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. 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

~~PART I—FINANCIAL INFORMATION~~

ITEM 1. FINANCIAL STATEMENTS

~~Item 1. Financial Statements.~~

NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share ~~data)~~

and per share amounts)

(Unaudited)

September 30,
2018

December 31,
2017

Assets

Current assets

Cash and cash equivalents

$
86,534

$
17,513

Accounts receivable, net

162,437

99,565

Income taxes receivable

84

—

Inventories, net

29,571

22,230

Prepaid expenses and other current assets

7,035

7,929

Notes receivable from shareholders (Note 8)

10,551

—

Total current assets

296,212

147,237

Property and equipment, net

257,447

259,039

Goodwill

93,756

93,756

Intangible assets, net

57,892

63,545

Other long-term assets

1,144

4,806

Notes receivable from shareholders (Note 8)

—

10,476

Total assets

$
706,451

$
578,859

Liabilities and Stockholders’ Equity

Current liabilities

Current portion of long-term debt

$
—

$
241,509

Accounts payable

49,497

29,643

Accrued expenses

44,600

14,687

Current portion of capital lease obligations

372

—

Income taxes payable

—

581

Total current liabilities

94,469

286,420

Long-term liabilities

Long-term debt

114,048

—

Deferred income taxes

5,983

5,017

Long-term lease obligations

1,266

—

Other long-term liabilities

55

64

Total liabilities

215,821

291,501

Commitments and contingencies (Note 9)

Stockholders’ equity

Common stock (120,000,000 shares authorized at $.01 par value; 25,114,597 and 15,810,540 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)

251

158

Additional paid-in capital

564,229

384,965

Accumulated other comprehensive loss

(4,121
)

(3,684
)
Accumulated deficit

(69,729
)

(94,081
)
Total stockholders’ equity

490,630

287,358

Total liabilities and stockholders’ equity

$
706,451

$
578,859



	September 30, 2019			December 31, 2018
Assets
Current assets
Cash and cash equivalents	$	93,321		$	63,615
Accounts receivable, net	118,428			154,783
Inventories, net	66,475			91,435
Prepaid expenses and other current assets	14,312			15,717
Notes receivable from shareholders (Note 9)	—			7,626
Total current assets	292,536			333,176
Property and equipment, net	198,879			211,644
Definite-lived intangible assets, net	159,526			173,451
Goodwill	316,469			307,804
Indefinite-lived intangible assets	108,711			108,711
Other long-term assets	5,462			6,386
Total assets	$	1,081,583		$	1,141,172
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	32,027		$	46,132
Accrued expenses	40,473			61,434
Current portion of capital lease obligations	973			665
Income taxes payable	308			57
Total current liabilities	73,781			108,288
Long-term liabilities
Long-term debt	391,539			424,978
Deferred income taxes	3,039			5,915
Long-term capital lease obligations	2,458			2,330
Other long-term liabilities	3,987			4,838
Total liabilities	474,804			546,349
Commitments and contingencies (Note 10)
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
Additional paid-in capital	755,349			746,428
Accumulated other comprehensive loss	(4,582		)	(4,843		)
Accumulated deficit	(144,294		)	(147,064		)
Total stockholders’ equity	606,779			594,823
Total liabilities and stockholders’ equity	$	1,081,583		$	1,141,172

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 ~~data)~~

and per share amounts)

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

Revenues

$
218,427

$
148,167

$
597,726

$
389,380

Cost and expenses

Cost of revenues (exclusive of depreciation and amortization shown separately below)

165,882

119,909

467,700

322,901

General and administrative expenses

21,784

12,870

53,282

37,628

Depreciation

13,661

13,150

39,982

40,326

Amortization of intangibles

1,857

2,200

5,653

6,601

Loss on equity method investment

77

83

270

255

(Gain) loss on sale of property and equipment

(1,190
)

148

(1,701
)

4,793

Income (loss) from operations

16,356

(193
)

32,540

(23,124
)
Other expense

Interest expense

1,568

4,093

6,313

11,780

Total other expense

1,568

4,093

6,313

11,780

Income (loss) before income taxes

14,788

(4,286
)

26,227

(34,904
)
Provision for income taxes

1,130

766

1,875

2,967

Net income (loss)

$
13,658

$
(5,052
)

$
24,352

$
(37,871
)
Net income (loss) per share

   Basic

$
0.57

$
(0.34
)

$
1.05

$
(2.61
)
   Diluted

$
0.56

$
(0.34
)

$
1.03

$
(2.61
)
Weighted average shares outstanding

   Basic

23,971,032

14,992,431

23,264,014

14,492,757

   Diluted

24,389,295

14,992,431

23,603,922

14,492,757

Other comprehensive income (loss), net of tax

Foreign currency translation adjustments, net of $0 tax in each period

$
207

$
(105
)

$
(437
)

$
(192
)
Total other comprehensive income (loss), net of tax

207

(105
)

(437
)

(192
)
Total comprehensive income (loss)

$
13,865

$
(5,157
)

$
23,915

$
(38,063
)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues	$	202,305		$	218,427		$	669,527		$	597,726
Cost and expenses
Cost of revenues (exclusive of depreciation and amortization shown separately below)	166,849			165,882			529,994			467,700
General and administrative expenses	19,222			21,816			60,979			51,837
(Gain) loss on revaluation of contingent liabilities	(5,771		)	45			(20,701		)	1,715
Loss on sale of subsidiaries	15,834			—			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		)
Income (loss) from operations	(10,168		)	16,356			30,723			32,540
Interest expense	9,843			1,756			29,940			6,763
Interest income	(111		)	(188		)	(439		)	(450		)
Income (loss) before income taxes	(19,900		)	14,788			1,222			26,227
Provision (benefit) for income taxes	727			1,130			(1,548		)	1,875
Net income (loss)	$	(20,627	)	$	13,658		$	2,770		$	24,352
Earnings (loss) per share
Basic	$	(0.70	)	$	0.57		$	0.09		$	1.05
Diluted	$	(0.70	)	$	0.56		$	0.09		$	1.03
Weighted average shares outstanding
Basic	29,361,633			23,971,032			29,288,113			23,264,014
Diluted	29,361,633			24,389,295			29,397,636			23,603,922
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of $0 tax in each period	$	(179	)	$	207		$	261		$	(437	)
Total other comprehensive income (loss), net of tax	(179		)	207			261			(437		)
Total comprehensive income (loss)	$	(20,806	)	$	13,865		$	3,031		$	23,915

The accompanying notes are an integral part of these ~~condensed consolidated financial statements.~~

Condensed Consolidated Financial Statements.

NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share ~~data)~~

amounts)

(Unaudited)

Common Stock

Additional
Paid-in

Accumulated
Other
Comprehensive

Retained
Earnings
(Accumulated

Total
Stockholders’

Shares

Amounts

Capital

Income (Loss)

Deficit)

Equity

Stockholders’ equity as of 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-based 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

Stockholders’ equity as of 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			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
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			—			—			—
Stock-based compensation expense	—		—			3,286			—			—			3,286
Exercise of stock options	—		—			—			—			—			—
Vesting of restricted stock	(1,471	)	—			(10		)	—			—			(10		)
Other comprehensive loss	—		—			—			(179		)	—			(179		)
Net loss	—		—			—			—			(20,627		)	(20,627		)
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		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
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			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
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		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
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 of dollars)~~

thousands)

(Unaudited)

Nine Months Ended September 30,

2018

2017

Cash flows from operating activities

Net income (loss)

$
24,352

$
(37,871
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities

Depreciation

39,982

40,326

Amortization of intangibles

5,653

6,601

Amortization of deferred financing costs

1,191

1,212

Recovery of doubtful accounts

(319
)

(7
)
Provision for deferred income taxes

965

2,624

Provision for inventory obsolescence

278

1,023

Stock-based compensation expense

9,719

6,380

(Gain) loss on sale of property and equipment

(1,701
)

4,793

Loss on revaluation of contingent liabilities (Note 9)

1,715

421

Loss on equity method investment

270

255

Changes in operating assets and liabilities, net of effects from acquisitions

Accounts receivable, net

(62,702
)

(46,940
)
Inventories, net

(7,705
)

(6,560
)
Prepaid expenses and other current assets

1,760

(289
)
Accounts payable and accrued expenses

38,117

19,051

Income taxes receivable/payable

(666
)

14,577

Other assets and liabilities

(153
)

(1,821
)
Net cash provided by operating activities

50,756

3,775

Cash flows from investing activities

Proceeds from sales of property and equipment

1,791

1,078

Proceeds from property and equipment casualty losses

1,743

97

Purchases of property and equipment

(29,545
)

(29,991
)
Equity method investment

—

(1,000
)
Net cash used in investing activities

(26,011
)

(29,816
)
Cash flows from financing activities

Proceeds from revolving credit facilities

—

53,500

Payments on revolving credit facilities

(96,182
)

(37,500
)
Proceeds from term loan

125,000

—

Payments on term loans

(155,701
)

(21,725
)
Payments on notes payable—insurance premium financing

—

(272
)
Proceeds from issuance of common stock in IPO, net of offering costs

171,450

—

Proceeds from other issuances of common stock

300

61,374

Proceeds from exercise of stock options

1,867

—

Vesting of restricted stock

(790
)

—

Distribution to shareholders

—

(2,438
)
Cost of debt issuance

(1,385
)

(716
)
Net cash provided by financing activities

44,559

52,223

Impact of foreign currency exchange on cash

(283
)

(85
)
Net increase in cash and cash equivalents

69,021

26,097

Cash and cash equivalents

Beginning of year

17,513

4,074

End of period

$
86,534

$
30,171

Supplemental disclosures of cash flow information:

Cash paid for interest

$
4,363

$
10,492

Cash paid (refunded) for income taxes

$
1,582

$
(14,311
)
Capital expenditures included in accounts payable and accrued expenses

$
11,946

$
8,566



	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

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

~~Company Description~~

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 and provides a range of production enhancement and well workover services.~~methodologies. The Company is headquartered in Houston, Texas.

~~Magnum Acquisition~~

On ~~October 25, 2018, pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018~~August 30, 2019 (the ~~“Magnum Purchase Agreement”~~“Divestiture Date”), the Company ~~acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP,~~sold its Production Solutions segment to Brigade Energy Services LLC ~~and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum” and such acquisition, the “Magnum Acquisition”~~(“Brigade”) 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 2025 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019. Due to the timing of the closing of the acquisition, the Company has not completed the detailed valuation work necessary to determine the required estimates of the fair value of the acquired assets and liabilities assumed and the related allocation of purchase price. The Company’s preliminary allocation of purchase price to the assets acquired will be included in the Company’s future filings.

~~Initial Public Offering~~

In January 2018, the Company completed its initial public offering (“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 pursuant to a registration statement on Form S-1 (File 333-217601), as amended and declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on January 18, 2018.. For additional information ~~see Note 10 – Stockholders’ Equity.~~

~~Beckman Combination~~

~~On February 28, 2017, pursuant to~~on the ~~terms and conditions of a combination agreement dated February 3, 2017, the Company merged with Beckman~~ Production Services, Inc. (“Beckman”), and all of the issued and outstanding shares of Beckman common stock were converted into shares of common stock of Nine Energy Service, Inc. (the “Combination”). Prior to the Combination, SCF-VII, L.P. had controlled a majority of the voting interests of Nine and Beckman since February 28, 2011 and July 31, 2012, respectively. The merger of the entities into the combined company was accounted for using reorganization accounting (i.e., “as if” pooling of interest) for entities under common control. For additional information,Solutions divestiture, see Note 4 – Business Acquisitions and ~~Combinations.~~

Divestitures.

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, ~~2017~~2018 and the Condensed Consolidated ~~Statement~~Statements of ~~Stockholders'~~Stockholders’ Equity as of December 31, 2018 and 2017 are derived from audited 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 Statements include all accounts of the Company.

These Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the ~~SEC~~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 Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and notes thereto for the year ended December 31, ~~2017,~~2018, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 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 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 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, ~~other intangibles~~definite and ~~long-lived~~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 revaluation of contingent liabilities” and “Interest income” are presented 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 2014-09

Background

In May 2014, the Financial Accounting Standards Board (the ~~‘‘FASB’’~~“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the current revenue recognition guidance. 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 exchange 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, 2018 and interim reporting periods within annual reporting periods 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 Company is currently updating and implementing revised accounting system processes in order to capture information required to be disclosed under ASU No. 2014-09.

The Company is also in the process 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, 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.

Disclosure Requirements for ASU No. 2014-09

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 the standard, the Company is analyzing its portfolio contracts and reviewing its current accounting policies and practices to identify potential differences that would result from applying the new standard to its existing contracts. Although the standard was generally effective for fiscal years beginning after December 15, 2017, the Company plans to adopt for the fiscal year beginning after December 15, 2018, as an emerging growth company, using the modified retrospective approach.

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 give companies the option to use the effective date as the date of initial application on transition. Based on initial evaluation, the Company expects to include operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. The Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio under the new standard. The Company will provide additional information about the expected financial impact as it progresses through the evaluation and implementation of the standard. Although the standard ~~will be generally~~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 ~~year~~years beginning after December 15, 2019 ~~as an emerging growth company.~~

and the interim periods within the fiscal years beginning after December 15, 2020.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230)~~-Classification~~: 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 application of the predominance principle. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017 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 fiscal ~~year~~years beginning after December 15, ~~2018.~~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 ~~new~~ 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 effort 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. The amendments in this standard provide a screen to determine when an integrated set of assets and activities is not a business. The screen requires 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. The Company is currently evaluating the impact of the ~~new~~ 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 ~~year~~years beginning after December 15, 2018 ~~as an emerging growth company.~~and the interim periods within annual periods beginning after December 15, 2019. Entities ~~will be~~are required to apply the guidance prospectively when adopted.

In ~~January 2017,~~August 2018, the FASB issued ASU ~~2017-04,~~No. 2018-13, ~~Intangibles-Goodwill~~Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and ~~Other (Topic 350)-Simplifying the Test~~modifies certain disclosure requirements for ~~Goodwill Impairment~~ ~~which simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test. In computing the implied~~ fair value ~~of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date~~measurements as part of its ~~assets~~disclosure framework project. The ASU is effective for all entities for fiscal years, and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the new standard, an entity should perform its annual, or interim goodwill impairment test by comparing the fair value of an operating unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the operating unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that operating unit. An entity still has the option to perform the qualitative assessment for an operating unit to determine if the quantitative impairment test is necessary. The new standard should be adopted for annual or any interim goodwill impairment tests inperiods within those fiscal years, beginning after December 15, 2019. ~~Early adoption~~The ASU is ~~permitted~~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 ~~or annual goodwill impairment tests performed on testing dates after January 1, 2017.~~periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the ~~fiscal year~~annual reporting periods beginning after December 15, 2020 and the interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of the ~~new~~ standard on its Condensed Consolidated Financial Statements.

4. Business Acquisitions and ~~Combinations~~

Divestitures

Magnum Acquisition

On ~~February 28, 2017,~~October 25, 2018 (the “Closing Date”), pursuant to the terms 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.

The Company finalized its purchase price allocation in connection with the Magnum Acquisition during the three months ended September 30, 2019. As a result, the Company recorded measurement 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, for the three and nine months ended September 30, 2019. It is impractical to quantify the contribution of Magnum since 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 terms and conditions of a ~~combination agreement dated February 3, 2017,~~Securities Purchase Agreement (the “Frac Tech Purchase Agreement”), the Company ~~merged~~acquired Frac 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. 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 ~~Beckman and substantially~~Brigade. Pursuant to the Production Solutions Purchase Agreement, on such date, through the sale of all of the ~~issued and outstanding shares~~limited liability interests of its wholly owned subsidiary, Beckman ~~common stock were converted into shares of common stock of Nine Energy Service, Inc. at a ratio of 0.567154 Nine shares per Beckman share, other than 1.6% of Beckman shares paid~~Holding Production Services, LLC, the Company sold its Production Solutions segment to Brigade for approximately $17.4 million in cash. ~~Prior~~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 ~~Combination, SCF-VII, L.P. had controlled~~third quarter of 2019. This divestiture does not qualify as discontinued operations at September 30, 2019 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 does not represent a majority of the voting interests of Nine and Beckman since February 28, 2011 and July 31, 2012, respectively. The merger of the entities into the combined company was accounted for using reorganization accounting (i.e., “as if” pooling of interest) for entities under common control.

~~In conjunction with the Combination, in addition to the conversion of Beckman shares into Nine shares, other events occurred, including:~~

~~The conversion of Beckman shares owned by non-accredited shareholders of Beckman at the time of the Combination into cash at~~strategic shift that has a ~~price of $17.69 per Beckman share;~~

~~Payment of cash for Beckman shares that converted into fractional Nine shares at a price of $31.18 per Nine share;~~

~~The conversion of options to purchase Beckman common stock into options to purchase Nine common stock;~~

~~The conversion of Beckman restricted shares into Nine restricted shares;~~

~~The conversion of warrants to purchase Beckman common stock into warrants to purchase Nine common stock;~~

~~The issuance of options to purchase Nine common stock;~~

~~The issuance,~~major effect on ~~a pro-rata basis, to~~ the Company’s ~~shareholders,~~operations and financial results.

5. Inventories

Inventories, consisting primarily of Nine common stock based on a subscription amount equal to the number of common shares issued at a price of $31.18. The subscription was offered to all shareholders of record at the time of the Combination. Any unsubscribed shares were reallocated among the other shareholders; and

~~The issuance to the Company’s shareholders of Nine warrants equal to one half of the amount of shares issued related to the subscription described above.~~

~~5. Inventories~~

~~Inventories, classified as~~ 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 ~~$1.7~~$5.6 million and ~~$2.9~~$1.9 million at September 30, ~~2018~~2019 and December 31, ~~2017~~2018, respectively.

Inventories, net as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were comprised of the following:

September 30,
2018

December 31,
2017

(in thousands)

Raw materials

$
2,796

$
939

Finished goods

28,518

24,197

Inventories

31,314

25,136

Reserve for obsolescence

(1,743
)

(2,906
)
Inventories, net

$
29,571

$
22,230



	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 ~~year ended December 31, 2017 and the~~ nine months ended September 30, ~~2018~~2019 were as follows:

Goodwill

Gross Value

Accumulated
Impairment Loss

Net

(in thousands)

Balance as of December 31, 2016

$
173,033

$
(47,747
)

$
125,286

Impairment

—

(31,530
)

(31,530
)
Balance as of December 31, 2017

$
173,033

$
(79,277
)

$
93,756

Impairment

—

—

—

Balance as of September 30, 2018

$
173,033

$
(79,277
)

$
93,756

~~At December 31, 2017, the~~



	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

(1) The Company ~~performed its annual impairment test on each of its operating units and concluded that there was impairment at one operating unit in its~~ ~~Completion Solutions~~ ~~segment because its carrying value exceeded its estimated~~recorded adjustments to the fair value ~~which resulted from declining profitability and deteriorating market conditions. As such, the Company recognized a~~of goodwill ~~impairment loss of $31.5 million in the fourth quarter of 2017.~~

~~The December 31, 2017 impairment test for the~~ ~~Production Solutions segment indicated that the estimated fair value calculation provided only 11% of cushion~~ in relation to ~~carrying value. As a result, this segment’s goodwill, which totals $13.0 million, is susceptible to impairment risk from adverse economic conditions in~~ the ~~future.~~

~~During~~Magnum Acquisition. For additional information on the ~~nine months ended September 30, 2018, there were no indications that impairment of goodwill had occurred. Goodwill by segment was unchanged from December 31, 2017.~~

Magnum Acquisition and related purchase price adjustments, see Note 4 – Business Acquisitions and Divestitures.

Intangible Assets

The changes in the net carrying value of the components of intangible assets for the ~~year ended December 31, 2017 and the~~ nine months ended September 30, ~~2018~~2019 were as follows:

Intangible assets

Gross Value

Accumulated
Amortization

Net

(in thousands)

Balance as of December 31, 2016

$
105,464

$
(29,320
)

$
76,144

Amortization expense

—

(8,799
)

(8,799
)
Impairment

(12,000
)

8,200

(3,800
)
Balance as of December 31, 2017

$
93,464

$
(29,919
)

$
63,545

Amortization expense

—

(5,653
)

(5,653
)
Impairment

—

—

—

Balance as of September 30, 2018

$
93,464

$
(35,572
)

$
57,892



	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 $4.6 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, ~~and $2.2 million and $6.6 million for the three and nine months ended~~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

7. Accrued Expenses

Accrued expenses as of September 30, ~~2017, respectively, are related to cost~~2019 and December 31, 2018 consisted of ~~revenues, but reported separately as “Amortization of intangibles” in~~ the ~~Condensed Consolidated Statements of Income and Comprehensive Income (Loss).~~

~~During the nine months ended September 30, 2018, there were no indications that impairment of intangible assets had occurred.~~

following:



	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, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:

September 30,
2018

December 31,
2017

(in thousands)

2018 IPO Term Loan Credit Facility

$
115,274

$
—

Legacy Term Loans

—

145,975

Legacy Revolving Credit Facilities

—

96,260

Total debt before deferred financing costs

$
115,274

$
242,235

Deferred financing costs

(1,226
)

(726
)
Total debt

$
114,048

$
241,509

Less: Current portion of long-term debt

—

(241,509
)
Long-term debt

$
114,048

$
—



	September 30, 2019			December 31, 2018
	(in thousands)
Senior Notes	$	400,000		$	400,000
2018 ABL Credit Facility	—			35,000
Total debt before deferred financing costs	$	400,000		$	435,000
Deferred financing costs	(8,461		)	(10,022		)
Total debt	$	391,539		$	424,978
Less: Current portion of long-term debt	—			—
Long-term debt	$	391,539		$	424,978

Senior Notes

On October 25, 2018, ~~IPO~~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 with the first interest payment being 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.

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 million and $10.0 million at September 30, 2019 and December 31, 2018, 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, 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 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 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below a certain threshold 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.

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, the Company’s availability under the 2018 ABL Credit Facility was approximately $118.0 million, net of an outstanding letter of credit of $0.2 million.

Prior Credit Agreements

On September 14, 2017, the Company entered into a ~~new~~ credit agreement (as amended on November 20, 2017, the “2018 IPO Credit Agreement”) with ~~JPMorgan Chase Bank, N.A. (“~~JP ~~Morgan”)~~Morgan as administrative agent and certain other financial institutions that became effective upon the consummation of the ~~IPO~~initial public offering (“IPO”) in January 2018 (the “Effective Date”). Pursuant to the terms of the 2018 IPO Credit Agreement, the Company and its domestic restricted subsidiaries were entitled to borrow $125.0 million of term loans (the “2018 IPO Term Loan Credit Facility”), 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% of the estimated net proceeds from the IPO in excess 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 (the “2018 IPO Revolving Credit Facility”). At September 30, 2018, the 2018 IPO Revolving Credit Facility had an undrawn capacity of $49.5 million, which was net of a $0.5 million outstanding letter of credit.

Concurrent with the effectiveness of the 2018 IPO Credit Agreement, using proceeds received from the IPO and borrowings under the 2018 IPO Term Loan Credit Facility, the Company repaid all indebtedness under its prior term loan and the Beckman term loan (together, the “Legacy Term Loans”) and under its prior revolving credit facility and the Beckman revolving credit facility (together, the “Legacy Revolving Credit Facilities”) in the first quarter of 2018, which approximated $242.2 million. In addition, in the first quarter of 2018, the Company wrote off approximately $0.7 million in deferred financing costs associated with the Legacy Term Loans and the Legacy Revolving Credit Facilities.

All of the obligations under the 2018 IPO Credit Agreement were secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of the Company and its domestic restricted subsidiaries, excluding certain assets.

commitments. Loans to the Company and its domestic restricted subsidiaries under 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. Interest rates averaged 5.5% during the nine months ended September 30, 2018. The Company was permitted to repay any amounts borrowed prior to the maturity date without any premium or penalty other than customary LIBOR breakage costs. In addition, a commitment fee of 0.50% per annum was charged on the average daily unused portion of the revolving commitments. ~~Such commitment fee was payable quarterly in arrears.~~

The 2018 IPO Credit Agreement contained 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. Financial covenants under the 2018 IPO Credit Agreement included a maximum total leverage ratio, an asset coverage ratio and a fixed charge coverage ratio, each of which was calculated on a quarterly basis. The Company was in compliance with all debt covenants under the 2018 IPO Credit Agreement as of September 30, 2018.

The fair value of the Company’s debt obligations under the 2018 IPO Credit Agreement was classified within Level 2 of the fair value hierarchy. Fair value approximated carrying value, as the interest rates are variable and based on market rates.

On October 25, 2018, the Company fully repaid and terminated the 2018 IPO Credit 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 ~~more fully described below.~~

~~Unamortized~~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 with the ~~Company’s 2018 IPO Term Loan~~termination of the Legacy Credit ~~Facility were $1.2 million at September 30, 2018.~~Agreements. These unamortized deferred financing costs were being amortized through the maturity ~~date~~dates of ~~the 2018 IPO Term Loan Credit Facility~~each agreement using the effective interest method. These debt extinguishment costs are included in “Interest expense” in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the nine months ended September 30, 2018.

Fair Value of Debt Instruments

The ~~Company wrote off these deferred financing costs on October 25, 2018 in conjunction with the termination~~estimated fair value of the Company’s debt obligations as of September 30, 2019 and December 31, 2018 ~~IPO Credit Agreement.~~

~~Senior Notes~~

~~On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”).~~ was as follows:



	September 30, 2019		December 31, 2018
	(in thousands)
Senior Notes	$	324,000	$	376,000
2018 ABL Credit Facility	$	—	$	35,000

The Senior Notes will bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year with the first interest payment being due on May 1, 2019. 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 2018 IPO Credit Agreement and (iii) pay fees and expenses associated with the issuancefair value of the Senior Notes is classified as Level 2 in the ~~Magnum Acquisition~~fair value hierarchy and ~~the 2018 ABL Credit Facility. For additional information regarding the Magnum Acquisition, see Note 1 – Company and Organization.~~

~~2018 ABL Credit Facility~~

~~On October 25, 2018, the Company entered into a five-year asset~~is established based ~~senior secured revolving credit facility with JP Morgan serving as administrative agent for the lenders thereunder (the “2018 ABL Credit Facility”).~~on observable inputs in less active markets. The 2018 ABL Credit Facility ~~permits aggregate borrowings~~is also classified within Level 2 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 fair value hierarchy. The ~~borrowing base is initially $146.5 million. Concurrent with the effectiveness~~fair value of the 2018 ABL Credit Facility the Company borrowed approximately $35.0 million to fund a portion of the upfront cash purchase price of the Magnum Acquisition. 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.

8.approximates its carrying value.

9. Related Party Transactions

During 2014, in conjunction with an exercise of warrants to provide a capital infusion, the Company issued promissory notes totaling $2.5 million to both a former executive officer of the Company and a current manager of the Company. The principal is due on June 30, 2019 (the “Maturity Date”). Interest of 4% per annum is due and payable on the Maturity Date. At each of September 30, 2018 and December 31, 2017, the outstanding balance of the notes, including principal and unpaid interest, totaled $3.0 million and $2.9 million, respectively. Unpaid interest at each of September 30, 2018 and December 31, 2017 totaled $0.4 million.

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 iswas due on June 30, 2019. The interest rate iswas 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 iswas due quarterly. Mr. Crombie paid $1.8 million during 2016 to pay his promissory note in full. At ~~each of September 30, 2018 and~~ December 31, ~~2017,~~2018, the outstanding principal balance of the notes of the remaining ~~promissory notes held by other former owners of Crest~~individuals totaled $7.6 ~~million. Unpaid~~million, and unpaid interest, included in “Prepaid expenses and other current assets” in the Company’s Condensed Consolidated Balance Sheets, totaled ~~$0.1 million and $8,000 at~~$10,000. During the nine months ended September 30, ~~2018 and December 31, 2017, respectively.~~

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. Total lease expense and building maintenance expense associated with these entities was $0.2 million and $0.6 million for ~~each of~~ the three and nine months ended September 30, 2019 and $0.2 million and $0.6 million for the three and nine months ended September 30, 2018, respectively. The Company also purchased $0.7 million and ~~2017.~~$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 September 30, 2019.

In addition, the Company leases office space in Corpus Christi and Midland, Texas from an entity affiliated with Lynn Frazier, a beneficial owner of more than 5% of the Company’s stock. Total rental expense associated with this office space was $0.4 million and $1.1 million for the three and nine months ended September 30, 2019, respectively. There were no outstanding payables due to ~~these entities~~the entity at September 30, ~~2018~~2019 and ~~$13,000 of payables to these entities at~~ December 31, ~~2017.~~

2018.

At December 31, 2018, the Company had an open receivable due from the sellers of Magnum primarily related to sales commissions paid to an intercompany entity that was not included in the Magnum Acquisition. The Company received payment in full in the first quarter of 2019.

The Company provides services to Citation Oil & Gas Corp., an entity owned by Curtis F. Harrell, a director of the Company. The Company billed ~~$0.5~~$0.2 million and $0.4 million for services provided to this entity during the three and nine months ended September 30, 2019, respectively, and billed $0.0 million and $0.5 million for the three and nine months ended September 30, 2018, ~~and 2017,~~ respectively. There was an outstanding receivable due from ~~such~~this entity of $0.2 million and $0.1 million ~~and $0.2 million as of~~at September 30, ~~2018~~2019 and December 31, ~~2017,~~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, ~~acts~~acted as the President of EOG ~~Resources, Inc.~~until his retirement from EOG at December 31, 2018. The Company generated revenue from EOG ~~Resources, Inc.~~ of $12.1 million and $31.8 million ~~and $26.1 million~~ for the three and nine months ended September 30, 2018, respectively. There was an outstanding receivable due from this entity of $7.0 million at December 31, 2018.

On June 5, 2019, Ann G. Fox, President and ~~2017,~~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 $5.4 million and $15.8 million for the three and nine months ended September 30, 2019, respectively.

There was an outstanding receivable due from Devon of $2.0 million at September 30, 2019.

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 ~~and~~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.

~~The Company has been named in the following proceeding:~~

~~Christina Sparks, et al v. Pioneer Natural Resources, et al., Filed in the District Court, 142nd Judicial District, Midland County, Texas.~~

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 ~~alleges,~~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 ~~are seeking~~sought money damages, including punitive damages. ~~Discovery proceedings are underway~~On December 17, 2018, a mediation was held, and the parties reached an agreement in principle to settle this ~~matter,~~matter. In May 2019, the parties entered into settlement agreements, which have been approved by the court, and ~~trial is scheduled for mid-2019.~~

the court has dismissed the case. The Company ~~maintains insurance coverage against liability for, among other things, personal injury (including death), which coverage is subject to certain exclusions and deductibles. The Company~~has tendered this matter to its insurance company for defense and indemnification of Big Lake Services and the other ~~defendants. While the Company maintains such insurance policies with insurers in amounts~~defendants, and ~~with coverage and deductibles that it, with the advice of~~this settlement has been fully funded by its insurance advisors and brokers, believes are reasonable and prudent, the Company cannot ensure that this insurance will be adequate to protect it from all material expenses related to current or potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices.

company.

Self-insurance

The Company uses a combination of third-party insurance and self-insurance for health insurance clams. 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 ~~$1.5 million and $1.3~~$1.6 million at September 30, ~~2018~~2019 and December 31, ~~2017, respectively,~~2018 and is included under the caption “Accrued expenses” on the 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.

~~Scorpion~~

Contingent ~~Liability~~

~~In connection with~~Liabilities

The Company has recorded the ~~acquisition~~following contingent liabilities at September 30, 2019:

Magnum Earnout

The Magnum Purchase Agreement includes the potential for additional future payments in cash of ~~Pat Greenlee Builders, LLC (“Scorpion”)~~(i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in ~~2015,~~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.

Frac Tech Earnout

On October 1, 2018, pursuant to the terms and conditions of the Frac Tech Purchase Agreement, the Company ~~recorded~~acquired Frac Tech. 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 ~~liability~~reconciliation of the beginning and ending amounts of the contingent liabilities (Level 3) for ~~contingent consideration to be paid in shares of Company common stock and in cash, contingent upon quantities of Scorpion Composite Plugs~~^TM ~~sold during 2016 and gross margin related to~~ the ~~product sales for three years following the acquisition.~~

nine months ended September 30, 2019:



	Magnum			Frac Tech			Total
	(in thousands)
Balance at December 31, 2018	$	24,521		$	1,008		$	25,529
Payments	—			(250		)	(250		)
Revaluation adjustments	(21,436		)	735			(20,701		)
Balance at September 30, 2019	$	3,085		$	1,493		$	4,578

The contingent consideration related to the ~~Scorpion acquisition~~contingent liabilities is reported at fair value, based on ~~discounted cash flows.~~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 million reported in “Accrued expenses” at September 30, 2019 and December 31, 2018, respectively, and $3.8 million and $4.6 million reported in “Other long-term liabilities” at September 30, 2019 and December 31, 2018, respectively, in the Company’s Condensed Consolidated Balance Sheets. The impact of the revaluation ~~gains and losses are~~adjustments is included in ~~“General and administrative expenses” 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) were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands, except percentages)
Income tax expense (benefit)	$	727		$	1,130		$	(1,548	)	$	1,875
Effective tax rate	(3.7		)%	7.6		%	(126.7		)%	7.1		%

Generally, 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 ~~following is a reconciliation of the beginning and ending amounts of~~

~~contingent consideration obligation (level 3) related to the Scorpion acquisition~~effective tax rate for the nine months ended September 30, ~~2018 and~~2019 also includes the ~~year ended December 31, 2017:~~

September 30,
2018

December 31,
2017

(in thousands)

Balance at beginning of year

$
1,730

$
3,187

Common stock issuance

—

(547
)
Payment

—

(1,325
)
Revaluation adjustment

1,715

415

Balance at end of the period

$
3,445

$
1,730

~~Contingent liabilities related~~discrete tax impact from the Production Solutions divestiture. All other changes in the effective tax rate are attributable to the Scorpion acquisition include $3.4 million and $1.7 million and are reported in “Accrued expenses” in the Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017, respectively. The contingent liabilities related to Scorpion are expected to be paid by December 31, 2018.

~~10. Stockholders’ Equity~~

In January 2018, the Company completed its 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 pursuant to a registration statement on Form S‑1 (File 333‑217601), as amended and declared effective by the SEC on January 18, 2018.

After subtracting approximately $16.9 million of underwriting discounts, commissions, and offering expenses, the Company received net proceeds of approximately $168.3 million from its IPO. The Company used these proceeds, together with borrowings under the 2018 IPO Term Loan Credit Facility, to repay all indebtedness under its Legacy Term Loans and Legacy Revolving Credit Facilities, to prepay $9.7 million of the borrowings under the 2018 IPO Term Loan Credit Facility, as well as for general corporate purposes. For additional information, see Note 7 – Debt Obligations. No payments, fees or expenses have been paid, directly or indirectly, to anycurrent year impact of the Company’s ~~officers, directors or associates, holders~~valuation allowance positions, levels of ~~10% or more of any class of its equity securities or other affiliates.~~

~~11. Taxes~~

~~The Company’s effective tax rate fluctuates based on, among other factors, changes in statutory tax rates, changes in~~ pre-tax income, and ~~nondeductible items,~~state and ~~changes in valuation allowances.~~

The Company’s effective tax rate for the three and nine months ended September 30, 2018 was 7.6% and 7.1%, respectively, compared to (17.9%) and (8.5%) for the three and nine months ended September 30, 2017, respectively. The change in effective tax rate for the three and nine months ended September 30, 2018 was primarily attributable to changes in pre-tax booknon-U.S. income ~~and valuation allowance positions as well as tax liabilities in states where income is expected to exceed available net operating losses.~~

The Company recognized the income tax effects of the Tax Cuts and Jobs Act (the “Tax Reform”) in its audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period during which the Tax Reform was signed into law. The guidance also provides for a measurement period of up to one year from the enactment date of the Tax Reform for the Company to complete its accounting for the U.S. tax law changes. As such, the Company’s 2017 financial results reflected the provisional estimate of the income tax effects of the Tax Reform. No subsequent adjustments have been made to the amounts recorded as of December 31, 2017, which continue to represent a provisional estimate of the impact of the Tax Reform. The estimate of the impact of the Tax Reform was based on certain assumptions and the Company’s current interpretation of the Tax Reform. Any adjustments to the 2017 estimate due to additional clarification and implementation guidance will be reported as a component of income tax expense in the reporting period in which any such adjustments are identified, which will be no later than the fourth quarter of 2018.

taxes.

12. ~~Income~~Earnings (Loss) Per Share

Basic ~~income~~earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted ~~income~~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, restricted stock, and restricted ~~stock.~~

stock units.

Basic and diluted ~~income~~earnings (loss) per common share was computed as ~~follows (in thousands, except share and per share amounts):~~

follows:

	2018						2017
Three Months Ended September 30,	Net Income		Average Shares Outstanding		Income Per Share		Net Loss			Average Shares Outstanding		Loss Per Share

															Three Months Ended September 30, 2019							Three Months Ended September 30, 2018
															Net Loss			Average Shares Outstanding	Loss Per Share			Net Income		Average Shares Outstanding	Earnings Per Share
															(in thousands, except share and per share amounts)
Basic	$	13,658		23,971,032	$	0.57	$	(5,052	)		14,992,431	$	(0.34	)	$	(20,627	)	29,361,633	$	(0.70	)	$	13,658	23,971,032	$	0.57
Assumed exercise of stock options		—		41,341				—			—				—			—	—			—		41,341	—
Unvested restricted stock		—		376,922				—			—
Unvested restricted stock and stock units															—			—	—			—		376,922	—
Diluted	$	13,658		24,389,295	$	0.56	$	(5,052	)		14,992,431	$	(0.34	)	$	(20,627	)	29,361,633	$	(0.70	)	$	13,658	24,389,295	$	0.56

(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 ~~2017:~~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.

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

(in thousands)

(in thousands)

EBITDA reconciliation:

Net income (loss)

$
13,658

$
(5,052
)

$
24,352

$
(37,871
)
Interest expense

1,568

4,093

6,313

11,780

Depreciation

13,661

13,150

39,982

40,326

Amortization of intangibles

1,857

2,200

5,653

6,601

Provision for income taxes

1,130

766

1,875

2,967

EBITDA

$
31,874

$
15,157

$
78,175

$
23,803

Adjusted EBITDA reconciliation:

EBITDA

$
31,874

$
15,157

$
78,175

$
23,803

Transaction expenses

2,320

50

2,697

3,415

Loss on revaluation of contingent liabilities ⁽¹⁾

45

277

1,715

421

Loss on equity method investment

77

83

270

255

Stock-based compensation expense

3,508

2,185

9,719

6,380

(Gain) loss on sale of property and equipment

(1,190
)

148

(1,701
)

4,793

Legal fees and settlements⁽²⁾

1,721

188

2,203

778

Adjusted EBITDA

$
38,355

$
18,088

$
93,078

$
39,845

~~(1)~~

Loss on revaluation of contingent liabilities relates to our acquisition of Scorpion to be paid in shares of our common stock and in cash, contingent upon quantities of Scorpion Composite Plugs sold during 2016 and gross margin related to the product sales for three years following the acquisition.

~~(2)~~

~~Amount represents fees and legal settlements associated with legal proceedings brought pursuant to the Fair Labor Standards Act and/or similar state laws.~~

(2)Amounts represent fees and legal settlements associated with legal proceedings brought pursuant to the FLSA 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) ~~from continuing operations (net of tax)~~ plus (i) transaction and integration costs related to acquisitions and our IPO, (ii) property and equipment, goodwill, and/or intangible asset impairment charges, (iii) interest expense ~~less taxes~~(income), (iv) restructuring charges, (v) loss or gain on ~~interest.~~the sale of subsidiaries, and (vi) 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~~then take 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, ~~2018 and 2017:~~

2019:

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

(in thousands)

(in thousands)

Net income (loss)

$
13,658

$
(5,052
)

$
24,352

$
(37,871
)
Add back:

Interest expense

1,568

4,093

6,313

11,780

Taxes on interest

(330
)

(1,433
)

(1,326
)

(4,123
)
After-tax net operating profit (loss)

$
14,896

$
(2,392
)

$
29,339

$
(30,214
)
Total capital as of prior period-end/year-end:

Total stockholders' equity

$
472,180

$
298,883

$
287,358

$
288,186

Total debt

115,274

256,072

242,235

245,888

Less cash and cash equivalents

(70,860
)

(12,127
)

(17,513
)

(4,074
)
Total capital

$
516,594

$
542,828

$
512,080

$
530,000

Total capital as of period-end:

Total stockholders' equity

$
490,630

$
315,987

$
490,630

$
315,987

Total debt

115,274

240,840

$
115,274

240,840

Less cash and cash equivalents

(86,534
)

(30,171
)

(86,534
)

(30,171
)
Total capital

$
519,370

$
526,656

$
519,370

$
526,656

Average total capital

$
517,982

$
534,742

$
515,725

$
528,328

ROIC

11.50%

(2)%

8%

(8)%



	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
	(in thousands)
Net income (loss)	$	(20,627	)	$	2,770
Add back:
Interest expense	9,843			29,940
Interest income	(111		)	(439		)
Transaction and integration costs	1,418			8,864
Restructuring charges	3,263			3,263
Loss on sale of subsidiaries	15,834			15,834
Provision (benefit) for deferred income taxes	143			(2,876		)
After-tax net operating profit	$	9,763		$	57,356
Total capital as of prior period-end/year-end:
Total stockholders’ equity	$	624,309		$	594,823
Total debt	400,000			435,000
Less cash and cash equivalents	(16,886		)	(63,615		)
Total capital as of prior period-end/year-end	$	1,007,423		$	966,208
Total capital as of period-end:
Total stockholders’ equity	$	606,779		$	606,779
Total debt	400,000			400,000
Less cash and cash equivalents	(93,321		)	(93,321		)
Total capital as of period-end	$	913,458		$	913,458
Average total capital	$	960,441		$	939,833
ROIC	4.1%			8.1%

Adjusted Gross Profit (Excluding Depreciation and Amortization)

GAAP defines gross profit as revenues less cost of revenues and includes depreciation and amortization in costs of revenues. We define adjusted gross profit (excluding depreciation and amortization) as revenues less cost of revenues ~~excluding~~(excluding depreciation and ~~amortization.~~amortization). This measure differs from the GAAP definition of gross profit 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) to evaluate operating ~~performance and to determine resource allocation between segments.~~performance. We prepare adjusted gross profit (excluding depreciation and amortization) 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) 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) may not be comparable to similarly titled measures of other

companies because other companies may not calculate adjusted gross profit (excluding depreciation and amortization) 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) to GAAP gross profit (loss) for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~

2018:

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

(in thousands)

(in thousands)

Calculation of gross profit

Revenues

$
218,427

$
148,167

$
597,726

$
389,380

Cost of revenues (exclusive of depreciation and amortization)

165,882

119,909

467,700

322,901

Depreciation (related to cost of revenues)

13,434

12,927

39,319

39,658

Amortization of intangibles

1,857

2,200

5,653

6,601

Gross profit

$
37,254

$
13,131

$
85,054

$
20,220

Adjusted gross profit (excluding depreciation and amortization) reconciliation:

Gross profit

$
37,254

$
13,131

$
85,054

$
20,220

Depreciation (related to cost of revenues)

13,434

12,927

39,319

39,658

Amortization of intangibles

1,857

2,200

5,653

6,601

Adjusted gross profit (excluding depreciation and amortization)

$
52,545

$
28,258

$
130,026

$
66,479



	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 flows from operating activities, external borrowings, proceeds from the IPO, and capital ~~contributions.~~contributions (prior to the IPO). Our principal uses of cash are to fund capital expenditures and acquisitions, to service our outstanding debt, and to fund our ~~day~~working capital requirements. In 2018, we issued $400.0 million of Senior Notes to, ~~day operations.~~ together with cash on hand and borrowings under the 2018 ABL Credit Facility, 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. In the third quarter of 2019, we divested the Production Solutions segment for approximately $17.4 million in cash. The closing consideration is subject to working capital and other customary post-closing adjustments. We plan to use such proceeds to fund our working capital requirements and 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 is 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, ~~2018,~~2019, we had ~~$86.5~~$93.3 million of cash and cash equivalents and ~~$49.5~~$118.0 million of availability under the 2018 ~~IPO~~ABL Credit ~~Agreement,~~Facility, which resulted in a total liquidity position of ~~$136.0~~$211.3 million.

~~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 pursuant to a registration statement on form S-1 (File 333-217601), as amended and declared effective by the SEC on January 18, 2018. After subtracting approximately $16.9 million of underwriting discounts, commissions and offering expenses, we received net proceeds of approximately $168.3 million from our IPO. We used these proceeds, together with borrowings under the 2018 IPO Term LoanABL Credit Facility (as defined below), to repay all indebtedness under our prior term loan and the Beckman term loan (together, the “Legacy Term Loans”) and under our prior revolving credit facility and the Beckman revolving credit facility (together, the “Legacy Revolving Credit Facilities”), as more fully described below, to prepay $9.7 million of the borrowings under the

On October 25, 2018, IPO Term Loan Credit Facility, as well as for general corporate purposes. No payments, fees or expenses have been paid, directly or indirectly, to any of our officers, directors or associates, holders of 10% or more of any class of our equity securities or other affiliates.

~~2018 IPO Credit Agreement~~

~~On September 14, 2017,~~ we entered into the 2018 ABL Credit Agreement. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a ~~new credit agreement (as amended~~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 will mature on ~~November 20, 2017,~~October 25, 2023 or, if earlier, on the ~~“2018 IPO Credit Agreement”) with JP Morgan as administrative agent, and certain other financial institutions~~date that ~~became effective upon~~is 180 days before the ~~consummation~~scheduled maturity date of the IPO in January 2018 (the “Effective Date”). Pursuant to the terms of the 2018 IPO Credit Agreement, we and our domestic restricted subsidiaries were entitled to borrow $125.0 million of term loans (the “2018 IPO Term Loan Credit Facility”), which we drew in full on the Effective Date. In January 2018, we also made a mandatory prepayment of $9.7 million against the 2018 IPO Term Loan Credit Facility, which approximated 50.0% of the estimated net proceeds from the IPO in excess of $150.0 million, as prescribed under the 2018 IPO Credit Agreement.

In addition, under the 2018 IPO Credit Agreement, we and our domestic restricted subsidiaries were entitled to borrow up to $50.0 million (including letters of credit) as revolving credit loans under the revolving commitments (the “2018 IPO Revolving Credit Facility”). At September 30, 2018, the 2018 IPO Revolving Credit Facility had an undrawn capacity of $49.5 million, which was net of a $0.5 million outstanding letter of credit.

Concurrent with the effectiveness of the 2018 IPO Credit Agreement, using proceeds received from the IPO and borrowings under the 2018 IPO Term Loan Credit Facility, we repaid all indebtedness under the Legacy Term Loans and Legacy Revolving Credit Facilities in the first quarter of 2018, which approximated $242.2 million. In addition, for the first quarter of 2018, we wrote off approximately $0.7 million in deferred financing costs associated with the Legacy Term Loans and the Legacy Revolving Credit Facilities.

~~All of the obligations under the 2018 IPO Credit Agreement were secured~~Senior Notes if they have not been redeemed or repurchased by ~~first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of us and our domestic restricted subsidiaries, excluding certain assets.~~

such date.

Loans to us and our domestic ~~restricted~~related subsidiaries (the “U.S. Credit Parties”) under the 2018 ~~IPO~~ABL Credit ~~Agreement were either~~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 CDOR loans or Canadian prime rate loans. The applicable margin for base rate loans ~~varied~~and Canadian prime rate loans vary from ~~1.50%~~0.75% to ~~2.75%~~1.25%, and the applicable margin for LIBOR loans ~~varied~~or CDOR loans vary from ~~2.50%~~1.75% to ~~3.75%~~2.25%, in each case depending on our leverage ratio. ~~Interest rates averaged 5.5% during the nine months ended September 30, 2018. We were permitted to repay any amounts borrowed prior to the maturity date without any premium or penalty other than~~

~~customary LIBOR breakage costs.~~ In addition, a commitment fee of 0.50% per annum ~~was~~will be charged on the average daily unused portion of the revolving commitments. ~~Such commitment fee~~The weighted average interest rate was ~~payable quarterly in arrears.~~

2.63% during the first nine months of 2019.

The 2018 ~~IPO~~ABL Credit Agreement ~~contained~~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. ~~Financial covenants~~In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant that is tested quarterly when the availability under the 2018 ~~IPO~~ABL Credit ~~Agreement included~~Facility drops below a ~~maximum total leverage ratio, an asset coverage ratio~~certain threshold or a default has occurred until the availability exceeds such threshold for 30 consecutive days and ~~a fixed charge coverage ratio, each of which was calculated on a quarterly basis.~~such default is no longer outstanding. We were in compliance with all ~~debt~~ covenants under the 2018 ~~IPO~~ABL Credit Agreement ~~as of September 30, 2018.~~

~~On October 25, 2018, we fully repaid and terminated the 2018 IPO Credit Agreement as more fully described in “Recent Events”.~~

~~Unamortized deferred financing costs associated with the 2018 IPO Term Loan Credit Facility were $1.2 million~~ at September 30, ~~2018. These costs were being amortized through~~2019.

All of the ~~maturity date~~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 ~~IPO Term Loan~~ABL Credit Facility, ~~using the effective interest method. We wrote off these deferred financing costs on October 25, 2018 in conjunction with the termination~~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, our availability under the 2018 ~~IPO~~ABL Credit ~~Agreement.~~

Facility was approximately $118.0 million, net of an outstanding letter of credit of $0.2 million.

Cash Flows

Cash flows provided by (used in) operations by type of activity were as follows for the nine months ended September 30, ~~2018~~2019 and ~~2017:~~

2018:

Nine Months Ended September 30,

2018

2017

(in thousands)

Operating activities

$
50,756

$
3,775

Investing activities

(26,011
)

(29,816
)
Financing activities

44,559

52,223

Impact of foreign exchange rate on cash

(283
)

(85
)
Net change in cash and cash equivalents

$
69,021

$
26,097



	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 ~~$50.8~~$86.8 million for the first nine months ~~ended September 30, 2018~~of 2019 compared to ~~$3.8~~$50.8 million in net cash provided by operating activities for the first nine months ~~ended September 30, 2017.~~of 2018. The ~~$47.0~~$36.0 million increase in net cash provided by operating activities was primarily a result of a $52.9 million increase in net cash provided through our working capital. The overall increase in net cash provided by operating activities was partially offset by a $16.9 million increase in cash flow ~~was~~used by continuing operations, adjusted for any non-cash items, primarily due to revenue growth for the ~~general improvement~~first nine months of 2019 in ~~profitability.~~

comparison to the first nine months of 2018.

Investing Activities

Net cash used in investing activities was ~~$26.0~~$19.6 million for the first nine months ~~ended September 30, 2018, a~~of 2019 compared to $26.0 million in net cash used in investing activities for the first nine months of 2018. The $6.4 million decrease in net cash ~~used of $3.8 million from the nine months ended September 30, 2017. The decrease in cash flow~~ used in investing activities was ~~mainly attributable~~primarily related to ~~a $2.4~~$17.2 million ~~increase~~ in proceeds received from ~~sales~~the sale of subsidiaries as well as $7.6 million in proceeds received from notes receivable payments, both of which occurred in the first nine months of 2019 and did not occur in the first nine months of 2018. The overall decrease in net cash used in investing activities was partially offset by an increase of $19.4 million in cash purchases of property and equipment ~~including casualty losses. Additionally,~~for the first nine months ~~ended September 30, 2017 included a $1.0~~of 2019.

Financing Activities

Net cash used in financing activities was $37.5 million ~~investment~~for the first nine months of 2019 compared to $44.6 million in ~~a company that is developing technology expected to enhance our service offerings.~~

~~Financing Activities~~

~~Net~~net cash flow provided by financing activities for the first nine months of 2018. The $82.1 million decrease in net cash provided by financing activities ~~totaled $44.6~~was primarily related to $171.8 million ~~for the nine months ended September 30, 2018, a decrease~~ in ~~cash provided of $7.7 million from the nine months ended September 30, 2017. For the nine months ended September 30, 2018, net~~ proceeds received from the IPO and ~~other share~~ issuances ~~totaled $171.8~~of common stock and $125.0 million ~~and borrowings under~~in proceeds received from our term loan entered into in conjunction with the ~~2018~~ IPO ~~Credit Agreement totaled $125.0 million. These proceeds were $181.9 million higher than the net proceeds from share issuances and borrowings~~ in the first nine months ~~ended September 30, 2017. Additionally, payments on debt~~ of ~~$251.9 million for~~2018 that did not recur in the first nine months ~~ended September 30, 2018, including payment~~ of ~~all debt outstanding under~~2019 as well as an increase in cash used of $2.7 million related to the ~~Legacy Term Loans and Legacy Revolving Credit Facilities, were $192.4 million greater than payments on debt for~~vesting of restricted stock in the first nine months ~~ended September 30, 2017.~~

of 2019 compared to the first nine months of 2018. The overall decrease in net cash provided by financing activities was partially offset by $155.7 million in payments made on prior term loans and $1.4 million in deferred financing costs in the first nine months of 2018 that did not recur in the first nine months of 2019 as well as a reduction in net payments of $61.2 million on our revolving credit facilities in the first nine months of 2019 compared to the first nine months of 2018.

Contractual Obligations

~~Other than as disclosed in Note 7 – Debt Obligations in Item 1 of Part I of this Quarterly Report on Form 10-Q, our~~

Our contractual obligations at September 30, ~~2018~~2019 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, ~~2017.~~

2018.

Off-Balance Sheet Arrangements

At September 30, 2019, we had noa letter of credit of $0.2 million, which represented an off-balance sheet ~~arrangements,~~arrangement as defined in Item 303(a)(4)(ii) of Regulation ~~S-K, as~~S-K. As of September 30, ~~2018.~~

2019, no liability has been recognized in our Condensed Consolidated Balance Sheets for the letter 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 from 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, ~~2017.~~

2018.

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 ~~SEC.~~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, have 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, ~~2018.~~2019. Based upon that evaluation, ~~and due to the material weaknesses in internal control over financial reporting described in Item 9A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2017,~~ our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, ~~2018.~~2019, 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 our Annual Report on Form 10-K for the year ended December 31, 2018, 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.

Material Weakness in Internal Control over Financial Reporting. In addition to the remediation steps listed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, management has performed, or is in the process of performing, the following:

Continued to develop and implement additional controls and procedures and enhance existing controls and procedures to ensure the segregation of certain accounting duties related to journal entries, account reconciliations, and other accounting functions.

Hired additional resources, including an experienced Internal Audit Director to lead the Company’s internal audit department, with responsibility for direction and oversight of all internal audit functions.

Until the remediation steps listed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018 and 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. ~~There was~~Except for the changes identified above related to our remediation efforts, there have been no ~~change~~changes in our internal control over financial reporting ~~during the quarter ended September 30, 2018~~ that ~~has~~ materially affected, or isare reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting during the quarterly period ended September 30, 2019.

PART II – ~~OTHE~~ROTHER 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 ~~and~~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.

~~We have been named in the following proceeding:~~

~~Christina Sparks, et al v. Pioneer Natural Resources, et al., Filed in the District Court, 142nd Judicial District, Midland County, Texas.~~

the court has dismissed the case. We ~~maintain insurance coverage against liability for, among other things, personal injury (including death), which coverage is subject to certain exclusions and deductibles. We~~have tendered this matter to our insurance company for defense and indemnification of Big Lake Services and the other ~~defendants. While we maintain such insurance policies with insurers in amounts~~defendants, and ~~with coverage and deductibles that we, with the advice of~~this settlement has been fully funded by our insurance advisors and brokers, believe are reasonable and prudent, we cannot assure you that this insurance will be adequate to protect us from all material expenses related to current or potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices.

company.

ITEM 1A. RISK FACTORS

Except as set forth below, 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, ~~2017.~~

2018. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.

~~We may be unable to successfully integrate~~

Our charter and bylaws designate the ~~acquired assets and operations or to realize anticipated revenues, cost savings,~~

~~or other benefits~~Court of Chancery of the ~~Magnum Acquisition.~~

~~Because the Magnum Acquisition involves the combination~~State of two companies that have operated independently, we will need to devote significant management attention and resources to integrating business practices, cultures, and operations of each business. Our ability to achieve the anticipated benefits of the Magnum Acquisition will depend in part upon whether we can integrate the acquired assets and operations into our existing businesses in an efficient and effective manner. Potential difficulties we may encounter as part of the integration process include:

~~the inability to successfully combine our respective businesses in a manner that permits us to achieve the cost savings, synergies, and other anticipated benefits from the Magnum Acquisition;~~

the challenge of integrating complex systems, operating procedures, compliance programs, technology, networks, and other assets while carrying on our ongoing business in a manner that minimizes any adverse impact on customers, suppliers, employees, and other constituencies;

~~the challenge of managing the expanded operations of a larger and more complex company and coordinating geographically separate organizations; and~~

potential unknown liabilities, liabilities that are significantly larger than we currently anticipate, and unforeseen increased expenses or delays associated with the Magnum Acquisition, including cash costs of integration that may exceed what we currently anticipate.

Any one of these factors could result in increased costs, decreases in the amount of anticipated benefits and diversion of management’s attention, which could materially impact our business, financial condition, and results of operations. In addition, even following successful integration, the anticipated benefits of the Magnum Acquisition may not be realized fully, or at all, or may take longer to realize than expected.

~~Certain product lines acquired in the Magnum Acquisition are subject to the risk of supplier concentration.~~

Certain of the product lines acquired in the Magnum Acquisition depend on a limited number of third-party suppliers and vendors. As a result of this concentration in some supply chains, our business and operations could be negatively affected if certain key suppliers were to experience significant disruptions affecting the price, quality, availability or timely delivery of their products. The partial or complete loss of any one of those key suppliers, or a significant adverse change in the relationship with any such suppliers, through consolidation or otherwise, may limit our ability to manufacture and sell certain of our product lines acquired in the Magnum Acquisition.

~~Intense competition in the markets for our dissolvable plug products may lead to pricing pressures, reduced sales, or reduced market share.~~

The oil and natural gas industry is intensely competitive and has been characterized by price erosion for new technologies as additional competing products enter the market. We may be unable to maintain the current pricing and profitability of our dissolvable plug products, including the products acquired in the Magnum Acquisition, in the future, which could harm our business.

We compete with major domestic and international oilfield services companies, many of which have greater market recognition and substantially greater financial, technical, marketing, distribution, and other resources than we do. We have experienced pricing declines in certain of our more mature proprietary product lines, primarily due to competitive conditions. Likewise, our customers may seek pricing declines more precipitously than our ability to reduce costs, leaving us unable to achieve or maintain pricing to our customers at a level sufficient to cover our costs.

We have been able to moderate average selling price declines in many of our proprietary product lines by continuing to introduce new and differentiated products with more valuable features and higher prices. However, there can be no assurance that we will be able to do so in the future. If the amounts we are able to charge customers for our dissolvable plug products decline significantly or are insufficient to cover our costs, that could have a material adverse effect on our financial condition, results of operations, and cash flows.

~~We have incurred and will continue to incur significant transaction and acquisition-related costs in connection with the Magnum Acquisition.~~

We have incurred and will continue to incur significant costs associated with the Magnum Acquisition and combining the operations of Magnum with our operations. The substantial majority of the expenses resulting from the Magnum Acquisition will be composed of transaction costs related to the Magnum Acquisition and our integration efforts. These fees and costs may be substantial and include fees paid to legal financial and accounting advisors, filing fees, and printing costs. Additional unanticipated costs may be incurred in the integration of Magnum’s business, including through the consolidation of our operations, workforce, information technology, and accounting systems. Although we expect that the elimination of duplicative costs, as wellDelaware as the ~~realization~~sole and exclusive forum for certain types of ~~other efficiencies related to the integration of the acquired assets with our assets, should allow us to offset incremental transaction~~actions and ~~acquisition-related costs over time, this net benefit may not be achieved in the near term, or at all.~~

~~Following the Magnum Acquisition, our overall level of debt obligations increased, which could adversely affect us.~~

Following the Magnum Acquisition, our overall debt level increased significantly. As of September 30, 2018, we had an aggregate outstanding principal balance of approximately $115.3 million under the 2018 IPO Credit Agreement. In connection with the Magnum Acquisition, although we fully repaid our aggregate outstanding principal balance and terminated the 2018 IPO Credit Agreement, we incurred significant indebtedness. On October 25, 2018, in connection with the Magnum Acquisition, we issued an aggregate principal amount of $400.0 million of Senior Notes and borrowed $35.0 million under the 2018 ABL Credit Facility.

~~Our increased level of debt and other obligations following the Magnum Acquisition could have significant adverse consequences on our business and future prospects, including the following:~~

~~we may not be able to obtain additional financing in the future on acceptable terms or at all for working capital, capital expenditures, acquisitions, debt service requirements, or other purposes;~~

~~less-levered competitors could have a competitive advantage because they have lower debt service requirements;~~

•

~~credit rating agencies could downgrade our credit ratings following the Magnum Acquisition below currently expected levels; and~~

~~we may be less able to take advantage of significant business opportunities and to react to changes in market or industry conditions than our competitors.~~

~~We are subject to complex U.S. and foreign laws and regulations governing anti-corruption and export controls and economic sanctions~~.

The U.S. Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act (“UKBA”), Canada’s Corruption of Foreign Public Officials Act (the “CFPOA”), and similar anti-bribery and anticorruption laws generally prohibit companies and their intermediaries from making improper payments or improperly providing anything of value for the purpose of obtaining or retaining business. Following the Magnum Acquisition, we now operate and make sales in parts of the worldproceedings that may be ~~viewed as higher risk~~initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for ~~corruption~~disputes with us or may have experienced some corruption in the past, and in some instances, strict compliance with the FCPA, UKBA, CFPOA, and similar anti-bribery laws may conflict with local practices. We are also subject to export control and economic sanctions laws and regulations, including those implemented by the U.S. Office of Foreign Assets Control, the U.S. Department of State, the U.S. Department of Commerce, the European Union and its member States, Her Majesty’s Treasury of the United Kingdom, and other relevant sanctions authorities. These measures can prohibit or restrict transactions and dealings with certain designated persons and in certain countries in which we conduct business. Despite efforts to ensure compliance, there can be no assurance that our directors, officers, employees, ~~agents,~~or agents.

Our charter and ~~third-party intermediaries will comply with such laws and regulations. We can be held liable for violations under such laws and regulations either due to our acts or omissions or due~~bylaws provide that, unless we consent in writing to the ~~acts~~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 ~~omissions of others, including intermediaries working~~proceeding brought on our ~~behalf.~~

~~If we fail~~behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees, or agents to ~~comply with applicable laws and regulations, including those referred~~us or our stockholders, (iii) any action asserting a claim arising pursuant to ~~above, we may be~~any provision 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 ~~criminal and civil penalties~~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 other sanctions, which could harm our reputation and have a material adverse impact on our business, financial condition, results of operations, and prospects. Any investigation of any actual or alleged violations of such laws could also harm our reputation or have an adverse impact on our business, financial condition, results of operations, and prospects. Additionally, we could face other third-party claims by agents, shareholders, debt holders, or other interest holders or constituents of our company. Our customers in relevant jurisdictions could seek to impose penalties or take other actions adverse to our interests, and we may be required to dedicate significant time and resources to investigate and resolve allegations of misconduct, regardless of the merit of such allegations. Furthermore, compliance with this additional regulatory burden could increase our operating or other costs.

~~The Magnum Acquisition could expose us to additional liabilities.~~

We have assumed certain potential liabilities relating to Magnum, and we could be exposed to additional unknown and contingent liabilities associated with the acquired business, including post-closing tax obligations and other liabilities for activities of Magnum before the consummation of the Magnum Acquisition, including violations of laws, rules and regulations, commercial disputes, tax liabilities, and other known and unknown liabilities. We have performed a certain level of due diligence in connection with the Magnum Acquisition and have attempted to verify the representations made by Magnum, but there may be liabilities related to Magnum of which we are unaware. There is a risk that we could ultimately be liable for obligations such as post-closing tax obligations relating to Magnum for which indemnification is either not available or not sufficient, which could materially adversely affect our business, results of operations, and cash flow.

~~During the 2019 fiscal year we may no longer qualify as an “emerging growth company,” and we may no longer be able to take advantage of certain exemptions from various reporting requirements.~~

During the 2019 fiscal year, we may no longer qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we may no longer be able to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are emerging growth companies. Following the time that we are no longer an “emerging growth company,” we will be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Further, we will not be able to take advantage of the same reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements that smaller reporting companies are permitted to provide or exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation, frequency of approval of executive compensation, and of any golden parachute payments not previously approved. In addition, we will no longer be able to take advantage of Section 107 of the JOBS Act that provides that an emerging growth company may take advantage of the extended transition period provided in 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 shares of our capital stock will be deemed to have notice of, and consented to, the ~~Exchange Act~~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 ~~complying~~disputes with ~~new~~us or ~~revised accounting standards. Compliance~~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 ~~these additional rules and regulations will increase~~resolving such matters in other jurisdictions, which could adversely affect our ~~legal and~~business, financial ~~compliance costs, make some activities more difficult, time-consuming,~~condition, or ~~costly, and increase demand on our systems and resources.~~

~~Changes in United States federal income tax law may have an adverse effect on our cash flows,~~ results of ~~operations, or financial condition overall.~~

The final version of the tax reform bill commonly known as the Tax Cuts and Jobs Act (the “Tax Reform”) signed into law on December 22, 2017 may affect our cash flows, results of operations, and financial condition. Among other items, the Tax Reform provided for a new limitation on the deduction for net interest expense. Given the scope of this law and the potential interdependency of its changes, it is difficult at this time to assess whether the overall effect of the Tax Reform will be cumulatively positive or negative for our earnings and cash flow, but such changes may adversely impact our financial results.

operations.

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.

~~Exhibit~~ ~~number~~		~~Description~~

~~2.1†~~ Exhibit number	Description

2.1†	~~Combination~~Securities Purchase Agreement, dated as of ~~February 3, 2017,~~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).

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., ~~Beckman Production~~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)

2.3†+	Membership Interest Purchase Agreement, dated August 30, 2019, by and between Brigade Energy Services ~~Inc.~~LLC and ~~Beckman Merger Sub,~~Nine Energy Service, Inc. (Incorporated by reference to Exhibit 2.1 of Nine Energy Service, Inc.’s ~~Amendment No. 1 to Registration Statement~~Current Report on Form ~~S-1~~8-K filed on ~~May 19, 2017)~~September 6, 2019).

3.1	Third Amended and Restated Certificate of Incorporation of Nine Energy Service, Inc., dated January 23, 2018 (Incorporated by reference to Exhibit 3.1 of Nine Energy Service, Inc.’s Current Report on Form 8-K filed on January 23, 2018).

3.2	Fourth Amended and Restated Bylaws of Nine Energy Service, Inc., dated January 23, 2018 (Incorporated by reference to Exhibit 3.2 of Nine Energy Service, Inc.’s Current Report on Form 8-K filed on January 23, 2018).
~~10.1~~
10.1	~~Indemnification~~First Amendment to Amended and Restated Employment Agreement, ~~dated as of August 9, 2018,~~ by and ~~between~~among Nine Energy Service, LLC, Nine Energy Service, Inc. and ~~Darryl Willis~~Edward Bruce Morgan, effective as of August 30, 2019 (Incorporated by reference to Exhibit 10.1 of Nine Energy Service, Inc.’s Current Report on Form 8-K filed on ~~August 10, 2018)~~September 6, 2019).

~~10.2~~ 31.1*	Amended and Restated Employment Agreement, dated August 28, 2018, by and between Nine Energy Service, LLC and Ann G. Fox (Incorporated by reference to Exhibit 10.1 of Nine Energy Service, Inc.’s Current Report on Form 8-K filed on August 30, 2018).

31.1*	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**	Certifications by Chief Executive Officer pursuant to Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2**	Certifications by Chief Financial Officer pursuant to Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

101*	Interactive Data Files

*
*	Filed herewith


**	Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K.

†
†	Certain schedules and similar attachments have been omitted pursuant to Item ~~601(b)(2)~~601(a)(5) of Regulation S-K and will be provided to the Securities and Exchange Commission upon request.

+ 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.

SIGNATURES

~~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.



		Nine Energy Service, Inc.

Date:	November ~~13, 2018~~ 12, 2019	By:	/s/ Ann G. Fox
			Ann G. Fox
			President, Chief Executive Officer and Director
			(Principal Executive Officer)

Date:	November ~~13, 2018~~ 12, 2019	By:	/s/ Clinton Roeder
			Clinton Roeder
			Senior Vice President and Chief Financial Officer
			(Principal Financial Officer)



Delaware	80-0759121
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)



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



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



PART I		FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)	1
		Condensed Consolidated Balance Sheets ~~as of September 30, 2018 and December 31, 2017~~	1
		Condensed Consolidated Statements of Income and Comprehensive Income (Loss) ~~for the Three and Nine Months Ended September 30, 2018 and 2017~~	2
		Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity ~~for the period from December 31, 2017 to September 30, 2018~~	3
		Condensed Consolidated Statements of Cash Flows ~~for the Nine Months Ended September 30, 2018 and 2017~~	4 5
		Notes to the Condensed Consolidated Financial Statements	5 6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 23
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28 38
	Item 4.	Controls and Procedures	28 38
PART II		OTHER INFORMATION	39
	Item 1.	Legal Proceedings	29 39
	Item 1A.	Risk Factors	29 39
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32 39
	Item 3.	Defaults Upon Senior Securities	32 40
	Item 4.	Mine Safety Disclosures	32 40
	Item 5.	Other Information	32 40
	Item 6.	Exhibits	33 41
		Signatures	34 42

☒

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

☐

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

	September 30, 2018			December 31, 2017

Assets
Current assets
Cash and cash equivalents	$	86,534		$	17,513
Accounts receivable, net		162,437			99,565
Income taxes receivable		84			—
Inventories, net		29,571			22,230
Prepaid expenses and other current assets		7,035			7,929
Notes receivable from shareholders (Note 8)		10,551			—
Total current assets		296,212			147,237
Property and equipment, net		257,447			259,039
Goodwill		93,756			93,756
Intangible assets, net		57,892			63,545
Other long-term assets		1,144			4,806
Notes receivable from shareholders (Note 8)		—			10,476
Total assets	$	706,451		$	578,859
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt	$	—		$	241,509
Accounts payable		49,497			29,643
Accrued expenses		44,600			14,687
Current portion of capital lease obligations		372			—
Income taxes payable		—			581
Total current liabilities		94,469			286,420
Long-term liabilities
Long-term debt		114,048			—
Deferred income taxes		5,983			5,017
Long-term lease obligations		1,266			—
Other long-term liabilities		55			64
Total liabilities		215,821			291,501
Commitments and contingencies (Note 9)
Stockholders’ equity
Common stock (120,000,000 shares authorized at $.01 par value; 25,114,597 and 15,810,540 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)		251			158
Additional paid-in capital		564,229			384,965
Accumulated other comprehensive loss		(4,121	)		(3,684	)
Accumulated deficit		(69,729	)		(94,081	)
Total stockholders’ equity		490,630			287,358
Total liabilities and stockholders’ equity	$	706,451		$	578,859

	Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Retained Earnings (Accumulated			Total Stockholders’
	Shares			Amounts		Capital			Income (Loss)			Deficit)			Equity
Stockholders’ equity as of 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-based 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
Stockholders’ equity as of September 30, 2018		25,114,597		$	251	$	564,229		$	(4,121	)	$	(69,729	)	$	490,630

		Intangible assets
		Gross Value			Accumulated Amortization			Net
	(in thousands)
Balance as of December 31, 2016		$	105,464		$	(29,320	)	$	76,144
Amortization expense			—			(8,799	)		(8,799	)
Impairment			(12,000	)		8,200			(3,800	)
Balance as of December 31, 2017		$	93,464		$	(29,919	)	$	63,545
Amortization expense			—			(5,653	)		(5,653	)
Impairment			—			—			—
Balance as of September 30, 2018		$	93,464		$	(35,572	)	$	57,892



	Nine Months Ended September 30, 2019					Nine Months Ended September 30, 2018
	Net Income		Average Shares Outstanding	Earnings Per Share		Net Income		Average Shares Outstanding	Earnings Per Share
	(in thousands, except share and per share amounts)
Basic	$	2,770	29,288,113	$	0.09	$	24,352	23,264,014	$	1.05
Assumed exercise of stock options	—		—	—		—		31,879	—
Unvested restricted stock and stock units	—		109,523	—		—		308,029	—
Diluted	$	2,770	29,397,636	$	0.09	$	24,352	23,603,922	$	1.03