) | | | — | | | — | | | 0 | |
Stock-based compensation expense | — | | | — | | | 10,553 | | | — | | | — | | | 10,553 | |
Exercise of stock options | 674 | | | — | | | 15 | | | — | | | — | | | 15 | |
Vesting of restricted stock | (71,027) | | | (1) | | | (1,642) | | | — | | | — | | | (1,643) | |
Other comprehensive income | — | | — | | | — | | | 261 | | | — | | | 261 | |
Net income | — | | — | | | — | | | — | | | 2,770 | | | 2,770 | |
Balance, September 30, 2019 | 30,582,584 | | | $ | 306 | | | $ | 755,349 | | | $ | (4,582) | | | $ | (144,294) | | | $ | 606,779 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity |
| Shares | | Amounts | | | | |
Balance, June 30, 2018 | 25,030,863 |
| | $ | 250 |
| | $ | 559,645 |
| | $ | (4,328 | ) | | $ | (83,387 | ) | | $ | 472,180 |
|
Issuance of common stock under stock compensation plan | 13,728 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation expense | — |
| | — |
| | 3,508 |
| | — |
| | — |
| | 3,508 |
|
Exercise of stock options | 96,367 |
| | 1 |
| | 1,866 |
| | — |
| | — |
| | 1,867 |
|
Vesting of restricted stock | (26,361 | ) | | — |
| | (790 | ) | | — |
| | — |
| | (790 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | 207 |
| | — |
| | 207 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 13,658 |
| | 13,658 |
|
Balance, September 30, 2018 | 25,114,597 |
| | $ | 251 |
| | $ | 564,229 |
| | $ | (4,121 | ) | | $ | (69,729 | ) | | $ | 490,630 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock |
| Additional Paid-in Capital |
| Accumulated Other Comprehensive Income (Loss) |
| Retained Earnings (Accumulated Deficit) |
| Total Stockholders’ Equity |
| Shares |
| Amounts |
|
|
|
|
Balance, December 31, 2018 | 30,163,408 |
| | $ | 302 |
| | $ | 746,428 |
| | $ | (4,843 | ) | | $ | (147,064 | ) | | $ | 594,823 |
|
Issuance of common stock under stock compensation plan | 489,529 |
| | 5 |
| | (5 | ) | | — |
| | — |
| | — |
|
Stock-based compensation expense | — |
| | — |
| | 10,553 |
| | — |
| | — |
| | 10,553 |
|
Exercise of stock options | 674 |
| | — |
| | 15 |
| | — |
| | — |
| | 15 |
|
Vesting of restricted stock | (71,027 | ) | | (1 | ) | | (1,642 | ) | | — |
| | — |
| | (1,643 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | 261 |
| | — |
| | 261 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 2,770 |
| | 2,770 |
|
Balance, September 30, 2019 | 30,582,584 |
| | $ | 306 |
| | $ | 755,349 |
| | $ | (4,582 | ) | | $ | (144,294 | ) | | $ | 606,779 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity |
| Shares | | Amounts | | | | |
Balance, December 31, 2017 | 15,810,540 |
| | $ | 158 |
| | $ | 384,965 |
| | $ | (3,684 | ) | | $ | (94,081 | ) | | $ | 287,358 |
|
Issuance of common stock in IPO, net of offering costs | 8,050,000 |
| | 81 |
| | 168,180 |
| | — |
| | — |
| | 168,261 |
|
Issuance of common stock under stock compensation plan | 1,171,008 |
| | 11 |
| | (11 | ) | | — |
| | — |
| | — |
|
Stock-based compensation expense | — |
| | — |
| | 9,719 |
| | — |
| | — |
| | 9,719 |
|
Exercise of stock options | 96,367 |
| | 1 |
| | 1,866 |
| | — |
| | — |
| | 1,867 |
|
Vesting of restricted stock | (26,361 | ) | | — |
| | (790 | ) | | — |
| | — |
| | (790 | ) |
Other issuances of common stock | 13,043 |
| | — |
| | 300 |
| | — |
| | — |
| | 300 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | (437 | ) | | — |
| | (437 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 24,352 |
| | 24,352 |
|
Balance, September 30, 2018 | 25,114,597 |
| | $ | 251 |
| | $ | 564,229 |
| | $ | (4,121 | ) | | $ | (69,729 | ) | | $ | 490,630 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
condensed consolidated financial statements.
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Cash flows from operating activities | | | |
Net income (loss) | $ | (343,573) | | | $ | 2,770 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities | | | |
Depreciation | 24,753 | | | 39,572 | |
Amortization of intangibles | 12,376 | | | 13,925 | |
Amortization of deferred financing costs | 2,160 | | | 2,238 | |
Provision for doubtful accounts | 2,121 | | | 236 | |
Benefit for deferred income taxes | (1,588) | | | (2,876) | |
Provision for inventory obsolescence | 1,919 | | | 4,502 | |
Stock-based compensation expense | 7,717 | | | 10,553 | |
Impairment of goodwill | 296,196 | | | 0 | |
Gain on extinguishment of debt | (37,501) | | | 0 | |
Gain on sale of property and equipment | (2,900) | | | (799) | |
(Gain) loss on revaluation of contingent liabilities | 781 | | | (20,701) | |
Loss on sale of subsidiaries | 0 | | | 15,834 | |
Changes in operating assets and liabilities, net of effects from acquisitions | | | |
Accounts receivable, net | 59,964 | | | 20,453 | |
Inventories, net | 6,244 | | | 17,634 | |
Prepaid expenses and other current assets | (1,457) | | | (405) | |
Accounts payable and accrued expenses | (27,073) | | | (16,953) | |
Income taxes receivable/payable | (586) | | | 674 | |
Other assets and liabilities | 5,087 | | | 151 | |
Net cash provided by operating activities | 4,640 | | | 86,808 | |
Cash flows from investing activities | | | |
Acquisitions, net of cash acquired | 0 | | | 1,020 | |
Proceeds from the sale of subsidiaries | 0 | | | 17,222 | |
Proceeds from sales of property and equipment | 5,948 | | | 1,934 | |
Proceeds from property and equipment casualty losses | 555 | | | 1,503 | |
Proceeds from notes receivable payments | 0 | | | 7,626 | |
Purchases of property and equipment | (7,053) | | | (48,898) | |
Net cash used in investing activities | (550) | | | (19,593) | |
Cash flows from financing activities | | | |
Purchases of Senior Notes | (14,410) | | | 0 | |
Proceeds from 2018 ABL Credit Facility | 0 | | | 10,000 | |
Payments on 2018 ABL Credit Facility | 0 | | | (45,000) | |
Payments on capital leases | (738) | | | (668) | |
Payments of contingent liability | (1,331) | | | (250) | |
Proceeds from exercise of stock options | 0 | | | 15 | |
Vesting of restricted stock | (158) | | | (1,643) | |
Net cash used in financing activities | (16,637) | | | (37,546) | |
Impact of foreign currency exchange on cash | (104) | | | 37 | |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
Cash flows from operating activities | |
| | |
|
Net income | $ | 2,770 |
| | $ | 24,352 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | |
Depreciation | 39,572 |
| | 39,982 |
|
Amortization of intangibles | 13,925 |
| | 5,653 |
|
Amortization of deferred financing costs | 2,238 |
| | 1,191 |
|
Provision for (recovery of) doubtful accounts | 236 |
| | (319 | ) |
(Benefit) provision for deferred income taxes | (2,876 | ) | | 965 |
|
Provision for inventory obsolescence | 4,502 |
| | 278 |
|
Stock-based compensation expense | 10,553 |
| | 9,719 |
|
Gain on sale of property and equipment | (799 | ) | | (1,701 | ) |
(Gain) loss on revaluation of contingent liabilities | (20,701 | ) | | 1,715 |
|
Loss on equity method of investment | — |
| | 270 |
|
Loss on sale of subsidiaries | 15,834 |
| | — |
|
Changes in operating assets and liabilities, net of effects from acquisitions | | | |
Accounts receivable, net | 20,453 |
| | (62,702 | ) |
Inventories, net | 17,634 |
| | (7,705 | ) |
Prepaid expenses and other current assets | (405 | ) | | 1,760 |
|
Accounts payable and accrued expenses | (16,953 | ) | | 38,117 |
|
Income taxes receivable/payable | 674 |
| | (666 | ) |
Other assets and liabilities | 151 |
| | (153 | ) |
Net cash provided by operating activities | 86,808 |
| | 50,756 |
|
Cash flows from investing activities | | | |
Acquisitions, net of cash acquired | 1,020 |
| | — |
|
Proceeds from sale of subsidiaries | 17,222 |
| | — |
|
Proceeds from sales of property and equipment | 1,934 |
| | 1,791 |
|
Proceeds from property and equipment casualty losses | 1,503 |
| | 1,743 |
|
Proceeds from notes receivable payments | 7,626 |
| | — |
|
Purchases of property and equipment | (48,898 | ) | | (29,545 | ) |
Net cash used in investing activities | (19,593 | ) | | (26,011 | ) |
Cash flows from financing activities | | | |
Proceeds from revolving credit facilities | 10,000 |
| | — |
|
Payments on revolving credit facilities | (45,000 | ) | | (96,182 | ) |
Proceeds from term loan | — |
| | 125,000 |
|
Payments on term loans | — |
| | (155,701 | ) |
Payments on capital leases | (668 | ) | | — |
|
Payments of contingent liability | (250 | ) | | — |
|
Proceeds from issuance of common stock in IPO, net of offering costs | — |
| | 171,450 |
|
Proceeds from other issuances of common stock | — |
| | 300 |
|
Proceeds from exercise of stock options | 15 |
| | 1,867 |
|
Vesting of restricted stock | (1,643 | ) | | (790 | ) |
Cost of debt issuance | — |
| | (1,385 | ) |
Net cash provided by (used in) financing activities | (37,546 | ) | | 44,559 |
|
Impact of foreign currency exchange on cash | 37 |
| | (283 | ) |
Net increase in cash and cash equivalents | 29,706 |
| | 69,021 |
|
Cash and cash equivalents | | | |
Cash and cash equivalents beginning of year | 63,615 |
| | 17,513 |
|
Cash and cash equivalents end of period | $ | 93,321 |
| | $ | 86,534 |
|
Supplemental disclosures of cash flow information: | | | |
Cash paid for interest | $ | 19,619 |
| | $ | 4,363 |
|
Cash paid for income taxes | $ | 649 |
| | $ | 1,582 |
|
Capital expenditures in accounts payable and accrued expenses | $ | 1,183 |
| | $ | 11,946 |
|
Property and equipment obtained by capital lease | $ | 1,621 |
| | $ | 1,679 |
|
| | | | | | | | | | | |
Net decrease in cash and cash equivalents | (12,651) | | | 29,706 | |
Cash and cash equivalents | | | |
Cash and cash equivalents beginning of year | 92,989 | | | 63,615 | |
Cash and cash equivalents end of period | $ | 80,338 | | | $ | 93,321 | |
Supplemental disclosures of cash flow information: | | | |
Cash paid for interest | $ | 18,901 | | | $ | 19,619 | |
Cash paid (refunded) for income taxes | $ | (482) | | | $ | 649 | |
Capital expenditures in accounts payable and accrued expenses | $ | 150 | | | $ | 1,183 | |
Property and equipment obtained by capital lease | $ | 0 | | | $ | 1,621 | |
Receivable from property and equipment sale (including insurance) | $ | 4,359 | | | $ | 0 | |
Termination of contingent liability related to business acquisition | $ | 3,375 | | | $ | 0 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
condensed consolidated financial statements.
NINE ENERGY SERVICE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Company and Organization
Background
Nine Energy Service, Inc. (the “Company” or “Nine”), a Delaware corporation, is an oilfield services business that provides services integral to the completion of unconventional wells through a full range of tools and methodologies. The Company is headquartered in Houston, Texas.
On August 30, 2019 (the “Divestiture Date”),Risks and Uncertainties
The Company’s business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. The worldwide coronavirus outbreak in early 2020, which was declared a pandemic by the World Health Organization in March 2020, the uncertainty regarding its impact, and various governmental actions taken to mitigate its impact have resulted in an unprecedented decline in demand for oil. In the midst of the ongoing pandemic, the Organization of the Petroleum Exporting Countries and other oil producing nations, including Russia, were initially unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. The convergence of these events created the unprecedented dual impact of a massive decline in the demand for oil, coupled with the risk of a substantial increase in supply, which has directly affected the Company. While the Company soldcannot predict the length of time that market disruptions resulting from the coronavirus pandemic and efforts to mitigate its Production Solutions segmenteffects will continue, the ultimate impact on its business, or the pace or extent of any subsequent recovery, the Company expects the coronavirus pandemic and related effects to Brigade Energy Services LLC (“Brigade”). For additional informationcontinue to have a material adverse impact on commodity prices and its business generally.
Historically, the Production Solutions divestiture, seeCompany has met its liquidity needs principally from cash on hand, cash flow from operations and, if needed, external borrowings. In response to the above events, the Company has implemented certain cost-cutting measures across the organization to continue to maintain its current liquidity position. Based on its current forecasts, the Company believes that cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility (as defined in Note 48 – Business Acquisitions and Divestitures.Debt Obligations), should be sufficient to fund its capital requirements for at least the next twelve months from the issuance date of its condensed consolidated financial statements.
2. Basis of Presentation
Condensed Consolidated Financial Information
The accompanying Condensed Consolidated Financial Statements have not been audited by the Company’s independent registered public accounting firm, except that the Condensed Consolidated Balance Sheet at December 31, 20182019 and the Condensed Consolidated StatementsStatement of Stockholders’ Equity as of December 31, 20182019 and 20172018 are derived from audited Consolidated Financial Statements.consolidated financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for the fair statement of the Company’s financial position have been included. These Condensed Consolidated Financial Statementscondensed consolidated financial statements include all accounts of the Company.
These Condensed Consolidated Financial Statementscondensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Therefore, these Condensed Consolidated Financial Statementscondensed consolidated financial statements should be read in conjunction with the Company’s audited Consolidated Financial Statementsconsolidated financial statements and notes thereto for the year ended December 31, 2018,2019, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the SEC. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Principles of Consolidation
The Condensed Consolidated Financial Statementscondensed consolidated financial statements include the accounts of Nine and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statementscondensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Such estimates include fair value assumptions used in purchase accounting and in analyzing goodwill, definite and indefinite-lived intangible assets, and property and equipment for possible impairment, useful lives used in depreciation and amortization expense, stock-based compensation fair value, estimated realizable value on excess and obsolete inventories, deferred taxes and income tax contingencies, and losses on accounts receivable. It is at least reasonably possible that the estimates used will change within the next year.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. “(Gain) loss on revaluationThese reclassifications relate to presenting “Revenues” and “Cost of contingent liabilities”revenues” by product and “Interest income” are presentedservice as separate line items in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss). Additionally, “(Gain) loss on equity method investment” is no longer shown as a separate line item but is included within the “General and administrative expenses” line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
3. New Accounting Standards
Accounting Standards Update 2014-09Pronouncements Recently Adopted
Background
In May 2014,August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers2018-13, Fair Value Measurement (Topic 606)820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which supersedes the current revenue recognition guidance.eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is based on the principle that revenue is recognized to depict the transfer of goods and services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchangeeffective for those goods or services. The standard also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and asset recognized from costs incurred to obtain or fulfill a contract. The FASB subsequently issued ASU No. 2016-08, ASU No. 2016-10, and ASU No. 2016-12 which provide additional guidance around Topic 606. These amendments are encompassed in the Company’s reference to ASU No. 2014-09 below.
As an emerging growth company, the Company is permitted to, and will, apply ASU No. 2014-09 to annual reporting periods beginning after December 15, 2018all entities for fiscal years, and interim reporting periods within annual reporting periodsthose fiscal years, beginning after December 15, 2019. In the fourth quarter of 2019, the Company, as an emerging growth company, expects to adopt ASU No. 2014-09 for the annual period ending December 31, 2019 (effective January 1, 2019) utilizing the modified retrospective approach. The Company will continue to report revenues under current accounting standards until it formally adopts ASU No. 2014-09.
Status of Management’s Implementation Efforts of ASU No. 2014-09
During 2018, in preparation for the adoption of ASU No. 2014-09, the Company reviewed the various types of customer contract arrangements for each of its businesses. These reviews included the following:
accumulating all customer contractual arrangements;
identifying the individual performance obligations pursuant to each arrangement;
quantifying the considerations under each arrangement;
allocating the consideration under each arrangement to the identified performance obligation; and
determining the timing of revenue recognition pursuant to each arrangement.
The Company has completed these contract reviews and has determined there will be no material adjustment to retained earnings upon adoption of ASU No. 2014-09, effective January 1, 2019. The Companystandard is currently updating and implementing revised accounting system processes in order to capture information required to be disclosed under ASU No. 2014-09.
applied retrospectively, except the new Level 3 disclosure requirements are applied prospectively. The Company is alsoadopted ASU 2018-13 in the processfirst quarter of updating its current accounting policies to align with revenue recognition practices under ASU No. 2014-09. In 2019, as part of its ongoing evaluation of contracts with customers,2020, and it had an immaterial impact on the Company is holding regular meetings with key stakeholders across the organization to determine any impact ASU No. 2014-09 may have on its current or new business processes. Additionally, the Company continues to evaluate its internal processes to address risks associated with incorporating ASU No. 2014-09. Upon adoption, the Company will also implement new internal controls associated with incorporating ASU No. 2014-09, which is not expected to result in a material change in its existing control environment.Company’s condensed consolidated financial statements.
Disclosure Requirements for ASU No. 2014-09Accounting Pronouncements Not Yet Adopted
The Company’s disclosures related to revenue recognition will be significantly expanded under ASU No. 2014-09, specifically around the quantitative and qualitative information associated with performance obligations, changes in contract assets and liabilities, and the disaggregation of revenue. The Company is currently in the process of evaluating the impact of these disclosure requirements.
Other Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard, which requires the use of a modified retrospective transition approach, includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued a new, optional transition method that will givegives companies the option to use the effective date as the date of initial application on transition. Based on initial evaluation,For emerging growth entities, the standard is effective for the fiscal years beginning after December 15, 2021 and interim periods within the fiscal years beginning after December 15, 2022. Early adoption is allowed, and the Company, expectsas an emerging growth company, plans to include operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. Theearly adopt the standard for the fiscal years beginning after December 15, 2019 and interim periods within the fiscal years beginning after December 15, 2020. To support the accounting and disclosure requirements under the new standard, the Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio underand developing and implementing appropriate changes to its internal processes and controls. Based on initial evaluation, the new standard.Company expects to recognize a lease liability and offsetting right-of-use asset for all of its operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. The Company will provide additional information about the expected financial impact as it progresses through the evaluation and implementation of the standard. Although the standard is effective for public business entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the Company, as an emerging growth company, is permitted, and plans, to adopt the standard for the fiscal years beginning after December 15, 2019 and the interim periods within the fiscal years beginning after December 15, 2020.
In August 2016,March 2020, the FASB issued ASU No. 2016-15, Statement of Cash Flows2020-04, Reference Rate Reform (Topic 230)848): Classification of Certain Cash Receipts and Cash Payments. This new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice, including: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and applicationFacilitation of the predominance principle. ASU 2016-15 is effectiveEffects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for public business entities for fiscal years beginning after December 15, 2017applying GAAP to contract modifications and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans,hedging relationships, subject to adopt the new standard for the fiscal years beginning after December 15, 2018 and the interim periods within fiscal years beginning after December 15, 2019. The Company will apply the guidance retrospectively and is currently evaluating the impact of the standard on its Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effortmeeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.discontinued. The amendments in this standard provideASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a screendate within an interim period that includes or is subsequent to determine when an integrated set of assets and activities is not a business. The screen requiresMarch 12, 2020, up to the date that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the integrated set of assets and activities is not a business.financial statements are available to be issued. The Company is currently evaluating the impact of the standard on its Condensed Consolidated Financial Statements. Although the standard is generally effective for fiscal years beginning after December 15, 2017, the Company, as an emerging growth company, is permitted, and plans, to adopt the standard for the fiscal years beginning after December 15, 2018 and the interim periods within annual periods beginning after December 15, 2019. Entities are required to apply the guidance prospectively when adopted.condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The ASU is required to be applied retrospectively, except the new Level 3 disclosure requirements are applied prospectively. The Company is currently evaluating the impact of the standard on its Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract. ASU No. 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in ASU No. 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for public businesses for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the annual reporting periodsfiscal years beginning after December 15, 2020 and the interim periods within annual periodsfiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of the standard on its Condensed Consolidatedcondensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Statements.Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in ASU 2016-13 replace the current incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. ASU 2016-13 is effective for SEC filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
4. Business Acquisitions and DivestituresRevenue
Magnum Acquisition
On October 25, 2018 (the “Closing Date”), pursuant to the termsDisaggregation of a Securities Purchase Agreement, dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), the Company acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum”) for approximately $334.5 million in upfront cash consideration, subject to customary adjustments, and 5.0 million shares of the Company’s common stock, which were issued to the sellers of Magnum in a private placement. The Magnum Purchase Agreement also includes the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019 (the “Magnum Earnout”).
The Magnum Acquisition has been accounted for as a business combination using the acquisition method. Under the acquisition method of accounting, the fair value of the consideration transferred is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date, with the remaining unallocated amount recorded as goodwill.
The following table summarizes the fair value of purchase consideration transferred on the Closing Date:
|
| | | |
| Fair Value |
| (in thousands) |
Proceeds from newly issued Senior Notes and 2018 ABL Credit Facility(1) | $ | 296,622 |
|
Cash provided from operations | 57,740 |
|
Total upfront cash consideration | $ | 354,362 |
|
| |
Issuance of the Company’s common shares | $ | 177,350 |
|
Contingent consideration(2) | 23,029 |
|
Total purchase consideration | $ | 554,741 |
|
(1) Senior Notes and 2018 ABL Credit Facility are defined in Note 8 – Debt Obligations.
(2) The estimated fair value of the Magnum Earnout was based on a Monte Carlo simulation model with estimated outcomes ranging from $0 to $25.0 million. The estimated fair value of the Magnum Earnout was based upon available information and certain assumptions, known at the time of the Closing Date, which management believed were reasonable. Any difference in the actual Magnum Earnout from the estimated fair value of the Magnum Earnout is recorded in operating income (loss) in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
The following table summarizes the allocation of the purchase price of the Magnum Acquisition to the assets acquired and liabilities assumed based on the fair value as of the Closing Date, with the excess of the purchase price over the estimated fair value of the identifiable net assets acquired recorded as goodwill:
|
| | | |
| Purchase Price Allocation |
| (in thousands) |
Cash and cash equivalents | $ | 8,509 |
|
Accounts receivable, net | 30,898 |
|
Income taxes receivable | 695 |
|
Inventories, net | 52,249 |
|
Prepaid expenses and other current assets | 1,147 |
|
Property and equipment, net | 3,729 |
|
Goodwill | 234,504 |
|
Definite-lived intangible assets, net | 148,000 |
|
Indefinite-lived intangible assets | 96,000 |
|
Other long-term assets | 1,055 |
|
Accounts payable | (3,626 | ) |
Accrued expenses | (18,404 | ) |
Other long-term liabilities | (15 | ) |
Total net assets acquired | $ | 554,741 |
|
All goodwill acquired is attributable to expected synergies gained through the Magnum Acquisition as well as the assembled workforce. In addition, all goodwill acquired is included in the Completion Solutions segment and is deductible for tax purposes. For additional information on goodwill, see Note 6 – Goodwill and Intangible Assets.Revenue
The Company finalized its purchase price allocationadopted Accounting Standards Codification 606 (“ASC 606”) on December 31, 2019, effective January 1, 2019, using the modified retrospective method. Accordingly, results for the year ended December 31, 2019 and periods thereafter are presented in connectionaccordance with the Magnum Acquisition during the three months ended September 30, 2019. As a result, the Company recorded measurementASC 606 while prior period adjustments to the fair value of assets acquired and liabilities assumed at the Closing Date due to the refinement of its valuation models, assumptions, and inputs. The updated assumptions and inputs incorporated additional information obtained about facts and circumstances that existed at the Closing Date. These final purchase price allocation adjustments recorded during the three months ended September 30, 2019 related to the finalization of contractual obligations and the finalization of working capital adjustments, which decreased working capital by $1.0 million, and increased accrued expenses by $7.7 million. Total adjustments recorded during the three months ended September 30, 2019 increased goodwill by $8.7 million.
Magnum’s results, of operations are included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss), as part of its Completion Solutions segment,including those presented below for the three and nine months ended September 30, 2019. It is impractical to quantify2019, have not been adjusted and are reported under the contribution of Magnum sinceprevious revenue recognition guidance.
Disaggregated revenue for the Closing Date, as the business was fully integrated into the Company’s existing operations in 2018.
Frac Tech Acquisition
On October 1, 2018, pursuant to the termsthree and conditions of a Securities Purchase Agreement (the “Frac Tech Purchase Agreement”), the Company acquired Frac Technology AS, a Norwegian private limited company (“Frac Tech”) focused on the development of downhole technology, including a casing flotation toolnine months ended September 30, 2020 and a number of patented downhole completion tools. This acquisition was not material to the Company’s Condensed Consolidated Financial Statements.
Production Solutions Divestiture
On August 30, 2019, the Company entered into a Membership Interest Purchase Agreement (“Production Solutions Purchase Agreement”) with Brigade. Pursuant to the Production Solutions Purchase Agreement, on such date, through the sale of all of the limited liability interests of its wholly owned subsidiary, Beckman Holding Production Services, LLC, the Company sold its Production Solutions segment to Brigade for approximately $17.4 million in cash. The closing consideration is subject to working capital and other customary post-closing adjustments. The Production Solutions Purchase Agreement contained customary representations and warranties, covenants, and indemnification provisions. The Company recorded a loss of $15.8 million in connection with this divestiture during the third quarter of 2019. This divestiture does not qualify as discontinued operations at September 30, 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| Completion Solutions | | Total | | Completion Solutions | | Production Solutions(2) | | Total |
| (in thousands) | | (in thousands) |
Coiled tubing | $ | 7,278 | | | $ | 7,278 | | | $ | 31,064 | | | $ | 0 | | | $ | 31,064 | |
Cement | 15,332 | | | 15,332 | | | 55,799 | | | 0 | | | 55,799 | |
Tools | 13,882 | | | 13,882 | | | 40,673 | | | 0 | | | 40,673 | |
Wireline | 13,029 | | | 13,029 | | | 58,716 | | | 0 | | | 58,716 | |
Well service | 0 | | | 0 | | | 0 | | | 16,053 | | | 16,053 | |
Total revenues | $ | 49,521 | | | $ | 49,521 | | | $ | 186,252 | | | $ | 16,053 | | | $ | 202,305 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| Completion Solutions | | Total | | Completion Solutions | | Production Solutions(2) | | Total |
| (in thousands) | | (in thousands) |
Coiled tubing | $ | 35,575 | | | $ | 35,575 | | | $ | 108,604 | | | $ | 0 | | | $ | 108,604 | |
Cement | 84,400 | | | 84,400 | | | 165,799 | | | 0 | | | 165,799 | |
Tools | 61,167 | | | 61,167 | | | 150,455 | | | 0 | | | 150,455 | |
Wireline | 67,738 | | | 67,738 | | | 186,397 | | | 0 | | | 186,397 | |
Well service | 0 | | | 0 | | | 0 | | | 58,272 | | | 58,272 | |
Total revenues | $ | 248,880 | | | $ | 248,880 | | | $ | 611,255 | | | $ | 58,272 | | | $ | 669,527 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| Completion Solutions | | Total | | Completion Solutions | | Production Solutions(2) | | Total |
| (in thousands) | | (in thousands) |
Service(1) | $ | 35,639 | | | $ | 35,639 | | | $ | 145,579 | | | $ | 16,053 | | | $ | 161,632 | |
Product(1) | 13,882 | | | 13,882 | | | 40,673 | | | 0 | | | 40,673 | |
Total revenues | $ | 49,521 | | | $ | 49,521 | | | $ | 186,252 | | | $ | 16,053 | | | $ | 202,305 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| Completion Solutions | | Total | | Completion Solutions | | Production Solutions(2) | | Total |
| (in thousands) | | (in thousands) |
Service(1) | $ | 187,713 | | | $ | 187,713 | | | $ | 460,800 | | | $ | 58,272 | | | $ | 519,072 | |
Product(1) | 61,167 | | | 61,167 | | | 150,455 | | | 0 | | | 150,455 | |
Total revenues | $ | 248,880 | | | $ | 248,880 | | | $ | 611,255 | | | $ | 58,272 | | | $ | 669,527 | |
(1) The Company recognizes revenues from the sales of products at a point in accordance with ASU 2014-08, Presentationtime and revenues from the sales of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity as it does not represent a strategic shift that has a major effectservices over time.
(2) The Production Solutions segment was sold to Brigade Energy Service LLC (“Brigade”) on August 30, 2019. For additional information on the Company’s operationsProduction Solutions divestiture, see Note 13 – Segment Information.
Performance Obligations
At September 30, 2020 and financial results.
December 31, 2019, the amount of remaining performance obligations were immaterial.
Contract Balances
At September 30, 2020 and December 31, 2019, contract assets and contract liabilities were immaterial.
5. Inventories
Inventories, consisting primarily of finished goods and raw materials, are stated at the lower of cost or net realizable value. Cost is determined on an average cost basis. The Company reviews its inventory balances and writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The reserve for obsolescence was $5.6$6.1 million and $1.9$5.4 million at September 30, 20192020 and December 31, 20182019, respectively.
Inventories, net as of September 30, 20192020 and December 31, 20182019 were comprised of the following:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) |
Raw materials | $ | 35,968 | | | $ | 38,823 | |
Work in progress | 93 | | | 0 | |
Finished goods | 22,685 | | | 27,555 | |
Inventories | 58,746 | | | 66,378 | |
Reserve for obsolescence | (6,063) | | | (5,433) | |
Inventories, net | $ | 52,683 | | | $ | 60,945 | |
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (in thousands) |
Raw materials | $ | 37,398 |
| | $ | 38,890 |
|
Work in progress | 597 |
| | 130 |
|
Finished goods | 34,072 |
| | 54,301 |
|
Inventories | 72,067 |
| | 93,321 |
|
Reserve for obsolescence | (5,592 | ) | | (1,886 | ) |
Inventories, net | $ | 66,475 |
| | $ | 91,435 |
|
6. Goodwill and Intangible Assets
Goodwill
The changes in the net carrying amount of the components of goodwill for the nine months ended September 30, 20192020 were as follows:
| | | | | | | | | | | | | | | | | |
| Goodwill |
| Gross Value | | Accumulated Impairment Loss | | Net |
| (in thousands) |
Balance as of December 31, 2019 | $ | 408,732 | | | $ | (112,536) | | | $ | 296,196 | |
Impairment | — | | | (296,196) | | | (296,196) | |
Balance as of September 30, 2020 | $ | 408,732 | | | $ | (408,732) | | | $ | 0 | |
|
| | | | | | | | | | | |
| Goodwill |
| Gross Value | | Accumulated Impairment Loss | | Net |
| (in thousands) |
Balance as of December 31, 2018 | $ | 400,067 |
| | $ | (92,263 | ) | | $ | 307,804 |
|
Purchase price adjustments (1) | 8,665 |
| | — |
| | 8,665 |
|
Balance as of September 30, 2019 | $ | 408,732 |
| | $ | (92,263 | ) | | $ | 316,469 |
|
Q1 2020 Goodwill Impairment(1) The Company recorded adjustments toWith a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes, the outlook for expected future cash flows associated with the Company’s reporting units decreased dramatically in the first quarter of 2020.
Based on the above events, an indication of impairment associated with the Company’s reporting units occurred, triggering an interim goodwill impairment test of the Level 3 fair value of each reporting unit under Accounting Standards Codification 350, Intangibles - Goodwill and Other (“ASC 350”) at March 31, 2020. The Level 3 fair value of each reporting unit was determined by using the income approach (discounted cash flows of forecasted income) based on the Company’s best internal projections and the likelihood of various outcomes.
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, the impact of new product development, and future market conditions, among others. The Company believes that the estimates and assumptions used in the interim goodwill impairment test are reasonable and appropriate.
Based on its Level 3 fair value determination in relationconnection with the interim goodwill impairment test under ASC 350, the Company recorded goodwill impairment charges of $296.2 million in the first quarter of 2020 associated with its tools, cementing, and wireline reporting units. These charges represented a full write-off of goodwill and were primarily attributed to the Magnum Acquisition. For additional information onevents described above, coupled with an increased weighted average cost of capital driven by a reduction in theMagnum Acquisition Company’s stock price and related purchase price adjustments, seethe Level 2 fair value of its Senior Notes (as defined in Note 48 – Business AcquisitionsDebt Obligations).
These charges are included in the line item “Impairment of goodwill” in the Company’s Condensed Consolidated Statements of Income and Divestitures.Comprehensive Income (Loss) for the nine months ended September 30, 2020.
Intangible Assets
The changes in the net carrying value of the components of intangible assets for the nine months ended September 30, 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer Relationships | | Non- Compete Agreements | | Technology | | In-process R&D | | Total |
| (in thousands, except weighted average amortization period information) |
Balance as of December 31, 2019 | $ | 32,536 | | | $ | 1,534 | | | $ | 113,921 | | | $ | 1,000 | | | $ | 148,991 | |
Amortization expense | (5,538) | | | (300) | | | (6,538) | | | — | | | (12,376) | |
Balance as of September 30, 2020 | $ | 26,998 | | | $ | 1,234 | | | $ | 107,383 | | | $ | 1,000 | | | $ | 136,615 | |
Weighted average amortization period | 5.6 | | 3.1 | | 12.9 | | Indefinite | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Intangible Assets |
| Customer Relationships | | Non- Compete Agreements | | Technology | | Definite-Lived Intangible Asset Total | | Trade Names | | Other Intangible Assets | | Indefinite-Lived Intangible Asset Total |
| (in thousands, except weighted average amortization period information) |
Balance as of December 31, 2018 | $ | 47,964 |
| | $ | 2,850 |
| | $ | 122,637 |
| | $ | 173,451 |
| | $ | 107,700 |
| | $ | 1,011 |
| | $ | 108,711 |
|
Additions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amortization expense | (6,255 | ) | | (1,133 | ) | | (6,537 | ) | | (13,925 | ) | | — |
| | — |
| | — |
|
Balance as of September 30, 2019 | $ | 41,709 |
| | $ | 1,717 |
| | $ | 116,100 |
| | $ | 159,526 |
| | $ | 107,700 |
| | $ | 1,011 |
| | $ | 108,711 |
|
Weighted average amortization period | 6.8 | | 3.9 | | 13.8 | | | | Indefinite | | Indefinite | | |
Amortization of intangibles expense was $4.1 million and $12.4 million for the three and nine months ended September 30, 2020, respectively. Amortization of intangibles expense was $4.6 million and $13.9 million for the three and nine months ended September 30, 2019, respectively. Amortization of intangibles expense was $1.9 million and $5.7 million for the three and nine months ended September 30, 2018, respectively.
Future estimated amortization of intangibles is as follows: |
| | | |
(in thousands) |
Year Ending December 31, | |
2019 | $ | 4,443 |
|
2020 | 17,227 |
|
2021 | 16,876 |
|
2022 | 14,223 |
|
2023 | 12,275 |
|
Thereafter | 94,482 |
|
Total | $ | 159,526 |
|
| | | | | |
Year Ending December 31, | (in thousands) |
2020 | $ | 4,091 | |
2021 | 16,116 | |
2022 | 13,463 | |
2023 | 11,516 | |
2024 | 11,183 | |
Thereafter | 79,246 | |
Total | $ | 135,615 | |
With a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes, the carrying amount of long-lived assets (inclusive of definite-lived intangible assets and property and equipment) associated with the Company’s asset groups may not be recoverable. As such, the Company performed an impairment assessment of long-lived assets in its asset groups under Accounting Standards Codification 360, Property, Plant and Equipment (“ASC 360”) at March 31, 2020, based on its best internal projections and the likelihood of various outcomes.
Based on its assessment, the Company determined that the estimated future undiscounted cash flows derived from long-lived assets associated with its asset groups exceeded the carrying amount of long-lived assets associated with its asset groups, and 0 impairment to long-lived assets was required.
No events triggered additional impairment tests under ASC 360 through September 30, 2020. However, the occurrence of future events or deteriorating market conditions could result in additional impairment assessments under ASC 360 subsequent to September 30, 2020.
7. Accrued Expenses
Accrued expenses as of September 30, 20192020 and December 31, 20182019 consisted of the following:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) |
Accrued compensation and benefits | $ | 5,519 | | | $ | 7,009 | |
Accrued interest | 12,948 | | | 6,091 | |
Accrued bonus | 0 | | | 5,043 | |
Accrued sales tax | 303 | | | 820 | |
Contingent liabilities | 396 | | | 391 | |
Other accrued expenses | 4,070 | | | 5,376 | |
Accrued expenses | $ | 23,236 | | | $ | 24,730 | |
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (in thousands) |
Accrued compensation and benefits | $ | 15,140 |
| | $ | 11,930 |
|
Accrued bonus | 2,067 |
| | 13,250 |
|
Sales tax payable | 724 |
| | 1,185 |
|
Contingent liabilities | 778 |
| | 20,922 |
|
Interest payable | 14,841 |
| | 7,031 |
|
Other accrued expenses | 6,923 |
| | 7,116 |
|
Accrued expenses | $ | 40,473 |
| | $ | 61,434 |
|
8. Debt Obligations
The Company’s debt obligations as of September 30, 20192020 and December 31, 20182019 were as follows:
| | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| (in thousands) | | (in thousands) |
Senior Notes | $ | 400,000 |
| | $ | 400,000 |
| Senior Notes | $ | 347,168 | | | $ | 400,000 | |
2018 ABL Credit Facility | — |
| | 35,000 |
| 2018 ABL Credit Facility | 0 | | | 0 | |
Magnum Promissory Notes | | Magnum Promissory Notes | 2,250 | | | 0 | |
Total debt before deferred financing costs | $ | 400,000 |
| | $ | 435,000 |
| Total debt before deferred financing costs | $ | 349,418 | | | $ | 400,000 | |
Deferred financing costs | (8,461 | ) | | (10,022 | ) | Deferred financing costs | (5,538) | | | (7,941) | |
Total debt | $ | 391,539 |
| | $ | 424,978 |
| Total debt | $ | 343,880 | | | $ | 392,059 | |
Less: Current portion of long-term debt | — |
| | — |
| Less: Current portion of long-term debt | (844) | | | 0 | |
Long-term debt | $ | 391,539 |
| | $ | 424,978 |
| Long-term debt | $ | 343,036 | | | $ | 392,059 | |
Senior Notes
Background
On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The Senior Notes were issued under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among the Company, certain subsidiaries of the Company and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year, withand the first interest payment beingwas due on May 1, 2019. The Senior Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s current domestic subsidiaries and by certain future subsidiaries.
The Indenture contains covenants that limit the Company’s ability and the ability of its restricted subsidiaries to engage in certain activities. The Company was in compliance with the provisions of the Indenture at September 30, 2019.2020.
Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to the Company, any restricted subsidiary of the Company that is a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.
Unamortized deferred financing costs associated with the Senior Notes were $8.5$5.5 million and $10.0$7.9 million at September 30, 20192020 and December 31, 2018,2019, respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method.
Extinguishment of Debt
The Company repurchased approximately $23.1 million and $52.8 million of Senior Notes at a repurchase price of approximately $7.0 million and $14.4 million in cash for the three and nine months ended September 30, 2020, respectively. Deferred financing costs associated with these transactions were $0.4 million and $0.9 million for the three and nine months ended September 30, 2020, respectively. As a result, for the three and nine months ended September 30, 2020, the Company recorded a $15.8 million gain and a $37.5 million gain, respectively, on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by the deferred financing costs. The gain on extinguishment of debt is included as a separate line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and nine months ended September 30, 2020.
Subsequent to September 30, 2020, the Company repurchased an additional $0.5 million of the Senior Notes for a repurchase price of approximately $0.2 million in cash.
2018 ABL Credit Facility
On October 25, 2018, the Company entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”), by and among the Company, Nine Energy Canada, Inc., JP Morgan Chase Bank, N.A. (“JP Morgan”), as administrative
agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.
Loans to the Company and its domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or LIBOR loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be CDORCanadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on the Company’s leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments. The weighted average interest rate was 2.63% during the nine months ended September 30, 2019.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below a certain threshold$18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. The Company was in compliance with all covenants under the 2018 ABL Credit Agreement at September 30, 2019.2020.
All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties, excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.
Concurrent with the effectiveness of the 2018 ABL Credit Facility, the Company borrowed approximately $35.0 million to fund a portion of the upfront cash purchase of the Magnum Acquisition. The Company is permitted to repay any amounts borrowed prior to the maturity date without any premium or penalty, subject to minimum amounts of prepayments and customary LIBOR breakage costs. During the first nine months of 2019, the Company repaid its outstanding revolver borrowings in full.
At September 30, 2019,2020, the Company’s availability under the 2018 ABL Credit Facility was approximately $118.0$39.5 million, net of an outstanding letterletters of credit of $0.2$0.4 million.
Prior Credit AgreementsMagnum Promissory Notes
On September 14, 2017, the Company entered into a credit agreement (as amended on November 20, 2017, the “2018 IPO Credit Agreement”) with JP Morgan as administrative agent and certain other financial institutions that became effective upon the consummation of the initial public offering (“IPO”) in JanuaryOctober 25, 2018, (the “Effective Date”). Pursuantpursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (as amended on June 7, 2019, the 2018 IPO Credit Agreement,“Magnum Purchase Agreement”), the Company acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and its domestic restricted subsidiaries were entitledMagnum Oil Tools Canada Ltd. (such entities collectively, “Magnum”). The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to borrow $125.060% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of term loanscertain dissolvable plug products in 2019 (the “2018 IPO Term Loan Credit Facility”“Magnum Earnout”).
On June 30, 2020, pursuant to an amendment to the Magnum Purchase Agreement to terminate the remaining Magnum Earnout and all obligations related thereto (the “Magnum Purchase Agreement Amendment”), the Company issued promissory notes with an aggregated principal amount of $2.3 million (the “Magnum Promissory Notes”) to the sellers of Magnum. The Magnum Promissory Notes bear interest at a rate of 6.0% per annum. The principal amount of the Magnum Promissory Notes will be paid in equal quarterly installments beginning January 1, 2021. The entire unpaid principal amount will be due and payable on the maturity date, which is the earlier of October 1, 2022 and the business day after the date on which the Company drew in full on the Effective Date. In January 2018, the Company also made a mandatory prepayment of $9.7 million against the 2018 IPO Term Loan Credit Facility, which approximated 50.0%sells, transfers or otherwise disposes of the estimated net proceeds from“E-Set” tools business to an unaffiliated third party, unless such sale, transfer or disposition is made, directly or indirectly, as part of the IPO in excesssale, transfer or disposition of $150.0 million, as prescribed under the 2018 IPO Credit Agreement. In addition, under the 2018 IPO Credit Agreement, the Company and its domestic restricted subsidiaries were entitled to borrow up to $50.0 million (including letters of credit) as revolving credit loans under the revolving commitments. LoansDissolvable Plugs Business or due to the Company and its domestic restricted subsidiaries underoccurrence of a Change of Control Event (each as defined in the 2018 IPO Credit Agreement were either base rate loans or LIBOR loans. The applicable margin for base rate loans varied from 1.50% to 2.75%, and the applicable margin for LIBOR loans varied from 2.50% to 3.75%, in each case depending on the Company’s leverage ratio. In addition, a commitment fee of 0.50% per annum was charged on the average daily unused portion of the revolving commitments. On October 25, 2018, the Company fully repaid and terminated the 2018 IPO Credit Agreement.Magnum Purchase Agreement).
In 2014, the Company entered into the Amended and Restated Credit Agreement (as amended, the “Legacy Nine Credit Agreement”) with HSBC Bank USA, N.A., as U.S. administrative agent, HSBC Bank Canada, as Canadian agent, and certain other financial institutions. All loans and other obligations under the Legacy Nine Credit Agreement were scheduled to mature on May 31, 2018. In 2014, Beckman Production Services, Inc. entered into a credit agreement (as amended, the “Legacy Beckman Credit Agreement” and together with the Legacy Nine Credit Agreement, the “Legacy Credit Agreements”) with Wells Fargo Bank, National Association, as administrative agent, and certain other financial institutions. All loans and other obligations under the Legacy Beckman Credit Agreement were scheduled to mature on June 30, 2018. Concurrent with the effectiveness of the 2018 IPO Credit Agreement in January 2018, the Company repaid all indebtedness under the Legacy Credit Agreements, which approximated $242.2 million.
Debt Extinguishment Costs
During the first quarter of 2018, the Company recorded debt extinguishment costs of approximately $0.7 million in unamortized deferred financing costs associated withFor additional information regarding the termination of the Legacy Credit Agreements. These unamortized deferred financing costs were being amortized through the maturity dates of each agreement using the effective interest method. These debt extinguishment costs are included in “Interest expense” in the Company’s Condensed Consolidated Statements of IncomeMagnum Earnout, see Note 10 – Commitments and Comprehensive Income (Loss) for the nine months ended September 30, 2018.Contingencies.
Fair Value of Debt Instruments
The estimated fair value of the Company’s debt obligations as of September 30, 20192020 and December 31, 20182019 was as follows:
| | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| (in thousands) | | (in thousands) |
Senior Notes | $ | 324,000 |
| | $ | 376,000 |
| Senior Notes | $ | 102,415 | | | $ | 324,000 | |
2018 ABL Credit Facility | $ | — |
| | $ | 35,000 |
| 2018 ABL Credit Facility | $ | 0 | | | $ | 0 | |
Magnum Promissory Notes | | Magnum Promissory Notes | $ | 2,250 | | | $ | 0 | |
The fair value of the Senior Notes, 2018 ABL Credit Facility, and the Magnum Promissory Notes is classified as Level 2 in the fair value hierarchy andhierarchy. The fair value of the Senior Notes is established based on observable inputs in less active markets. The 2018 ABL Credit Facility is also classified within Level 2 of the fair value hierarchy. The fair value of the 2018 ABL Credit Facility and the Magnum Promissory Notes approximates itstheir carrying value.
9. Related Party Transactions
As part of the acquisition of Crest Pumping Technologies, LLC (“Crest”) in 2014, the Company issued promissory notes totaling $9.4 million to former owners of Crest, including David Crombie, who is an executive officer of the Company. The principal was due on June 30, 2019. The interest rate was based on the prime rate, the federal funds rate, or LIBOR, plus a margin to be determined in connection with the Company’s credit agreement and was due quarterly. Mr. Crombie paid $1.8 million during 2016 to pay his promissory note in full. At December 31, 2018, the outstanding principal balance of the notes of the remaining individuals totaled $7.6 million, and unpaid interest, included in “Prepaid expenses and other current assets” in the Company’s Condensed Consolidated Balance Sheets, totaled $10,000. During the nine months ended September 30, 2019, the Company received the full principal balance of the notes outstanding as well as any unpaid interest.
The Company leases office space, yard facilities, and equipment and purchases building maintenance services from entities owned by Mr. Crombie.David Crombie, an executive officer of the Company. Total lease expense and building maintenance expense associated with these entities was $0.2 million and $0.6 million for the three and nine months ended September 30, 20192020, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2018,2019, respectively. The Company also purchased $0.8 million and $1.3 million of equipment during the three and nine months ended September 30, 2020, respectively, and $0.7 million and $1.3 million of equipment during the three and nine months ended September 30, 2019, respectively, from an entity in which Mr. Crombie is a limited partner. The Company purchased $0.6 million of equipment from this entity during the three and nine months ended September 30, 2018. There were outstanding payables due to this entity relating to equipment purchases of $0.1 million at both September 30, 2020 and December 31, 2019.
In addition, the Company leases office space in Corpus Christi and Midland, Texas from an entity affiliated with Warren Lynn Frazier, a beneficial owner of more than 5% of the Company’s stock. In the third quarter of 2020, another entity affiliated with Mr. Frazier began to sub-lease a portion of such space in Corpus Christi, Texas from the Company. Total rental expense associated with this office space, net of sub-leasing income, was $0.3 million and $1.0 million for the three and nine months ended September 30, 2020, respectively, and $0.4 million and $1.1 million for the three and nine months ended September 30, 2019, respectively. There were nonet outstanding payables due to the entity of $0.1 million at September 30, 2019 and December 31, 2018.
At December 31, 2018,2020. Additionally, on June 30, 2020, the Company had an open receivable due fromissued the Magnum Promissory Notes to the sellers of Magnum, primarily relatedincluding Mr. Frazier. At September 30, 2020, the outstanding principal balance payable to sales commissions paid to an intercompany entity thatMr. Frazier was not included in$2.1 million. For additional information regarding the Magnum Acquisition. The Company received payment in full in the first quarter of 2019.Promissory Notes, see Note 8 – Debt Obligations.
The Company provides services to Citation Oil & Gas Corp.,purchases cable for its wireline trucks from an entity owned by Curtis F. Harrell, a directorForum Energy Technologies (“Forum”). Two of the Company.Company’s directors serve as directors of Forum. The Company billed $0.2 million and $0.4 million for services provided to this entity during the three and nine months ended September 30, 2019, respectively, andwas billed $0.0 million and $0.5$0.4 million for the three and nine months ended September 30, 2018, respectively. There was an outstanding receivable due from this entity of $0.22020, respectively, and $0.6 million and $0.1 million at September 30, 2019 and December 31, 2018, respectively.
The Company provides services in the ordinary course of business to EOG Resources, Inc. (“EOG”). Gary L. Thomas, a director of the Company, acted as the President of EOG until his retirement from EOG at December 31, 2018. The Company generated revenue from EOG of $12.1 million and $31.8$1.5 million for the three and nine months ended September 30, 2018,2019, respectively. There was anwere outstanding receivablepayables due from thisto the entity of $7.0$0.3 million at December 31, 2018.2019. The Company purchases coiled tubing string from another entity owned by Forum. The Company was billed $0.9 million and $3.0 million for coiled tubing string for the three and nine months ended September 30, 2020, respectively, and $2.0 million and $6.2 million for the three and nine months ended September 30, 2019, respectively. There were outstanding payables due to the entity of $0.2 million and $0.9 million at September 30, 2020 and December 31, 2019, respectively.
The Company purchases chemical additives used in cementing from Select Energy Services, Inc. (“Select”). One of the Company’s directors also serves as a director of Select. The Company was billed $0.2 million and $1.0 million for the three and nine months ended September 30, 2020, respectively, and $0.5 million and $1.6 million for the three and nine months ended September 30, 2019, respectively. There were outstanding payables due to Select of $0.1 million at both September 30, 2020 and December 31, 2019.
The Company provides products and rentals to National Energy Reunited Corp. (“NESR”), where one of the Company’s directors serves as a director. The Company billed NESR $0.2 million and $1.4 million for the three and nine months ended September 30, 2020, respectively, and issued credit memos of $0.5 million for both the three and nine months ended September 30, 2020. The Company billed NESR $0.6 million for both the three and nine months ended September 30, 2019. During the fourth quarter of 2019, the Company sold coiled tubing equipment for $5.9 million to NESR with payments due in 24 monthly equal installments beginning on January 31, 2020. Total outstanding receivables due to the Company from NESR (inclusive of the equipment sale above) were $4.4 million and $6.8 million at September 30, 2020 and December 31, 2019, respectively.
On June 5, 2019, Ann G. Fox, President and Chief Executive Officer and a director of the Company, was elected as a director of Devon Energy Corporation (“Devon”). The Company generated revenue from Devon of $1.2 million and $4.6 million for the three and nine months ended September 30, 2020, respectively, and $5.4 million and $15.8 million for the three and nine months ended September 30, 2019, respectively. There was anwere outstanding receivablereceivables due from Devon of $2.0$0.4 million and $1.0 million at September 30, 2019.
2020 and December 31, 2019, respectively.
10. Commitments and Contingencies
Litigation
From time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.
On August 31, 2017, an accident occurred while a five-employee crew of Big Lake Services, LLC, a subsidiary of Nine (“Big Lake Services”), was performing workover services at an oil and gas wellsite near Midland, Texas, operated by Pioneer Natural Resources USA, Inc. (“Pioneer Natural Resources”), resulting in the death of a Big Lake Services employee, Juan De La Rosa. On December 7, 2017, a lawsuit was filed on behalf of Mr. De La Rosa’s minor children in the Midland County District Court against Pioneer Natural Resources, Big Lake Services, and Phillip Hamilton related to this accident. The petition alleged, among other things, that the defendants acted negligently, resulting in the death of Mr. De La Rosa. On March 14, 2018, a plea in intervention was filed on behalf of Mr. De La Rosa’s parents, alleging similar claims. The plaintiffs and intervenors sought money damages, including punitive damages. On December 17, 2018, a mediation was held, and the parties reached an agreement in principle to settle this matter. In May 2019, the parties entered into settlement agreements, which have been approved by the court, and the court has dismissed the case. The Company has tendered this matter to its insurance company for defense and indemnification of Big Lake Services and the other defendants, and this settlement has been fully funded by its insurance company.
Self-insurance
The Company uses a combination of third-party insurance and self-insurance for health insurance clams.claims. The self-insured liability represents an estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. The estimate is based on an analysis of trailing months of incurred medical claims to project the amount of incurred but not reported claims liability. The estimated liability for self-insured medical claims was $1.6$1.5 million and $1.8 million at September 30, 20192020 and December 31, 20182019, respectively, and is included under the caption “Accrued expenses” onin the Company’s Condensed Consolidated Balance Sheets.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, the self-insurance liability could be affected if future claims experience differs significantly from historical trends and actuarial assumptions.
Contingent Liabilities
The Company has recorded the following contingent liabilities at September 30, 2019:2020:
Magnum Earnout
The Magnum Purchase Agreement includesincluded the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019.
In 2019, the Company did not meet the sales requirement of certain dissolvable plug products during the year.
Pursuant to the Magnum Purchase Agreement Amendment, which terminated the remaining Magnum Earnout and all obligations related thereto, the Company made a cash payment of $1.1 million and issued the Magnum Promissory Notes with an aggregated principal amount of $2.3 million to the sellers of Magnum. For additional information onregarding the Magnum Acquisition,Promissory Notes, see Note 48 – Business Acquisitions and Divestitures.Debt Obligations.
Frac Tech Earnout
On October 1, 2018, pursuant to the terms and conditions of the Fraca Securities Purchase Agreement (the “Frac Tech Purchase Agreement,Agreement”), the Company acquired Frac Tech.Technology AS, a Norwegian private limited company (“Frac Tech”) focused on the development of downhole technology, including a casing flotation tool and a number of patented downhole completion tools. The Frac Tech Purchase Agreement includes, among other things, the potential for additional future payments, based on certain Frac Tech sales volume metrics through December 31, 2023.
The following is a reconciliationchanges in the components of the beginning and ending amounts of the contingent liabilities (Level 3) for the nine months ended September 30, 2019:2020 were as follows: | | | | | | | | | | Magnum | | Frac Tech | | Total |
| Magnum | | Frac Tech | | Total | | (in thousands) |
| (in thousands) | |
Balance at December 31, 2018 | $ | 24,521 |
| | $ | 1,008 |
| | $ | 25,529 |
| |
Balance at December 31, 2019 | | Balance at December 31, 2019 | $ | 2,609 | | | $ | 1,359 | | | $ | 3,968 | |
Revaluation adjustments | | Revaluation adjustments | 766 | | | 15 | | | 781 | |
Payments | — |
| | (250 | ) | | (250 | ) | Payments | 0 | | | (206) | | | (206) | |
Revaluation adjustments | (21,436 | ) | | 735 |
| | (20,701 | ) | |
Balance at September 30, 2019 | $ | 3,085 |
| | $ | 1,493 |
| | $ | 4,578 |
| |
Termination | | Termination | (3,375) | | | 0 | | | (3,375) | |
Balance at September 30, 2020 | | Balance at September 30, 2020 | $ | 0 | | | $ | 1,168 | | | $ | 1,168 | |
The contingent consideration related to the contingent liabilities is reported at fair value, based on a Monte Carlo simulation model. Significant inputs used in the fair value measurement include estimated gross margin related to forecasted sales of the plugs, term of the agreement, and a risk adjusted discount factor. Contingent liabilities include $0.8 million and $20.9$0.4 million reported in “Accrued expenses” at both September 30, 20192020 and December 31, 2018, respectively,2019, and $3.8$0.8 million and $4.6$3.6 million reported in “Other long-term liabilities” at September 30, 20192020 and December 31, 2018,2019, respectively, in the Company’s Condensed Consolidated Balance Sheets. The impact of the revaluation adjustments is included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
11. Taxes
Income tax expense (benefit) included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) werewas as follows: | | | | | | | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 |
| 2019 | | 2018 | | 2019 | | 2018 | | (in thousands, except percentages) | | (in thousands, except percentages) |
| (in thousands, except percentages) | |
Income tax expense (benefit) | $ | 727 |
| | $ | 1,130 |
| | $ | (1,548 | ) | | $ | 1,875 |
| |
Income tax provision (benefit) | | Income tax provision (benefit) | $ | (37) | | | $ | 727 | | | $ | (2,348) | | | $ | (1,548) | |
Effective tax rate | (3.7 | )% | | 7.6 | % | | (126.7 | )% | | 7.1 | % | Effective tax rate | 0.2 | % | | (3.7) | % | | 0.7 | % | | (126.7) | % |
Generally, the
The Company’s effective tax rate is lower than the statutory federal rate of 21% in most periods due to its valuation allowance position, offset by state and foreign income taxes. The effective tax ratebenefit for the three and nine months ended September 30, 2019 also includes2020 was less than $0.1 million and $2.3 million, respectively. The Company’s year-to-date tax benefit was primarily a result of the discrete tax impact from the Production Solutions divestiture. All other changesbenefit recorded in the effective tax rate are attributablefirst quarter of 2020 related to the current year impactCoronavirus Aid, Relief, and Economic Security Act as well as the release of the Company’s valuation allowance positions, levelsdue to the goodwill impairment which was also recorded in the first quarter of pre-tax income, and state and non-U.S. income taxes.
2020.
12. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of shares outstanding during each period and the assumed exercise of potentially dilutive stock options assumed to be purchased from the proceeds using the average market price of the Company’s stock for each of the periods presented as well as the potentially dilutive restricted stock, restricted stock units, and restrictedperformance stock units.
Basic and diluted earnings (loss) per common share was computed as follows:
| | | Three Months Ended September 30, 2019 | | Three Months Ended September 30, 2018 | | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| Net Loss | | Average Shares Outstanding | | Loss Per Share | | Net Income | | Average Shares Outstanding | | Earnings Per Share | | Net Loss | | Average Shares Outstanding | | Loss Per Share | | Net Loss | | Average Shares Outstanding | | Loss Per Share |
| (in thousands, except share and per share amounts) | | (in thousands, except share and per share amounts) |
Basic | $ | (20,627 | ) | | 29,361,633 |
| | $ | (0.70 | ) | | $ | 13,658 |
| | 23,971,032 |
| | $ | 0.57 |
| Basic | $ | (18,502) | | | 29,849,753 | | | $ | (0.62) | | | $ | (20,627) | | | 29,361,633 | | | $ | (0.70) | |
Assumed exercise of stock options | — |
| | — |
| | — |
| | — |
| | 41,341 |
| | — |
| Assumed exercise of stock options | — | | | 0 | | | — | | | — | | | 0 | | | — | |
Unvested restricted stock and stock units | — |
| | — |
| | — |
| | — |
| | 376,922 |
| | — |
| Unvested restricted stock and stock units | — | | | 0 | | | — | | | — | | | 0 | | | — | |
Diluted | $ | (20,627 | ) | | 29,361,633 |
| | $ | (0.70 | ) | | $ | 13,658 |
| | 24,389,295 |
| | $ | 0.56 |
| Diluted | $ | (18,502) | | | 29,849,753 | | | $ | (0.62) | | | $ | (20,627) | | | 29,361,633 | | | $ | (0.70) | |
| | | Nine Months Ended September 30, 2019 | | Nine Months Ended September 30, 2018 | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| Net Income | | Average Shares Outstanding | | Earnings Per Share | | Net Income | | Average Shares Outstanding | | Earnings Per Share | | Net Loss | | Average Shares Outstanding | | Loss Per Share | | Net Income | | Average Shares Outstanding | | Earnings Per Share |
| (in thousands, except share and per share amounts) | | (in thousands, except share and per share amounts) |
Basic | $ | 2,770 |
| | 29,288,113 |
| | $ | 0.09 |
| | $ | 24,352 |
| | 23,264,014 |
| | $ | 1.05 |
| Basic | $ | (343,573) | | | 29,708,673 | | | $ | (11.56) | | | $ | 2,770 | | | 29,288,113 | | | $ | 0.09 | |
Assumed exercise of stock options | — |
| | — |
| | — |
| | — |
| | 31,879 |
| | — |
| Assumed exercise of stock options | — | | 0 | | | — | | | — | | 0 | | | — | |
Unvested restricted stock and stock units | — |
| | 109,523 |
| | — |
| | — |
| | 308,029 |
| | — |
| Unvested restricted stock and stock units | — | | 0 | | | — | | | — | | 109,523 | | | — | |
Diluted | $ | 2,770 |
| | 29,397,636 |
| | $ | 0.09 |
| | $ | 24,352 |
| | 23,603,922 |
| | $ | 1.03 |
| Diluted | $ | (343,573) | | | 29,708,673 | | | $ | (11.56) | | | $ | 2,770 | | | 29,397,636 | | | $ | 0.09 | |
For the three and nine months ended September 30, 2020 as well as the three months ended September 30, 2019, the computation of diluted earnings (loss) per share excluded all stock options, unvested restricted stock, unvested restricted stock units, and unvested restrictedperformance stock units because their inclusion would be anti-dilutive given the Company was in a net loss position.
The average number of securities that were excluded from diluted earnings (loss) per share that would potentially dilute earnings (loss) per share for the periods in which the Company experienced a net loss were as follows:
| | | | | | | | | | | |
| 2020 | | 2019 |
Three months ended September 30, | 723,608 | | 71,574 |
Nine months ended September 30, | 700,417 | | 0 |
13. Segment Information
On August 30, 2019, the Company entered into a Membership Interest Purchase Agreement (the “Production Solutions Purchase Agreement”) with Brigade. Pursuant to the Production Solutions Purchase Agreement, on such date, through the sale of all of the limited liability interests of its wholly owned subsidiary, Beckman Holding Production Services, LLC, the Company sold its Production Solutions segment to Brigade. For additional informationThe Production Solutions Purchase Agreement contained customary representations and warranties, covenants, and indemnification provisions. This divestiture did not qualify as discontinued operations in accordance with ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity as it did not represent a strategic shift that had a major effect on the Production Solutions divestiture, see Note 4 – Business AcquisitionsCompany’s operations and Divestitures. financial results.
Prior to the Divestiture Date,August 30, 2019, the Company reported its results in two2 segments, the Completions Solutions segment and the Production Solutions segment. As a result of the Company’s sale of its Production Solutions segment, the Company considers the Completion Solutions segment to be its operating and reporting segment. This segmentation is representative of the manner in which the Chief Operating Decision Maker (“CODM”) and its Board of Directors view the business in allocating resources and measuring financial performance. The Company considers the CODM to be its Chief Executive Officer.
Financial data through the Divestiture Date is reported below for the Production Solutions segment. The amounts labeled “Corporate” relate to assets not allocated to either the Completion Solutions segment or the Production Solutions segment.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands) | | (in thousands) | | (in thousands) |
Revenues | |
| | |
| | | | | Revenues | | | | |
Completion Solutions | $ | 186,252 |
| | $ | 196,608 |
| | $ | 611,255 |
| | $ | 536,363 |
| Completion Solutions | $ | 49,521 | | | $ | 186,252 | | | $ | 248,880 | | | $ | 611,255 | |
Production Solutions | 16,053 |
| | 21,819 |
| | 58,272 |
| | 61,363 |
| Production Solutions | 0 | | | 16,053 | | | 0 | | | 58,272 | |
| $ | 202,305 |
| | $ | 218,427 |
| | $ | 669,527 |
| | $ | 597,726 |
| | $ | 49,521 | | | $ | 202,305 | | | $ | 248,880 | | | $ | 669,527 | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | | | | | | | Cost of revenues (exclusive of depreciation and amortization shown separately below) | |
Completion Solutions | $ | 152,679 |
| | $ | 147,178 |
| | $ | 480,140 |
| | $ | 414,606 |
| Completion Solutions | $ | 52,483 | | | $ | 152,679 | | | $ | 235,194 | | | $ | 480,140 | |
Production Solutions | 14,170 |
| | 18,704 |
| | 49,854 |
| | 53,094 |
| Production Solutions | 0 | | | 14,170 | | | 0 | | | 49,854 | |
| $ | 166,849 |
| | $ | 165,882 |
| | $ | 529,994 |
| | $ | 467,700 |
| | $ | 52,483 | | | $ | 166,849 | | | $ | 235,194 | | | $ | 529,994 | |
Adjusted gross profit | | | | | | | | |
Adjusted gross profit (loss) | | Adjusted gross profit (loss) | | | | | | | |
Completion Solutions | $ | 33,573 |
| | $ | 49,430 |
| | $ | 131,115 |
| | $ | 121,757 |
| Completion Solutions | $ | (2,962) | | | $ | 33,573 | | | $ | 13,686 | | | $ | 131,115 | |
Production Solutions | 1,883 |
| | 3,115 |
| | 8,418 |
| | 8,269 |
| Production Solutions | 0 | | | 1,883 | | | 0 | | | 8,418 | |
| $ | 35,456 |
| | $ | 52,545 |
| | $ | 139,533 |
| | $ | 130,026 |
| | $ | (2,962) | | | $ | 35,456 | | | $ | 13,686 | | | $ | 139,533 | |
| | | | | | | | | | | | | | | |
General and administrative expenses | 19,222 |
| | 21,816 |
| | 60,979 |
| | 51,837 |
| General and administrative expenses | 10,701 | | | 19,222 | | | 38,380 | | | 60,979 | |
Depreciation | | Depreciation | 7,763 | | | 12,196 | | | 24,753 | | | 39,572 | |
Amortization of intangibles | | Amortization of intangibles | 4,091 | | | 4,609 | | | 12,376 | | | 13,925 | |
Impairment of goodwill | | Impairment of goodwill | 0 | | | 0 | | | 296,196 | | | 0 | |
(Gain) loss on revaluation of contingent liabilities | (5,771 | ) | | 45 |
| | (20,701 | ) | | 1,715 |
| (Gain) loss on revaluation of contingent liabilities | 297 | | | (5,771) | | | 781 | | | (20,701) | |
Loss on sale of subsidiaries | 15,834 |
| | — |
| | 15,834 |
| | — |
| Loss on sale of subsidiaries | 0 | | | 15,834 | | | 0 | | | 15,834 | |
Depreciation | 12,196 |
| | 13,661 |
| | 39,572 |
| | 39,982 |
| |
Amortization of intangibles | 4,609 |
| | 1,857 |
| | 13,925 |
| | 5,653 |
| |
Gain on sale of property and equipment | (466 | ) | | (1,190 | ) | | (799 | ) | | (1,701 | ) | Gain on sale of property and equipment | (535) | | | (466) | | | (2,900) | | | (799) | |
Income (loss) from operations | $ | (10,168 | ) | | $ | 16,356 |
| | $ | 30,723 |
| | $ | 32,540 |
| Income (loss) from operations | $ | (25,279) | | | $ | (10,168) | | | $ | (355,900) | | | $ | 30,723 | |
Non-operating expenses | 9,732 |
| | 1,568 |
| | 29,501 |
| | 6,313 |
| |
Non-operating (income) expenses | | Non-operating (income) expenses | (6,740) | | | 9,732 | | | (9,979) | | | 29,501 | |
Income (loss) before income taxes | (19,900 | ) | | 14,788 |
| | 1,222 |
| | 26,227 |
| Income (loss) before income taxes | (18,539) | | | (19,900) | | | (345,921) | | | 1,222 | |
Provision (benefit) for income taxes | 727 |
| | 1,130 |
| | (1,548 | ) | | 1,875 |
| Provision (benefit) for income taxes | (37) | | | 727 | | | (2,348) | | | (1,548) | |
Net income (loss) | $ | (20,627 | ) | | $ | 13,658 |
| | $ | 2,770 |
| | $ | 24,352 |
| Net income (loss) | $ | (18,502) | | | $ | (20,627) | | | $ | (343,573) | | | $ | 2,770 | |
Capital expenditures by segment for the three and nine months ended September 30, 20192020 and 2018,2019, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands) | | (in thousands) |
Completion Solutions | $ | 2,193 | | | $ | 9,146 | | | $ | 7,193 | | | $ | 44,343 | |
Production Solutions | 0 | | | 804 | | | 0 | | | 2,790 | |
Corporate | 0 | | | 0 | | | 0 | | | 93 | |
| $ | 2,193 | | | $ | 9,950 | | | $ | 7,193 | | | $ | 47,226 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in thousands) |
Completion Solutions | $ | 9,146 |
| | $ | 10,723 |
| | $ | 44,343 |
| | $ | 26,636 |
|
Production Solutions | 804 |
| | 665 |
| | 2,790 |
| | 2,312 |
|
Corporate | — |
| | 92 |
| | 93 |
| | 597 |
|
| $ | 9,950 |
| | $ | 11,480 |
| | $ | 47,226 |
| | $ | 29,545 |
|
Total assets by segment as of September 30, 20192020 and December 31, 20182019 were as follows:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) |
Completion Solutions | $ | 342,182 | | | $ | 739,142 | |
Corporate | 96,277 | | | 111,753 | |
| $ | 438,459 | | | $ | 850,895 | |
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (in thousands) |
Completion Solutions | $ | 977,633 |
| | $ | 1,045,643 |
|
Production Solutions | — |
| | 35,086 |
|
Corporate | 103,950 |
| | 60,443 |
|
| $ | 1,081,583 |
| | $ | 1,141,172 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements for the three and nine months ended September 30, 2019,2020, included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the Consolidated Financial Statementsconsolidated financial statements and Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including Critical“Critical Accounting Policies,” included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
This section contains forward-looking statements based on our current expectations, estimates, and projections about our operations and the industry in which we operate. Our actual results may differ materially from those discussed in any forward-looking statement because of various risks and uncertainties, including those described in the sectionsections titled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q, “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
OVERVIEW
Company Description
Nine Energy Service, Inc. (either individually or together with its subsidiaries, as the context requires, the “Company,” “Nine,”“Nine” “we,” “us,” and “our”) is a leading North American onshore completion services provider that targets unconventional oil and gas resource development. We partner with our exploration and production (“E&P”) customers across all major onshore basins in both the U.S.United States and Canada as well as abroad to design and deploy downhole solutions and technology to prepare horizontal, multistage wells for production. We focus on providing our customers with cost-effective and comprehensive completion solutions designed to maximize their production levels and operating efficiencies. We believe our success is a product of our culture, which is driven by our intense focus on performance and wellsite execution as well as our commitment to forward-leaning technologies that aid us in the development of smarter, customized applications that drive efficiencies.
Recent Events
Production Solutions Divestiture
On August 30, 2019 (the “Divestiture Date”), we entered into a Membership Interest Purchase Agreement (“Production Solutions Purchase Agreement”) with Brigade Energy Services LLC (“Brigade”). Pursuant to the Production Solutions Purchase Agreement, on such date, through the sale of all of the limited liability interests of our wholly owned subsidiary, Beckman Holding Production Services, LLC, we sold our Production Solutions segment to Brigade for approximately $17.4 million in cash. The closing consideration is subject to working capital and other customary post-closing adjustments. We recorded a loss of $15.8 million in connection with this divestiture during the third quarter of 2019. For additional information on this divestiture, see Note 4 – Business Acquisitions and Divestitures included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Magnum Acquisition
On October 25, 2018, pursuant to the terms of a Securities Purchase Agreement dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), we acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum” and such acquisition, the “Magnum Acquisition”) for approximately $334.5 million in upfront cash consideration, subject to customary adjustments, and 5.0 million shares of our common stock, which were issued to the sellers of Magnum in a private placement. The Magnum Purchase Agreement also includes the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019. For additional information on the Magnum Acquisition, see Note 4 – Business Acquisitions and Divestitures included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Senior Notes
On October 25, 2018, we issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The proceeds from the Senior Notes, together with cash on hand and borrowings under the 2018 ABL Credit Facility (as defined below), were used to (i) fund a portion of the upfront cash purchase price of the Magnum Acquisition, (ii) repay all indebtedness under the credit facility entered into in conjunction with our initial public offering (the “IPO”), and (iii) pay fees and expenses associated with the issuance of the Senior Notes, the Magnum Acquisition, and the 2018 ABL Credit Facility (as
described below). For additional information on the Senior Notes, see Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
2018 ABL Credit Facility
On October 25, 2018, we entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”) that permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). Concurrent with the effectiveness of the 2018 ABL Credit Facility, we borrowed approximately $35.0 million to fund a portion of the upfront cash purchase price of the Magnum Acquisition. During the first six months of 2019, we fully repaid the outstanding revolver balance. For additional information on the 2018 ABL Credit Facility, see Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Initial Public Offering
In January 2018, we completed our IPO of 8,050,000 shares of common stock (including 1,050,000 shares pursuant to an over-allotment option) at a price to the public of $23.00 per share.
Business Segments
The Completion Solutions segment provides services integral to the completion of unconventional wells through a full range of tools and methodologies. Through the Completion Solutions segment, we provide (i) cementing services, which consist of blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped between the casing and the wellbore of the well, (ii) an innovative portfolio of completion tools, including those that provide pinpoint frac sleeve system technologies as well as a portfolio of completion technologies used for completing the toe stage of a horizontal well and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug and perf operations, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns to a specified depth, and (iv) coiled tubing services, which perform wellbore intervention operations utilizing a continuous steel pipe that is transported to the wellsite wound on a large spool in lengths of up to 30,000 feet and which provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well.
On August 30, 2019, we entered into a Membership Interest Purchase Agreement (“Production Solutions Purchase Agreement”) with Brigade Energy Services LLC (“Brigade”). Pursuant to the Divestiture Date,Production Solutions Purchase Agreement, on such date, through the sale of all of the limited liability interests of our wholly owned subsidiary, Beckman Holding Production Services, LLC, we sold the our Production Solutions segment to Brigade.For additional information on the Production Solutionsthis divestiture, see Note 413 – Business Acquisitions and Divestitures.Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q. Prior to the Divestiture Date,August 30, 2019, we reported our results in two segments, the Completions Solutions segment and the Production Solutions segment.
The Production Solutions segment provided a range of production enhancement and well workover services that were performed with a well servicing rig and ancillary equipment. Our well servicing business encompassed a full range of services performed with a mobile well servicing rig (or workover rig) and ancillary equipment throughout a well’s life cycle from completion to ultimate plug and abandonment. Our rigs and personnel installed and removed downhole equipment and eliminated obstructions in the well to facilitate the flow of oil and natural gas.
How We Generate Revenue and the Costs of Conducting Our Business
We generate our revenues by providing completion services to E&P customers across all major onshore basins in both
the U.S.United States and Canada as well as abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically will enter into a Master Service Agreement (“MSA”) with each customer that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Each specific job is obtained through competitive bidding or as a result of negotiations with customers. The rate we charge is determined by location, complexity of the job, operating conditions, duration of the contract, and market conditions. In addition to MSAs, we have entered into a select number of longer-term contracts with certain customers relating to our wireline and cementing services, and we may enter into similar contracts from time to time to the extent beneficial to the operation of our business. These longer-term contracts address pricing and other details concerning our services, but each job is performed on a standalone basis.
The principal expenses involved in conducting our business include labor costs, materials and freight, the costs of maintaining our equipment, and fuel costs. Our direct labor costs vary with the amount of equipment deployed and the utilization of that equipment. Another key component of labor costs relates to the ongoing training of our field service employees, which improves safety rates and reduces employee attrition.
How We Evaluate Our Operations
We evaluate our performance based on a number of financial and non-financial measures, including the following:
•Revenue: We compare actual revenue achieved each month to the most recent projection for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the performance of our operations compared to historical revenue drivers or market metrics. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes.
•Adjusted Gross Profit (Excluding Depreciation and Amortization)(Loss): Adjusted gross profit (excluding depreciation and amortization)(loss) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (excluding depreciation and amortization)(loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). Costs of revenues include direct and indirect labor costs, costs of materials, maintenance of equipment, fuel and transportation freight costs, contract services, crew cost, and other miscellaneous expenses. For additional information, see “Non-GAAP Financial Measures” below.
•Adjusted EBITDA: We define Adjusted EBITDA as net income (loss) before interest, expense, taxes, and depreciation and amortization, further adjusted for (i) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, and our IPO, (iii) loss or gain from discontinued operations, (iv) loss or gain on revaluation of contingent liabilities, (iv) gain on extinguishment of debt, (v) loss or gain on equity method investment,the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation expense, (vii)(viii) loss or gain on sale of property and equipment, (viii) restructuring charges, (ix) loss or gain on the sale of subsidiaries, and (x) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business and restructuring costs.business. For additional information, see “Non-GAAP Financial Measures” below.
•Return on Invested Capital (“ROIC”):We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) transaction and integration costs related to acquisitions and our IPO, (ii) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss or gain on the sale of subsidiaries, (vi) gain on extinguishment of debt, and (vi)(vii) the provision or benefit for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis. For additional information, see “Non-GAAP Financial Measures” below.
•Safety: We measure safety by tracking the total recordable incident rate (“TRIR”), which is reviewed on a monthly basis.TRIRis a measure of the rate of recordable workplace injuries, defined below, normalized and stated on the basis of 100 workers for an annual period. The factor is derived by multiplying the number of recordable injuries in a calendar year by 200,000 (i.e., the total hours for 100 employees working 2,000 hours per year) and dividing this value by the total hours actually worked in the year. A recordable injury includes occupational death, nonfatal occupational illness, and other occupational injuries that involve loss of consciousness, restriction of work or motion, transfer to another job, or medical treatment other than first aid.
Factors Affecting the Comparability of Our Results of Operations
Our future results of operations may not be comparable to our historical results of operations for the periods presented, and our historical results of operations among the periods presented may not be comparable to each other, primarily due to the Magnum Acquisition and partially due to our divestiture of the Production Solutions segment.
The historical results of operations for the three and nine months ended September 30, 20192020 included in this Quarterly Report on Form 10-Q do not include activity related to the Magnum AcquisitionProduction Solutions segment whereas the historical results of operations for the three and nine months ended September 30, 2018 do not2019 include activity related to the Magnum Acquisition. As a result, the historical results of operations for the three and nine months ended SeptemberProduction Solutions segment through August 30, 2018 may not give an accurate indication of what our actual results would have been if the Magnum Acquisition had been completed at the beginning of the period presented, or of what our2019.Furthermore, future results of operations are likely to be for the following reasons:
As a result of the Magnum Acquisition and the application of purchase accounting, these identifiable net assets have been adjusted to their estimated fair value as of October 25, 2018, the closing date of the Magnum Acquisition (the “Closing Date”). These adjusted valuations increase our operating expenses in periods after the Closing Date primarily due to an increase in the amortization of intangible assets with definite lives.
Transaction and integration costs associated with the Magnum Acquisition increase operating expenses in periods after the Closing Date.
Our completion tools line constitutes a larger portion of our business, due in large part to the Magnum Acquisition. We expect that the Magnum Acquisition will generate additional free cash flow, reduce overall capital intensity, and improve our margins. We also expect that the Magnum Acquisition will further diversify our basin exposure and add significant size and scale.
We incurred significant indebtedness in connection with the consummation of the Magnum Acquisition, and our related interest expense is expected to be significantly higher than in prior periods.
In addition, the historical results of operations for the three and nine months ended September 30, 2019 included in this Quarterly Report on Form 10-Q include activity related to the Production Solutions segment only through August 30, 2019 (which is the Divestiture Date) whereas the historical results of operations for the three and nine months ended September 30, 2018 include activity related to the Production Solutions segment for the entire periods.Furthermore, future results of operations will not include activity related to the Production Solutions segment. For additional information on the Magnum Acquisition and on the divestiture of the Production Solutions segment, see Note 413 – Business Acquisitions and DivestituresSegment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Recent Events, Industry Trends, and Outlook
Our business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America.companies. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. The worldwide coronavirus outbreak in early 2020, which was declared a pandemic by the World Health Organization in March 2020, the uncertainty regarding its impact, and various governmental actions taken to mitigate its impact have resulted in an unprecedented decline in demand for oil. In the midst of the ongoing pandemic, OPEC and other oil producing nations, including Russia (“OPEC+”), were initially unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. The convergence of these events created the unprecedented dual impact of a massive decline in the demand for oil coupled with the risk of a substantial increase in supply. While OPEC+ agreed in April 2020 to cut production, downward pressure on commodity prices has remained and could continue for the foreseeable future. During 2018,the first half of the year, the posted price for West Texas Intermediate (“WTI”) oil decreased from a high of $63 per barrel in early January 2020 to a one-day low of $(37) per barrel in late April 2020, a level which had not been previously experienced, with physical markets showing signs of distress as spot prices have been negatively impacted by the lack of available storage capacity. Since the end of April 2020 through the end of September 2020, the WTI price has averaged approximately $38 per barrel.
In response to lower oil prices, roseour customers have generally revised their capital budgets downward and adjusted their operations accordingly, which has caused a significant decline in demand for our products and services. These reductions were most evident in the Permian Basin where total completions declined approximately 57% in the second quarter of 2020 in comparison to their highestthe first quarter of 2020, followed by another decrease of approximately 28% in the third quarter of 2020 in comparison to the second quarter of 2020 per the Energy Information Administration. Additionally, between January 3, 2020 and September 30, 2020, the total U.S. rig count has declined by approximately 67% according to Baker Hughes. This overall decline in activity, coupled with downward pricing pressure, has led to a significant reduction in our revenue and profitability for the first nine months of the year. We expect these trends to continue through at least the remainder of the year and into 2021. Over the course of the third quarter of 2020, we did see sequential activity and revenue increases month over month, although revenue and activity levels since the downturn that beganremained lower than they were in late 2014. However, duringApril 2020. We currently expect the fourth quarter of 2018, oil prices declined approximately 40%, which is generally believed2020 to be duebetter sequentially than the third quarter of 2020 from an activity and revenue perspective; however, as activity returns, we expect many competitors will seek to concerns overbuy market share, driving down prices and offsetting much of the anticipated revenue increases.
While we cannot predict the length of time that market disruptions resulting from the coronavirus pandemic and efforts to mitigate its effects will continue, the ultimate impact on our business, or the pace or extent of any subsequent recovery, we expect the coronavirus pandemic and related effects to continue to have a worldwide oversupplymaterial adverse impact on commodity prices and our business generally. We have experienced inefficiencies and logistical challenges surrounding stay-at-home orders and remote work arrangements, travel restrictions, and an inability to commute to certain facilities and job sites, as we provide services and products to our customers. For additional information regarding risks relating to the coronavirus outbreak, see “Risk Factors” in Item 1A of oil as well as concerns overPart II of our Quarterly Report on Form 10-Q for the possible slowingquarterly period ended March 31, 2020.
During the pandemic, we have maintained our commitment to the safety of global demand growth.our employees, customers, vendors, and community at large, and we have taken, and are continuing to take, a proactive approach to navigating the pandemic. To mitigate exposure and risk, we have implemented processes and procedures across our entire organization based on federal, regional, and local guidelines and mandates, and our Health, Safety & Environment and management teams are in frequent communication with our entire employee base to ensure they are receiving updated guidelines, processes, and procedures. In response to the pandemic, we have implemented the following changes, for example: at the beginningfield level, we are working closely with our customers and vendors to update standard operating procedures, based on social distancing, hand washing, and other recommended best practices set forth by the Centers for Disease Control and Prevention; electronic assessments have been
employed to check the health of 2019, OPEC membersemployees prior to reporting to work, to ensure facilities are being properly cleaned and some nonmembers, including Russia, renewed pledgessanitized, and to reduce planned productioncheck visitor health before arrival to a Nine location; internal case managers have been identified to handle all coronavirus-related cases, and all confirmed and potential cases are tracked through closure; many of our corporate and office employees are working virtually to avoid unnecessary risk and exposure; and we have significantly limited any work-related travel.We are actively monitoring updates from regulatory and government bodies and evolving our strategy accordingly in an effort to draw down a global oversupplykeep our workforce and to rebalance supply and demand. These and other events provided support for an increase in oil prices during the first several months of 2019. Since then, due to, among other things, global geopolitical tensions, oil prices have slightly decreased, despite renewed pledges by OPEC members and some non-members, including Russia, to extend production cuts into 2020. We expect ongoing oil price volatility as compliance with the output reduction agreements, changes in oil inventories, GDP growth, and actual demand growth are reported. Similarly, natural gas prices have decreased significantly throughout 2019 and are expected to continue to be volatile, causing many operators in the more gas-exposed regions to curtail activity. Significantcommunities healthy.
Other significant factors that are likely to affect 2019 commodity prices for the remainder of the year include the extent to which members of OPEC+ and other oil exporting nations continue to reduce oil export prices and increase production; the effect of U.S. energy, monetary, and trade policies;policies of the United States; the pace of economic growth in the U.S.United States and throughout the world, including the potential for macro weakness; geopolitical and economic developments in the U.S.United States and globally; the extent to which membersoutcome of OPECthe United States presidential election and other oil exporting nations adhere tosubsequent energy and agree to further extend the agreed oil production cuts;Environmental Protection Agency policies; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows.
Customer budgets for 2019 were set at the end of 2018. As discussed above, there was a sharp decline in oil Even with price during the fourth quarter of 2018. As a result, customer budgets for 2019 are more limited than previously anticipated, and on average, customers have decreased E&P investments in 2019 as compared to 2018, which could adversely affect our business. With this overall reduction, there has been a strong commitment from E&P operators to stay within capital budgets, prompting many of them to begin to scale back activity in the third quarter of 2019 and likely into the fourth quarter of 2019. Even if there
is price improvementimprovements in oil and natural gas, during the remainder of 2019, it is expected that operator activity wouldmay not materially increase, as operators would likely remain focused on operating within their previously set capital plans.plans, and uncertainty remains around supply and demand fundamentals.
In this challenging environment, we will nevertheless continue to focus on generating returns and cash flow. Due to our high level of variable costs and the asset-light make-up of our business, we were able to quickly implement cost-cutting measures and will continue to adapt as the market dictates. These cost-cutting measures included salary reductions for key employees ranging from 10% to 15%, the suspension of the company match (which totaled $4.8 million in 2019) under our Nine Energy Service 401(k) Plan, and headcount reductions of 55% across the entire organization as of September 30, 2020 in comparison to December 31, 2019. In addition, we have revised our capital expenditure budget, excluding possible acquisitions, to between $10.0 million to $15.0 million for 2020 and deferred or eliminated certain capital projects, where necessary. During the first nine months of 2020, we incurred approximately $7.2 million of capital expenditures compared to $47.2 million for the first nine months of 2019.
OperatorsGenerally, operators have continued to improve operational efficiencies in completions design, increasing the complexity and difficulty, making oilfield service selection more important. This increase in high-intensity, high-efficiency completions of oil and gas wells further enhances the demand for our services. We compete for the most complex and technically demanding wells in which we specialize, which are characterized by extended laterals, increased stage spacing, multi-well pads, cluster spacing, and high proppant loads. These well characteristics lead to increased operating leverage and returns for us, as we are able to complete more jobs and stages with the same number of units and crews. Service providers for these projects are selected based on their technical expertise and ability to execute safely and efficiently, rather than only price.
Results of Operations
Results for the Three Months Ended September 30, 20192020 Compared to the Three Months Ended September 30, 2018 |
| | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2019 | | 2018 | | Change |
| (in thousands) | | |
Revenues | |
| | |
| | |
|
Completion Solutions | $ | 186,252 |
| | $ | 196,608 |
| | $ | (10,356 | ) |
Production Solutions (1) | 16,053 |
| | 21,819 |
| | (5,766 | ) |
| $ | 202,305 |
| | $ | 218,427 |
| | $ | (16,122 | ) |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | | | | |
Completion Solutions | $ | 152,679 |
| | $ | 147,178 |
| | $ | 5,501 |
|
Production Solutions (1) | 14,170 |
| | 18,704 |
| | (4,534 | ) |
| $ | 166,849 |
| | $ | 165,882 |
| | $ | 967 |
|
Adjusted gross profit | | | | | |
Completion Solutions | $ | 33,573 |
| | $ | 49,430 |
| | $ | (15,857 | ) |
Production Solutions (1) | 1,883 |
| | 3,115 |
| | (1,232 | ) |
| $ | 35,456 |
| | $ | 52,545 |
| | $ | (17,089 | ) |
| | | | | |
General and administrative expenses | $ | 19,222 |
| | $ | 21,816 |
| | $ | (2,594 | ) |
(Gain) loss on revaluation of contingent liabilities | (5,771 | ) | | 45 |
| | (5,816 | ) |
Loss on sale of subsidiaries | 15,834 |
| | — |
| | 15,834 |
|
Depreciation | 12,196 |
| | 13,661 |
| | (1,465 | ) |
Amortization of intangibles | 4,609 |
| | 1,857 |
| | 2,752 |
|
Gain on sale of property and equipment | (466 | ) | | (1,190 | ) | | 724 |
|
Income (loss) from operations | (10,168 | ) | | 16,356 |
| | (26,524 | ) |
Non-operating expenses | 9,732 |
| | 1,568 |
| | 8,164 |
|
Income (loss) before income taxes | (19,900 | ) | | 14,788 |
| | (34,688 | ) |
Provision (benefit) for income taxes | 727 |
| | 1,130 |
| | (403 | ) |
Net income (loss) | $ | (20,627 | ) | | $ | 13,658 |
| | $ | (34,285 | ) |
2019 | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
Revenues | | | | | |
Completion Solutions | $ | 49,521 | | | $ | 186,252 | | | $ | (136,731) | |
Production Solutions (1) | — | | | 16,053 | | | (16,053) | |
| $ | 49,521 | | | $ | 202,305 | | | $ | (152,784) | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | | | | |
Completion Solutions | $ | 52,483 | | | $ | 152,679 | | | $ | (100,196) | |
Production Solutions (1) | — | | | 14,170 | | | (14,170) | |
| $ | 52,483 | | | $ | 166,849 | | | $ | (114,366) | |
Adjusted gross profit (loss) | | | | | |
Completion Solutions | $ | (2,962) | | | $ | 33,573 | | | $ | (36,535) | |
Production Solutions (1) | — | | | 1,883 | | | (1,883) | |
| $ | (2,962) | | | $ | 35,456 | | | $ | (38,418) | |
| | | | | |
General and administrative expenses | $ | 10,701 | | | $ | 19,222 | | | $ | (8,521) | |
Depreciation | 7,763 | | | 12,196 | | | (4,433) | |
Amortization of intangibles | 4,091 | | | 4,609 | | | (518) | |
Impairment of goodwill | — | | | — | | | — | |
(Gain) loss on revaluation of contingent liabilities | 297 | | | (5,771) | | | 6,068 | |
Loss on sale of subsidiaries | — | | | 15,834 | | | (15,834) | |
Gain on sale of property and equipment | (535) | | | (466) | | | (69) | |
Loss from operations | (25,279) | | | (10,168) | | | (15,111) | |
Non-operating (income) expenses | (6,740) | | | 9,732 | | | (16,472) | |
Loss before income taxes | (18,539) | | | (19,900) | | | 1,361 | |
Provision (benefit) for income taxes | (37) | | | 727 | | | (764) | |
Net loss | $ | (18,502) | | | $ | (20,627) | | | $ | 2,125 | |
(1)We sold the Production Solutions segment to Brigade on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 413 – Business Acquisitions and Divestitures.Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Revenues
Revenues decreased $16.1$152.8 million, or 7%76%, to $202.3$49.5 million for the third quarter of 20192020 which is primarily related to reduced activity and pricing pressure acrosscaused by poor market conditions, including an economic recession associated with the company. The Completion Solutions segment andcoronavirus pandemic, in comparison to the historical Production Solutions segmentthird quarter of 2019. We depend, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America. In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the third quarter of 2020, the average closing price was $40.89 per barrel of WTI, and the average closing price of natural gas was $2.00 per MMBtu. During the third quarter of 2019, the average closing price of oilWTI was $56.34 per barrel, and the average closing price of natural gas was $2.38 per MMBtu. During the third quarter of 2018, the average closing price per barrel of oil was $69.69, and the average closing price of natural gas was $2.93 per MMBtu. The overall decrease is partially offset with an increase in completion tools revenue from the first nine months of 2018, due in large part to the Magnum Acquisition in the fourth quarter of 2018.
Additional information with respect to revenues by historical reportable segment is discussed below.
Completion Solutions: RevenuesRevenue decreased $10.4$136.7 million, or 5%73%, to $186.3$49.5 million for the third quarter of 2019.2020. The decrease was primarily related toprevalent across all lines of service and was a decrease in coiled tubingdirect reflection of pricing pressures caused by reasons described above. More specifically, wireline revenue of $16.8decreased $45.7 million, or 35%78%, as total job countcompleted wireline stages decreased by 39%74%, in comparison to the third quarter of 2018.2019. In addition, the decrease was partly related to a decrease in wirelinecementing revenue of $8.9(including pump downs) decreased by $40.4 million, or 13%73%, mainly related to pricing pressure. Total completed wireline stages increased 10%as total cement job count decreased 66% in comparison to the third quarter of 2018. The overall decrease in Completions Solutions revenues was partially offset by an increase in2019, tools revenue decreased $26.8 million, or 66%, as completion tools stages decreased by 56% in comparison to the third quarter of 2019, and coiled tubing revenue of $12.6decreased by $23.8 million, or 45%. The increase was primarily due to an increase of 10%77%, as total days worked decreased by 66% in completion tool stages with a corresponding increase of 32% in completion tools revenues by stage due in large partcomparison to the Magnum Acquisition in the fourththird quarter of 2018. Cementing revenues (including pump downs) also increased by $2.62019.
Production Solutions: Revenue decreased $16.1 million, or 5%100%, which is in conjunction with the increase in cement job count of 4% quarter-over-quarter.
Production Solutions: Revenues decreased $5.8 million, or 26%, to $16.1 million for the third quarter of 2019. The overall decrease in revenue was primarily related to2020 as the fact that the Production Solutions segment was sold on August 30, 2019 and therefore only recorded two months of revenue in the third quarter of 2019 compared to recording three months of revenue in the third quarter of 2018.2019.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased $1.0decreased $114.4 million, or 1%69%, to $166.8$52.5 million for the third quarter of 2020, which is primarily related to reduced activity and pricing pressure caused by poor market conditions, including an economic recession associated with the coronavirus pandemic, in comparison to the third quarter of 2019.
Additional information with respect to cost of revenues by historical reportable segment is discussed below.
Completion Solutions: Cost of revenues decreased $100.2 million, or 66%, to $52.5 million for the third quarter of 2020. The increase decrease in comparison to the third quarter of 2019 was prevalent across all lines of service and was a direct reflection of reasons described above. More specifically, the decreasewas primarily related to additional costs of $5.8a $56.3 million fordecrease in materials installed and consumed while performing services. The increaseservices, a $33.4 million decrease in theseemployee costs, was duea $10.8 million decrease in large part to the Magnum Acquisitionother costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses, and a $1.4 million decrease in the fourth quarter of 2018. In addition, the overall increase in cost of revenues was partly related to an increase in severance and other cost of revenue type restructuring charges of $1.8 million mainlyprimarily associated with the third quarter of 2019 wind-down of our wireline service offeringsservices in Canada.Canada that did not recur in the third quarter of 2020. The overall increasedecrease in cost of revenues was partially offset by a decrease of $5.4$1.1 million increase in other employee-relatednon-cash facility lease costs as well asand a decrease of $1.2$0.6 million increase in other costs, which was mainly driven by reductions in repairs and maintenance, travel and meals and entertainment expenses in comparison to the third quarter of 2018.bad debt expense between periods.
Additional information with respect to cost of revenues by reportable segment is discussed below.
CompletionProduction Solutions: Cost of revenues increased $5.5decreased $14.2 million, or 4%100%, to $152.7 million for the third quarter of 2019 primarily related2020 as the Production Solutions segment was sold on August 30, 2019.
Adjusted Gross Profit (Loss)
Completion Solutions: Adjusted gross profit decreased $36.5 million to additional costs of $7.0a $3.0 million for materials installed and consumed while performing services. The increase in these costs was due in large part to the Magnum Acquisition in the fourth quarter of 2018. In addition, the overall increase in cost of revenues was partly related to an increase in severance and other cost of revenue type restructuring charges of $1.8 million mainly associated with the third quarter of 2019 wind-down of our wireline service offerings in Canada. The overall increase in cost of revenues was partially offset by a decrease of $2.8 million in other employee-related costs, as well as a decrease of $0.5 million in other costs, which was mainly driven by reductions in repairs and maintenance, travel and meals and entertainment in comparison to the third quarter of 2018.
Production Solutions: Cost of revenues decreased $4.5 million, or 24%, to $14.2 millionloss for the third quarter of 2019. Employee-related costs decreased by $2.6 million while costs related to materials consumed while performing services decreased by $1.3 million, and other costs such as repairs and maintenance, vehicle and facilities expenses, decreased by $0.7 million in the third quarter of 2019. The primary driver behind the reduction of these costs of revenues related to the sale of the Production Solutions segment on August 30, 2019 as only two months of cost of revenues was recorded in the third quarter of 2019 compared to three months of cost of revenues recorded in the third quarter of 2018.
Adjusted Gross Profit
Completion Solutions: Adjusted gross profit (excluding depreciation and amortization) decreased $15.9 million to $33.6 million for the third quarter of 20192020 due to the factors described above under “Revenues” and “Cost of Revenues.”
Production Solutions: Adjusted gross profit (excluding depreciation and amortization) decreased $1.2$1.9 million to $1.9$0.0 million for the third quarter of 20192020 as a result of the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses decreased $2.6$8.5 million to $19.2$10.7 million for the third quarter of 2019.2020. The decrease was primarily related to a decrease of $1.9 million in employee-related costs in comparison to the third quarter of 2018. The decrease is also partly2019 was primarily related to a third quarter of 2018 settlement of $1.5$5.6 million associated withdecrease in employee costs due mainly to headcount reductions across the Fair Labor Standards Act (“FLSA”) that did not recur in the third quarter of 2019, coupled with certain transaction costs recorded in the third quarter of 2018 associated with the Magnum Acquisition that also did not recur in the third quarter of 2019.organization. The overall decrease was also partly attributed to a $1.4 million reduction in general and administrative expenses was partially offset by an increase in severance and other general and administrative type restructuring charges of $1.4 million mainlyprimarily associated with the third quarter of 2019 wind-down of our wireline service offeringsservices in Canada. GeneralCanada that did not recur in the third quarter of 2020. In addition, the overall decrease was partly
attributed to a $1.0 million reduction in transaction and integration costs associated with the Magnum Acquisition and a $0.5 million decrease in other general and administrative expenses such as a percentage of revenue was 9.5%professional fees, marketing, and travel expenses between periods.
Depreciation
Depreciation expense decreased $4.4 million to $7.8 million for the third quarter of 2020. The decrease in comparison to the third quarter of 2019 comparedwas primarily related to 10.0%a $2.7 million reduction in depreciation expense associated with our coiled tubing business mainly due to the property and equipment charge recorded in the fourth quarter of 2019, coupled with a $1.2 million reduction in depreciation expense in the Production Solutions segment, which was sold on August 30, 2019, and a $0.5 million reduction in depreciation expense in other lines of service within our Completion Solutions segment due to a decrease in capital expenditures between periods.
Amortization of Intangibles
Amortization of intangibles decreased $0.5 million to $4.1 million for the third quarter of 2018.2020, primarily due to a $0.3 million decrease in amortization associated with certain non-compete agreements that were fully amortized in 2019, coupled with a $0.2 million decrease in amortization associated with our coiled tubing business mainly due to the intangible asset impairment charge recorded in the fourth quarter of 2019.
(Gain) Loss on Revaluation of Contingent Liabilities
(Gain)We recorded a $0.3 million loss on the revaluation of contingent liabilities changedfor the third quarter of 2020 compared to a $5.8 million from a lossgain on the revaluation of less than $0.1 million to a gain of $5.8 millioncontingent liabilities for the third quarter of 2019. The $6.1 million change was primarily related to a reduction$6.0 million gain on the revaluation of the Magnum Earnout (as defined in Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) in the estimated salesthird quarter of certain dissolvable plug products2019 that did not recur in 2019 associated with the third quarter of 2020. The Magnum Acquisition, which contributed toEarnout was terminated in the reductionsecond quarter of 2020.
Non-Operating (Income) Expenses
We recorded $6.7 million in fair value during the current quarter.
(Gain) Loss on Sale of Subsidiaries
Loss on the sale of subsidiaries was approximately$15.8 millionnon-operating income for the third quarter of 2019 and was related2020 compared to the sale of the ProductionSolutions segment on August 30, 2019. We did not record a loss on the sale of subsidiaries for the third quarter of 2018.
Depreciation
Depreciation expense decreased $1.5$9.7 million to $12.2 millionin non-operating expenses for the third quarter of 2019. The overall decrease$16.4 million change was primarily within service offeringsrelated to a $15.8 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined in “Liquidity and Capital Resources”) in the Production Solutions segment as we recorded a property and equipment impairment charge recordedthird quarter of 2020 that did not occur in the fourththird quarter of 2018. Furthermore, the remaining property2019. The change is also partly attributed to a $0.7 million reduction in interest expense and equipment associated with the Production Solutions segment was sold on August 30, 2019.a $0.1 million increase in interest income between periods.
Amortization of IntangiblesProvision (Benefit) for Income Taxes
Amortization of intangibles increased $2.8We recorded less than a $0.1 million to $4.6 millionincome tax benefit for the third quarter of 2019, primarily due2020 compared to a $3.1$0.7 million increase in amortization associated with intangible assets acquired as part of the Magnum Acquisition and the acquisition of Frac Technology AS, a Norwegian private limited company (the “Frac Tech Acquisition”). The overall increase was partially offset by a reduction in amortization of $0.3 million associated with intangible assets in the Production Solutions segment, which were fully impaired in the fourth quarter of 2018.
Non-Operating Expenses
Non-operating expenses increased $8.2 million to $9.7 millionincome tax provision for the third quarter of 2019. The increase$0.8 million decrease in comparison to the third quarter of 2018income tax provision was primarily related to an increasedriven by our valuation allowance position and fluctuations in interest expense related to higher indebtedness and an increased interest rate in conjunction with the Senior Notes, which were entered into in the fourth quarter of 2018 in connection with the Magnum Acquisition.income between periods.
Provision (Benefit) for Income TaxesAdjusted EBITDA
Our tax provision for the third quarter of 2019 was approximately $0.7Adjusted EBITDA decreased $35.4 million as compared to a tax provisionloss of $1.1$11.1 million for the third quarter of 2018. The $0.4 million decrease in the tax provision was primarily a result of the discrete tax impact from the sale of the Production Solutions segment on August 30, 2019, coupled with changes in pre-tax income between periods.
Adjusted EBITDA
Adjusted EBITDA decreased $14.1 million to $24.2 million for the third quarter of 2019.2020. The Adjusted EBITDA decrease iswas primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.
Results for the Nine Months Ended September 30, 20192020 Compared to the Nine Months Ended September 30, 20182019
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
Revenues | | | | | |
Completion Solutions | $ | 248,880 | | | $ | 611,255 | | | $ | (362,375) | |
Production Solutions (1) | — | | | 58,272 | | | (58,272) | |
| $ | 248,880 | | | $ | 669,527 | | | $ | (420,647) | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | | | | |
Completion Solutions | $ | 235,194 | | | $ | 480,140 | | | $ | (244,946) | |
Production Solutions (1) | — | | | 49,854 | | | (49,854) | |
| $ | 235,194 | | | $ | 529,994 | | | $ | (294,800) | |
Adjusted gross profit | | | | | |
Completion Solutions | $ | 13,686 | | | $ | 131,115 | | | $ | (117,429) | |
Production Solutions (1) | — | | | 8,418 | | | (8,418) | |
| $ | 13,686 | | | $ | 139,533 | | | $ | (125,847) | |
| | | | | |
General and administrative expenses | $ | 38,380 | | | $ | 60,979 | | | $ | (22,599) | |
Depreciation | 24,753 | | | 39,572 | | | (14,819) | |
Amortization of intangibles | 12,376 | | | 13,925 | | | (1,549) | |
Impairment of goodwill | 296,196 | | | — | | | 296,196 | |
(Gain) loss on revaluation of contingent liabilities | 781 | | | (20,701) | | | 21,482 | |
Loss on sale of subsidiaries | — | | | 15,834 | | | (15,834) | |
Gain on sale of property and equipment | (2,900) | | | (799) | | | (2,101) | |
Income (loss) from operations | (355,900) | | | 30,723 | | | (386,623) | |
Non-operating (income) expenses | (9,979) | | | 29,501 | | | (39,480) | |
Income (loss) before income taxes | (345,921) | | | 1,222 | | | (347,143) | |
Benefit for income taxes | (2,348) | | | (1,548) | | | (800) | |
Net income (loss) | $ | (343,573) | | | $ | 2,770 | | | $ | (346,343) | |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2019 | | 2018 | | Change |
| (in thousands) | | |
Revenues | | | | | |
Completion Solutions | $ | 611,255 |
| | $ | 536,363 |
| | $ | 74,892 |
|
Production Solutions (1) | 58,272 |
| | 61,363 |
| | (3,091 | ) |
| $ | 669,527 |
| | $ | 597,726 |
| | $ | 71,801 |
|
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | | | | |
Completion Solutions | $ | 480,140 |
| | $ | 414,606 |
| | $ | 65,534 |
|
Production Solutions (1) | 49,854 |
| | 53,094 |
| | (3,240 | ) |
| $ | 529,994 |
| | $ | 467,700 |
| | $ | 62,294 |
|
Adjusted gross profit | | | | | |
Completion Solutions | $ | 131,115 |
| | $ | 121,757 |
| | $ | 9,358 |
|
Production Solutions (1) | 8,418 |
| | 8,269 |
| | 149 |
|
| $ | 139,533 |
| | $ | 130,026 |
| | $ | 9,507 |
|
| | | | | |
General and administrative expenses | $ | 60,979 |
| | $ | 51,837 |
| | $ | 9,142 |
|
(Gain) loss on revaluation of contingent liabilities | (20,701 | ) | | 1,715 |
| | (22,416 | ) |
Loss on sale of subsidiaries | 15,834 |
| | — |
| | 15,834 |
|
Depreciation | 39,572 |
| | 39,982 |
| | (410 | ) |
Amortization of intangibles | 13,925 |
| | 5,653 |
| | 8,272 |
|
Gain on sale of property and equipment | (799 | ) | | (1,701 | ) | | 902 |
|
Income from operations | 30,723 |
| | 32,540 |
| | (1,817 | ) |
Non-operating expenses | 29,501 |
| | 6,313 |
| | 23,188 |
|
Income before income taxes | 1,222 |
| | 26,227 |
| | (25,005 | ) |
Provision (benefit) for income taxes | (1,548 | ) | | 1,875 |
| | (3,423 | ) |
Net income | $ | 2,770 |
| | $ | 24,352 |
| | $ | (21,582 | ) |
(1)We sold the Production Solutions segment to Brigade on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 413 – Business Acquisitions and Divestitures.Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Revenues
Revenues increased $71.8decreased $420.6 million, or 12%63%, to $669.5$248.9 million for the first nine months of 2019. The increase2020 which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an increaseeconomic recession associated with the coronavirus pandemic, as well as international pricing and production disputes, in completion tools revenue fromcomparison to the first nine months of 2018, due in large part to the Magnum Acquisition in the fourth quarter of 2018. The overall increase is partially offset with pricing pressure across the company. The Completion Solutions segment and the historical Production Solutions segment2019. We depend, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America. In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the first nine months of 2020, the average closing price was $38.04 per barrel of WTI, and the average closing price of natural gas was $1.87 per MMBtu. During the first nine months of 2019, the average closing price of oilWTI was $57.04 per barrel, and the average closing price of natural gas was $2.62 per MMBtu. During the first nine months of 2018, the average closing price per barrel of oil was $66.93, and the average closing price of natural gas was $2.95 per MMBtu.
Additional information with respect to revenues by historical reportable segment is discussed below.
Completion Solutions: Revenues increased $74.9Revenue decreased $362.4 million, or 14%59%, to $611.3$248.9 million for the first nine months of 2019. 2020.The increasedecrease was primarily related to an increase in completion toolsprevalent across all lines of service and was a direct reflection of pricing pressures caused by reasons described above. More specifically, wireline revenue of $78.0decreased $118.7 million, or 107%, with a corresponding increase of 65% in completion tool stages and 26% in completion tools revenues by stage due in large part to the Magnum Acquisition in the fourth quarter of 2018. In addition, the increase was partly attributable to an increase in wireline revenue of $7.8 million, or 4%64%, as total completed wireline stages completed increased 19% due to an increase in activitydecreased by 58% in comparison to the first nine months of 2018. Furthermore, cementing revenues (including pump downs) increased by $19.02019. In addition, tools revenue decreased $89.3 million, or 13%, primarily due to a 12% increase in cement job count during the first nine months of 2019. The increase was partially offset with a decrease in coiled tubing revenue of $29.8 million, or 22%59%, as total job countcompletion tools stages decreased by 34%49% in comparison to the first nine months of 2018.
Production Solutions: Revenues2019, cementing revenue (including pump downs) decreased $3.1by $81.4 million, or 5%49%, as our total cement job count decreased 45% in comparison to the first nine months of 2019, and coiled tubing revenue decreased $73.0 million, or 67%, as total days worked decreased by 57% in comparison to the first nine months of 2019.
Production Solutions: Revenue decreased $58.3 million, or 100%, for the first nine months of 2019 primarily related to a reduction of activity. The 2020 as the Production Solutions segment was sold on August 30, 2019.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased $62.3decreased $294.8 million, or 13%56%, to $530.0$235.2 million for the first nine months of 2019. The increase was 2020, which isprimarily related to increased revenues described abovereduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes, in comparison to the first nine months of 2018, which was due in large part to the Magnum Acquisition in the fourth quarter of 2018.2019.
Additional information with respect to cost of revenues by historical reportable segment is discussed below.below.
Completion Solutions: Cost of revenues increased $65.5decreased $244.9 million, or 16%51%, to $480.1$235.2 million for the first nine months of 2019. Costs related to materials installed and consumed while performing services increased $53.4 million and other employee-related costs increased $8.0 million2020. The decrease in comparison to the first nine months of 2018, due2019 was prevalent across all lines of service and was a direct reflection of reasons described above. More specifically, the decrease was primarily related to a $144.9 million decrease in large part to the Magnum Acquisitionmaterials installed and consumed while performing services, a $76.6 million decrease in the fourth quarter of 2018. In addition, Magnumemployee costs, a $24.2 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses, and a $3.2 million decrease in transaction and integration costs associated with cost of revenues was approximately $3.2 million in the third quarter of 2019. These costs did not occur in the third quarter of 2018. Furthermore, the increase in cost of revenues was partly related to an increase in severance and other cost of revenue type restructuring charges of $1.8 million mainly associated with the third quarter of 2019 wind-down of our wireline service offerings in Canada.Magnum Acquisition. The overall increasedecrease in cost of revenues was partially offset by a decrease of$2.0 million increase in bad debt expense, a $1.1 million increase in non-cash facility lease costs, and a $0.9 million increase in othercost of revenue type restructuring costs which was mainly driven by reductions in repairs and maintenance, travel and meals and entertainment in comparison tobetween periods.
Production Solutions: Cost of revenues decreased $49.9 million, or 100%, for the first nine months of 2018.
2020 as the Production Solutions segment was sold on August 30, 2019.
Adjusted Gross Profit (Loss)
Completion Solutions: Cost of revenuesAdjusted gross profit decreased $3.2$117.4 million or 6%, to $49.9$13.7 million for the first nine months of 2019. Costs related to materials consumed while performing services decreased $1.7 million, employee-related costs decreased $1.2 million, and other costs such as repairs and maintenance, vehicle and facilities expenses, decreased $0.3 million in the third quarter of 2019. The primary drivers behind the reduction of these costs of revenues related to a reduction in activity for the first nine months of 2019 coupled with the ultimate sale of the Production Solutions segment on August 30, 2019.
Adjusted Gross Profit
Completion Solutions: Adjusted gross profit (excluding depreciation and amortization) increased $9.4 million to $131.1 million for the first nine months of 20192020 due to the factors described above under “Revenues” and “Cost of Revenues.”
Production Solutions: Adjusted gross profit (excluding depreciation and amortization) increased $0.1decreased $8.4 million to $8.4$0.0 million for the first nine months of 20192020 as a result of the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses increased $9.1decreased $22.6 million to $61.0$38.4 million for the first nine months of 2020.The decrease in comparison to the first nine months of 2019 was primarily related to a $14.5 million decrease in employee costs due mainly to headcount reductions across the organization. The overall decrease was also partly attributed to a $5.5 million decrease in transaction and integration costs associated with the Magnum Acquisition and a $3.3 million decrease in other costs
such as professional fees, marketing, and travel expenses, as well as expenses associated with the recently sold Production Solutions segment. The overall decrease in general and administrative expenses was partially offset by a $0.7 million increase in severance and other general and administrative type restructuring costs between periods.
Depreciation
Depreciation expense decreased $14.8 million to $24.8 million for the first nine months of 2020. The decrease in comparison to the first nine months of 2019 was primarily related to a$7.4 million reduction in depreciation expense associated with our coiled tubing business mainly due to the property and equipment charge recorded in the fourth quarter of 2019, coupled with a $5.0 million reduction in depreciation expense in the Production Solutions segment, which was sold on August 30, 2019, and a $2.4 million reduction in depreciation expense in other lines of service within our Completion Solutions segment due to a decrease in capital expenditures between periods.
Amortization of Intangibles
Amortization of intangibles decreased $1.5 million to $12.4 million for the first nine months of 2020, primarily due to a $0.8 million decrease in amortization associated with certain non-compete agreements that were fully amortized in 2019, coupled with a $0.7 million decrease in amortization associated with our coiled tubing business mainly due to the intangible asset impairment charge recorded in the fourth quarter of 2019.
Impairment of Goodwill
We recorded goodwill impairment charges of $296.2 million for the first nine months of 2020 in our tools, cementing, and wireline reporting units due to sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes. No goodwill impairment charges were recorded for the first nine months of 2019.
(Gain) Loss on Revaluation of Contingent Liabilities
We recorded a $0.8 million loss on the revaluation of contingent liabilities for the first nine months of 2020 compared to a $20.7 million gain on the revaluation of contingent liabilities for the first nine months of 2019. The $21.5 million change was primarily related to an $0.8 million loss on the revaluation of the Magnum Earnout (as defined in Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) for the first nine months of 2020 compared to a $21.4 million gain on the revaluation of the Magnum Earnout for the first nine months of 2019. The Magnum Earnout was terminated in the second quarter of 2020. The change was partially offset by a $0.7 million loss on the revaluation of the earnout associated with our acquisition of Frac Technology AS for the first nine months of 2019 that did not recur for the first nine months of 2020.
Non-Operating (Income) Expenses
We recorded $10.0 million in non-operating income for the first nine months of 2020 compared to $29.5 million in non-operating expenses for the first nine months of 2019.The $39.5 million change was primarily related to a $37.5 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined in “Liquidity and Capital Resources”) in the first nine months of 2020 that did not occur in the first nine months of 2019. The change is also partly attributed to a $1.8 million reduction in interest expense and a $0.2 million increase in interest income between periods.
Provision (Benefit) for Income Taxes
We recorded a $2.3 million income tax benefit for the first nine months of 2020 compared to an income tax benefit of $1.5 million for the first nine months of 2019. The $0.8 million increase in comparison to the first nine months of 2018income tax benefit was primarily relateddriven by our valuation allowance position and fluctuations in income between periods.
Adjusted EBITDA
Adjusted EBITDA decreased $113.3 million to additional general and administrative costs, including integration, compensation, and benefits costs, associated with the Magnum Acquisition in the fourth quarter of 2018. General and administrative expenses as a percentage of revenue was 9.1% for the first nine months of 2019, compared to 8.7% for the first nine months of 2018.
(Gain) Loss on Revaluation of Contingent Liabilities
(Gain) loss on the revaluation of contingent liabilities changed $22.4 million from a loss of $1.7$11.9 million for the first nine months of 2018 to againof $20.7 million for the first nine months of 2019. The change was primarily related to a reduction in the estimated sales of certain dissolvable plug products in 2019 associated with the Magnum Acquisition, which contributed to the reduction in fair value during the first nine months of 2019.
(Gain) Loss on Sale of Subsidiaries
Loss on the sale of subsidiaries was approximately$15.8 million for the first nine months of 2019 and was related to the sale of the ProductionSolutions segment. We did not record a loss on the sale of subsidiaries for the first nine months of 2018.
Depreciation
Depreciation expense decreased $0.4 million to $39.6 million for the first nine months of 2019. The decrease was primarily within service offerings in the Production Solutions segment as we recorded a property and equipment impairment charge recorded in the fourth quarter of 2018. Furthermore, the remaining property and equipment associated with the Production Solutions segment was sold in the third quarter of 2019. The overall decrease is partially offset with an increase in depreciation expense in other lines of service where capital expenditure activity was larger in the first nine months of 2019 in comparison to the first nine months of 2018.
Amortization of Intangibles
Amortization of intangibles increased $8.3 million to $13.9 million for the first nine months of 2019, primarily due to a $9.4 million increase in amortization associated with intangible assets acquired as part of the Magnum Acquisition and Frac Tech Acquisition. The overall increase was partially offset by a reduction in amortization of $0.8 million associated with intangible assets in the Production Solutions segment, which were fully impaired in the fourth quarter of 2018.
Non-Operating Expenses
Non-operating expenses increased $23.2 million to $29.5 million for the first nine months of 2019. The increase in comparison to the first nine months of 2018 was primarily related to an increase in interest expense related to higher indebtedness and an increased interest rate in conjunction with the Senior Notes, which were entered into in the fourth quarter of 2018 in connection with the Magnum Acquisition.
Provision (Benefit) for Income Taxes
Our tax benefit for the first nine months of 2019 was approximately $1.5 million as compared to a tax provision of $1.9 million for the first nine months of 2018. The $3.4 million decrease in our tax provision was primarily related to changes in pre-tax income between periods coupled with the discrete tax impact from the sale of the Production Solutions segment during the first nine months of 2019.
Adjusted EBITDA
Adjusted EBITDA increased $8.3 million to $101.4 million for the first nine months of 2019.2020. The Adjusted EBITDA increase isdecrease was primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures that are used by management and external users of our financial statements, such as industry analysts, investors, lenders, and rating agencies.
We define EBITDA as net income (loss) before interest, expense,taxes, depreciation, amortization of intangibles, and provision (benefit) for income taxes.amortization.
We define Adjusted EBITDA as EBITDA further adjusted for (i) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, and our IPO, (iii) loss or gain from discontinued operations, (iv) loss or gain on revaluation of contingent liabilities, (iv) gain on extinguishment of debt, (v) loss or gain on equity method investment,the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation expense, (vii)(viii) loss or gain on sale of property and equipment, and (viii) restructuring charges, (ix) loss or gain on the sale of subsidiaries, and (x) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business and restructuring costs.
business.
Management believes EBITDA and Adjusted EBITDA are useful because they allow us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above from net income (loss) in arriving at these measures because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, and the method by which the assets were acquired. These measures should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”) or as an indicator of our operating performance. Certain items excluded from these measures are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of these measures. Our computations of these measures may not be comparable to other similarly titled measures of other companies. We believe that these are widely followed measures of operating performance.
The following table presents a reconciliation of the non-GAAP financial measures of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) for the three and nine months ended September 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands) | | (in thousands) |
EBITDA reconciliation: | | | | | | | |
Net income (loss) | $ | (18,502) | | | $ | (20,627) | | | $ | (343,573) | | | $ | 2,770 | |
Interest expense | 9,130 | | | 9,843 | | | 28,144 | | | 29,940 | |
Interest income | (43) | | | (111) | | | (593) | | | (439) | |
Provision (benefit) for income taxes | (37) | | | 727 | | | (2,348) | | | (1,548) | |
Depreciation | 7,763 | | | 12,196 | | | 24,753 | | | 39,572 | |
Amortization of intangibles | 4,091 | | | 4,609 | | | 12,376 | | | 13,925 | |
EBITDA | $ | 2,402 | | | $ | 6,637 | | | $ | (281,241) | | | $ | 84,220 | |
| | | | | | | |
Adjusted EBITDA reconciliation: | | | | | | | |
EBITDA | $ | 2,402 | | | $ | 6,637 | | | $ | (281,241) | | | $ | 84,220 | |
Impairment of goodwill | — | | | — | | | 296,196 | | | — | |
Transaction and integration costs | — | | | 1,418 | | | 146 | | | 8,864 | |
(Gain) loss on revaluation of contingent liabilities (1) | 297 | | | (5,771) | | | 781 | | | (20,701) | |
Gain on extinguishment of debt | (15,798) | | | — | | | (37,501) | | | — | |
Loss on sale of subsidiaries | — | | | 15,834 | | | — | | | 15,834 | |
Restructuring charges | 459 | | | 3,263 | | | 4,882 | | | 3,263 | |
Stock-based compensation expense | 2,020 | | | 3,286 | | | 7,717 | | | 10,553 | |
Gain on sale of property and equipment | (535) | | | (466) | | | (2,900) | | | (799) | |
Legal fees and settlements (2) | 15 | | | 22 | | | 39 | | | 165 | |
Adjusted EBITDA | $ | (11,140) | | | $ | 24,223 | | | $ | (11,881) | | | $ | 101,399 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in thousands) |
EBITDA reconciliation: | | | | | | | |
Net income (loss) | $ | (20,627 | ) | | $ | 13,658 |
| | $ | 2,770 |
| | $ | 24,352 |
|
Interest expense | 9,843 |
| | 1,756 |
| | 29,940 |
| | 6,763 |
|
Interest income | (111 | ) | | (188 | ) | | (439 | ) | | (450 | ) |
Depreciation | 12,196 |
| | 13,661 |
| | 39,572 |
| | 39,982 |
|
Amortization of intangibles | 4,609 |
| | 1,857 |
| | 13,925 |
| | 5,653 |
|
Provision (benefit) for income taxes | 727 |
| | 1,130 |
| | (1,548 | ) | | 1,875 |
|
EBITDA | $ | 6,637 |
| | $ | 31,874 |
| | $ | 84,220 |
| | $ | 78,175 |
|
| | | | | | | |
Adjusted EBITDA reconciliation: | | | | | | | |
EBITDA | $ | 6,637 |
| | $ | 31,874 |
| | $ | 84,220 |
| | $ | 78,175 |
|
Transaction and integration costs | 1,418 |
| | 2,320 |
| | 8,864 |
| | 2,697 |
|
Loss on equity method investment | — |
| | 77 |
| | — |
| | 270 |
|
(Gain) loss on revaluation of contingent liabilities (1) | (5,771 | ) | | 45 |
| | (20,701 | ) | | 1,715 |
|
Loss on sale of subsidiaries | 15,834 |
| | — |
| | 15,834 |
| | — |
|
Restructuring charges | 3,263 |
| | — |
| | 3,263 |
| | — |
|
Stock-based compensation expense | 3,286 |
| | 3,508 |
| | 10,553 |
| | 9,719 |
|
Gain on sale of property and equipment | (466 | ) | | (1,190 | ) | | (799 | ) | | (1,701 | ) |
Legal fees and settlements (2) | 22 |
| | 1,721 |
| | 165 |
| | 2,203 |
|
Adjusted EBITDA | $ | 24,223 |
| | $ | 38,355 |
| | $ | 101,399 |
| | $ | 93,078 |
|
(1)Amounts relate to the revaluation of contingent liabilities associated with our 2018 acquisitions. The impact is included in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss). For additional information on contingent liabilities, see Note 10 – Commitments and Contingencies included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
(2)Amounts represent fees and legal settlements associated with legal proceedings brought pursuant to the FLSAFair Labor Standards Act and/or similar state laws.
Return on Invested Capital
ROIC is a supplemental non-GAAP financial measure. We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) transaction and integration costs related to acquisitions and our IPO, (ii) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss or gain on the sale of subsidiaries, (vi) gain on extinguishment of debt, and (vi)(vii) the provision or benefit for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We then takecompute the average of the current and prior period-end total capital for use in this analysis.
Management believes ROIC is a meaningful measure because it quantifies how well we generate operating income relative to the capital we have invested in our business and illustrates the profitability of a business or project taking into account the capital invested. Management uses ROIC to assist them in capital resource allocation decisions and in evaluating business performance. Although ROIC is commonly used as a measure of capital efficiency, definitions of ROIC differ, and our computation of ROIC may not be comparable to other similarly titled measures of other companies.
The following table provides an explanation of our calculation of ROIC for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands) | | (in thousands) | | (in thousands) |
Net income (loss) | $ | (20,627 | ) | | $ | 2,770 |
| Net income (loss) | $ | (18,502) | | | $ | (20,627) | | | $ | (343,573) | | | $ | 2,770 | |
Add back: | | | | Add back: | |
Impairment of goodwill | | Impairment of goodwill | — | | | — | | | 296,196 | | | — | |
Transaction and integration costs | | Transaction and integration costs | — | | | 1,418 | | | 146 | | | 8,864 | |
Interest expense | 9,843 |
| | 29,940 |
| Interest expense | 9,130 | | | 9,843 | | | 28,144 | | | 29,940 | |
Interest income | (111 | ) | | (439 | ) | Interest income | (43) | | | (111) | | | (593) | | | (439) | |
Transaction and integration costs | 1,418 |
| | 8,864 |
| |
Restructuring charges | 3,263 |
| | 3,263 |
| Restructuring charges | 459 | | | 3,263 | | | 4,882 | | | 3,263 | |
Loss on sale of subsidiaries | 15,834 |
| | 15,834 |
| Loss on sale of subsidiaries | — | | | 15,834 | | | — | | | 15,834 | |
Gain on extinguishment of debt | | Gain on extinguishment of debt | (15,798) | | | — | | | (37,501) | | | — | |
Provision (benefit) for deferred income taxes | 143 |
| | (2,876 | ) | Provision (benefit) for deferred income taxes | — | | | 143 | | | (1,588) | | | (2,876) | |
After-tax net operating profit | $ | 9,763 |
| | $ | 57,356 |
| |
Total capital as of prior period-end/year-end: | | | | |
After-tax net operating profit (loss) | | After-tax net operating profit (loss) | $ | (24,754) | | | $ | 9,763 | | | $ | (53,887) | | | $ | 57,356 | |
Total capital as of prior period-end: | | Total capital as of prior period-end: | | | | | | | |
Total stockholders’ equity | $ | 624,309 |
| | $ | 594,823 |
| Total stockholders’ equity | $ | 69,950 | | | $ | 624,309 | | | $ | 389,877 | | | $ | 594,823 | |
Total debt | 400,000 |
| | 435,000 |
| Total debt | 372,584 | | | 400,000 | | | 400,000 | | | 435,000 | |
Less cash and cash equivalents | (16,886 | ) | | (63,615 | ) | Less cash and cash equivalents | (88,678) | | | (16,886) | | | (92,989) | | | (63,615) | |
Total capital as of prior period-end/year-end | $ | 1,007,423 |
| | $ | 966,208 |
| |
Total capital as of prior period-end | | Total capital as of prior period-end | $ | 353,856 | | | $ | 1,007,423 | | | $ | 696,888 | | | $ | 966,208 | |
Total capital as of period-end: | | | | Total capital as of period-end: | | | | | | | |
Total stockholders’ equity | $ | 606,779 |
| | $ | 606,779 |
| Total stockholders’ equity | $ | 53,599 | | | $ | 606,779 | | | $ | 53,599 | | | $ | 606,779 | |
Total debt | 400,000 |
| | 400,000 |
| Total debt | 349,418 | | | 400,000 | | | 349,418 | | | 400,000 | |
Less cash and cash equivalents | (93,321 | ) | | (93,321 | ) | Less cash and cash equivalents | (80,338) | | | (93,321) | | | (80,338) | | | (93,321) | |
Total capital as of period-end | $ | 913,458 |
| | $ | 913,458 |
| Total capital as of period-end | $ | 322,679 | | | $ | 913,458 | | | $ | 322,679 | | | $ | 913,458 | |
Average total capital | $ | 960,441 |
| | $ | 939,833 |
| Average total capital | $ | 338,268 | | | $ | 960,441 | | | $ | 509,784 | | | $ | 939,833 | |
ROIC | 4.1% | | 8.1% | ROIC | (29.3)% | | 4.1% | | (14.1)% | | 8.1% |
Adjusted Gross Profit (Excluding Depreciation and Amortization)(Loss)
GAAP defines gross profit (loss) as revenues less cost of revenues and includes depreciation and amortization in costs of revenues. We define adjusted gross profit (excluding depreciation and amortization)(loss) as revenues less costdirect and indirect costs of revenues (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit (loss) because we do not include the impact of depreciation and amortization, which represent non-cash expenses.
Management uses adjusted gross profit (excluding depreciation and amortization)(loss) to evaluate operating performance. We prepare adjusted gross profit (excluding depreciation and amortization)(loss) to eliminate the impact of depreciation and amortization because we do not consider depreciation and amortization indicative of our core operating performance. Adjusted gross profit (excluding depreciation and amortization)(loss) should not be considered as an alternative to gross profit (loss), operating income (loss), or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted gross profit (excluding depreciation and amortization)(loss) may not be comparable to similarly titled measures of other
companies because other companies may not calculate adjusted gross profit (excluding depreciation and amortization)(loss) or similarly titled measures in the same manner as we do.
The following table presents a reconciliation of adjusted gross profit (excluding depreciation and amortization)(loss) to GAAP gross profit (loss) for the three and nine months ended September 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands) | | (in thousands) |
Calculation of gross profit (loss) | | | | | | | |
Revenues | $ | 49,521 | | | $ | 202,305 | | | $ | 248,880 | | | $ | 669,527 | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 52,483 | | | 166,849 | | | 235,194 | | | 529,994 | |
Depreciation (related to cost of revenues) | 7,219 | | | 11,994 | | | 23,020 | | | 38,916 | |
Amortization of intangibles | 4,091 | | | 4,609 | | | 12,376 | | | 13,925 | |
Gross profit (loss) | $ | (14,272) | | | $ | 18,853 | | | $ | (21,710) | | | $ | 86,692 | |
Adjusted gross profit (loss) reconciliation: | | | | | | | |
Gross profit (loss) | $ | (14,272) | | | $ | 18,853 | | | $ | (21,710) | | | $ | 86,692 | |
Depreciation (related to cost of revenues) | 7,219 | | | 11,994 | | | 23,020 | | | 38,916 | |
Amortization of intangibles | 4,091 | | | 4,609 | | | 12,376 | | | 13,925 | |
Adjusted gross profit (loss) | $ | (2,962) | | | $ | 35,456 | | | $ | 13,686 | | | $ | 139,533 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in thousands) |
Calculation of gross profit | | | | | | | |
Revenues | $ | 202,305 |
| | $ | 218,427 |
| | $ | 669,527 |
| | $ | 597,726 |
|
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 166,849 |
| | 165,882 |
| | 529,994 |
| | 467,700 |
|
Depreciation (related to cost of revenues) | 11,994 |
| | 13,434 |
| | 38,916 |
| | 39,319 |
|
Amortization of intangibles | 4,609 |
| | 1,857 |
| | 13,925 |
| | 5,653 |
|
Gross profit | $ | 18,853 |
| | $ | 37,254 |
| | $ | 86,692 |
| | $ | 85,054 |
|
Adjusted gross profit (excluding depreciation and amortization) reconciliation: | | | | | | | |
Gross profit | $ | 18,853 |
| | $ | 37,254 |
| | $ | 86,692 |
| | $ | 85,054 |
|
Depreciation (related to cost of revenues) | 11,994 |
| | 13,434 |
| | 38,916 |
| | 39,319 |
|
Amortization of intangibles | 4,609 |
| | 1,857 |
| | 13,925 |
| | 5,653 |
|
Adjusted gross profit (excluding depreciation and amortization) | $ | 35,456 |
| | $ | 52,545 |
| | $ | 139,533 |
| | $ | 130,026 |
|
Liquidity and Capital Resources
Sources and Uses of Liquidity
Historically, we have met our liquidity needs principally from cash on hand, cash flows from operating activities and, if needed, external borrowings, proceeds from the IPO, and capital contributions (prior to the IPO).borrowings. Our principal uses of cash are to fund capital expenditures and acquisitions, to service our outstanding debt, and to fund our working capital requirements. We may also, from time to time, make open market debt repurchases (including our Senior Notes as defined and described below) when it is opportunistic to do to manage our debt maturity profile. In 2018, we issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”) to, together with cash on hand and borrowings under the 2018 ABL Credit Facility (as defined and described below), fund the Magnum Acquisition as well as fully repay and terminate the term loan borrowings and the outstanding revolving credit commitments under our prior credit facility. For additional information regarding the Senior Notes, see Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.“Senior Notes” below. In the third quarter of 2019, we divested the Production Solutions segment for approximately $17.4$17.1 million in cash. The closing consideration is subject to working capital and other customary post-closing adjustments. We plan to useused such proceeds to fund oursupport working capital requirements and fund a portion of our 2020 capital expenditures.
We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue to access outside sources of capital. In addition, our ability to satisfy our liquidity requirements depends on our future operating performance, which is affected by prevailing economic conditions, the level of drilling, completion and production activity for North American onshore oil and natural gas resources, and financial and business and other factors, many of which are beyond our control.
Although we do not budget for acquisitions, pursuing growth through acquisitions ismay continue to be a significant part of our business strategy. Our ability to make significant additional acquisitions for cash will require us to obtain additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.
At September 30, 2019,2020, we had $93.3$80.3 million of cash and cash equivalents and $118.0$39.5 million of availability under the 2018 ABL Credit Facility (as defined below), which resulted in a total liquidity position of $211.3$119.8 million. In response to rapidly deteriorating market conditions driven in large part by the coronavirus pandemic and international pricing and production disputes, we have implemented certain cost-cutting measures across the organization to continue to maintain our current liquidity position. Based on our current forecasts, we believe that, cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility, should be sufficient to fund our capital requirements for at least the next twelve months from the issuance date of our condensed consolidated financial statements. However, we can make no assurance regarding our ability to achieve our forecasts. Furthermore, depending on our financial performance and the ever-changing market, we may implement additional cost-cutting measures, as necessary, to continue to meet our liquidity and capital resource needs for at least the next twelve months from the issuance date of our condensed consolidated financial statements. We can make no assurance regarding our ability to successfully implement such measures, or whether such measures would be sufficient to mitigate a decline in our financial performance.
Senior Notes
On October 25, 2018, we issued the Senior Notes due 2023 under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among us, including certain of our subsidiaries, and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year, and the first interest payment was due on May 1, 2019. The Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed on a senior unsecured basis by each of our current domestic subsidiaries and by certain future subsidiaries.
The Indenture contains covenants that limit our ability and the ability of our restricted subsidiaries to engage in certain activities. We were in compliance with the provisions of the Indenture at September 30, 2020.
Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to us, any of our restricted subsidiaries that are a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.
We repurchased approximately $23.1 million and $52.8 million of Senior Notes at a repurchase price of approximately $7.0 million and $14.4 million in cash for the three and nine months ended September 30, 2020, respectively. Deferred financing costs associated with these transactions were $0.4 million and $0.9 million for the three and nine months ended September 30, 2020, respectively. As a result, for the three and nine months ended September 30, 2020, we recorded a $15.8 million gain and a $37.5 million gain, respectively, on the extinguishment of debt.
Subsequent to September 30, 2020, we repurchased an additional $0.5 million of the Senior Notes for a repurchase price of approximately $0.2 million in cash.
Unamortized deferred financing costs associated with the Senior Notes were $5.5 million and $7.9 million at September 30, 2020 and December 31, 2019, respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method.
2018 ABL Credit Facility
On October 25, 2018, we entered into thea credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement.Agreement”), by and among us, Nine Energy Canada, Inc., JP Morgan Chase Bank, N.A. as administrative agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit.credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.
Loans to us and our domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or LIBORLondon Interbank Offered Rate (“LIBOR”) loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be CDORCanadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on our leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments. The weighted average interest rate was 2.63% during the first nine months of 2019.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions) and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below a certain threshold$18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. We were in compliance with all covenants under the 2018 ABL Credit Agreement at September 30, 2019.2020.
All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted
liens) in substantially all of the personal property of Canadian Credit Parties excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.
Concurrent with the effectiveness of the 2018 ABL Credit Facility, we borrowed approximately $35.0 million to fund a portion of the upfront cash purchase price of the Magnum Acquisition. During the second quarter of 2019, we repaid our outstanding revolver borrowings in full.
At September 30, 2019,2020, our availability under the 2018 ABL Credit Facility was approximately $118.0$39.5 million, net of an outstanding letterletters of credit of $0.2$0.4 million.
Cash Flows
Cash flows provided by (used in) operations by type of activity were as follows for the nine months ended September 30, 20192020 and 2018:2019:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
| (in thousands) |
Operating activities | $ | 4,640 | | | $ | 86,808 | |
Investing activities | (550) | | | (19,593) | |
Financing activities | (16,637) | | | (37,546) | |
Impact of foreign exchange rate on cash | (104) | | | 37 | |
Net change in cash and cash equivalents | $ | (12,651) | | | $ | 29,706 | |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
| (in thousands) |
Operating activities | $ | 86,808 |
| | $ | 50,756 |
|
Investing activities | (19,593 | ) | | (26,011 | ) |
Financing activities | (37,546 | ) | | 44,559 |
|
Impact of foreign exchange rate on cash | 37 |
| | (283 | ) |
Net change in cash and cash equivalents | $ | 29,706 |
| | $ | 69,021 |
|
Operating Activities
Net cash provided by operating activities was $86.8$4.6 million for the first nine months of 20192020 compared to $50.8$86.8 million in net cash provided by operating activities for the first nine months of 2018.2019. The $36.0$82.2 million increasedecrease in net cash provided by operating activities was primarily a result of a $52.9$102.8 million increasedecrease in net cash flow provided through our working capital.by operations, adjusted for any non-cash items, primarily due to a decrease in revenue for the first nine months of 2020 compared to the first nine months of 2019. The overall increasedecrease in net cash provided by operating activities was partially offset by a $16.9an increase of $20.6 million increase in cash collections and other changes in working capital which provided an increased source of cash flow used by continuing operations, adjusted for any non-cash items, primarily due to revenue growth for the first nine months of 20192020 in comparison to the first nine months of 2018.2019.
Investing Activities
Net cash used in investing activities was $19.6$0.6 million for the first nine months of 20192020 compared to $26.0$19.6 million in net cash used in investing activities for the first nine months of 2018.2019. The $6.4$19.0 million decrease in net cash used in investing activities was primarily related to $17.2a decrease of $41.8 million in proceeds received fromcash purchases of property and equipment for the salefirst nine months of subsidiaries as well as $7.6 million2020 in comparison to the first nine months of 2019. The overall decrease was also partly due to an increase in proceeds received from notes receivable payments, bothsales of which occurredproperty and equipment (including insurance) of $3.1 million in the first nine months of 2019 and did not occur in2020 compared to the first nine months of 2018.2019. The overall decrease in net cash used in investing activities was partially offset by an increase of $19.4$17.2 million in cash purchasesproceeds from the sale of propertysubsidiaries and equipment for$7.6 million in proceeds from notes receivable payments, which were received in the first nine months of 2019.2019 but did not recur in the first nine months of 2020.
Financing Activities
Net cash used in financing activities was $37.5$16.6 million for the first nine months of 20192020 compared to $44.6$37.5 million in net cash flow provided byused in financing activities for the first nine months of 2018.2019. The $82.1$20.9 million decrease in net cash provided byused in financing activities was primarily related to $171.8$45.0 million in proceeds received frompayments on the IPO and issuances of common stock and $125.0 million in proceeds received from our term loan entered into in conjunction with the IPO2018 ABL Credit Facility in the first nine months of 20182019 that did not recur in the first nine months of 2019 as well as an increase2020. The overall decrease was also partly due to a decrease of $1.5 million in cash used of $2.7 million related tofor the vesting of restricted stock in the first nine months of 20192020 compared to net cash used in the first nine months of 2018.2019. The overall decrease in net cash provided byused in financing activities was partially offset by $155.7$14.4 million in payments made on prior term loans and $1.4 million in deferred financing costsof purchases of the Senior Notes in the first nine months of 2020 that did not occur in the first nine months of 2019, coupled with $10.0 million in proceeds from the 2018 ABL Credit Facility in the first nine months of 2019 that did not recur in the first nine months of 20192020 as well as a reductionan additional $1.1 million in net payments of $61.2 million on our revolving credit facilitiescontingent liabilities in the first nine months of 2019 compared2020 in comparison to the first nine months of 2018.2019.
Contractual Obligations
Our contractual obligations at September 30, 20192020 did not change materially, outside the normal course of business, from those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations” in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Off-Balance Sheet Arrangements
At September 30, 2019,2020, we had a letterletters of credit of $0.2$0.4 million, which represented an off-balance sheet arrangementarrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. As of September 30, 2019,2020, no liability has been recognized in our Condensed Consolidated Balance Sheets for the letterletters of credit.
Recent Accounting Pronouncements
See Note 3 – New Accounting Standards included in Item 1 of Part I of this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk fromAs a “smaller reporting company,” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information previously disclosed in Item 7A of Part II included in our Annual Report on Form 10-K for the year ended December 31, 2018.required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our principal executive officer and principal financial officer, havehas evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2019.2020. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2019,2020, due to the material weakness in internal control over financial reporting described below.
Material Weakness in Internal Control over Financial Reporting. As reported in Item 9A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, we did not design and maintain adequate controls to address the segregation of certain accounting duties related to journal entries, account reconciliations, and other accounting functions. Certain accounting personnel had the ability to prepare and post journal entries, as well as reconcile accounts, without an independent review by someone other than the preparer. Specifically, our internal controls were not designed or operating effectively to evidence that journal entries were appropriately recorded or were properly reviewed for validity, accuracy, and completeness. Immaterial misstatements were identified in 2017 related to the inadequate segregation of accounting duties. This material weakness could result in misstatement of the aforementioned accounts and disclosures that would result in a material misstatement in our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.
Remediation Efforts to Address the Material Weakness in Internal Control over Financial Reporting.Weakness. In additionresponse to the remediation steps listed in Item 9Amaterial weakness described above, our management has dedicated significant time and effort to improve our internal control over financial reporting and develop a detailed action plan to fully remediate the material weakness, as follows:
Previously Completed Remediation Actions
•Replaced the less sophisticated accounting systems used by the majority of our Annual Report on Form 10-Knewly acquired subsidiaries with the enterprise resource planning system used by the majority of our existing subsidiaries.
•Hired additional resources, including an experienced Internal Audit Director to lead our internal audit department, with responsibility for direction and oversight of all internal audit functions.
•Substantially completed a comprehensive risk assessment of the year ended December 31, 2018, management has performed, or is indesign of internal controls, including the processimplementation of performing, the following:
Continued to develop and implement additionalnew internal controls and procedures and enhance existing controls and proceduresas needed to ensure the segregation of certain accounting duties related to journal entries, account reconciliations, and other accounting functions.
Hired•Designed and implemented a monitoring control that captures key roles and responsibilities within our enterprise resource planning system with consideration of mitigating business process controls designed to reduce the risk of material misstatement related to inadequate segregation of certain accounting duties related to journal entries, account reconciliations, and other accounting functions. Our management continues to assess the effectiveness of this control.
•Instituted additional resources, including an experienced Internal Audit Directortraining programs for appropriate personnel regarding the application of our enterprise resource planning system.
As we continue to leadevaluate and work to improve our internal control over financial reporting, our management may determine to take additional measures to address the Company’s internal audit department, with responsibility for direction and oversight of all internal audit functions.
Untilmaterial weakness identified above or determine to modify the remediation steps listed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018 anddescribed above. Until the remediation steps set forth above are fully developed, implemented, and operating for a sufficient amount of time to validate the remediation, the material weakness described above will continue to exist.
Changes in Internal Control over Financial Reporting.Except for the changes identified above related to our remediation efforts, there have beenThere were no changes in our internal control over financial reporting during the quarterly period ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarterly period ended September 30, 2019.
reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we have various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, we believe any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our business, operating results, or financial condition.
On August 31, 2017, an accident occurred while a five-employee crew of Big Lake Services, LLC, a subsidiary of Nine (“Big Lake Services”), was performing workover services at an oil and gas wellsite near Midland, Texas, operated by Pioneer Natural Resources USA, Inc. (“Pioneer Natural Resources”), resulting in the death of a Big Lake Services employee, Juan De La Rosa. On December 7, 2017, a lawsuit was filed on behalf of Mr. De La Rosa’s minor children in the Midland County District Court against Pioneer Natural Resources, Big Lake Services, and Phillip Hamilton related to this accident. The petition alleged, among other things, that the defendants acted negligently, resulting in the death of Mr. De La Rosa. On March 14, 2018, a plea in intervention was filed on behalf of Mr. De La Rosa’s parents, alleging similar claims. The plaintiffs and intervenors sought money damages, including punitive damages. On December 17, 2018, a mediation was held, and the parties reached an agreement in principle to settle this matter. In May 2019, the parties entered into settlement agreements, which have been approved by the court, and the court has dismissed the case. We have tendered this matter to our insurance company for defense and indemnification of Big Lake Services and the other defendants, and this settlement has been fully funded by our insurance company.
ITEM 1A. RISK FACTORS
Except as set forth below,in “Risk Factors” in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, there have been no material changes to the risk factors involving us from those previously disclosed in disclosed in “Risk Factors” in Item 1A of Part I included in our Annual Report on Form 10-K for the year ended December 31, 2018. Additional risks and uncertainties not currently2019. For a detailed discussion of known to us or that we currently deem to be immaterial also maymaterial factors which could materially adversely affect our business, financial condition, or future results.
Our charter and bylaws designate the Courtresults, refer to “Risk Factors” in Item 1A of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, or agents.
Our charter and bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by anyPart I of our directors, officers, employees, or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provisionAnnual Report on Form 10-K for the year ended December 31, 2019 and in Item 1A of the Delaware General Corporation Law, our charter or our bylaws, or (iv) any action asserting a claim against us that is 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. These exclusive forum provisions are not intended to apply to actions arising under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”). The Court of Chancery of the State of Delaware has recently held that a Delaware corporation can only use its constitutive documents to bind a plaintiff to a particular forum where the claim involves rights or relationships that were established by or under Delaware’s corporate law.
Any person or entity purchasing or otherwise acquiring any interest in sharesPart II of our capital stock will be deemed to have notice of, and consented to,Quarterly Report on Form 10-Q for the forum selection provisions of our charter and bylaws. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees, or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our charter or bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, or results of operations.quarterly period ended March 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE AND SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The exhibits required to be filed or furnished by Item 601 of Regulation S-K are listed below.
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Exhibit number
Number | | Description |
3.1 | | |
2.1† | | Securities Purchase Agreement, dated as of October 15, 2018, by and among Warren Lynn Frazier, Garrett Lynn Frazier 2018 DG Trust, Derrick Chase Frazier 2018 DG Trust, Frazier Family Foundation, Inc., as sellers, Warren Lynn Frazier, solely and in his capacity as seller representative, MOTI Holdco, LLC and Nine Energy Canada Inc., as buyers, Nine Energy Service, Inc. and certain other parties named therein (Incorporated by reference to Exhibit 2.1 of Nine Energy Service, Inc.’s Current Report on Form 8-K filed on October 15, 2018). |
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2.2* | | First Amendment to Securities Purchase Agreement, dated June 7, 2019, by and among Warren Lynn Frazier, Garrett Lynn Frazier 2018 DG Trust, Derrick Chase Frazier 2018 DG Trust, and Frazier Family Foundation, Inc., as sellers, MOTI Holdco, LLC and Nine Energy Canada Inc., as buyers, and Nine Energy Service, Inc. (Incorporated by reference to Exhibit 2.2 of Nine Energy Service, Inc.’s Quarterly Report on Form 10-Q filed on August 12, 2019) |
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2.3†+
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3.1 | | |
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3.2 | | |
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10.131.1* | | |
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31.1* | | |
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31.2* | | |
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32.1** | | |
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32.2** | | |
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101* | | Interactive Data Files |
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*101* | Filed herewith | Interactive Data Files |
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** | Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K. |
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† | Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided to the Securities and Exchange Commission upon request. |
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+ | Pursuant to Item 601(b)(2) of Regulation S-K, certain immaterial provisions of the agreement that would likely cause competitive harm to the Company if publicly disclosed have been redacted. The Company hereby undertakes to furnish supplementally an unredacted copy of the agreement to the Securities and Exchange Commission upon request; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any documents so furnished. |
* Filed herewith.
** Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | Nine Energy Service, Inc. |
| | | | | |
Date: | November 12, 20195, 2020 | | By: | | /s/ Ann G. Fox |
| | | | | Ann G. Fox |
| | | | | President, Chief Executive Officer and Director |
| | | | | (Principal Executive Officer) |
| | | | | |
Date: | November 12, 20195, 2020 | | By: | | /s/ Clinton RoederGuy Sirkes |
| | | | | Clinton RoederGuy Sirkes |
| | | | | Senior Vice President and Chief Financial Officer |
| | | | | (Principal Financial Officer) |