(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2001 Kirby Drive, Suite 200
Houston, TX77019
(Address of principal executive offices) (zip code)
(281) 730-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
NINE
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding at November 1, 2021 was 32,828,949.
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans, and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q; we disclaim any obligation to update these statements unless required by law, and we caution you not to place undue reliance on them. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved.
We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, 2020. These factors, some of which are beyond our control, include the following:
•Our business is cyclical and depends on capital spending and well completions by the onshore oil and natural gas industry, and the level of such activity is volatile and strongly influenced by current and expected oil and natural gas prices. If the prices of oil and natural gas decline or remain depressed for a lengthy period, our business, financial condition, results of operations, cash flows, and prospects may be materially and adversely affected.
•The coronavirus pandemic and related economic repercussions have had, and may continue to have, a significant adverse impact on our business, and depending on the duration of the pandemic and its effect on the oil and gas industry, could have a material adverse effect on our business, liquidity, results of operations, and financial condition.
•Our substantial debt obligations could have significant adverse consequences on our business and future prospects, and restrictions in our debt agreements could limit our growth and our ability to engage in certain activities.
•We may be unable to maintain existing prices or implement price increases on our products and services, and intense competition in the markets for our dissolvable plug products may lead to pricing pressures, reduced sales, or reduced market share.
•Our current and potential competitors may have longer operating histories, significantly greater financial or technical resources, and greater name recognition than we do.
•Our operations are subject to conditions inherent in the oilfield services industry, such as equipment defects, liabilities arising from accidents or damage involving our fleet of trucks or other equipment, explosions and uncontrollable flows of gas or well fluids, and loss of well control.
•If we are unable to accurately predict customer demand or if customers cancel their orders on short notice, we may hold excess or obsolete inventory, which would reduce gross margins. Conversely, insufficient inventory would result in lost revenue opportunities and potentially in loss of market share and damaged customer relationships.
•We are dependent on customers in a single industry. The loss of one or more significant customers could adversely affect our financial condition, prospects, and results of operations.
•We may be subject to claims for personal injury and property damage or other litigation, which could materially adversely affect our financial condition, prospects, and results of operations.
•We are subject to federal, state, and local laws and regulations regarding issues of health, safety, and protection of the environment. Under these laws and regulations, we may become liable for penalties, damages, or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business.
•Our success may be affected by the use and protection of our proprietary technology as well as our ability to enter into license agreements.
•Our success may be affected by our ability to implement new technologies and services.
•Our future financial condition and results of operations could be adversely impacted by asset impairment charges.
•Increased attention to climate change and conservation measures may reduce oil and natural gas demand, and we face various risks associated with increased activism against oil and natural gas exploration and development activities.
•Seasonal and adverse weather conditions adversely affect demand for our products and services.
•We may be unable to employ, or maintain the employment of, a sufficient number of key employees, technical personnel, and other skilled and qualified workers.
Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial, or that could apply to any company could also materially adversely affect our business, financial condition, or future results.
These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
September 30, 2021
December 31, 2020
Assets
Current assets
Cash and cash equivalents
$
29,969
$
68,864
Accounts receivable, net
58,579
41,235
Income taxes receivable
1,205
1,392
Inventories, net
43,019
38,402
Prepaid expenses and other current assets
11,084
16,270
Total current assets
143,856
166,163
Property and equipment, net
83,749
102,429
Operating lease right of use assets, net
33,877
36,360
Finance lease right of use assets, net
1,517
1,816
Intangible assets, net
120,312
132,524
Other long-term assets
2,572
3,308
Total assets
$
385,883
$
442,600
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
$
23,713
$
18,140
Accrued expenses
29,455
17,139
Current portion of long-term debt
1,125
844
Current portion of operating lease obligations
5,689
6,200
Current portion of finance lease obligations
1,132
1,092
Total current liabilities
61,114
43,415
Long-term liabilities
Long-term debt
317,180
342,714
Long-term operating lease obligations
29,766
32,295
Long-term finance lease obligations
259
1,109
Other long-term liabilities
2,296
2,658
Total liabilities
410,615
422,191
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock (120,000,000 shares authorized at $0.01 par value; 32,840,084 and 31,557,809 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively)
328
316
Additional paid-in capital
772,135
768,429
Accumulated other comprehensive loss
(4,533)
(4,501)
Accumulated deficit
(792,662)
(743,835)
Total stockholders’ equity
(24,732)
20,409
Total liabilities and stockholders’ equity
$
385,883
$
442,600
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Revenues
Service
$
65,916
$
35,639
$
172,932
$
187,713
Product
26,952
13,882
71,394
61,167
92,868
49,521
244,326
248,880
Cost and expenses
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Service
59,614
38,445
160,141
179,508
Product
19,265
14,038
57,659
55,686
General and administrative expenses
11,114
10,701
33,505
38,380
Depreciation
6,921
7,763
22,148
24,753
Amortization of intangibles
4,029
4,091
12,212
12,376
Impairment of goodwill
—
—
—
296,196
(Gain) loss on revaluation of contingent liabilities
21
297
(124)
781
(Gain) loss on sale of property and equipment
(17)
(535)
660
(2,900)
Loss from operations
(8,079)
(25,279)
(41,875)
(355,900)
Interest expense
7,968
9,130
24,534
28,144
Interest income
(3)
(43)
(24)
(593)
Gain on extinguishment of debt
—
(15,798)
(17,618)
(37,501)
Other income
(34)
(29)
(103)
(29)
Loss before income taxes
(16,010)
(18,539)
(48,664)
(345,921)
Provision (benefit) for income taxes
41
(37)
163
(2,348)
Net loss
$
(16,051)
$
(18,502)
$
(48,827)
$
(343,573)
Loss per share
Basic
$
(0.53)
$
(0.62)
$
(1.61)
$
(11.56)
Diluted
$
(0.53)
$
(0.62)
$
(1.61)
$
(11.56)
Weighted average shares outstanding
Basic
30,449,286
29,849,753
30,252,670
29,708,673
Diluted
30,449,286
29,849,753
30,252,670
29,708,673
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of $0 tax in each period
$
(102)
$
132
$
(32)
$
(264)
Total other comprehensive income (loss), net of tax
(102)
132
(32)
(264)
Total comprehensive loss
$
(16,153)
$
(18,370)
$
(48,859)
$
(343,837)
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Accumulated Deficit)
Total Stockholders’ Equity
Shares
Amounts
Balance, June 30, 2021
31,350,677
$
314
$
770,997
$
(4,431)
$
(776,611)
$
(9,731)
Issuance of common stock under stock compensation plan, net of forfeitures
1,490,234
14
(14)
—
—
—
Stock-based compensation expense
—
—
1,153
—
—
1,153
Vesting of restricted stock
(827)
—
(1)
—
—
(1)
Other comprehensive loss
—
—
—
(102)
—
(102)
Net loss
—
—
—
—
(16,051)
(16,051)
Balance, September 30, 2021
32,840,084
$
328
$
772,135
$
(4,533)
$
(792,662)
$
(24,732)
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Accumulated Deficit)
Total Stockholders’ Equity
Shares
Amounts
Balance, June 30, 2020
31,652,635
$
317
$
764,382
$
(4,863)
$
(689,886)
$
69,950
Issuance of common stock under stock compensation plan, net of forfeitures
(80,882)
(1)
1
—
—
—
Stock-based compensation expense
—
—
2,020
—
—
2,020
Vesting of restricted stock
(827)
—
(1)
—
—
(1)
Other comprehensive income
—
—
—
132
—
132
Net loss
—
—
—
—
(18,502)
(18,502)
Balance, September 30, 2020
31,570,926
$
316
$
766,402
$
(4,731)
$
(708,388)
$
53,599
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Accumulated Deficit)
Total Stockholders’ Equity
Shares
Amounts
Balance, December 31, 2020
31,557,809
$
316
$
768,429
$
(4,501)
$
(743,835)
$
20,409
Issuance of common stock under stock compensation plan, net of forfeitures
1,471,150
14
(14)
—
—
—
Stock-based compensation expense
—
—
4,191
—
—
4,191
Vesting of restricted stock
(188,875)
(2)
(471)
—
—
(473)
Other comprehensive loss
—
—
—
(32)
—
(32)
Net loss
—
—
—
—
(48,827)
(48,827)
Balance, September 30, 2021
32,840,084
$
328
$
772,135
$
(4,533)
$
(792,662)
$
(24,732)
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Accumulated Deficit)
Total Stockholders’ Equity
Shares
Amounts
Balance, December 31, 2019
30,555,677
$
306
$
758,853
$
(4,467)
$
(364,815)
$
389,877
Issuance of common stock under stock compensation plan, net of forfeitures
1,164,797
11
(11)
—
—
—
Stock-based compensation expense
—
—
7,717
—
—
7,717
Vesting of restricted stock
(149,548)
(1)
(157)
—
—
(158)
Other comprehensive loss
—
—
—
(264)
—
(264)
Net loss
—
—
—
—
(343,573)
(343,573)
Balance, September 30, 2020
31,570,926
$
316
$
766,402
$
(4,731)
$
(708,388)
$
53,599
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
2021
2020
Cash flows from operating activities
Net loss
$
(48,827)
$
(343,573)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation
22,148
24,753
Amortization of intangibles
12,212
12,376
Amortization of operating leases
6,001
—
Amortization of deferred financing costs
1,960
2,160
Provision (benefit) for doubtful accounts
(232)
2,121
Benefit for deferred income taxes
—
(1,588)
Provision for inventory obsolescence
3,670
1,919
Stock-based compensation expense
4,191
7,717
Impairment of goodwill
—
296,196
Gain on extinguishment of debt
(17,618)
(37,501)
(Gain) loss on sale of property and equipment
660
(2,900)
(Gain) loss on revaluation of contingent liabilities
(124)
781
Changes in operating assets and liabilities
Accounts receivable, net
(17,101)
59,964
Inventories, net
(8,284)
6,244
Prepaid expenses and other current assets
2,956
(1,457)
Accounts payable and accrued expenses
17,759
(27,073)
Income taxes receivable/payable
187
(586)
Other assets and liabilities
(6,262)
5,087
Net cash provided by (used in) operating activities
(26,704)
4,640
Cash flows from investing activities
Proceeds from sales of property and equipment
2,997
5,948
Proceeds from property and equipment casualty losses
—
555
Purchases of property and equipment
(4,832)
(7,053)
Net cash used in investing activities
(1,835)
(550)
Cash flows from financing activities
Purchases of Senior Notes
(8,355)
(14,410)
Payments on Magnum Promissory Notes
(562)
—
Payments on finance leases
(810)
(738)
Payments of contingent liability
(110)
(1,331)
Vesting of restricted stock
(473)
(158)
Net cash used in financing activities
(10,310)
(16,637)
Impact of foreign currency exchange on cash
(46)
(104)
Net decrease in cash and cash equivalents
(38,895)
(12,651)
Cash and cash equivalents
Cash and cash equivalents beginning of period
68,864
92,989
Cash and cash equivalents end of period
$
29,969
$
80,338
4
Supplemental disclosures of cash flow information:
Cash paid for interest
$
15,787
$
18,901
Cash refunded for income taxes
$
24
$
482
Cash paid for operating leases
$
6,114
$
—
Right of use assets obtained in exchange for operating lease obligations
$
2,236
$
—
Non-cash investing and financing activities:
Capital expenditures in accounts payable and accrued expenses
$
781
$
150
Receivable from property and equipment sale (including insurance)
$
992
$
4,359
Termination of contingent liability related to business acquisition
$
—
$
3,375
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NINE ENERGY SERVICE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Company and Organization
Background
Nine Energy Service, Inc. (the “Company” or “Nine”), a Delaware corporation, is an oilfield services business that provides services integral to the completion of unconventional wells through a full range of tools and methodologies. The Company is headquartered in Houston, Texas.
The Company’s chief operating decision maker, which is its Chief Executive Officer, and its board of directors allocate resources and assess performance based on financial information presented at a consolidated level. Accordingly, the Company determined that it operates as one reportable segment.
Risks and Uncertainties
The Company’s business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. In 2020, the coronavirus pandemic, coupled with production disputes amongst the Organization of the Petroleum Exporting Countries and other oil producing nations, led to a massive decline in the demand for oil and a risk of a substantial increase in supply, which led to extreme activity levels and pricing declines across all of the Company’s service offerings for the entire year. Although oil and natural gas prices have rebounded in 2021, the Company’s customers remain committed to capital discipline, and activity has only moderately increased. As pricing for its products and services continues to remain depressed as a result of this level of activity, the Company is focused on strategically implementing modest price increases where it is able to do so without sacrificing its market share of customers. Thus, even with further improvements in commodity prices, the Company’s business in the near or medium term may not improve materially or at all depending on, among other things, the Company’s customers’ activity plans, its ability to implement price increases, and its ability to find and retain qualified personnel.
Historically, the Company has met its liquidity needs principally from cash on hand, cash flow from operations and, if needed, external borrowings. At September 30, 2021, the Company had $30.0 million of cash and cash equivalents and $55.4 million of availability under the 2018 ABL Credit Facility (as defined in Note 8 – Debt Obligations), which resulted in a total liquidity position of $85.4 million. Subsequent to September 30, 2021, the Company borrowed approximately $10.0 million under the 2018 ABL Credit Facility for general corporate purposes. Based on its current forecasts, the Company believes that cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility, should be sufficient to fund its capital requirements for at least the next twelve months from the issuance date of its condensed consolidated financial statements.
2. Basis of Presentation
Condensed Consolidated Financial Information
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2021, and its results of operations for the three and nine months ended September 30, 2021, and 2020, and cash flows for the nine months ended September 30, 2021, and 2020. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), in a manner consistent with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, unless otherwise disclosed herein, and should be read in conjunction therewith. The Condensed Consolidated Balance Sheet at December 31, 2020 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Operating results for interim periods are not necessarily indicative of the results that may be expected 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.
6
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 analyzing goodwill, definite and indefinite-lived intangible assets, and property and equipment for possible impairment, useful lives used in depreciation and amortization expense, stock-based compensation fair value, estimated realizable value on excess and obsolete inventories, deferred taxes and income tax contingencies, and losses on accounts receivable. It is at least reasonably possible that the estimates used will change within the next year.
3. New Accounting Standards
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for public businesses for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect the standard to have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 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 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 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for public businesses for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in ASU 2016-13 replace the current incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. ASU 2016-13 is effective for SEC filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
7
4. Revenues
Disaggregation of Revenue
Disaggregated revenue for the three and nine months ended September 30, 2021 and 2020 was as follows:
Three Months Ended September 30, 2021
Three Months Ended September 30, 2020
(in thousands)
Cement
$
29,541
$
15,332
Tools
26,952
13,882
Wireline
19,246
13,029
Coiled tubing
17,129
7,278
Total revenues
$
92,868
$
49,521
Nine Months Ended September 30, 2021
Nine Months Ended September 30, 2020
(in thousands)
Cement
$
79,757
$
84,400
Tools
71,394
61,167
Wireline
50,643
67,738
Coiled tubing
42,532
35,575
Total revenues
$
244,326
$
248,880
Three Months Ended September 30, 2021
Three Months Ended September 30, 2020
(in thousands)
Service(1)
$
65,916
$
35,639
Product(1)
26,952
13,882
Total revenues
$
92,868
$
49,521
Nine Months Ended September 30, 2021
Nine Months Ended September 30, 2020
(in thousands)
Service(1)
$
172,932
$
187,713
Product(1)
71,394
61,167
Total revenues
$
244,326
$
248,880
(1) The Company recognizes revenues from the sales of products at a point in time and revenues from the sales of services over time.
Performance Obligations
At September 30, 2021 and December 31, 2020, the amount of remaining performance obligations was not material.
Contract Balances
At September 30, 2021 and December 31, 2020, the amount of contract assets and contract liabilities was not material.
5. Inventories
Inventories, consisting primarily of finished goods and raw materials, are stated at the lower of cost or net realizable value. Cost is determined on an average cost basis. The Company reviews its inventory balances and writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The reserve for obsolescence was $10.3 million and
8
$13.3 million at September 30, 2021 and December 31, 2020, respectively.
Inventories, net as of September 30, 2021 and December 31, 2020 were comprised of the following:
September 30, 2021
December 31, 2020
(in thousands)
Raw materials
$
33,387
$
33,361
Work in progress
517
367
Finished goods
19,426
17,952
Inventories
53,330
51,680
Reserve for obsolescence
(10,311)
(13,278)
Inventories, net
$
43,019
$
38,402
6. Intangible Assets and Goodwill
Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets as of September 30, 2021 and December 31, 2020 was as follows:
September 30, 2021
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Weighted Average Amortization Period
(in thousands, except weighted average amortization period information)
Customer relationships
$
63,270
$
(43,484)
$
19,786
5.3
Non-compete agreements
6,500
(5,666)
834
2.1
Technology
125,110
(26,418)
98,692
11.9
In-process research and development
1,000
—
1,000
Indefinite
Total
$
195,880
$
(75,568)
$
120,312
December 31, 2020
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Weighted Average Amortization Period
(in thousands, except weighted average amortization period information)
Customer relationships
$
63,270
$
(38,084)
$
25,186
5.5
Non-compete agreements
6,500
(5,366)
1,134
2.8
Technology
125,110
(19,906)
105,204
12.7
In-process research and development
1,000
—
1,000
Indefinite
Total
$
195,880
$
(63,356)
$
132,524
Amortization of intangibles expense was $4.0 million and $12.2 million for the three and nine months ended September 30, 2021, respectively. Amortization of intangibles expense was $4.1 million and $12.4 million for the three and nine months ended September 30, 2020, respectively.
9
Future estimated amortization of intangibles is as follows:
Year Ending December 31,
(in thousands)
2021
$
3,904
2022
13,463
2023
11,516
2024
11,183
2025
11,183
2026
11,082
Thereafter
56,981
Total
$
119,312
Q1 2020 Goodwill Impairment
With a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as sharp declines in oil and natural gas prices, the outlook for expected future cash flows associated with the Company’s reporting units decreased dramatically in the first quarter of 2020.
Based on these events, an indication of impairment associated with the Company’s reporting units occurred, triggering an interim goodwill impairment test of the Level 3 fair value of each reporting unit under Accounting Standards Codification 350, Intangibles - Goodwill and Other (“ASC 350”) at March 31, 2020.
As such, based on its Level 3 fair value determination in connection with the interim goodwill impairment test under ASC 350, the Company recorded goodwill impairment charges of $296.2 million in the first quarter of 2020 associated with its tools, cementing, and wireline reporting units. These charges represented a full write-off of goodwill and were due to the events described above, coupled with an increased weighted average cost of capital driven by a reduction in the Company’s stock price and the Level 2 fair value of its Senior Notes (as defined in Note 8 – Debt Obligations). These charges are included in the line item “Impairment of goodwill” in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the nine months ended September 30, 2020.
7. Accrued Expenses
Accrued expenses as of September 30, 2021 and December 31, 2020 consisted of the following:
September 30, 2021
December 31, 2020
(in thousands)
Accrued interest
$
11,958
$
5,313
Accrued compensation and benefits
7,778
5,430
Accrued legal fees and settlements
2,085
165
Other accrued expenses
7,634
6,231
Accrued expenses
$
29,455
$
17,139
10
8. Debt Obligations
The Company’s debt obligations as of September 30, 2021 and December 31, 2020 were as follows:
September 30, 2021
December 31, 2020
(in thousands)
Senior Notes
$
320,343
$
346,668
Magnum Promissory Notes
1,407
1,969
Total debt before deferred financing costs
$
321,750
$
348,637
Deferred financing costs
(3,445)
(5,079)
Total debt
$
318,305
$
343,558
Less: Current portion of long-term debt
(1,125)
(844)
Long-term debt
$
317,180
$
342,714
Senior Notes
Background
On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The Senior Notes were issued under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among the Company, certain subsidiaries of the Company and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year, and the first interest payment was 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, 2021.
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 $3.4 million and $5.1 million at September 30, 2021 and December 31, 2020, respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method.
Extinguishment of Debt
During the three months ended March 31, 2021, the Company repurchased approximately $26.3 million of Senior Notes at a repurchase price of approximately $8.4 million in cash. Deferred financing costs associated with these repurchases were $0.3 million. As a result, the Company recorded a $17.6 million gain on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by the deferred financing costs. The gain on extinguishment of debt is included as a separate line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the nine months ended September 30, 2021. The Company did not repurchase any Senior Notes during the three months ended June 30, 2021 or during the three months ended September 30, 2021.
During the three and nine months ended September 30, 2020, the Company repurchased approximately $23.1 million and $52.8 million of Senior Notes at a repurchase price of approximately $7.0 million and $14.4 million in cash, respectively. Deferred financing costs associated with these transactions were $0.4 million and $0.9 million for the three and nine months ended September 30, 2020, respectively. As a result, the Company recorded a $15.8 million gain and a $37.5 million gain on the extinguishment of debt for the three and nine months ended September 30, 2020, respectively, which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by the deferred financing costs. The gain on extinguishment of debt is included as a separate line item in the Company’s Condensed Consolidated
11
Statements of Income and Comprehensive Income (Loss) for the three and nine months ended September 30, 2020, respectively.
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., 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 Canadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on the Company’s leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below $18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. The Company was in compliance with all covenants under the 2018 ABL Credit Agreement at September 30, 2021.
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.
At September 30, 2021, the Company had no outstanding borrowings under the 2018 ABL Credit Facility, and its availability under the 2018 ABL Credit Facility was approximately $55.4 million, net of outstanding letters of credit of $0.5 million. Subsequent to September 30, 2021, the Company borrowed approximately $10.0 million under the 2018 ABL Credit Facility for general corporate purposes.
Magnum Promissory Notes
On October 25, 2018, pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), 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”). The Magnum Purchase Agreement included 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”).
On June 30, 2020, pursuant to an amendment to the Magnum Purchase Agreement to terminate the remaining Magnum Earnout and all obligations related thereto (the “Magnum Purchase Agreement Amendment”), the Company issued promissory notes with an aggregated principal amount of $2.3 million (the “Magnum Promissory Notes”) to the sellers of Magnum. The Magnum Promissory Notes bear interest at a rate of 6.0% per annum. The principal amount of the Magnum Promissory Notes are paid in equal quarterly installments which began January 1, 2021. The entire unpaid principal amount will be due and payable on the maturity date, which is the earlier of October 1, 2022 or the business day after the date on which the Company sells, transfers or otherwise disposes of the “E-Set” tools business to an unaffiliated third party, unless such sale, transfer or disposition is made, directly or indirectly, as part of the sale, transfer or disposition of the Dissolvable Plugs Business or due to the occurrence of a Change of Control Event (each as defined in the Magnum Purchase Agreement).
12
For additional information regarding the termination of the Magnum Earnout, see Note 10 – Commitments and Contingencies.
Fair Value of Debt Instruments
The estimated fair value of the Company’s debt obligations as of September 30, 2021 and December 31, 2020 was as follows:
September 30, 2021
December 31, 2020
(in thousands)
Senior Notes
$
153,765
$
156,001
Magnum Promissory Notes
$
1,407
$
1,969
The fair value of the Senior Notes, 2018 ABL Credit Facility, and the Magnum Promissory Notes is classified as Level 2 in the fair value hierarchy. The fair value of the Senior Notes is established based on observable inputs in less active markets. The fair value of the Magnum Promissory Notes approximates their carrying value.
9. Related Party Transactions
The Company leases office space, yard facilities, and equipment and purchases building maintenance services from entities owned by David Crombie, an executive officer of the Company. Total lease expense and building maintenance expense associated with these entities was $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2020, respectively. The Company also purchased $0.9 million and $1.7 million of products and services during the three and nine months ended September 30, 2021, respectively, and $0.8 million and $1.3 million for the three and nine months ended September 30, 2020, respectively, from an entity in which Mr. Crombie is a limited partner. There were outstanding payables due to this entity relating to equipment purchases of $0.3 million and $0.2 million at September 30, 2021 and December 31, 2020, respectively.
In addition, the Company leases office space in Corpus Christi and Midland, Texas from an entity affiliated with Warren Lynn Frazier, a beneficial owner of more than 5% of the Company’s stock. In the third quarter of 2020, another entity affiliated with Mr. Frazier began to sub-lease a portion of such space in Corpus Christi, Texas from the Company. Total rental expense associated with this office space, net of sub-leasing income, was $0.3 million and $1.0 million for the three and nine months ended September 30, 2021, respectively, and $0.3 million and $1.0 million for the three and nine months ended September 30, 2020, respectively.There were net outstanding payables due to this entity of $0.1 million at December 31, 2020. Additionally, on June 30, 2020, the Company issued the Magnum Promissory Notes to the sellers of Magnum, including Mr. Frazier. At September 30, 2021 and December 31, 2020, the outstanding principal balance payable to Mr. Frazier was $1.4 million and $1.9 million, respectively. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.
The Company purchases cable for its wireline trucks from an entity owned by Forum Energy Technologies (“Forum”). Two of the Company’s directors serve as directors of Forum. The Company was billed $0.1 million and $0.3 millionfor the three and nine months ended September 30, 2021, respectively, and $0.0 million and $0.4 million for the three and nine months ended September 30, 2020, respectively.There were outstanding payables due to this entity of $0.1 million at December 31, 2020. The Company purchases coiled tubing string from another entity owned by Forum. The Company was billed $0.7 million and $4.6 million for coiled tubing string for the three and nine months ended September 30, 2021, respectively, and $0.9 million and $3.0 million for the three and nine months ended September 30, 2020, respectively. There were outstanding payables due to this entity of $0.3 million and $0.9 million at September 30, 2021 and December 31, 2020, respectively.
The Company purchases chemical additives used in cementing from Select Energy Services, Inc. (“Select”). One of the Company’s directors also serves as a director of Select. The Company was billed $0.2 million and $0.8 million for the three and nine months ended September 30, 2021, respectively, and $0.2 million and $1.0 million for the three and nine months ended September 30, 2020, respectively. There were outstanding payables due to Select of $0.1 million and $0.2 million at September 30, 2021 and December 31, 2020, respectively.
The Company provides products and rentals to National Energy Reunited Corp. (“NESR”), where one of the Company’s directors serves as a director. The Company billed NESR $0.3 million and $1.3 million for the three and nine months ended September 30, 2021, respectively, and $0.2 million and $1.4 million for the three and nine months ended September 30, 2020, respectively. During the fourth quarter of 2019, the Company sold coiled tubing equipment for $5.9 million to NESR with payments due in 24 equal monthly installments beginning on January 31, 2020. Total outstanding
13
receivables due to the Company from NESR (inclusive of the equipment sale above) were $1.6 million and $3.7 million at September 30, 2021 and December 31, 2020, respectively.
Ann G. Fox, President and Chief Executive Officer and a director of the Company, is a director of Devon Energy Corporation (“Devon”). The Company generated revenue from Devon of $0.6 million and $2.2 million for the three and nine months ended September 30, 2021, respectively, and $1.2 million and $4.6 million for the three and nine months ended September 30, 2020, respectively. There were outstanding receivables due from Devon of $0.3 million and $0.4 million at September 30, 2021 and December 31, 2020, respectively.
10. Commitments and Contingencies
Litigation
The Company records accruals related to litigation and other legal proceedings when they are either known or considered probable and can be reasonably estimated. Legal proceedings are inherently unpredictable and subject to significant uncertainties, and significant judgment is required to determine both probability and the estimated amount. Some of these uncertainties include the stage of litigation, available facts, uncertainty as to the outcome of any legal proceedings or settlement discussions, and any novel legal issues presented. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending litigation. As of September 30, 2021 and December 31, 2020, the Company recorded a $2.1 million and a $0.2 million accrual, respectively, for liabilities related to legal matters, which is included under the caption “Accrued expenses” in its Condensed Consolidated Balance Sheets.
In addition to the matter disclosed below, from time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.
On May 21, 2018, a certified class action was filed in the United States District Court, District of New Mexico by Jacob Rodriguez on behalf of similarly situated employees. The class action alleged certain wage and overtime related claims and violations of the New Mexico Minimum Wage Act, which is a state law similar to the Fair Labor Standards Act. Subsequent to September 30, 2021, the Company reached a settlement agreement for the class action for an aggregate $1.7 million plus related payroll taxes to be paid in four quarterly installments.
Self-insurance
The Company uses a combination of third-party insurance and self-insurance for health insurance claims. The self-insured liability represents an estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. The estimate is based on an analysis of trailing months of incurred medical claims to project the amount of incurred but not reported claims liability. The estimated liability for self-insured medical claims was $0.9 million and $1.3 million at September 30, 2021 and December 31, 2020, respectively, and is included under the caption “Accrued expenses” in the Company’s Condensed Consolidated Balance Sheets.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, the self-insurance liability could be affected if future claims experience differs significantly from historical trends and actuarial assumptions.
Contingent Liabilities
The Company’s contingent liabilities (Level 3) at September 30, 2021 and 2020 were as follows:
Frac Tech
(in thousands)
Balance at December 31, 2020
$
604
Revaluation adjustments
(124)
Payments
(110)
Balance at September 30, 2021
$
370
14
Magnum
Frac Tech
Total
(in thousands)
Balance at December 31, 2019
$
2,609
$
1,359
$
3,968
Revaluation adjustments
766
15
781
Payments
(1,125)
(206)
(1,331)
Terminations
(2,250)
—
(2,250)
Balance at September 30, 2020
$
—
$
1,168
$
1,168
All contingent liabilities that relate to contingent consideration are reported at fair value, based on a Monte Carlo simulation model. Significant inputs used in the fair value measurement include estimated gross margin related to forecasted sales of the plugs, term of the agreement, and a risk adjusted discount factor. Contingent liabilities include $0.2 million reported in “Accrued expenses” at both September 30, 2021 and December 31, 2020, and $0.2 million and $0.4 million reported in “Other long-term liabilities” at September 30, 2021 and December 31, 2020, respectively, in the Company’s Condensed Consolidated Balance Sheets. The impact of the revaluation adjustments is included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
Frac Tech Earnout
On October 1, 2018, pursuant to the terms and conditions of a Securities Purchase Agreement (the “Frac Tech Purchase Agreement”), the Company acquired Frac Technology AS, a Norwegian private limited company (“Frac Tech”) focused on the development of downhole technology, including a casing flotation tool and a number of patented downhole completion tools. The Frac Tech Purchase Agreement, as amended, includes, among other things, the potential for additional future payments, based on certain Frac Tech revenue metrics through December 31, 2025.
Magnum Earnout
The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019.
In 2019, the Company did not meet the sales requirement of certain dissolvable plug products during the year.
In 2020, pursuant to the Magnum Purchase Agreement Amendment, which terminated the remaining Magnum Earnout and all obligations related thereto, the Company made a cash payment of $1.1 million and issued the Magnum Promissory Notes with an aggregated principal amount of $2.3 million to the sellers of Magnum. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.
11. Taxes
The Company’s provision (benefit) for income taxes included in its Condensed Consolidated Statements of Income and Comprehensive Income (Loss) was as follows:
Three Months Ended September 30,
2021
2020
(in thousands, except percentages)
Provision (benefit) for income taxes
$
41
$
(37)
Effective tax rate
(0.3)
%
0.2
%
Nine Months Ended September 30,
2021
2020
(in thousands, except percentages)
Provision (benefit) for income taxes
$
163
$
(2,348)
Effective tax rate
(0.3)
%
0.7
%
The Company’s effective income tax rate fluctuates from the statutory tax rate of the United States (the “U.S.”) based
15
on, among other factors, the impact of U.S. state and local taxes, the realizability of deferred tax assets, differences related to the recognition of income and expense between U.S. GAAP and tax accounting, and changes in pre-tax income in jurisdictions with varying statutory tax rates.
The Company recorded an income tax provision of less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2021, respectively, compared to an income tax benefit of less than $0.1 million and $2.3 million for the three and nine months ended September 30, 2020, respectively. The difference in tax position is primarily a result of the discrete tax impact from the Coronavirus Aid, Relief, and Economic Security Act, and the goodwill impairment recorded during the first quarter of 2020.
12. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of shares outstanding during each period and the exercise of potentially dilutive stock options assumed to be purchased from the proceeds using the average market price of the Company’s stock for each of the periods presented as well as the potentially dilutive restricted stock, restricted stock units, and performance stock units.
Basic and diluted earnings (loss) per common share was computed as follows:
Three Months Ended September 30, 2021
Three Months Ended September 30, 2020
Net Loss
Average Shares Outstanding
Loss Per Share
Net Loss
Average Shares Outstanding
Loss Per Share
(in thousands, except share and per share amounts)
Basic
$
(16,051)
30,449,286
$
(0.53)
$
(18,502)
29,849,753
$
(0.62)
Assumed exercise of stock options
—
—
—
—
—
—
Unvested restricted stock and stock units
—
—
—
—
—
—
Diluted
$
(16,051)
30,449,286
$
(0.53)
$
(18,502)
29,849,753
$
(0.62)
Nine Months Ended September 30, 2021
Nine Months Ended September 30, 2020
Net Loss
Average Shares Outstanding
Loss Per Share
Net Loss
Average Shares Outstanding
Loss Per Share
(in thousands, except share and per share amounts)
Basic
$
(48,827)
30,252,670
$
(1.61)
$
(343,573)
29,708,673
$
(11.56)
Assumed exercise of stock options
—
—
—
—
—
—
Unvested restricted stock and stock units
—
—
—
—
—
—
Diluted
$
(48,827)
30,252,670
$
(1.61)
$
(343,573)
29,708,673
$
(11.56)
The diluted earnings (loss) per share calculation excludes all stock options, unvested restricted stock, unvested restricted stock units, and unvested performance stock units for the three and nine months ended September 30, 2021 and 2020 because their inclusion would be anti-dilutive given the Company was in a net loss position. The average number of securities that were excluded from diluted earnings (loss) per share that would potentially dilute earnings (loss) per share for the periods in which the Company experienced a net loss were as follows:
2021
2020
Three months ended September 30,
719,381
723,608
Nine months ended September 30,
692,689
700,417
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2021, included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “Critical Accounting Policies,” included in our Annual Report on Form 10-K for the year ended December 31, 2020.
This section contains forward-looking statements based on our current expectations, estimates, and projections about our operations and the industry in which we operate. Our actual results may differ materially from those discussed in any forward-looking statement because of various risks and uncertainties, including those described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q, and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.
OVERVIEW
Company Description
Nine Energy Service, Inc. (either individually or together with its subsidiaries, as the context requires, the “Company,” “Nine” “we,” “us,” and “our”) is a leading North American onshore completion services provider that targets unconventional oil and gas resource development. We partner with our exploration and production (“E&P”) customers across all major onshore basins in the United States (the “U.S.”), as well as within Canada and abroad to design and deploy downhole solutions and technology to prepare horizontal, multistage wells for production. We focus on providing our customers with cost-effective and comprehensive completion solutions designed to maximize their production levels and operating efficiencies. We believe our success is a product of our culture, which is driven by our intense focus on performance and wellsite execution as well as our commitment to forward-leaning technologies that aid us in the development of smarter, customized applications that drive efficiencies.
We provide (i) cementing services, which consist of blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped between the casing and the wellbore of the well, (ii) an innovative portfolio of completion tools, including those that provide pinpoint frac sleeve system technologies as well as a portfolio of completion technologies used for completing the toe stage of a horizontal well and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug-and-perf operations, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns and isolating tools to a specified depth, and (iv) coiled tubing services, which perform wellbore intervention operations utilizing a continuous steel pipe that is transported to the wellsite wound on a large spool in lengths of up to 30,000 feet and which provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well.
How We Generate Revenue and the Costs of Conducting Our Business
We generate our revenues by providing completion services to E&P customers across all major onshore basins in the U.S., as well as within Canada and abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically enter into a Master Service Agreement (“MSA”) with each customer that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Each specific job is obtained through competitive bidding or as a result of negotiations with customers. The rate we charge is determined by location, complexity of the job, operating conditions, duration of the contract, and market conditions. In addition to MSAs, we have entered into a select number of longer-term contracts with certain customers relating to our wireline and cementing services, and we may enter into similar contracts from time to time to the extent beneficial to the operation of our business. These longer-term contracts address pricing and other details concerning our services, but each job is performed on a standalone basis.
The principal expenses involved in conducting our business include labor costs, materials and freight, the costs of maintaining our equipment, and fuel costs. Our direct labor costs vary with the amount of equipment deployed and the utilization of that equipment. Another key component of labor costs relates to the ongoing training of our field service employees, which improves safety rates and reduces employee attrition.
17
How We Evaluate Our Operations
We evaluate our performance based on a number of financial and non-financial measures, including the following:
•Revenue: We compare actual revenue achieved each month to the most recent projection for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the performance of our operations compared to historical revenue drivers or market metrics. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes.
•Adjusted Gross Profit (Loss): Adjusted gross profit (loss) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). Costs of revenues include direct and indirect labor costs, costs of materials, maintenance of equipment, fuel and transportation freight costs, contract services, crew cost, and other miscellaneous expenses. For additional information, see “Non-GAAP Financial Measures” below.
•Adjusted EBITDA: We define Adjusted EBITDA as net income (loss) before interest, taxes, and depreciation and amortization, further adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business. For additional information, see “Non-GAAP Financial Measures” below.
•Return on Invested Capital (“ROIC”): We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on extinguishment of debt, and (vii) the provision (benefit) for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis. For additional information, see “Non-GAAP Financial Measures” below.
•Safety: We measure safety by tracking the total recordable incident rate (“TRIR”), which is reviewed on a monthly basis.TRIRis a measure of the rate of recordable workplace injuries, defined below, normalized and stated on the basis of 100 workers for an annual period. The factor is derived by multiplying the number of recordable injuries in a calendar year by 200,000 (i.e., the total hours for 100 employees working 2,000 hours per year) and dividing this value by the total hours actually worked in the year. A recordable injury includes occupational death, nonfatal occupational illness, and other occupational injuries that involve loss of consciousness, restriction of work or motion, transfer to another job, or medical treatment other than first aid.
Recent Events, Industry Trends, and Outlook
Our business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are typically strongly influenced by the current and expected oil and natural gas prices. During 2020, due the coronavirus pandemic, North American activity levels decreased by nearly 50% versus 2019, which led to extreme pricing declines across all of our service offerings, but especially within our completion tools and wireline business. Even with increased commodity prices thus far in 2021, we have only seen moderate activity increases in North America, as our customers remain committed to capital discipline. For example, for the first nine months of 2021, the average West Texas Intermediate crude price has averaged $65.05, an increase of approximately 14% over the average price for the same period in 2019. However, the U.S. rig count for the first nine months of 2021 has averaged 447, a decrease of approximately 53% over the average for the first nine months of 2019. Because of sustained lower activity thus far in 2021, although we were able to implement modest net price increases within our cementing and coiled tubing service lines during the second quarter of 2021, we expect pricing for our products and services will remain depressed for the near to medium term. Additionally, like others in the industry, we are facing cost inflation with both labor and materials, which is further offsetting revenue and price increases. Finding and retaining qualified labor is currently one of our largest challenges as we continue to rebuild the oilfield services sector and compete with other industries for labor. Thus, even with further improvements in commodity prices, our business in the near or medium term may not improve materially or at all
18
depending on, among other things, our customers’ activity plans, our ability to implement additional price increases, our ability to navigate cost inflation, and our ability to find and retain qualified personnel.
Other significant factors that are likely to affect commodity prices moving forward include the extent to which members of Organization of the Petroleum Exporting Countries and other oil producing nations, including Russia, continue to increase production and the rate of such increase; the effect of energy, monetary, and trade policies of the United States; the pace of economic growth in the United States and throughout the world, including the potential for macro weakness; geopolitical and economic developments in the United States and globally; new energy policies put in place by the new administration and the Environmental Protection Agency; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows. Even with price improvements in oil and natural gas, operator activity may not materially increase, as operators remain focused on operating within their capital plans, and uncertainty remains around supply and demand fundamentals.
We will continue to focus on generating returns and cash flow. Due to our high level of variable costs and the asset-light make-up of our business, we have been able to quickly implement cost-cutting measures and will continue to adapt as the market dictates.
Results of Operations
Results for the Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020
Three Months Ended September 30,
2021
2020
Change
(in thousands)
Revenues
$
92,868
$
49,521
$
43,347
Cost of revenues (exclusive of depreciation and amortization shown separately below)
78,879
52,483
26,396
Adjusted gross profit (loss)
$
13,989
$
(2,962)
$
16,951
General and administrative expenses
$
11,114
$
10,701
$
413
Depreciation
6,921
7,763
(842)
Amortization of intangibles
4,029
4,091
(62)
Loss on revaluation of contingent liabilities
21
297
(276)
Gain on sale of property and equipment
(17)
(535)
518
Loss from operations
(8,079)
(25,279)
17,200
Non-operating (income) expense
7,931
(6,740)
14,671
Loss before income taxes
(16,010)
(18,539)
2,529
Provision (benefit) for income taxes
41
(37)
78
Net loss
$
(16,051)
$
(18,502)
$
2,451
Revenues
Revenues increased $43.3 million, or 88%, to $92.9 million for the third quarter of 2021. The increase in comparison to the third quarter of 2020 was prevalent across all lines of service and in line with a 95% increase in average U.S. rig count and a 98% increase in active frac crews. More specifically, cementing revenue (including pump downs) increased by $14.2 million, or 93%, as total cement job count increased 101% in comparison to the third quarter of 2020. In addition, tools revenue increased $13.1 million, or 94%, as completion tools stages increased by 144%, coiled tubing revenue increased $9.9 million, or 135%, as total days worked increased by 109%, and wireline revenue increased $6.2 million, or 48%, as total completed wireline stages increased by 56%, in each case, in comparison to the third quarter of 2020.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased $26.4 million, or 50%, to $78.9 million for the third quarter of 2021. The increase in comparison to the third quarter of 2020 was prevalent across all lines of service and was primarily related to increased activity coupled with cost inflation associated with both labor and materials as well as headcount increases. More specifically, the
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increase was primarily related to a $17.9 million increase in materials installed and consumed while performing services, a $7.5 million increase in employee costs, and a $2.1 million increase in other costs such as repairs and maintenance, freight, and vehicle expenses, in comparison to the third quarter of 2020. The overall increase was partially offset by $1.1 million in non-cash facility lease costs in the first nine months of 2020 that did not recur in the first nine months of 2021.
Adjusted Gross Profit (Loss)
Adjusted gross profit increased $17.0 million to $14.0 million for the third quarter of 2021 due to the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses increased $0.4 million to $11.1 million for the third quarter of 2021. The increase was primarily related to a $0.3 million increase in employee costs, coupled with a $0.1 million increase in other costs such as marketing and travel expenses in comparison to the third quarter of 2020.
Depreciation
Depreciation expense decreased $0.8 million to $6.9 million for the third quarter of 2021. The decrease in comparison to the third quarter of 2020 was associated with all lines of service and was primarily due to certain assets becoming fully depreciated in recent periods.
Amortization of Intangibles
We recorded $4.0 million in intangible amortization in the third quarter of 2021 and $4.1 million in intangible amortization for the third quarter of 2020, in each case, primarily attributed to technology and customer relationships. The $0.1 million decrease is related to certain intangible assets being fully amortized during the third quarter of 2021.
(Gain) Loss on Revaluation of Contingent Liabilities
We recorded a less than $0.1 million loss on the revaluation of contingent liabilities for the third quarter of 2021 compared to a $0.3 million loss on the revaluation of contingent liabilities for the third quarter of 2020. The decreased loss was due to a reduction on the loss on the revaluation of the earnout associated with our acquisition of Frac Technology AS between periods.
Non-Operating (Income) Expenses
We recorded $7.9 million in non-operating expenses for the third quarter of 2021 compared to $6.7 million in non-operating income for the third quarter of 2020. The $14.6 million decrease in non-operating income was primarily related to a $15.8 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined and described in “Liquidity and Capital Resources”) in the third quarter of 2020 that did not recur in the third quarter of 2021. The overall decrease in non-operating income is partially offset by a $1.2 million reduction in interest expense mainly due to a reduced debt balance attributed to repurchases of Senior Notes in recent periods.
Provision (Benefit) for Income Taxes
We recorded an income tax provision of less than $0.1 million for the third quarter of 2021 compared to an income tax benefit of less than $0.1 million for the third quarter of 2020. The difference in tax position is primarily a result of discrete tax changes in pre-tax income.
Adjusted EBITDA
Adjusted EBITDA increased $15.6 million to $4.5 million for the third quarter of 2021. The Adjusted EBITDA increase was primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.
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Results for the Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
Nine Months Ended September 30,
2021
2020
Change
(in thousands)
Revenues
$
244,326
$
248,880
$
(4,554)
Cost of revenues (exclusive of depreciation and amortization shown separately below)
217,800
235,194
(17,394)
Adjusted gross profit
$
26,526
$
13,686
$
12,840
General and administrative expenses
$
33,505
$
38,380
$
(4,875)
Depreciation
22,148
24,753
(2,605)
Amortization of intangibles
12,212
12,376
(164)
Impairment of goodwill
—
296,196
(296,196)
(Gain) loss on revaluation of contingent liabilities
(124)
781
(905)
(Gain) loss on sale of property and equipment
660
(2,900)
3,560
Loss from operations
(41,875)
(355,900)
314,025
Non-operating (income) expense
6,789
(9,979)
16,768
Loss before income taxes
(48,664)
(345,921)
297,257
Provision (benefit) for income taxes
163
(2,348)
2,511
Net loss
$
(48,827)
$
(343,573)
$
294,746
Revenues
Revenues decreased $4.6 million, or 2%, to $244.3 million for the first nine months of 2021 due to decreases in wireline and cement revenue, partially offset by increases in tools and coiled tubing revenue. Wireline revenue decreased $17.1 million, or 25%, as total completed wireline stages decreased by 11%, and cementing revenue (including pump downs) decreased by $4.6 million, or 6%, due to pricing pressures that were only partially offset by increased activity (total cement job count increased 8%), in each case, in comparison to the first nine months of 2020. Tools revenue increased $10.2 million, or 17%, as completion tools stages increased by 52%, and coiled tubing revenue increased $6.9 million, or 20%, as total days worked increased by 27%, in each case in comparison to the first nine months of 2020.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues decreased $17.4 million, or 7%, to $217.8 million for the first nine months of 2021. The decrease was primarily related to a $11.5 million decrease in employee costs mainly due to headcount and salary reductions, a $2.5 million decrease in cost of revenue type restructuring costs, and a $2.3 million decrease in bad debt expense, in comparison to the first nine months of 2020. The overall decrease is also partly attributed to $1.1 million in non-cash facility lease costs in the first nine months of 2020 that did not recur in the first nine months of 2021.
Adjusted Gross Profit (Loss)
Adjusted gross profit increased $12.8 million to $26.5 million for the first nine months of 2021 due to the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses decreased $4.9 million to $33.5 million for the first nine months of 2021. The decrease was primarily related to a $5.1 million decrease in employee costs mainly due to headcount and salary reductions, as well as a $1.8 million decrease in other general and administrative expenses such as restructuring, travel, vehicle, and marketing expenses in comparison to the first nine months of 2020. The overall decrease was partially offset by a $2.0 million increase in professional fees between periods.
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Depreciation
Depreciation expense decreased $2.6 million to $22.1 million for the first nine months of 2021. The decrease in comparison to the first nine months of 2020 was associated with all lines of service and was primarily due to certain assets becoming fully depreciated in recent periods.
Amortization of Intangibles
We recorded $12.2 million in intangible amortization for the first nine months of 2021 and $12.4 million in intangible amortization for the first nine months of 2020, in each case, primarily attributed to technology and customer relationships. The $0.2 million decrease is related to certain intangible assets being fully amortized during the first nine months of 2021.
Impairment of Goodwill
In the first nine months of 2020, we recorded goodwill impairment charges of $296.2 million in our tools, cementing, and wireline reporting units due to sharp declines in global crude oil demand, an economic recession associated with the coronavirus pandemic, sharp declines in oil and natural gas prices, and an increased weighted average cost of capital driven by a reduction in our stock price and the Level 2 fair value of our Senior Notes. These goodwill impairment charges did not recur in the first nine months of 2021 because goodwill was fully impaired in 2020.
(Gain) Loss on Revaluation of Contingent Liabilities
We recorded a $0.1 million gain on the revaluation of contingent liabilities for the first nine months of 2021 compared to a $0.8 million loss on the revaluation of contingent liabilities for the first nine months of 2020. The $0.9 million change was primarily related to a $0.8 million loss on the revaluation of contingent liabilities associated with the Magnum Earnout (as defined in Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q ) in the first nine months of 2020 that did not recur in the first nine months of 2021. The Magnum Earnout was terminated in the second quarter of 2020. The overall change was also partially attributed to an increased gain of $0.1 million on the revaluation of the earnout associated with our acquisition of Frac Technology AS between periods.
Non-Operating (Income) Expenses
We recorded $6.8 million in non-operating expenses for the first nine months of 2021 compared to $10.0 million in non-operating income for the first nine months of 2020. The $16.8 million decrease in non-operating income was primarily related to a $19.9 million reduction in gains on the extinguishment of debt attributed to the repurchase of Senior Notes in the first nine months of 2021 compared to the first nine months of 2020, coupled with a $0.5 million reduction in interest and other income between periods. The overall decrease in non-operating income is partially offset by a $3.6 million reduction in interest expense mainly due to a reduced debt balance attributed to repurchases of Senior Notes in recent periods.
Provision (Benefit) for Income Taxes
We recorded an income tax provision of $0.2 million for the first nine months of 2021 compared to an income tax benefit of $2.3 million for the first nine months of 2020. The difference in tax position is primarily a result of the discrete tax impact from the Coronavirus Aid, Relief, and Economic Security Act and the goodwill impairment charge recorded during the first quarter of 2020.
Adjusted EBITDA
Adjusted EBITDA increased $12.5 million to $0.7 million for the first nine months of 2021. The Adjusted EBITDA increase was primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures that are used by management and external users of our financial statements, such as industry analysts, investors, lenders, and rating agencies.
We define EBITDA as net income (loss) before interest, taxes, depreciation, and amortization.
We define Adjusted EBITDA as EBITDA further adjusted for (i) goodwill, intangible asset, and/or property and
22
equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business.
Management believes EBITDA and Adjusted EBITDA are useful because they allow us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above from net income (loss) in arriving at these measures because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, and the method by which the assets were acquired. These measures should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”) or as an indicator of our operating performance. Certain items excluded from these measures are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of these measures. Our computations of these measures may not be comparable to other similarly titled measures of other companies. We believe that these are widely followed measures of operating performance.
The following table presents a reconciliation of the non-GAAP financial measures of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(in thousands)
(in thousands)
EBITDA reconciliation:
Net loss
$
(16,051)
$
(18,502)
$
(48,827)
$
(343,573)
Interest expense
7,968
9,130
24,534
28,144
Interest income
(3)
(43)
(24)
(593)
Provision (benefit) for income taxes
41
(37)
163
(2,348)
Depreciation
6,921
7,763
22,148
24,753
Amortization of intangibles
4,029
4,091
12,212
12,376
EBITDA
$
2,905
$
2,402
$
10,206
$
(281,241)
Adjusted EBITDA reconciliation:
EBITDA
$
2,905
$
2,402
$
10,206
$
(281,241)
Impairment of goodwill
—
—
—
296,196
Transaction and integration costs
—
—
—
146
Loss (gain) on revaluation of contingent liabilities (1)
21
297
(124)
781
Gain on extinguishment of debt
—
(15,798)
(17,618)
(37,501)
Restructuring charges
375
459
1,588
4,882
Stock-based compensation expense
1,153
2,020
4,191
7,717
(Gain) loss on sale of property and equipment
(17)
(535)
660
(2,900)
Legal fees and settlements (2)
17
15
1,764
39
Adjusted EBITDA
$
4,454
$
(11,140)
$
667
$
(11,881)
(1)Amounts relate to the revaluation of contingent liabilities associated with our 2018 acquisitions. The impact is included in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss). For additional information on contingent liabilities, see Note 10 – Commitments and Contingencies included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
(2)Amounts represent fees, legal settlements and/or accruals associated with legal proceedings brought pursuant to the Fair Labor Standards Act and/or similar state laws.
Return on Invested Capital
ROIC is a supplemental non-GAAP financial measure. We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) goodwill, intangible asset,
23
and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on extinguishment of debt, and (vii) the provision (benefit) for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis.
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, 2021 and 2020:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(in thousands)
(in thousands)
Net loss
$
(16,051)
$
(18,502)
$
(48,827)
$
(343,573)
Add back:
Impairment of goodwill
—
—
—
296,196
Transaction and integration costs
—
—
—
146
Interest expense
7,968
9,130
24,534
28,144
Interest income
(3)
(43)
(24)
(593)
Restructuring charges
375
459
1,588
4,882
Gain on extinguishment of debt
—
(15,798)
(17,618)
(37,501)
Benefit for deferred income taxes
—
—
—
(1,588)
After-tax net operating loss
$
(7,711)
$
(24,754)
$
(40,347)
$
(53,887)
Total capital as of prior period-end:
Total stockholders’ equity
$
(9,731)
$
69,950
$
20,409
$
389,877
Total debt
322,031
372,584
348,637
400,000
Less cash and cash equivalents
(33,128)
(88,678)
(68,864)
(92,989)
Total capital as of prior period-end
$
279,172
$
353,856
$
300,182
$
696,888
Total capital as of period-end:
Total stockholders’ equity
$
(24,732)
$
53,599
$
(24,732)
$
53,599
Total debt
321,750
349,418
321,750
349,418
Less cash and cash equivalents
(29,969)
(80,338)
(29,969)
(80,338)
Total capital as of period-end
$
267,049
$
322,679
$
267,049
$
322,679
Average total capital
$
273,111
$
338,268
$
283,616
$
509,784
ROIC
(11.3)%
(29.3)%
(19.0)%
(14.1)%
Adjusted Gross Profit (Loss)
GAAP defines gross profit (loss) as revenues less cost of revenues and includes depreciation and amortization in costs of revenues. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit (loss) because we do not include the impact of depreciation and amortization, which represent non-cash expenses.
Management uses adjusted gross profit (loss) to evaluate operating performance. We prepare adjusted gross profit (loss) to eliminate the impact of depreciation and amortization because we do not consider depreciation and amortization indicative of our core operating performance. Adjusted gross profit (loss) should not be considered as an alternative to gross profit (loss), operating income (loss), or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted gross profit (loss) may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted gross profit (loss) or similarly titled measures in the same manner as we do.
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The following table presents a reconciliation of adjusted gross profit (loss) to GAAP gross profit (loss) for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(in thousands)
(in thousands)
Calculation of gross profit (loss)
Revenues
$
92,868
$
49,521
$
244,326
$
248,880
Cost of revenues (exclusive of depreciation and amortization shown separately below)
78,879
52,483
217,800
235,194
Depreciation (related to cost of revenues)
6,437
7,219
20,598
23,020
Amortization of intangibles
4,029
4,091
12,212
12,376
Gross profit (loss)
$
3,523
$
(14,272)
$
(6,284)
$
(21,710)
Adjusted gross profit (loss) reconciliation:
Gross profit (loss)
$
3,523
$
(14,272)
$
(6,284)
$
(21,710)
Depreciation (related to cost of revenues)
6,437
7,219
20,598
23,020
Amortization of intangibles
4,029
4,091
12,212
12,376
Adjusted gross profit (loss)
$
13,989
$
(2,962)
$
26,526
$
13,686
Liquidity and Capital Resources
Sources and Uses of Liquidity
Historically, we have met our liquidity needs principally from cash on hand, cash flows from operating activities and, if needed, external borrowings and issuances of debt securities. Our principal uses of cash are to fund capital expenditures, service our outstanding debt, fund our working capital requirements and, historically, fund acquisitions. Due to our high level of variable costs and the asset-light make-up of our business, we have historically been able to quickly implement cost-cutting measures and will continue to adapt as the market dictates. We have also used cash to make open market repurchases of our debt and may, from time to time, continue to make such repurchases (including with respect to our Senior Notes) when it is opportunistic to do so to manage our debt maturity profile.
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.
At September 30, 2021, we had $30.0 million of cash and cash equivalents and $55.4 million of availability under the 2018 ABL Credit Facility (as defined below), which resulted in a total liquidity position of $85.4 million. Subsequent to September 30, 2021, we borrowed approximately $10.0 million under the 2018 ABL Credit Facility for general corporate purposes.
Although we believe our total liquidity position will continue to materially erode, due in large part to interest payments due on the Senior Notes, we believe that, based on our current forecasts, our cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility, should be sufficient to fund our capital requirements for at least the next twelve months from the issuance date of our condensed consolidated financial statements. However, we can make no assurance regarding our ability to achieve our forecasts, which are materially dependent on our financial performance and the ever-changing market.
Senior Notes
On October 25, 2018, we issued $400.0 million of 8.750% Senior Notes due 2023 (the “Senior Notes”) under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among us, including certain of our subsidiaries, and Wells Fargo, National Association, as Trustee. As of September 30, 2021, there were approximately $320.3 million aggregate principal amount of Senior Notes outstanding. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year, and the first interest payment was due on May 1, 2019. Based on current amounts outstanding as of
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September 30, 2021, the semi-annual interest payments are $14.0 million each. The Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed on a senior unsecured basis by each of our current domestic subsidiaries and by certain future subsidiaries.
The Indenture contains covenants that limit our ability and the ability of our restricted subsidiaries to engage in certain activities. We were in compliance with the provisions of the Indenture at September 30, 2021.
Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to us, any of our restricted subsidiaries that are a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.
During the three months ended March 31, 2021, we repurchased approximately $26.3 million of Senior Notes at a repurchase price of approximately $8.4 million in cash. We also repurchased approximately $53.3 million of Senior Notes at a repurchase price of approximately $14.6 million in cash during the year ended December 31, 2020.
In addition to repurchases, from time to time, we have explored, and may continue to further consider, transactions to restructure or refinance a portion of the Senior Notes. Any such transactions may involve the issuance of additional equity or convertible debt securities that could result in material dilution to our stockholders, and these or other securities issued in any such transactions could have rights superior to holders of our common stock or holders of the Senior Notes and could contain covenants that will restrict our operations.
2018 ABL Credit Facility
On October 25, 2018, we entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”) that permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.
Loans to us and our domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or London Interbank Offered Rate (“LIBOR”) loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be Canadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on our leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions) and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below $18.75 million or a default has occurred, until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. We were in compliance with all covenants under the 2018 ABL Credit Agreement at September 30, 2021.
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.
At September 30, 2021, we had no outstanding borrowings under the 2018 ABL Credit Facility, and our availability under the 2018 ABL Credit Facility was approximately $55.4 million, net of outstanding letters of credit of $0.5 million. Subsequent to September 30, 2021, we borrowed approximately $10.0 million under the 2018 ABL Credit Facility for general corporate purposes.
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Cash Flows
Cash flows provided by (used in) operations by type of activity were as follows for the nine months ended September 30, 2021 and 2020:
Nine Months Ended September 30,
2021
2020
(in thousands)
Operating activities
$
(26,704)
$
4,640
Investing activities
(1,835)
(550)
Financing activities
(10,310)
(16,637)
Impact of foreign exchange rate on cash
(46)
(104)
Net change in cash and cash equivalents
$
(38,895)
$
(12,651)
Operating Activities
Net cash used in operating activities was $26.7 million during the first nine months of 2021 compared to $4.6 million in net cash provided by operating activities in the first nine months of 2020. The $31.3 million decrease in net cash provided by operating activities was primarily a result of a $52.9 million decrease in the change in working capital, including an increase in accounts receivable from increased product and service sales, which has the effect of lagging cash collections, in comparison to the first nine months of 2020. The overall decrease in net cash provided by operating activities was partially offset by an increase of $21.6 million in cash flow provided by operations, adjusted for any non-cash items, in comparison to the first nine months of 2020.
Investing Activities
Net cash used in investing activities was $1.8 million during the first nine months of 2021 compared to $0.6 million in net cash used in investing activities in the first nine months of 2020. The $1.2 million increase in net cash used in investing activities was primarily related to a $3.5 million decrease in proceeds from the sale of property and equipment (including insurance) in comparison to the first nine months of 2020, partially offset by a $2.3 million decrease in cash purchases of property and equipment between periods.
Financing Activities
Net cash used in financing activities was $10.3 million during the first nine months of 2021 compared to $16.6 million in net cash used in financing activities in the first nine months of 2020. The $6.3 million decrease in net cash used in financing activities was primarily related to a $6.1 million decrease in purchases of the Senior Notes and a $1.2 million reduction in payments of contingent liabilities between periods. The overall decrease in net cash used for financing activities was partially offset by a $0.6 million increase in payments on the Magnum Promissory Notes (as defined in Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q), a $0.3 million increase in cash used for the vesting of restricted stock, and a $0.1 million increase in cash used on finance leases, in comparison to the first nine months of 2020.
Contractual Obligations
As a “smaller reporting company”, as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide this information.
Off-Balance Sheet Arrangements
At September 30, 2021, we had letters of credit of $0.5 million, which represented off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. As of September 30, 2021, no liability has been recognized in our Condensed Consolidated Balance Sheets for the letters 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company”, as defined under the Exchange Act, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by an issuer in the reports the issuer files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time period specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports filed or submitted under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
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, has 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, 2021. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarterly period ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we have various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, we believe any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our business, operating results, or financial condition.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. For a detailed discussion of known material factors which could materially affect our business, financial condition, or future results, refer to “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth our repurchases of our equity securities registered under Section 12 of the Exchange Act that have occurred during the three months ended September 30, 2021:
Total number of shares purchased (a)
Average price paid per share
Total number of shares purchased as part of publicly announced plans or programs
Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
July 1, 2021 – July 31, 2021
—
$
—
—
—
August 1, 2021 – August 31, 2021
—
—
—
—
September 1, 2021 – September 30, 2021
873
1.73
—
—
Total
873
$
1.73
—
—
(a) Reflects the number of shares we have withheld to pay taxes upon vesting of restricted stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The exhibits required to be filed or furnished by Item 601 of Regulation S-K are listed below.
Interactive Data Files (Formatted as inline XBRL).
104*
Cover Page Interactive Data File (Formatted as inline XBRL and contained in Exhibit 101).
* Filed herewith.
** Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K.
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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.
