(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 May 3, 2021 was 31,358,497.
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 continue to 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 recent coronavirus pandemic and related economic repercussions have had, and are expected to 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.
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)
March 31, 2021
December 31, 2020
Assets
Current assets
Cash and cash equivalents
$
52,982
$
68,864
Accounts receivable, net
48,139
41,235
Income taxes receivable
1,142
1,392
Inventories, net
38,759
38,402
Prepaid expenses and other current assets
13,115
16,270
Total current assets
154,137
166,163
Property and equipment, net
96,530
102,429
Operating lease right of use assets, net
35,186
36,360
Finance lease right of use assets, net
1,716
1,816
Intangible assets, net
128,432
132,524
Other long-term assets
3,048
3,308
Total assets
$
419,049
$
442,600
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
$
21,385
$
18,140
Accrued expenses
24,547
17,139
Current portion of long-term debt
844
844
Current portion of operating lease obligations
5,897
6,200
Current portion of finance lease obligations
1,118
1,092
Total current liabilities
53,791
43,415
Long-term liabilities
Long-term debt
316,910
342,714
Long-term operating lease obligations
30,948
32,295
Long-term finance lease obligations
819
1,109
Other long-term liabilities
2,498
2,658
Total liabilities
404,966
422,191
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock (120,000,000 shares authorized at $0.01 par value; 31,517,982 and 31,557,809 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively)
315
316
Additional paid-in capital
770,309
768,429
Accumulated other comprehensive loss
(4,460)
(4,501)
Accumulated deficit
(752,081)
(743,835)
Total stockholders’ equity
14,083
20,409
Total liabilities and stockholders’ equity
$
419,049
$
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 March 31,
2021
2020
Revenues
Service
$
46,617
$
114,401
Product
20,009
32,223
66,626
146,624
Cost and expenses
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Service
45,229
99,198
Product
17,054
26,810
General and administrative expenses
10,224
16,395
Depreciation
7,789
8,541
Amortization of intangibles
4,092
4,169
Impairment of goodwill
—
296,196
Gain on revaluation of contingent liabilities
(190)
(426)
Gain on sale of property and equipment
(273)
(575)
Loss from operations
(17,299)
(303,684)
Interest expense
8,585
9,828
Interest income
(13)
(371)
Gain on extinguishment of debt
(17,618)
(10,116)
Other income
(34)
—
Loss before income taxes
(8,219)
(303,025)
Provision (benefit) for income taxes
27
(2,125)
Net loss
$
(8,246)
$
(300,900)
Loss per share
Basic
$
(0.28)
$
(10.22)
Diluted
$
(0.28)
$
(10.22)
Weighted average shares outstanding
Basic
29,878,426
29,430,475
Diluted
29,878,426
29,430,475
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of $0 tax in each period
$
41
$
(603)
Total other comprehensive income (loss), net of tax
41
(603)
Total comprehensive loss
$
(8,205)
$
(301,503)
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, 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
(2,488)
—
—
—
—
—
Stock-based compensation expense
—
—
2,010
—
—
2,010
Vesting of restricted stock
(37,339)
(1)
(130)
—
—
(131)
Other comprehensive income
—
—
—
41
—
41
Net loss
—
—
—
—
(8,246)
(8,246)
Balance, March 31, 2021
31,517,982
$
315
$
770,309
$
(4,460)
$
(752,081)
$
14,083
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
(49,009)
(1)
1
—
—
—
Stock-based compensation expense
—
—
3,592
—
—
3,592
Vesting of restricted stock
(99,674)
(1)
(114)
—
—
(115)
Other comprehensive loss
—
—
—
(603)
—
(603)
Net loss
—
—
—
—
(300,900)
(300,900)
Balance, March 31, 2020
30,406,994
$
304
$
762,332
$
(5,070)
$
(665,715)
$
91,851
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)
Three Months Ended March 31,
2021
2020
Cash flows from operating activities
Net loss
$
(8,246)
$
(300,900)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation
7,789
8,541
Amortization of intangibles
4,092
4,169
Amortization of operating leases
2,041
—
Amortization of deferred financing costs
676
745
Provision (benefit) for doubtful accounts
34
(288)
Benefit for deferred income taxes
—
(1,588)
Provision for inventory obsolescence
906
271
Stock-based compensation expense
2,010
3,592
Impairment of goodwill
—
296,196
Gain on extinguishment of debt
(17,618)
(10,116)
Gain on sale of property and equipment
(273)
(575)
Gain on revaluation of contingent liabilities
(190)
(426)
Changes in operating assets and liabilities
Accounts receivable, net
(6,921)
4,458
Inventories, net
(1,247)
(2,651)
Prepaid expenses and other current assets
2,412
2,409
Accounts payable and accrued expenses
11,136
(3,213)
Income taxes receivable/payable
250
(150)
Other assets and liabilities
(2,094)
271
Net cash provided by (used in) operating activities
(5,243)
745
Cash flows from investing activities
Proceeds from sales of property and equipment
843
892
Proceeds from property and equipment casualty losses
—
428
Purchases of property and equipment
(2,428)
(785)
Net cash provided by (used in) investing activities
(1,585)
535
Cash flows from financing activities
Purchases of Senior Notes
(8,355)
(3,455)
Payments on Magnum Promissory Notes
(281)
—
Payments on finance leases
(264)
(240)
Payments of contingent liability
(30)
(98)
Vesting of restricted stock
(131)
(115)
Net cash used in financing activities
(9,061)
(3,908)
Impact of foreign currency exchange on cash
7
(245)
Net decrease in cash and cash equivalents
(15,882)
(2,873)
Cash and cash equivalents
Cash and cash equivalents beginning of period
68,864
92,989
Cash and cash equivalents end of period
$
52,982
$
90,116
4
Supplemental disclosures of cash flow information:
Cash paid for interest
$
1,240
$
748
Cash refunded for income taxes
$
224
$
577
Cash paid for operating leases
$
2,099
$
—
Right of use assets obtained in exchange for operating lease obligations
$
410
$
—
Non-cash investing and financing activities:
Capital expenditures in accounts payable and accrued expenses
$
198
$
648
Receivable from property and equipment sale (including insurance)
$
2,479
$
5,454
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. The worldwide coronavirus outbreak in early 2020, which was declared a pandemic by the World Health Organization in March 2020, the uncertainty regarding its impact, and various governmental actions taken to mitigate its impact have resulted in an unprecedented decline in demand for oil. In the midst of the ongoing pandemic, the Organization of the Petroleum Exporting Countries and other oil producing nations, including Russia, were initially unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. The convergence of these events created the unprecedented dual impact of a massive decline in the demand for oil, coupled with the risk of a substantial increase in supply, which has directly affected the Company. While the Company cannot predict the length of time that market disruptions resulting from the coronavirus pandemic and efforts to mitigate its effects will continue, the ultimate impact on its business, or the pace or extent of any subsequent recovery, the Company expects the coronavirus pandemic and related effects to continue to have a material adverse impact on commodity prices and its business generally.
Historically, the Company has met its liquidity needs principally from cash on hand, cash flow from operations and, if needed, external borrowings. In response to the above events, the Company has implemented certain cost-cutting measures across the organization to continue to maintain its current liquidity position. Based on its current forecasts, the Company believes that cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility (as defined in Note 8 – Debt Obligations), should be sufficient to fund its capital requirements for at least the next twelve months from the issuance date of its condensed consolidated financial statements.
2. Basis of Presentation
Condensed Consolidated Financial Information
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 March 31, 2021, and its results of operations for the three months ended March 31, 2021, and 2020, and cash flows for the three months ended March 31, 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 does 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 months ended March 31, 2021 and 2020, respectively, was as follows:
Three Months Ended March 31, 2021
Three Months Ended March 31, 2020
(in thousands)
(in thousands)
Cement
$
22,922
$
48,637
Tools
20,009
32,223
Wireline
12,752
45,033
Coiled tubing
10,943
20,731
Total revenues
$
66,626
$
146,624
Three Months Ended March 31, 2021
Three Months Ended March 31, 2020
(in thousands)
(in thousands)
Service(1)
$
46,617
$
114,401
Product(1)
20,009
32,223
Total revenues
$
66,626
$
146,624
(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 March 31, 2021 and December 31, 2020, the amount of remaining performance obligations was not material.
Contract Balances
At March 31, 2021 and December 31, 2020, contract assets and contract liabilities were 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 $12.6 million and $13.3 million at March 31, 2021 and December 31, 2020, respectively.
Inventories, net as of March 31, 2021 and December 31, 2020 were comprised of the following:
March 31, 2021
December 31, 2020
(in thousands)
Raw materials
$
31,178
$
33,361
Work in progress
219
367
Finished goods
19,932
17,952
Inventories
51,329
51,680
Reserve for obsolescence
(12,570)
(13,278)
Inventories, net
$
38,759
$
38,402
8
6. Intangible Assets and Goodwill
Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets as of March 31, 2021 and December 31, 2020 was as follows:
March 31, 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
$
(39,896)
$
23,374
5.4
Non-compete agreements
6,500
(5,466)
1,034
2.6
Technology
125,110
(22,086)
103,024
12.4
In-process research and development
1,000
—
1,000
Indefinite
Total
$
195,880
$
(67,448)
$
128,432
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 $4.1 million and $4.2 million for the three months ended March 31, 2021 and 2020, respectively.
Future estimated amortization of intangibles is as follows:
Year Ending December 31,
(in thousands)
2021
$
12,024
2022
13,463
2023
11,516
2024
11,183
2025
11,183
2026
11,082
Thereafter
56,981
Total
$
127,432
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
9
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 three months ended March 31, 2020.
7. Accrued Expenses
Accrued expenses as of March 31, 2021 and December 31, 2020 consisted of the following:
March 31, 2021
December 31, 2020
(in thousands)
Accrued interest
$
11,931
$
5,313
Accrued compensation and benefits
6,798
5,430
Other accrued expenses
5,818
6,396
Accrued expenses
$
24,547
$
17,139
8. Debt Obligations
The Company’s debt obligations as of March 31, 2021 and December 31, 2020 were as follows:
March 31, 2021
December 31, 2020
(in thousands)
Senior Notes
$
320,343
$
346,668
Magnum Promissory Notes
1,688
1,969
Total debt before deferred financing costs
$
322,031
$
348,637
Deferred financing costs
(4,277)
(5,079)
Total debt
$
317,754
$
343,558
Less: Current portion of long-term debt
(844)
(844)
Long-term debt
$
316,910
$
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 March 31, 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 $4.3 million and $5.1 million at March 31, 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.
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Extinguishment of Debt
The Company repurchased approximately $26.3 million and $13.8 million of Senior Notes at a repurchase price of approximately $8.4 million and $3.5 million in cash during the three months ended March 31, 2021 and 2020, respectively. Deferred financing costs associated with these transactions were $0.3 million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively. As a result, for the three months ended March 31, 2021 and 2020, the Company recorded a $17.6 million gain and a $10.1 million gain, respectively, on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by the deferred financing costs. The gain on extinguishment of debt is included as a separate line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended March 31, 2021 and March 31, 2020.
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 March 31, 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 March 31, 2021, the Company’s availability under the 2018 ABL Credit Facility was approximately $45.8 million, net of outstanding letters of credit of $0.5 million. As of March 31, 2021 and December 31, 2020, the Company had no outstanding borrowings under its 2018 ABL Credit Facility.
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
11
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).
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 March 31, 2021 and December 31, 2020 was as follows:
March 31, 2021
December 31, 2020
(in thousands)
Senior Notes
$
112,120
$
156,001
Magnum Promissory Notes
$
1,688
$
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 for both the three months ended March 31, 2021 and 2020, respectively. The Company also purchased $0.2 million and $0.1 million of equipment during the three months ended March 31, 2021 and 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 $0.1 million and $0.2 million at March 31, 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 for both the three months ended March 31, 2021 and 2020, respectively.There were net outstanding payables due to this entity of $0.1 million at both March 31, 2021 and December 31, 2020, respectively. Additionally, on June 30, 2020, the Company issued the Magnum Promissory Notes to the sellers of Magnum, including Mr. Frazier. At March 31, 2021 and December 31, 2020, the outstanding principal balance payable to Mr. Frazier was $1.6 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 millionand $0.4 million for the three months ended March 31, 2021 and 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 $1.5 million and $1.9 million for coiled tubing string for the three months ended March 31, 2021 and 2020, respectively. There were outstanding payables due to this entity of $1.0 million and $0.9 million at March 31, 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 $0.3 million and $0.6 million for the three months ended March 31, 2021 and 2020, respectively. There were outstanding payables due to Select of $0.2 million at both March 31, 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 $0.2 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively. During the fourth quarter of 2019, the Company sold coiled tubing equipment for $5.9
12
million to NESR with payments due in 24 equal monthly installments beginning on January 31, 2020. Total outstanding receivables due to the Company from NESR (inclusive of the equipment sale above) were $2.6 million and $3.7 million at March 31, 2021 and December 31, 2020, respectively.
On June 5, 2019, Ann G. Fox, President and Chief Executive Officer and a director of the Company, was elected as a director of Devon Energy Corporation (“Devon”). The Company generated revenue from Devon of $1.0 million and $1.7 million for the three months ended March 31, 2021 and 2020, respectively. There were outstanding receivables due from Devon of $0.4 million at both March 31, 2021 and December 31, 2020, respectively.
10. Commitments and Contingencies
Litigation
From time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.
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 March 31, 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 March 31, 2021 and 2020 were as follows:
Frac Tech
(in thousands)
Balance at December 31, 2020
$
604
Revaluation adjustments
(190)
Payments
(30)
Balance at March 31, 2021
$
384
Magnum
Frac Tech
Total
(in thousands)
Balance at December 31, 2019
$
2,609
$
1,359
$
3,968
Revaluation adjustments
141
(567)
(426)
Payments
—
(98)
(98)
Balance at March 31, 2020
$
2,750
$
694
$
3,444
13
The contingent consideration related to the contingent liabilities is reported at fair value, based on a Monte Carlo simulation model. Significant inputs used in the fair value measurement include estimated gross margin related to forecasted sales of the plugs, term of the agreement, and a risk adjusted discount factor. Contingent liabilities include $0.1 million and $0.2 million reported in “Accrued expenses” at March 31, 2021 and December 31, 2020, respectively and $0.3 million and $0.4 million reported in “Other long-term liabilities” at March 31, 2021 and December 31, 2020, respectively, in the Company’s Condensed Consolidated Balance Sheets. Revaluation adjustments resulting in a $0.2 million gain and a $0.4 million gain for the three months ended March 31, 2021 and March 31, 2020, respectively, are 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.
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 March 31,
2021
2020
(in thousands, except percentages)
Provision (benefit) for income taxes
$
27
$
(2,125)
Effective tax rate
(0.3)
%
0.7
%
The Company recorded an income tax provision of less than $0.1 million for the first quarter of 2021, compared to an income tax benefit of $2.1 million for the first quarter 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 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.
14
Basic and diluted earnings (loss) per common share was computed as follows:
Three Months Ended March 31, 2021
Three Months Ended March 31, 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
$
(8,246)
29,878,426
$
(0.28)
$
(300,900)
29,430,475
$
(10.22)
Assumed exercise of stock options
—
—
—
—
—
—
Unvested restricted stock and stock units
—
—
—
—
—
—
Diluted
$
(8,246)
29,878,426
$
(0.28)
$
(300,900)
29,430,475
$
(10.22)
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 months ended March 31, 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 March 31,
1,033,743
119,075
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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 months ended March 31, 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.
16
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 strongly influenced by
current and expected oil and natural gas prices. In early 2020, the worldwide coronavirus outbreak caused an unprecedented decline in demand for oil and the West Texas Intermediate price averaged approximately $39 per barrel in 2020 as compared to $57 per barrel in 2019. Uncertainty remains around the timing, pace and rate of a global demand recovery, which is dependent on, among other things, vaccine rollouts and efficacy, government-issued restrictions and the global economic recovery, and we cannot predict the length of time that market disruptions resulting from the coronavirus pandemic and efforts to mitigate its effects will continue, the ultimate impact on our business, or the pace or extent of any subsequent recovery.
In addition, the recent decision by the Organization of the Petroleum Exporting Countries and other oil producing nations, including Russia, to start gradually boosting oil production, coupled with the new Biden administration’s potential energy restrictions and additional regulations, has created additional headwinds for U.S. oil and gas land activity. Thus, even with the recent improvement in oil prices, we have seen our customers remain committed to capital discipline over activity and production growth and our customers have generally revised their capital budgets downward for 2021 versus 2020.
17
Accordingly, demand for our products and services remains depressed, and there is little to no pricing leverage for oil field service companies. The extreme activity declines, as well as an over-saturated competitive landscape in 2020 accelerated pricing declines, especially within our completion tools and wireline business. The pace of activity increases thus far in 2021 are not able to offset the depressed pricing, leading to relatively anemic revenue growth and profitability. Even with further improvements in oil prices, our business in 2021 may not improve materially or at all depending on our customers’ activity plans and our ability to implement price increases.
Results of Operations
Results for the Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
Three Months Ended March 31,
2021
2020
Change
(in thousands)
Revenues
$
66,626
$
146,624
$
(79,998)
Cost of revenues (exclusive of depreciation and amortization shown separately below)
62,283
126,008
(63,725)
Adjusted gross profit
$
4,343
$
20,616
$
(16,273)
General and administrative expenses
$
10,224
$
16,395
$
(6,171)
Depreciation
7,789
8,541
(752)
Amortization of intangibles
4,092
4,169
(77)
Impairment of goodwill
—
296,196
(296,196)
Gain on revaluation of contingent liabilities
(190)
(426)
236
Gain on sale of property and equipment
(273)
(575)
302
Loss from operations
(17,299)
(303,684)
286,385
Non-operating income
(9,080)
(659)
(8,421)
Loss before income taxes
(8,219)
(303,025)
294,806
Provision (benefit) for income taxes
27
(2,125)
2,152
Net loss
$
(8,246)
$
(300,900)
$
292,654
Revenues
Revenues decreased $80.0 million, or 55%, to $66.6 million for the first quarter of 2021. The decrease was prevalent across all lines of service and was primarily related to reduced activity and pricing pressure caused by poor market conditions, and, to a lesser extent, reduced activity caused by weather-related shutdowns, in comparison to the first quarter of 2020. More specifically, wireline revenue decreased $32.3 million, or 72%, as total completed wireline stages decreased by 62%, in comparison to the first quarter of 2020. In addition, cementing revenue (including pump downs) decreased by $25.7 million, or 53%, as total cement job count decreased 41% in comparison to the first quarter of 2020, tools revenue decreased $12.2 million, or 38%, as completion tools stages decreased by 19% in comparison to the first quarter of 2020, and coiled tubing revenue decreased by $9.8 million, or 47%, as total days worked decreased by 34% in comparison to the first quarter of 2020.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues decreased $63.7 million, or 51%, to $62.3 million for the first quarter of 2021. The decrease was prevalent across all lines of service and was primarily related to reduced activity caused by poor market conditions, and, to a lesser extent, reduced activity caused by weather-related shutdowns, in comparison to the first quarter of 2020. More specifically, the decrease was primarily related to a $34.3 million decrease in materials installed and consumed while performing services, a $23.2 million decrease in employee costs, and a $6.2 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses.
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Adjusted Gross Profit (Loss)
Adjusted gross profit decreased $16.3 million to $4.3 million for the first quarter of 2021 due to the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses decreased $6.2 million to $10.2 million for the first quarter of 2021. The decrease was primarily related to a $4.1 million decrease in employee costs mainly due to headcount and salary reductions in comparison to the first quarter of 2020. The overall decrease was also partly attributed to a $1.1 million decrease in other general and administrative expenses such as marketing, travel and vehicle expense and a $1.0 million decrease in severance and other general and administrative-type restructuring costs between periods.
Depreciation
Depreciation expense decreased $0.8 million to $7.8 million for the first quarter of 2021. The decrease in comparison to the first quarter of 2020 was primarily related to a reduction in depreciation expense associated with our cement and wireline businesses due to a decrease in capital expenditures, coupled with certain assets becoming fully depreciated, in recent periods.
Amortization of Intangibles
We recorded $4.1 million in intangible amortization for the first quarter of 2021 and $4.2 million in the first quarter of 2020 primarily attributed to technology and customer relationships. The $0.1 million decrease is related to certain intangible assets being fully amortized in the first quarter of 2021.
Impairment of Goodwill
In the first quarter 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 (as defined and described in “Liquidity and Capital Resources”). These goodwill impairment charges did not recur in the first quarter of 2021.
(Gain) Loss on Revaluation of Contingent Liabilities
We recorded a $0.2 million gain on the revaluation of contingent liabilities for the first quarter of 2021 compared to a $0.4 million gain on the revaluation of contingent liabilities for the first quarter of 2020. The $0.2 million change was primarily related to a reduced $0.4 million gain on the revaluation of the earnout associated with our acquisition of Frac Technology AS partially offset by a $0.2 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 quarter of 2020 that did not recur in the first quarter of 2021. The Magnum Earnout was terminated in the second quarter of 2020.
Non-Operating (Income) Expenses
We recorded $9.1 million in non-operating income for the first quarter of 2021 compared to $0.7 million in non-operating income for the first quarter of 2020. The $8.4 million increase was primarily related to a $17.6 million gain on the extinguishment of debt related to the repurchase of Senior Notes in the first quarter of 2021 compared to a $10.1 million gain in the first quarter of 2020. The overall increase is also partly attributed to a $1.2 million reduction in interest expense mainly due to a reduced debt balance attributed to repurchases of Senior Notes in recent periods. The overall increase is partially offset by a $0.3 million decrease in interest income between periods.
Provision (Benefit) for Income Taxes
We recorded an income tax provision of less than $0.1 million for the first quarter of 2021 compared to an income tax benefit of $2.1 million for the first quarter 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 decreased $13.6 million to a $3.4 million loss for the first quarter of 2021. The Adjusted EBITDA
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decrease 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 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.
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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 months ended March 31, 2021 and 2020:
Three Months Ended March 31,
2021
2020
(in thousands)
EBITDA reconciliation:
Net loss
$
(8,246)
$
(300,900)
Interest expense
8,585
9,828
Interest income
(13)
(371)
Provision (benefit) for income taxes
27
(2,125)
Depreciation
7,789
8,541
Amortization of intangibles
4,092
4,169
EBITDA
$
12,234
$
(280,858)
Adjusted EBITDA reconciliation:
EBITDA
$
12,234
$
(280,858)
Impairment of goodwill
—
296,196
Transaction and integration costs
—
146
Gain on revaluation of contingent liabilities (1)
(190)
(426)
Gain on extinguishment of debt
(17,618)
(10,116)
Restructuring charges
468
2,329
Stock-based compensation expense
2,010
3,592
Gain on sale of property and equipment
(273)
(575)
Legal fees and settlements (2)
12
4
Adjusted EBITDA
$
(3,357)
$
10,292
(1)Amounts relate to the revaluation of contingent liabilities associated with our 2018 acquisitions. The impact is included in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss). For additional information on contingent liabilities, see Note 10 – Commitments and Contingencies included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
(2)Amounts represent fees and legal settlements associated with legal proceedings brought pursuant to the 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, 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.
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The following table provides an explanation of our calculation of ROIC for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
2021
2020
(in thousands)
Net loss
$
(8,246)
$
(300,900)
Add back:
Impairment of goodwill
—
296,196
Transaction and integration costs
—
146
Interest expense
8,585
9,828
Interest income
(13)
(371)
Restructuring charges
468
2,329
Gain on extinguishment of debt
(17,618)
(10,116)
Benefit for deferred income taxes
—
(1,588)
After-tax net operating loss
$
(16,824)
$
(4,476)
Total capital as of prior period-end:
Total stockholders’ equity
$
20,409
$
389,877
Total debt
348,637
400,000
Less cash and cash equivalents
(68,864)
(92,989)
Total capital as of prior period-end
$
300,182
$
696,888
Total capital as of period-end:
Total stockholders’ equity
$
14,083
$
91,851
Total debt
322,031
386,171
Less cash and cash equivalents
(52,982)
(90,116)
Total capital as of period-end
$
283,132
$
387,906
Average total capital
$
291,657
$
542,397
ROIC
(23.1)%
(3.3)%
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 months ended March 31, 2021 and 2020:
Three Months Ended March 31,
2021
2020
(in thousands)
Calculation of gross profit (loss)
Revenues
$
66,626
$
146,624
Cost of revenues (exclusive of depreciation and amortization shown separately below)
62,283
126,008
Depreciation (related to cost of revenues)
7,244
7,943
Amortization of intangibles
4,092
4,169
Gross profit (loss)
$
(6,993)
$
8,504
Adjusted gross profit (loss) reconciliation:
Gross profit (loss)
$
(6,993)
$
8,504
Depreciation (related to cost of revenues)
7,244
7,943
Amortization of intangibles
4,092
4,169
Adjusted gross profit
$
4,343
$
20,616
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. 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 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. In 2020, in response to rapidly deteriorating market conditions driven in large part by the coronavirus pandemic, we implemented certain cost-cutting measures across the organization. We expect to continue to maintain many of these measures, including those relating to employee compensation, and may implement additional cost-cutting measures, as necessary. We can make no assurance regarding our ability to successfully implement such measures, or whether such measures would be sufficient to mitigate a decline in our financial performance.
At March 31, 2021, we had $53.0 million of cash and cash equivalents and $45.8 million of availability under the 2018 ABL Credit Facility (as defined below), which resulted in a total liquidity position of $98.8 million. 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. 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 April 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
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activities. We were in compliance with the provisions of the Indenture at March 31, 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.
We repurchased approximately $26.3 million and $13.8 million of Senior Notes at a repurchase price of approximately $8.4 million and $3.5 million in cash during the three months ended March 31, 2021 and 2020, respectively. Deferred financing costs associated with these transactions were $0.3 million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively. As a result, for the three months ended March 31, 2021 and 2020, we recorded a $17.6 million gain and a $10.1 million gain, respectively, on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by the deferred financing costs. 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 March 31, 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 March 31, 2021, we had no borrowings outstanding under the 2018 ABL Credit Facility, and our availability under the 2018 ABL Credit Facility was approximately $45.8 million, net of outstanding letters of credit of $0.5 million.
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Cash Flows
Cash flows provided by (used in) operations by type of activity were as follows for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
2021
2020
(in thousands)
Operating activities
$
(5,243)
$
745
Investing activities
(1,585)
535
Financing activities
(9,061)
(3,908)
Impact of foreign exchange rate on cash
7
(245)
Net change in cash and cash equivalents
$
(15,882)
$
(2,873)
Operating Activities
Net cash used in operating activities was $5.2 million in the first quarter of 2021 compared to $0.7 million in net cash provided by operating activities in the first quarter of 2020. The $5.9 million decrease in net cash provided by operating activities was primarily a result of a $8.4 million decrease in cash flow provided by operations, adjusted for any non-cash items, primarily due to a decrease in revenue in the first quarter of 2021 compared to the first quarter of 2020. The overall decrease in net cash provided by operating activities was partially offset by an increase of $2.5 million in working capital which provided an increased source of cash flow in the first quarter of 2021 in comparison to the first quarter of 2020.
Investing Activities
Net cash used in investing activities was $1.6 million in the first quarter of 2021 compared to $0.5 million in net cash provided by investing activities in the first quarter of 2020. The $2.1 million decrease in net cash provided by investing activities was primarily related to a $1.6 million increase in cash purchases of property and equipment in the first quarter of 2021 in comparison to the first quarter of 2020. The overall decrease was also partly due to a decrease in proceeds from sales of property and equipment (including insurance) of $0.5 million in the first quarter of 2021 compared to the first quarter of 2020.
Financing Activities
Net cash used in financing activities was $9.1 million in the first quarter of 2021 compared to $3.9 million in net cash used in financing activities in the first quarter of 2020. The $5.2 million increase in net cash used in financing activities was primarily related to $4.9 million increase in purchases of the Senior Notes and a $0.3 million increase in payments on the Magnum Promissory Notes in the first quarter of 2021 in comparison to the first quarter 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 March 31, 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 March 31, 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.
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.
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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 March 31, 2021. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarterly period ended March 31, 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
None.
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.
** 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.
