Nine Energy Service, Inc. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________

FORM 10-Q

_________________________________

(Mark One)


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

FOR THE QUARTERLY PERIOD ENDED September 30, 2020


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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 001-38347

__________________________________________________________________

Nine Energy Service, Inc.

(Exact name of registrant as specified in its charter)

__________________________________________________________________


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

2001 Kirby Drive, Suite 200

Houston, TX 77019

(Address of principal executive offices) (zip code)

(281) 730-5100

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	NINE	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding at November 2, 2020 was 31,561,578.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

Condensed Consolidated Statements of Stockholders’ Equity

Condensed Consolidated Statements of Cash Flows

Notes to the Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans, and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.

All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q; we disclaim any obligation to update these statements unless required by law, and we caution you not to place undue reliance on them. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved.

We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, 2019 and “Risk Factors” in Item 1A of Part II in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. These factors, some of which are beyond our control, include the following:

•the level of capital spending and well completions by the onshore oil and natural gas industry;

•oil and natural gas commodity prices;

•general economic conditions;

•the impact of the coronavirus pandemic on our business and the business of our customers, including the effects of the resulting excess supply of oil;

•geopolitical factors, including actions by the Organization of the Petroleum Exporting Countries (“OPEC”) and other significant oil-producing countries and the ability of such producers to agree to and maintain oil price and production controls;

•our ability to employ, or maintain the employment of, a sufficient number of key employees, technical personnel, and other skilled and qualified workers;

•our ability to implement price increases or maintain existing prices on our products and services;

•pricing pressures, reduced sales, or reduced market share as a result of intense competition in the markets for our composite and dissolvable plug products;

•our ability to accurately predict customer demand;

•conditions inherent in the oilfield services industry, such as equipment defects, liabilities arising from accidents or damage involving our fleet of trucks or other equipment, explosions and uncontrollable flows of gas or well fluids, and loss of well control;

•our ability to implement new technologies and services;

•seasonal and adverse weather conditions;

•our ability to maintain compliance with the New York Stock Exchange continued listing requirements and avoid the delisting of our common stock;

•changes in laws or regulations regarding issues of health, safety, and protection of the environment, including those relating to hydraulic fracturing, greenhouse gases, and climate change; and

•our ability to successfully integrate the assets and operations that we acquired with our acquisition of Magnum Oil Tools International, LTD and its affiliates (the “Magnum Acquisition”) and realize anticipated revenues, cost savings, or other benefits of such acquisition.

Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial, or that could apply to any company could also materially adversely affect our business, financial condition, or future results.

These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	September 30, 2020		December 31, 2019
Assets
Current assets
Cash and cash equivalents	$	80,338	$	92,989
Accounts receivable, net	34,805		96,889
Income taxes receivable	1,246		660
Inventories, net	52,683		60,945
Prepaid expenses and other current assets	19,526		17,434
Total current assets	188,598		268,917
Property and equipment, net	108,986		128,604
Intangible assets, net	136,615		148,991
Goodwill	—		296,196
Other long-term assets	4,260		8,187
Total assets	$	438,459	$	850,895
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	10,022	$	35,490
Accrued expenses	23,236		24,730
Current portion of long-term debt	844		—
Current portion of capital lease obligations	1,067		995
Total current liabilities	35,169		61,215
Long-term liabilities
Long-term debt	343,036		392,059
Deferred income taxes	—		1,588
Long-term capital lease obligations	1,391		2,201
Other long-term liabilities	5,264		3,955
Total liabilities	384,860		461,018
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock (120,000,000 shares authorized at $0.01 par value; 31,570,926 and 30,555,677 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively)	316		306
Additional paid-in capital	766,402		758,853
Accumulated other comprehensive loss	(4,731)		(4,467)
Accumulated deficit	(708,388)		(364,815)
Total stockholders’ equity	53,599		389,877
Total liabilities and stockholders’ equity	$	438,459	$	850,895

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

NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues
Service	$	35,639	$	161,632	$	187,713	$	519,072
Product	13,882		40,673		61,167		150,455
	49,521		202,305		248,880		669,527
Cost and expenses
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Service	38,445		134,984		179,508		420,445
Product	14,038		31,865		55,686		109,549
General and administrative expenses	10,701		19,222		38,380		60,979
Depreciation	7,763		12,196		24,753		39,572
Amortization of intangibles	4,091		4,609		12,376		13,925
Impairment of goodwill	—		—		296,196		—
(Gain) loss on revaluation of contingent liabilities	297		(5,771)		781		(20,701)
Loss on sale of subsidiaries	—		15,834		—		15,834
Gain on sale of property and equipment	(535)		(466)		(2,900)		(799)
Income (loss) from operations	(25,279)		(10,168)		(355,900)		30,723
Interest expense	9,130		9,843		28,144		29,940
Interest income	(43)		(111)		(593)		(439)
Gain on extinguishment of debt	(15,798)		—		(37,501)		—
Other income	(29)		—		(29)		—
Income (loss) before income taxes	(18,539)		(19,900)		(345,921)		1,222
Provision (benefit) for income taxes	(37)		727		(2,348)		(1,548)
Net income (loss)	$	(18,502)	$	(20,627)	$	(343,573)	$	2,770
Earnings (loss) per share
Basic	$	(0.62)	$	(0.70)	$	(11.56)	$	0.09
Diluted	$	(0.62)	$	(0.70)	$	(11.56)	$	0.09
Weighted average shares outstanding
Basic	29,849,753		29,361,633		29,708,673		29,288,113
Diluted	29,849,753		29,361,633		29,708,673		29,397,636
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of $0 tax in each period	$	132	$	(179)	$	(264)	$	261
Total other comprehensive income (loss), net of tax	132		(179)		(264)		261
Total comprehensive income (loss)	$	(18,370)	$	(20,806)	$	(343,837)	$	3,031

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

NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity
	Shares	Amounts
Balance, June 30, 2020	31,652,635	$	317	$	764,382	$	(4,863)	$	(689,886)	$	69,950
Issuance of common stock under stock compensation plan, net of forfeitures	(80,882)	(1)		1		—		—		—
Stock-based compensation expense	—	—		2,020		—		—		2,020
Exercise of stock options	—	—		—		—		—		—
Vesting of restricted stock	(827)	—		(1)		—		—		(1)
Other comprehensive income	—	—		—		132		—		132
Net loss	—	—		—		—		(18,502)		(18,502)
Balance, September 30, 2020	31,570,926	$	316	$	766,402	$	(4,731)	$	(708,388)	$	53,599


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity
	Shares	Amounts
Balance, June 30, 2019	30,683,009	$	307	$	752,072	$	(4,403)	$	(123,667)	$	624,309
Issuance of common stock under stock compensation plan, net of forfeitures	(98,954)	(1)		1		—		—		—
Stock-based compensation expense	—	—		3,286		—		—		3,286
Exercise of stock options	—	—		—		—		—		—
Vesting of restricted stock	(1,471)	—		(10)		—		—		(10)
Other comprehensive loss	—	—		—		(179)		—		(179)
Net loss	—	—		—		—		(20,627)		(20,627)
Balance, September 30, 2019	30,582,584	$	306	$	755,349	$	(4,582)	$	(144,294)	$	606,779


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity
	Shares	Amounts
Balance, December 31, 2019	30,555,677	$	306	$	758,853	$	(4,467)	$	(364,815)	$	389,877
Issuance of common stock under stock compensation plan, net of forfeitures	1,164,797	11		(11)		—		—		—
Stock-based compensation expense	—	—		7,717		—		—		7,717
Exercise of stock options	—	—		—		—		—		—
Vesting of restricted stock	(149,548)	(1)		(157)		—		—		(158)
Other comprehensive loss	—	—		—		(264)		—		(264)
Net loss	—	—		—		—		(343,573)		(343,573)
Balance, September 30, 2020	31,570,926	$	316	$	766,402	$	(4,731)	$	(708,388)	$	53,599


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity
	Shares	Amounts
Balance, December 31, 2018	30,163,408	$	302	$	746,428	$	(4,843)	$	(147,064)	$	594,823
Issuance of common stock under stock compensation plan, net of forfeitures	489,529	5		(5)		—		—		—
Stock-based compensation expense	—	—		10,553		—		—		10,553
Exercise of stock options	674	—		15		—		—		15
Vesting of restricted stock	(71,027)	(1)		(1,642)		—		—		(1,643)
Other comprehensive income	—	—		—		261		—		261
Net income	—	—		—		—		2,770		2,770
Balance, September 30, 2019	30,582,584	$	306	$	755,349	$	(4,582)	$	(144,294)	$	606,779

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

NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities
Net income (loss)	$	(343,573)	$	2,770
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation	24,753		39,572
Amortization of intangibles	12,376		13,925
Amortization of deferred financing costs	2,160		2,238
Provision for doubtful accounts	2,121		236
Benefit for deferred income taxes	(1,588)		(2,876)
Provision for inventory obsolescence	1,919		4,502
Stock-based compensation expense	7,717		10,553
Impairment of goodwill	296,196		—
Gain on extinguishment of debt	(37,501)		—
Gain on sale of property and equipment	(2,900)		(799)
(Gain) loss on revaluation of contingent liabilities	781		(20,701)
Loss on sale of subsidiaries	—		15,834
Changes in operating assets and liabilities, net of effects from acquisitions
Accounts receivable, net	59,964		20,453
Inventories, net	6,244		17,634
Prepaid expenses and other current assets	(1,457)		(405)
Accounts payable and accrued expenses	(27,073)		(16,953)
Income taxes receivable/payable	(586)		674
Other assets and liabilities	5,087		151
Net cash provided by operating activities	4,640		86,808
Cash flows from investing activities
Acquisitions, net of cash acquired	—		1,020
Proceeds from the sale of subsidiaries	—		17,222
Proceeds from sales of property and equipment	5,948		1,934
Proceeds from property and equipment casualty losses	555		1,503
Proceeds from notes receivable payments	—		7,626
Purchases of property and equipment	(7,053)		(48,898)
Net cash used in investing activities	(550)		(19,593)
Cash flows from financing activities
Purchases of Senior Notes	(14,410)		—
Proceeds from 2018 ABL Credit Facility	—		10,000
Payments on 2018 ABL Credit Facility	—		(45,000)
Payments on capital leases	(738)		(668)
Payments of contingent liability	(1,331)		(250)
Proceeds from exercise of stock options	—		15
Vesting of restricted stock	(158)		(1,643)
Net cash used in financing activities	(16,637)		(37,546)
Impact of foreign currency exchange on cash	(104)		37


Net decrease in cash and cash equivalents	(12,651)		29,706
Cash and cash equivalents
Cash and cash equivalents beginning of year	92,989		63,615
Cash and cash equivalents end of period	$	80,338	$	93,321
Supplemental disclosures of cash flow information:
Cash paid for interest	$	18,901	$	19,619
Cash paid (refunded) for income taxes	$	(482)	$	649
Capital expenditures in accounts payable and accrued expenses	$	150	$	1,183
Property and equipment obtained by capital lease	$	—	$	1,621
Receivable from property and equipment sale (including insurance)	$	4,359	$	—
Termination of contingent liability related to business acquisition	$	3,375	$	—

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

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.

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

The Condensed Consolidated Balance Sheet at December 31, 2019 and the Condensed Consolidated Statement of Stockholders’ Equity as of December 31, 2019 and 2018 are derived from audited consolidated financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for the fair statement of the Company’s financial position have been included. These condensed consolidated financial statements include all accounts of the Company.

These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Nine and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Such estimates include fair value assumptions used in purchase accounting and in analyzing goodwill, definite and indefinite-lived intangible assets, and property and equipment for possible impairment, useful lives used in depreciation and amortization expense, stock-based compensation fair value, estimated realizable value on excess and obsolete inventories, deferred taxes and income tax contingencies, and losses on accounts receivable. It is at least reasonably possible that the estimates used will change within the next year.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications relate to presenting “Revenues” and “Cost of revenues” by product and service as separate line items in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

3. New Accounting Standards

Accounting Pronouncements Recently Adopted

In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The standard is required to be applied retrospectively, except the new Level 3 disclosure requirements are applied prospectively. The Company adopted ASU 2018-13 in the first quarter of 2020, and it had an immaterial impact on the Company’s condensed consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard, which requires the use of a modified retrospective transition approach, includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued a new, optional transition method that gives companies the option to use the effective date as the date of initial application on transition. For emerging growth entities, the standard is effective for the fiscal years beginning after December 15, 2021 and interim periods within the fiscal years beginning after December 15, 2022. Early adoption is allowed, and the Company, as an emerging growth company, plans to early adopt the standard for the fiscal years beginning after December 15, 2019 and interim periods within the fiscal years beginning after December 15, 2020. To support the accounting and disclosure requirements under the new standard, the Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio and developing and implementing appropriate changes to its internal processes and controls. Based on initial evaluation, the Company expects to recognize a lease liability and offsetting right-of-use asset for all of its operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. The Company will provide additional information about the expected financial impact as it progresses through the evaluation and implementation of the standard.

In March 2020, the FASB issued 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 Company is currently evaluating the impact of the standard 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.

4. Revenue

Disaggregation of Revenue

The Company adopted Accounting Standards Codification 606 (“ASC 606”) on December 31, 2019, effective January 1, 2019, using the modified retrospective method. Accordingly, results for the year ended December 31, 2019 and periods thereafter are presented in accordance with ASC 606 while prior period results, including those presented below for the three and nine months ended September 30, 2019, have not been adjusted and are reported under the previous revenue recognition guidance.

Disaggregated revenue for the three and nine months ended September 30, 2020 and September 30, 2019 was as follows:


	Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
	Completion Solutions		Total		Completion Solutions		Production Solutions(2)		Total
	(in thousands)				(in thousands)
Coiled tubing	$	7,278	$	7,278	$	31,064	$	—	$	31,064
Cement	15,332		15,332		55,799		—		55,799
Tools	13,882		13,882		40,673		—		40,673
Wireline	13,029		13,029		58,716		—		58,716
Well service	—		—		—		16,053		16,053
Total revenues	$	49,521	$	49,521	$	186,252	$	16,053	$	202,305


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
	Completion Solutions		Total		Completion Solutions		Production Solutions(2)		Total
	(in thousands)				(in thousands)
Coiled tubing	$	35,575	$	35,575	$	108,604	$	—	$	108,604
Cement	84,400		84,400		165,799		—		165,799
Tools	61,167		61,167		150,455		—		150,455
Wireline	67,738		67,738		186,397		—		186,397
Well service	—		—		—		58,272		58,272
Total revenues	$	248,880	$	248,880	$	611,255	$	58,272	$	669,527


	Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
	Completion Solutions		Total		Completion Solutions		Production Solutions(2)		Total
	(in thousands)				(in thousands)
Service(1)	$	35,639	$	35,639	$	145,579	$	16,053	$	161,632
Product(1)	13,882		13,882		40,673		—		40,673
Total revenues	$	49,521	$	49,521	$	186,252	$	16,053	$	202,305


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
	Completion Solutions		Total		Completion Solutions		Production Solutions(2)		Total
	(in thousands)				(in thousands)
Service(1)	$	187,713	$	187,713	$	460,800	$	58,272	$	519,072
Product(1)	61,167		61,167		150,455		—		150,455
Total revenues	$	248,880	$	248,880	$	611,255	$	58,272	$	669,527

(1) The Company recognizes revenues from the sales of products at a point in time and revenues from the sales of services over time.

(2) The Production Solutions segment was sold to Brigade Energy Service LLC (“Brigade”) on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 13 – Segment Information.

Performance Obligations

At September 30, 2020 and December 31, 2019, the amount of remaining performance obligations were immaterial.

Contract Balances

At September 30, 2020 and December 31, 2019, contract assets and contract liabilities were immaterial.

5. Inventories

Inventories, consisting primarily of finished goods and raw materials, are stated at the lower of cost or net realizable value. Cost is determined on an average cost basis. The Company reviews its inventory balances and writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The reserve for obsolescence was $6.1 million and $5.4 million at September 30, 2020 and December 31, 2019, respectively.

Inventories, net as of September 30, 2020 and December 31, 2019 were comprised of the following:


	September 30, 2020		December 31, 2019
	(in thousands)
Raw materials	$	35,968	$	38,823
Work in progress	93		—
Finished goods	22,685		27,555
Inventories	58,746		66,378
Reserve for obsolescence	(6,063)		(5,433)
Inventories, net	$	52,683	$	60,945

6. Goodwill and Intangible Assets

Goodwill

The changes in the net carrying amount of the components of goodwill for the nine months ended September 30, 2020 were as follows:


	Goodwill
	Gross Value		Accumulated Impairment Loss		Net
	(in thousands)
Balance as of December 31, 2019	$	408,732	$	(112,536)	$	296,196
Impairment	—		(296,196)		(296,196)
Balance as of September 30, 2020	$	408,732	$	(408,732)	$	—

Q1 2020 Goodwill Impairment

Based on the above events, an indication of impairment associated with the Company’s reporting units occurred, triggering an interim goodwill impairment test of the Level 3 fair value of each reporting unit under Accounting Standards Codification 350, Intangibles - Goodwill and Other (“ASC 350”) at March 31, 2020. The Level 3 fair value of each reporting unit was determined by using the income approach (discounted cash flows of forecasted income) based on the Company’s best internal projections and the likelihood of various outcomes.

Determining fair value requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating profit margins, weighted average cost of capital, terminal growth rates, future market share, the impact of new product development, and future market conditions, among others. The Company believes that the estimates and assumptions used in the interim goodwill impairment test are reasonable and appropriate.

Based on its Level 3 fair value determination in connection with the interim goodwill impairment test under ASC 350, the Company recorded goodwill impairment charges of $296.2 million in the first quarter of 2020 associated with its tools, cementing, and wireline reporting units. These charges represented a full write-off of goodwill and were primarily attributed to the events described above, coupled with an increased weighted average cost of capital driven by a reduction in the Company’s stock price and the Level 2 fair value of its Senior Notes (as defined in Note 8 – Debt Obligations).

These charges are included in the line item “Impairment of goodwill” in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the nine months ended September 30, 2020.

Intangible Assets

The changes in the net carrying value of the components of intangible assets for the nine months ended September 30, 2020 were as follows:


	Customer Relationships		Non- Compete Agreements		Technology		In-process R&D		Total
	(in thousands, except weighted average amortization period information)
Balance as of December 31, 2019	$	32,536	$	1,534	$	113,921	$	1,000	$	148,991
Amortization expense	(5,538)		(300)		(6,538)		—		(12,376)
Balance as of September 30, 2020	$	26,998	$	1,234	$	107,383	$	1,000	$	136,615
Weighted average amortization period	5.6		3.1		12.9		Indefinite

Amortization of intangibles expense was $4.1 million and $12.4 million for the three and nine months ended September 30, 2020, respectively. Amortization of intangibles expense was $4.6 million and $13.9 million for the three and nine months ended September 30, 2019, respectively.

Future estimated amortization of intangibles is as follows:


Year Ending December 31,	(in thousands)
2020	$	4,091
2021	16,116
2022	13,463
2023	11,516
2024	11,183
Thereafter	79,246
Total	$	135,615

With a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes, the carrying amount of long-lived assets (inclusive of definite-lived intangible assets and property and equipment) associated with the Company’s asset groups may not be recoverable. As such, the Company performed an impairment assessment of long-lived assets in its asset groups under Accounting Standards Codification 360, Property, Plant and Equipment (“ASC 360”) at March 31, 2020, based on its best internal projections and the likelihood of various outcomes.

Based on its assessment, the Company determined that the estimated future undiscounted cash flows derived from long-lived assets associated with its asset groups exceeded the carrying amount of long-lived assets associated with its asset groups, and no impairment to long-lived assets was required.

No events triggered additional impairment tests under ASC 360 through September 30, 2020. However, the occurrence of future events or deteriorating market conditions could result in additional impairment assessments under ASC 360 subsequent to September 30, 2020.

7. Accrued Expenses

Accrued expenses as of September 30, 2020 and December 31, 2019 consisted of the following:


	September 30, 2020		December 31, 2019
	(in thousands)
Accrued compensation and benefits	$	5,519	$	7,009
Accrued interest	12,948		6,091
Accrued bonus	—		5,043
Accrued sales tax	303		820
Contingent liabilities	396		391
Other accrued expenses	4,070		5,376
Accrued expenses	$	23,236	$	24,730

8. Debt Obligations

The Company’s debt obligations as of September 30, 2020 and December 31, 2019 were as follows:


	September 30, 2020		December 31, 2019
	(in thousands)
Senior Notes	$	347,168	$	400,000
2018 ABL Credit Facility	—		—
Magnum Promissory Notes	2,250		—
Total debt before deferred financing costs	$	349,418	$	400,000
Deferred financing costs	(5,538)		(7,941)
Total debt	$	343,880	$	392,059
Less: Current portion of long-term debt	(844)		—
Long-term debt	$	343,036	$	392,059

Senior Notes

Background

On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The Senior Notes were issued under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among the Company, certain subsidiaries of the Company and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year, and the first interest payment was due on May 1, 2019. The Senior Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s current domestic subsidiaries and by certain future subsidiaries.

The Indenture contains covenants that limit the Company’s ability and the ability of its restricted subsidiaries to engage in certain activities. The Company was in compliance with the provisions of the Indenture at September 30, 2020.

Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to the Company, any restricted subsidiary of the Company that is a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.

Unamortized deferred financing costs associated with the Senior Notes were $5.5 million and $7.9 million at September 30, 2020 and December 31, 2019, respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method.

Extinguishment of Debt

The Company repurchased approximately $23.1 million and $52.8 million of Senior Notes at a repurchase price of approximately $7.0 million and $14.4 million in cash for the three and nine months ended September 30, 2020, respectively. Deferred financing costs associated with these transactions were $0.4 million and $0.9 million for the three and nine months ended September 30, 2020, respectively. As a result, for the three and nine months ended September 30, 2020, the Company recorded a $15.8 million gain and a $37.5 million gain, respectively, on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by the deferred financing costs. The gain on extinguishment of debt is included as a separate line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and nine months ended September 30, 2020.

Subsequent to September 30, 2020, the Company repurchased an additional $0.5 million of the Senior Notes for a repurchase price of approximately $0.2 million in cash.

2018 ABL Credit Facility

On October 25, 2018, the Company entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”), by and among the Company, Nine Energy Canada, Inc., JP Morgan Chase Bank, N.A., as administrative

agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.

Loans to the Company and its domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or LIBOR loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be Canadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on the Company’s leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments.

The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below $18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. The Company was in compliance with all covenants under the 2018 ABL Credit Agreement at September 30, 2020.

All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties, excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.

At September 30, 2020, the Company’s availability under the 2018 ABL Credit Facility was approximately $39.5 million, net of outstanding letters of credit of $0.4 million.

Magnum Promissory Notes

On October 25, 2018, pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), the Company acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum”). The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019 (the “Magnum Earnout”).

On June 30, 2020, pursuant to an amendment to the Magnum Purchase Agreement to terminate the remaining Magnum Earnout and all obligations related thereto (the “Magnum Purchase Agreement Amendment”), the Company issued promissory notes with an aggregated principal amount of $2.3 million (the “Magnum Promissory Notes”) to the sellers of Magnum. The Magnum Promissory Notes bear interest at a rate of 6.0% per annum. The principal amount of the Magnum Promissory Notes will be paid in equal quarterly installments beginning January 1, 2021. The entire unpaid principal amount will be due and payable on the maturity date, which is the earlier of October 1, 2022 and the business day after the date on which the Company 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 September 30, 2020 and December 31, 2019 was as follows:


	September 30, 2020		December 31, 2019
	(in thousands)
Senior Notes	$	102,415	$	324,000
2018 ABL Credit Facility	$	—	$	—
Magnum Promissory Notes	$	2,250	$	—

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 2018 ABL Credit Facility and the Magnum Promissory Notes approximates their carrying value.

9. Related Party Transactions

The Company leases office space, yard facilities, and equipment and purchases building maintenance services from entities owned by David Crombie, an executive officer of the Company. Total lease expense and building maintenance expense associated with these entities was $0.2 million and $0.6 million for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2019, respectively. The Company also purchased $0.8 million and $1.3 million of equipment during the three and nine months ended September 30, 2020, respectively, and $0.7 million and $1.3 million of equipment during the three and nine months ended September 30, 2019, respectively, from an entity in which Mr. Crombie is a limited partner. There were outstanding payables due to this entity relating to equipment purchases of $0.1 million at both September 30, 2020 and December 31, 2019.

In addition, the Company leases office space in Corpus Christi and Midland, Texas from an entity affiliated with Warren Lynn Frazier, a beneficial owner of more than 5% of the Company’s stock. In the third quarter of 2020, another entity affiliated with Mr. Frazier began to sub-lease a portion of such space in Corpus Christi, Texas from the Company. Total rental expense associated with this office space, net of sub-leasing income, was $0.3 million and $1.0 million for the three and nine months ended September 30, 2020, respectively, and $0.4 million and $1.1 million for the three and nine months ended September 30, 2019, respectively. There were net outstanding payables due to the entity of $0.1 million at September 30, 2020. Additionally, on June 30, 2020, the Company issued the Magnum Promissory Notes to the sellers of Magnum, including Mr. Frazier. At September 30, 2020, the outstanding principal balance payable to Mr. Frazier was $2.1 million. 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 $0.0 million and $0.4 million for the three and nine months ended September 30, 2020, respectively, and $0.6 million and $1.5 million for the three and nine months ended September 30, 2019, respectively. There were outstanding payables due to the entity of $0.3 million at December 31, 2019. The Company purchases coiled tubing string from another entity owned by Forum. The Company was billed $0.9 million and $3.0 million for coiled tubing string for the three and nine months ended September 30, 2020, respectively, and $2.0 million and $6.2 million for the three and nine months ended September 30, 2019, respectively. There were outstanding payables due to the entity of $0.2 million and $0.9 million at September 30, 2020 and December 31, 2019, respectively.

The Company purchases chemical additives used in cementing from Select Energy Services, Inc. (“Select”). One of the Company’s directors also serves as a director of Select. The Company was billed $0.2 million and $1.0 million for the three and nine months ended September 30, 2020, respectively, and $0.5 million and $1.6 million for the three and nine months ended September 30, 2019, respectively. There were outstanding payables due to Select of $0.1 million at both September 30, 2020 and December 31, 2019.

The Company provides products and rentals to National Energy Reunited Corp. (“NESR”), where one of the Company’s directors serves as a director. The Company billed NESR $0.2 million and $1.4 million for the three and nine months ended September 30, 2020, respectively, and issued credit memos of $0.5 million for both the three and nine months ended September 30, 2020. The Company billed NESR $0.6 million for both the three and nine months ended September 30, 2019. During the fourth quarter of 2019, the Company sold coiled tubing equipment for $5.9 million to NESR with payments due in 24 monthly equal installments beginning on January 31, 2020. Total outstanding receivables due to the Company from NESR (inclusive of the equipment sale above) were $4.4 million and $6.8 million at September 30, 2020 and December 31, 2019, respectively.

On June 5, 2019, Ann G. Fox, President and Chief Executive Officer and a director of the Company, was elected as a director of Devon Energy Corporation (“Devon”). The Company generated revenue from Devon of $1.2 million and $4.6 million for the three and nine months ended September 30, 2020, respectively, and $5.4 million and $15.8 million for the three and nine months ended September 30, 2019, respectively. There were outstanding receivables due from Devon of $0.4 million and $1.0 million at September 30, 2020 and December 31, 2019, respectively.

10. Commitments and Contingencies

Litigation

From time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.

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 $1.5 million and $1.8 million at September 30, 2020 and December 31, 2019, 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 has recorded the following contingent liabilities at September 30, 2020:

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.

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 includes, among other things, the potential for additional future payments, based on certain Frac Tech sales volume metrics through December 31, 2023.

The changes in the components of contingent liabilities for the nine months ended September 30, 2020 were as follows:


	Magnum		Frac Tech		Total
	(in thousands)
Balance at December 31, 2019	$	2,609	$	1,359	$	3,968
Revaluation adjustments	766		15		781
Payments	—		(206)		(206)
Termination	(3,375)		—		(3,375)
Balance at September 30, 2020	$	—	$	1,168	$	1,168

The contingent consideration related to the contingent liabilities is reported at fair value, based on a Monte Carlo simulation model. Significant inputs used in the fair value measurement include estimated gross margin related to forecasted sales of the plugs, term of the agreement, and a risk adjusted discount factor. Contingent liabilities include $0.4 million reported in “Accrued expenses” at both September 30, 2020 and December 31, 2019, and $0.8 million and $3.6 million reported in “Other long-term liabilities” at September 30, 2020 and December 31, 2019, respectively, in the Company’s Condensed Consolidated Balance Sheets. The impact of the revaluation adjustments is included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

11. Taxes

Income tax expense (benefit) included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(in thousands, except percentages)						(in thousands, except percentages)
Income tax provision (benefit)	$	(37)		$	727		$	(2,348)		$	(1,548)
Effective tax rate	0.2		%	(3.7)		%	0.7		%	(126.7)		%

The Company’s tax benefit for the three and nine months ended September 30, 2020 was less than $0.1 million and $2.3 million, respectively. The Company’s year-to-date tax benefit was primarily a result of the discrete tax benefit recorded in the first quarter of 2020 related to the Coronavirus Aid, Relief, and Economic Security Act as well as the release of valuation allowance due to the goodwill impairment which was also recorded in the first quarter of 2020.

12. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of shares outstanding during each period and the exercise of potentially dilutive stock options assumed to be purchased from the proceeds using the average market price of the Company’s stock for each of the periods presented as well as the potentially dilutive restricted stock, restricted stock units, and performance stock units.

Basic and diluted earnings (loss) per common share was computed as follows:


	Three Months Ended September 30, 2020					Three Months Ended September 30, 2019
	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	$	(18,502)	29,849,753	$	(0.62)	$	(20,627)	29,361,633	$	(0.70)
Assumed exercise of stock options	—		—	—		—		—	—
Unvested restricted stock and stock units	—		—	—		—		—	—
Diluted	$	(18,502)	29,849,753	$	(0.62)	$	(20,627)	29,361,633	$	(0.70)


	Nine Months Ended September 30, 2020					Nine Months Ended September 30, 2019
	Net Loss		Average Shares Outstanding	Loss Per Share		Net Income		Average Shares Outstanding	Earnings Per Share
	(in thousands, except share and per share amounts)
Basic	$	(343,573)	29,708,673	$	(11.56)	$	2,770	29,288,113	$	0.09
Assumed exercise of stock options	—		—	—		—		—	—
Unvested restricted stock and stock units	—		—	—		—		109,523	—
Diluted	$	(343,573)	29,708,673	$	(11.56)	$	2,770	29,397,636	$	0.09

For the three and nine months ended September 30, 2020 as well as the three months ended September 30, 2019, the computation of diluted earnings (loss) per share excluded all stock options, unvested restricted stock, unvested restricted stock units, and unvested performance stock units because their inclusion would be anti-dilutive given the Company was in a net loss position. The average number of securities that were excluded from diluted earnings (loss) per share that would potentially dilute earnings (loss) per share for the periods in which the Company experienced a net loss were as follows:


	2020	2019
Three months ended September 30,	723,608	71,574
Nine months ended September 30,	700,417	—

13. Segment Information

On August 30, 2019, the Company entered into a Membership Interest Purchase Agreement (the “Production Solutions Purchase Agreement”) with Brigade. Pursuant to the Production Solutions Purchase Agreement, on such date, through the sale of all of the limited liability interests of its wholly owned subsidiary, Beckman Holding Production Services, LLC, the Company sold its Production Solutions segment to Brigade. The Production Solutions Purchase Agreement contained customary representations and warranties, covenants, and indemnification provisions. This divestiture did not qualify as discontinued operations in accordance with ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity as it did not represent a strategic shift that had a major effect on the Company’s operations and financial results.

Prior to August 30, 2019, the Company reported its results in two segments, the Completions Solutions segment and the Production Solutions segment. As a result of the Company’s sale of its Production Solutions segment, the Company considers the Completion Solutions segment to be its operating and reporting segment. This segmentation is representative of the manner in which the Chief Operating Decision Maker (“CODM”) and its Board of Directors view the business in allocating resources and measuring financial performance. The Company considers the CODM to be its Chief Executive Officer.

The amounts labeled “Corporate” relate to assets not allocated to either the Completion Solutions segment or the Production Solutions segment.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Revenues
Completion Solutions	$	49,521	$	186,252	$	248,880	$	611,255
Production Solutions	—		16,053		—		58,272
	$	49,521	$	202,305	$	248,880	$	669,527
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Completion Solutions	$	52,483	$	152,679	$	235,194	$	480,140
Production Solutions	—		14,170		—		49,854
	$	52,483	$	166,849	$	235,194	$	529,994
Adjusted gross profit (loss)
Completion Solutions	$	(2,962)	$	33,573	$	13,686	$	131,115
Production Solutions	—		1,883		—		8,418
	$	(2,962)	$	35,456	$	13,686	$	139,533

General and administrative expenses	10,701		19,222		38,380		60,979
Depreciation	7,763		12,196		24,753		39,572
Amortization of intangibles	4,091		4,609		12,376		13,925
Impairment of goodwill	—		—		296,196		—
(Gain) loss on revaluation of contingent liabilities	297		(5,771)		781		(20,701)
Loss on sale of subsidiaries	—		15,834		—		15,834
Gain on sale of property and equipment	(535)		(466)		(2,900)		(799)
Income (loss) from operations	$	(25,279)	$	(10,168)	$	(355,900)	$	30,723
Non-operating (income) expenses	(6,740)		9,732		(9,979)		29,501
Income (loss) before income taxes	(18,539)		(19,900)		(345,921)		1,222
Provision (benefit) for income taxes	(37)		727		(2,348)		(1,548)
Net income (loss)	$	(18,502)	$	(20,627)	$	(343,573)	$	2,770

Capital expenditures by segment for the three and nine months ended September 30, 2020 and 2019, were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Completion Solutions	$	2,193	$	9,146	$	7,193	$	44,343
Production Solutions	—		804		—		2,790
Corporate	—		—		—		93
	$	2,193	$	9,950	$	7,193	$	47,226

Total assets by segment as of September 30, 2020 and December 31, 2019 were as follows:


	September 30, 2020		December 31, 2019
	(in thousands)
Completion Solutions	$	342,182	$	739,142
Corporate	96,277		111,753
	$	438,459	$	850,895

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2020, 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, 2019.

This section contains forward-looking statements based on our current expectations, estimates, and projections about our operations and the industry in which we operate. Our actual results may differ materially from those discussed in any forward-looking statement because of various risks and uncertainties, including those described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q, “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.

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 both the United States and Canada as well as abroad to design and deploy downhole solutions and technology to prepare horizontal, multistage wells for production. We focus on providing our customers with cost-effective and comprehensive completion solutions designed to maximize their production levels and operating efficiencies. We believe our success is a product of our culture, which is driven by our intense focus on performance and wellsite execution as well as our commitment to forward-leaning technologies that aid us in the development of smarter, customized applications that drive efficiencies.

Business Segments

The Completion Solutions segment provides services integral to the completion of unconventional wells through a full range of tools and methodologies. Through the Completion Solutions segment, we provide (i) cementing services, which consist of blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped between the casing and the wellbore of the well, (ii) an innovative portfolio of completion tools, including those that provide pinpoint frac sleeve system technologies as well as a portfolio of completion technologies used for completing the toe stage of a horizontal well and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug and perf operations, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns to a specified depth, and (iv) coiled tubing services, which perform wellbore intervention operations utilizing a continuous steel pipe that is transported to the wellsite wound on a large spool in lengths of up to 30,000 feet and which provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well.

On August 30, 2019, we entered into a Membership Interest Purchase Agreement (“Production Solutions Purchase Agreement”) with Brigade Energy Services LLC (“Brigade”). Pursuant to the Production Solutions Purchase Agreement, on such date, through the sale of all of the limited liability interests of our wholly owned subsidiary, Beckman Holding Production Services, LLC, we sold our Production Solutions segment to Brigade. For additional information on this divestiture, see Note 13 – Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q. Prior to August 30, 2019, we reported our results in two segments, the Completions Solutions segment and the Production Solutions segment.

The Production Solutions segment provided a range of production enhancement and well workover services that were performed with a well servicing rig and ancillary equipment. Our well servicing business encompassed a full range of services performed with a mobile well servicing rig (or workover rig) and ancillary equipment throughout a well’s life cycle from completion to ultimate plug and abandonment. Our rigs and personnel installed and removed downhole equipment and eliminated obstructions in the well to facilitate the flow of oil and natural gas.

How We Generate Revenue and the Costs of Conducting Our Business

We generate our revenues by providing completion services to E&P customers across all major onshore basins in both

the United States and Canada as well as abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically will enter into a Master Service Agreement (“MSA”) with each customer that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Each specific job is obtained through competitive bidding or as a result of negotiations with customers. The rate we charge is determined by location, complexity of the job, operating conditions, duration of the contract, and market conditions. In addition to MSAs, we have entered into a select number of longer-term contracts with certain customers relating to our wireline and cementing services, and we may enter into similar contracts from time to time to the extent beneficial to the operation of our business. These longer-term contracts address pricing and other details concerning our services, but each job is performed on a standalone basis.

The principal expenses involved in conducting our business include labor costs, materials and freight, the costs of maintaining our equipment, and fuel costs. Our direct labor costs vary with the amount of equipment deployed and the utilization of that equipment. Another key component of labor costs relates to the ongoing training of our field service employees, which improves safety rates and reduces employee attrition.

How We Evaluate Our Operations

We evaluate our performance based on a number of financial and non-financial measures, including the following:

•Revenue: We compare actual revenue achieved each month to the most recent projection for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the performance of our operations compared to historical revenue drivers or market metrics. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes.

•Adjusted Gross Profit (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) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) 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, (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) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss or gain on the sale of subsidiaries, (vi) gain on extinguishment of debt, and (vii) the provision or benefit for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis. For additional information, see “Non-GAAP Financial Measures” below.

•Safety: We measure safety by tracking the total recordable incident rate (“TRIR”), which is reviewed on a monthly basis. TRIR is a measure of the rate of recordable workplace injuries, defined below, normalized and stated on the basis of 100 workers for an annual period. The factor is derived by multiplying the number of recordable injuries in a calendar year by 200,000 (i.e., the total hours for 100 employees working 2,000 hours per year) and dividing this value by the total hours actually worked in the year. A recordable injury includes occupational death, nonfatal occupational illness, and other occupational injuries that involve loss of consciousness, restriction of work or motion, transfer to another job, or medical treatment other than first aid.

Factors Affecting the Comparability of Our Results of Operations

Our future results of operations may not be comparable to our historical results of operations for the periods presented, and our historical results of operations among the periods presented may not be comparable to each other, primarily due to our divestiture of the Production Solutions segment.

The historical results of operations for the three and nine months ended September 30, 2020 included in this Quarterly Report on Form 10-Q do not include activity related to the Production Solutions segment whereas the historical results of operations for the three and nine months ended September 30, 2019 include activity related to the Production Solutions segment through August 30, 2019. Furthermore, future results of operations after August 30, 2019 will not include activity related to the Production Solutions segment. For additional information on the divestiture of the Production Solutions segment, see Note 13 – Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Recent Events, Industry Trends, and Outlook

Our business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. The worldwide coronavirus outbreak in early 2020, which was declared a pandemic by the World Health Organization in March 2020, the uncertainty regarding its impact, and various governmental actions taken to mitigate its impact have resulted in an unprecedented decline in demand for oil. In the midst of the ongoing pandemic, OPEC and other oil producing nations, including Russia (“OPEC+”), were initially unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. The convergence of these events created the unprecedented dual impact of a massive decline in the demand for oil coupled with the risk of a substantial increase in supply. While OPEC+ agreed in April 2020 to cut production, downward pressure on commodity prices has remained and could continue for the foreseeable future. During the first half of the year, the posted price for West Texas Intermediate (“WTI”) oil decreased from a high of $63 per barrel in early January 2020 to a one-day low of $(37) per barrel in late April 2020, a level which had not been previously experienced, with physical markets showing signs of distress as spot prices have been negatively impacted by the lack of available storage capacity. Since the end of April 2020 through the end of September 2020, the WTI price has averaged approximately $38 per barrel.

In response to lower oil prices, our customers have generally revised their capital budgets downward and adjusted their operations accordingly, which has caused a significant decline in demand for our products and services. These reductions were most evident in the Permian Basin where total completions declined approximately 57% in the second quarter of 2020 in comparison to the first quarter of 2020, followed by another decrease of approximately 28% in the third quarter of 2020 in comparison to the second quarter of 2020 per the Energy Information Administration. Additionally, between January 3, 2020 and September 30, 2020, the total U.S. rig count has declined by approximately 67% according to Baker Hughes. This overall decline in activity, coupled with downward pricing pressure, has led to a significant reduction in our revenue and profitability for the first nine months of the year. We expect these trends to continue through at least the remainder of the year and into 2021. Over the course of the third quarter of 2020, we did see sequential activity and revenue increases month over month, although revenue and activity levels remained lower than they were in April 2020. We currently expect the fourth quarter of 2020 to be better sequentially than the third quarter of 2020 from an activity and revenue perspective; however, as activity returns, we expect many competitors will seek to buy market share, driving down prices and offsetting much of the anticipated revenue increases.

While we cannot predict the length of time that market disruptions resulting from the coronavirus pandemic and efforts to mitigate its effects will continue, the ultimate impact on our business, or the pace or extent of any subsequent recovery, we expect the coronavirus pandemic and related effects to continue to have a material adverse impact on commodity prices and our business generally. We have experienced inefficiencies and logistical challenges surrounding stay-at-home orders and remote work arrangements, travel restrictions, and an inability to commute to certain facilities and job sites, as we provide services and products to our customers. For additional information regarding risks relating to the coronavirus outbreak, see “Risk Factors” in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.

During the pandemic, we have maintained our commitment to the safety of our employees, customers, vendors, and community at large, and we have taken, and are continuing to take, a proactive approach to navigating the pandemic. To mitigate exposure and risk, we have implemented processes and procedures across our entire organization based on federal, regional, and local guidelines and mandates, and our Health, Safety & Environment and management teams are in frequent communication with our entire employee base to ensure they are receiving updated guidelines, processes, and procedures. In response to the pandemic, we have implemented the following changes, for example: at the field level, we are working closely with our customers and vendors to update standard operating procedures, based on social distancing, hand washing, and other recommended best practices set forth by the Centers for Disease Control and Prevention; electronic assessments have been

employed to check the health of employees prior to reporting to work, to ensure facilities are being properly cleaned and sanitized, and to check visitor health before arrival to a Nine location; internal case managers have been identified to handle all coronavirus-related cases, and all confirmed and potential cases are tracked through closure; many of our corporate and office employees are working virtually to avoid unnecessary risk and exposure; and we have significantly limited any work-related travel. We are actively monitoring updates from regulatory and government bodies and evolving our strategy accordingly in an effort to keep our workforce and communities healthy.

Other significant factors that are likely to affect commodity prices for the remainder of the year include the extent to which members of OPEC+ and other oil exporting nations continue to reduce oil export prices and increase production; the effect of energy, monetary, and trade policies of the United States; the pace of economic growth in the United States and throughout the world, including the potential for macro weakness; geopolitical and economic developments in the United States and globally; the outcome of the United States presidential election and subsequent energy and Environmental Protection Agency policies; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows. Even with price improvements in oil and natural gas, operator activity may not materially increase, as operators remain focused on operating within their capital plans, and uncertainty remains around supply and demand fundamentals.

In this challenging environment, we will nevertheless continue to focus on generating returns and cash flow. Due to our high level of variable costs and the asset-light make-up of our business, we were able to quickly implement cost-cutting measures and will continue to adapt as the market dictates. These cost-cutting measures included salary reductions for key employees ranging from 10% to 15%, the suspension of the company match (which totaled $4.8 million in 2019) under our Nine Energy Service 401(k) Plan, and headcount reductions of 55% across the entire organization as of September 30, 2020 in comparison to December 31, 2019. In addition, we have revised our capital expenditure budget, excluding possible acquisitions, to between $10.0 million to $15.0 million for 2020 and deferred or eliminated certain capital projects, where necessary. During the first nine months of 2020, we incurred approximately $7.2 million of capital expenditures compared to $47.2 million for the first nine months of 2019.

Generally, operators have continued to improve operational efficiencies in completions design, increasing the complexity and difficulty, making oilfield service selection more important. This increase in high-intensity, high-efficiency completions of oil and gas wells further enhances the demand for our services. We compete for the most complex and technically demanding wells in which we specialize, which are characterized by extended laterals, increased stage spacing, multi-well pads, cluster spacing, and high proppant loads. These well characteristics lead to increased operating leverage and returns for us, as we are able to complete more jobs and stages with the same number of units and crews. Service providers for these projects are selected based on their technical expertise and ability to execute safely and efficiently, rather than only price.

Results of Operations

Results for the Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019


	Three Months Ended September 30,
	2020		2019		Change
	(in thousands)
Revenues
Completion Solutions	$	49,521	$	186,252	$	(136,731)
Production Solutions (1)	—		16,053		(16,053)
	$	49,521	$	202,305	$	(152,784)
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Completion Solutions	$	52,483	$	152,679	$	(100,196)
Production Solutions (1)	—		14,170		(14,170)
	$	52,483	$	166,849	$	(114,366)
Adjusted gross profit (loss)
Completion Solutions	$	(2,962)	$	33,573	$	(36,535)
Production Solutions (1)	—		1,883		(1,883)
	$	(2,962)	$	35,456	$	(38,418)

General and administrative expenses	$	10,701	$	19,222	$	(8,521)
Depreciation	7,763		12,196		(4,433)
Amortization of intangibles	4,091		4,609		(518)
Impairment of goodwill	—		—		—
(Gain) loss on revaluation of contingent liabilities	297		(5,771)		6,068
Loss on sale of subsidiaries	—		15,834		(15,834)
Gain on sale of property and equipment	(535)		(466)		(69)
Loss from operations	(25,279)		(10,168)		(15,111)
Non-operating (income) expenses	(6,740)		9,732		(16,472)
Loss before income taxes	(18,539)		(19,900)		1,361
Provision (benefit) for income taxes	(37)		727		(764)
Net loss	$	(18,502)	$	(20,627)	$	2,125

(1)We sold the Production Solutions segment to Brigade on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 13 – Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Revenues

Revenues decreased $152.8 million, or 76%, to $49.5 million for the third quarter of 2020 which is primarily related to reduced activity and pricing pressure caused by poor market conditions, including an economic recession associated with the coronavirus pandemic, in comparison to the third quarter of 2019. We depend, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America. In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the third quarter of 2020, the average closing price was $40.89 per barrel of WTI, and the average closing price of natural gas was $2.00 per MMBtu. During the third quarter of 2019, the average closing price of WTI was $56.34 per barrel, and the average closing price of natural gas was $2.38 per MMBtu.

Additional information with respect to revenues by historical reportable segment is discussed below.

Completion Solutions: Revenue decreased $136.7 million, or 73%, to $49.5 million for the third quarter of 2020. The decrease was prevalent across all lines of service and was a direct reflection of pricing pressures caused by reasons described above. More specifically, wireline revenue decreased $45.7 million, or 78%, as total completed wireline stages decreased by 74%, in comparison to the third quarter of 2019. In addition, cementing revenue (including pump downs) decreased by $40.4 million, or 73%, as total cement job count decreased 66% in comparison to the third quarter of 2019, tools revenue decreased $26.8 million, or 66%, as completion tools stages decreased by 56% in comparison to the third quarter of 2019, and coiled tubing revenue decreased by $23.8 million, or 77%, as total days worked decreased by 66% in comparison to the third quarter of 2019.

Production Solutions: Revenue decreased $16.1 million, or 100%, for the third quarter of 2020 as the Production Solutions segment was sold on August 30, 2019.

Cost of Revenues (Exclusive of Depreciation and Amortization)

Cost of revenues decreased $114.4 million, or 69%, to $52.5 million for the third quarter of 2020, which is primarily related to reduced activity and pricing pressure caused by poor market conditions, including an economic recession associated with the coronavirus pandemic, in comparison to the third quarter of 2019.

Additional information with respect to cost of revenues by historical reportable segment is discussed below.

Completion Solutions: Cost of revenues decreased $100.2 million, or 66%, to $52.5 million for the third quarter of 2020. The decrease in comparison to the third quarter of 2019 was prevalent across all lines of service and was a direct reflection of reasons described above. More specifically, the decrease was primarily related to a $56.3 million decrease in materials installed and consumed while performing services, a $33.4 million decrease in employee costs, a $10.8 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses, and a $1.4 million decrease in cost of revenue type restructuring charges primarily associated with the third quarter of 2019 wind-down of our wireline services in Canada that did not recur in the third quarter of 2020. The overall decrease in cost of revenues was partially offset by a $1.1 million increase in non-cash facility lease costs and a $0.6 million increase in bad debt expense between periods.

Production Solutions: Cost of revenues decreased $14.2 million, or 100%, for the third quarter of 2020 as the Production Solutions segment was sold on August 30, 2019.

Adjusted Gross Profit (Loss)

Completion Solutions: Adjusted gross profit decreased $36.5 million to a $3.0 million loss for the third quarter of 2020 due to the factors described above under “Revenues” and “Cost of Revenues.”

Production Solutions: Adjusted gross profit decreased $1.9 million to $0.0 million for the third quarter of 2020 as a result of the factors described above under “Revenues” and “Cost of Revenues.”

General and Administrative Expenses

General and administrative expenses decreased $8.5 million to $10.7 million for the third quarter of 2020. The decrease in comparison to the third quarter of 2019 was primarily related to a $5.6 million decrease in employee costs due mainly to headcount reductions across the organization. The overall decrease was also partly attributed to a $1.4 million reduction in general and administrative restructuring charges primarily associated with the third quarter of 2019 wind-down of our wireline services in Canada that did not recur in the third quarter of 2020. In addition, the overall decrease was partly

attributed to a $1.0 million reduction in transaction and integration costs associated with the Magnum Acquisition and a $0.5 million decrease in other general and administrative expenses such as professional fees, marketing, and travel expenses between periods.

Depreciation

Depreciation expense decreased $4.4 million to $7.8 million for the third quarter of 2020. The decrease in comparison to the third quarter of 2019 was primarily related to a $2.7 million reduction in depreciation expense associated with our coiled tubing business mainly due to the property and equipment charge recorded in the fourth quarter of 2019, coupled with a $1.2 million reduction in depreciation expense in the Production Solutions segment, which was sold on August 30, 2019, and a $0.5 million reduction in depreciation expense in other lines of service within our Completion Solutions segment due to a decrease in capital expenditures between periods.

Amortization of Intangibles

Amortization of intangibles decreased $0.5 million to $4.1 million for the third quarter of 2020, primarily due to a $0.3 million decrease in amortization associated with certain non-compete agreements that were fully amortized in 2019, coupled with a $0.2 million decrease in amortization associated with our coiled tubing business mainly due to the intangible asset impairment charge recorded in the fourth quarter of 2019.

(Gain) Loss on Revaluation of Contingent Liabilities

We recorded a $0.3 million loss on the revaluation of contingent liabilities for the third quarter of 2020 compared to a $5.8 million gain on the revaluation of contingent liabilities for the third quarter of 2019. The $6.1 million change was primarily related to a $6.0 million gain on the revaluation of the Magnum Earnout (as defined in Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) in the third quarter of 2019 that did not recur in the third quarter of 2020. The Magnum Earnout was terminated in the second quarter of 2020.

Non-Operating (Income) Expenses

We recorded $6.7 million in non-operating income for the third quarter of 2020 compared to $9.7 million in non-operating expenses for the third quarter of 2019. The $16.4 million change was primarily related to a $15.8 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined in “Liquidity and Capital Resources”) in the third quarter of 2020 that did not occur in the third quarter of 2019. The change is also partly attributed to a $0.7 million reduction in interest expense and a $0.1 million increase in interest income between periods.

Provision (Benefit) for Income Taxes

We recorded less than a $0.1 million income tax benefit for the third quarter of 2020 compared to a $0.7 million income tax provision for the third quarter of 2019. The $0.8 million decrease in the income tax provision was primarily driven by our valuation allowance position and fluctuations in income between periods.

Adjusted EBITDA

Adjusted EBITDA decreased $35.4 million to a loss of $11.1 million for the third quarter of 2020. The Adjusted EBITDA decrease was primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.

Results for the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019


	Nine Months Ended September 30,
	2020		2019		Change
	(in thousands)
Revenues
Completion Solutions	$	248,880	$	611,255	$	(362,375)
Production Solutions (1)	—		58,272		(58,272)
	$	248,880	$	669,527	$	(420,647)
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Completion Solutions	$	235,194	$	480,140	$	(244,946)
Production Solutions (1)	—		49,854		(49,854)
	$	235,194	$	529,994	$	(294,800)
Adjusted gross profit
Completion Solutions	$	13,686	$	131,115	$	(117,429)
Production Solutions (1)	—		8,418		(8,418)
	$	13,686	$	139,533	$	(125,847)

General and administrative expenses	$	38,380	$	60,979	$	(22,599)
Depreciation	24,753		39,572		(14,819)
Amortization of intangibles	12,376		13,925		(1,549)
Impairment of goodwill	296,196		—		296,196
(Gain) loss on revaluation of contingent liabilities	781		(20,701)		21,482
Loss on sale of subsidiaries	—		15,834		(15,834)
Gain on sale of property and equipment	(2,900)		(799)		(2,101)
Income (loss) from operations	(355,900)		30,723		(386,623)
Non-operating (income) expenses	(9,979)		29,501		(39,480)
Income (loss) before income taxes	(345,921)		1,222		(347,143)
Benefit for income taxes	(2,348)		(1,548)		(800)
Net income (loss)	$	(343,573)	$	2,770	$	(346,343)

Revenues

Revenues decreased $420.6 million, or 63%, to $248.9 million for the first nine months of 2020 which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes, in comparison to the first nine months of 2019. We depend, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America. In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the first nine months of 2020, the average closing price was $38.04 per barrel of WTI, and the average closing price of natural gas was $1.87 per MMBtu. During the first nine months of 2019, the average closing price of WTI was $57.04 per barrel, and the average closing price of natural gas was $2.62 per MMBtu.

Additional information with respect to revenues by historical reportable segment is discussed below.

Completion Solutions: Revenue decreased $362.4 million, or 59%, to $248.9 million for the first nine months of 2020. The decrease was prevalent across all lines of service and was a direct reflection of pricing pressures caused by reasons described above. More specifically, wireline revenue decreased $118.7 million, or 64%, as total completed wireline stages decreased by 58% in comparison to the first nine months of 2019. In addition, tools revenue decreased $89.3 million, or 59%, as completion tools stages decreased by 49% in comparison to the first nine months of 2019, cementing revenue (including pump downs) decreased by $81.4 million, or 49%, as our total cement job count decreased 45% in comparison to the first nine months of 2019, and coiled tubing revenue decreased $73.0 million, or 67%, as total days worked decreased by 57% in comparison to the first nine months of 2019.

Production Solutions: Revenue decreased $58.3 million, or 100%, for the first nine months of 2020 as the Production Solutions segment was sold on August 30, 2019.

Cost of Revenues (Exclusive of Depreciation and Amortization)

Cost of revenues decreased $294.8 million, or 56%, to $235.2 million for the first nine months of 2020, which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes, in comparison to the first nine months of 2019.

Additional information with respect to cost of revenues by historical reportable segment is discussed below.

Completion Solutions: Cost of revenues decreased $244.9 million, or 51%, to $235.2 million for the first nine months of 2020. The decrease in comparison to the first nine months of 2019 was prevalent across all lines of service and was a direct reflection of reasons described above. More specifically, the decrease was primarily related to a $144.9 million decrease in materials installed and consumed while performing services, a $76.6 million decrease in employee costs, a $24.2 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses, and a $3.2 million decrease in transaction and integration costs associated with the Magnum Acquisition. The overall decrease in cost of revenues was partially offset by a $2.0 million increase in bad debt expense, a $1.1 million increase in non-cash facility lease costs, and a $0.9 million increase in cost of revenue type restructuring costs between periods.

Production Solutions: Cost of revenues decreased $49.9 million, or 100%, for the first nine months of 2020 as the Production Solutions segment was sold on August 30, 2019.

Adjusted Gross Profit (Loss)

Completion Solutions: Adjusted gross profit decreased $117.4 million to $13.7 million for the first nine months of 2020 due to the factors described above under “Revenues” and “Cost of Revenues.”

Production Solutions: Adjusted gross profit decreased $8.4 million to $0.0 million for the first nine months of 2020 as a result of the factors described above under “Revenues” and “Cost of Revenues.”

General and Administrative Expenses

General and administrative expenses decreased $22.6 million to $38.4 million for the first nine months of 2020. The decrease in comparison to the first nine months of 2019 was primarily related to a $14.5 million decrease in employee costs due mainly to headcount reductions across the organization. The overall decrease was also partly attributed to a $5.5 million decrease in transaction and integration costs associated with the Magnum Acquisition and a $3.3 million decrease in other costs

such as professional fees, marketing, and travel expenses, as well as expenses associated with the recently sold Production Solutions segment. The overall decrease in general and administrative expenses was partially offset by a $0.7 million increase in severance and other general and administrative type restructuring costs between periods.

Depreciation

Depreciation expense decreased $14.8 million to $24.8 million for the first nine months of 2020. The decrease in comparison to the first nine months of 2019 was primarily related to a $7.4 million reduction in depreciation expense associated with our coiled tubing business mainly due to the property and equipment charge recorded in the fourth quarter of 2019, coupled with a $5.0 million reduction in depreciation expense in the Production Solutions segment, which was sold on August 30, 2019, and a $2.4 million reduction in depreciation expense in other lines of service within our Completion Solutions segment due to a decrease in capital expenditures between periods.

Amortization of Intangibles

Amortization of intangibles decreased $1.5 million to $12.4 million for the first nine months of 2020, primarily due to a $0.8 million decrease in amortization associated with certain non-compete agreements that were fully amortized in 2019, coupled with a $0.7 million decrease in amortization associated with our coiled tubing business mainly due to the intangible asset impairment charge recorded in the fourth quarter of 2019.

Impairment of Goodwill

We recorded goodwill impairment charges of $296.2 million for the first nine months of 2020 in our tools, cementing, and wireline reporting units due to sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes. No goodwill impairment charges were recorded for the first nine months of 2019.

(Gain) Loss on Revaluation of Contingent Liabilities

We recorded a $0.8 million loss on the revaluation of contingent liabilities for the first nine months of 2020 compared to a $20.7 million gain on the revaluation of contingent liabilities for the first nine months of 2019. The $21.5 million change was primarily related to an $0.8 million loss on the revaluation of the Magnum Earnout (as defined in Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) for the first nine months of 2020 compared to a $21.4 million gain on the revaluation of the Magnum Earnout for the first nine months of 2019. The Magnum Earnout was terminated in the second quarter of 2020. The change was partially offset by a $0.7 million loss on the revaluation of the earnout associated with our acquisition of Frac Technology AS for the first nine months of 2019 that did not recur for the first nine months of 2020.

Non-Operating (Income) Expenses

We recorded $10.0 million in non-operating income for the first nine months of 2020 compared to $29.5 million in non-operating expenses for the first nine months of 2019. The $39.5 million change was primarily related to a $37.5 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined in “Liquidity and Capital Resources”) in the first nine months of 2020 that did not occur in the first nine months of 2019. The change is also partly attributed to a $1.8 million reduction in interest expense and a $0.2 million increase in interest income between periods.

Provision (Benefit) for Income Taxes

We recorded a $2.3 million income tax benefit for the first nine months of 2020 compared to an income tax benefit of $1.5 million for the first nine months of 2019. The $0.8 million increase in the income tax benefit was primarily driven by our valuation allowance position and fluctuations in income between periods.

Adjusted EBITDA

Adjusted EBITDA decreased $113.3 million to a loss of $11.9 million for the first nine months of 2020. The Adjusted EBITDA 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) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) 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 as determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”) or as an indicator of our operating performance. Certain items excluded from these measures are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of these measures. Our computations of these measures may not be comparable to other similarly titled measures of other companies. We believe that these are widely followed measures of operating performance.

The following table presents a reconciliation of the non-GAAP financial measures of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
EBITDA reconciliation:
Net income (loss)	$	(18,502)	$	(20,627)	$	(343,573)	$	2,770
Interest expense	9,130		9,843		28,144		29,940
Interest income	(43)		(111)		(593)		(439)
Provision (benefit) for income taxes	(37)		727		(2,348)		(1,548)
Depreciation	7,763		12,196		24,753		39,572
Amortization of intangibles	4,091		4,609		12,376		13,925
EBITDA	$	2,402	$	6,637	$	(281,241)	$	84,220

Adjusted EBITDA reconciliation:
EBITDA	$	2,402	$	6,637	$	(281,241)	$	84,220
Impairment of goodwill	—		—		296,196		—
Transaction and integration costs	—		1,418		146		8,864
(Gain) loss on revaluation of contingent liabilities (1)	297		(5,771)		781		(20,701)
Gain on extinguishment of debt	(15,798)		—		(37,501)		—
Loss on sale of subsidiaries	—		15,834		—		15,834
Restructuring charges	459		3,263		4,882		3,263
Stock-based compensation expense	2,020		3,286		7,717		10,553
Gain on sale of property and equipment	(535)		(466)		(2,900)		(799)
Legal fees and settlements (2)	15		22		39		165
Adjusted EBITDA	$	(11,140)	$	24,223	$	(11,881)	$	101,399

(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) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss or gain on the sale of subsidiaries, (vi) gain on extinguishment of debt, and (vii) the provision or benefit for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis.

Management believes ROIC is a meaningful measure because it quantifies how well we generate operating income relative to the capital we have invested in our business and illustrates the profitability of a business or project taking into account the capital invested. Management uses ROIC to assist them in capital resource allocation decisions and in evaluating business performance. Although ROIC is commonly used as a measure of capital efficiency, definitions of ROIC differ, and our computation of ROIC may not be comparable to other similarly titled measures of other companies.

The following table provides an explanation of our calculation of ROIC for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Net income (loss)	$	(18,502)	$	(20,627)	$	(343,573)	$	2,770
Add back:
Impairment of goodwill	—		—		296,196		—
Transaction and integration costs	—		1,418		146		8,864
Interest expense	9,130		9,843		28,144		29,940
Interest income	(43)		(111)		(593)		(439)
Restructuring charges	459		3,263		4,882		3,263
Loss on sale of subsidiaries	—		15,834		—		15,834
Gain on extinguishment of debt	(15,798)		—		(37,501)		—
Provision (benefit) for deferred income taxes	—		143		(1,588)		(2,876)
After-tax net operating profit (loss)	$	(24,754)	$	9,763	$	(53,887)	$	57,356
Total capital as of prior period-end:
Total stockholders’ equity	$	69,950	$	624,309	$	389,877	$	594,823
Total debt	372,584		400,000		400,000		435,000
Less cash and cash equivalents	(88,678)		(16,886)		(92,989)		(63,615)
Total capital as of prior period-end	$	353,856	$	1,007,423	$	696,888	$	966,208
Total capital as of period-end:
Total stockholders’ equity	$	53,599	$	606,779	$	53,599	$	606,779
Total debt	349,418		400,000		349,418		400,000
Less cash and cash equivalents	(80,338)		(93,321)		(80,338)		(93,321)
Total capital as of period-end	$	322,679	$	913,458	$	322,679	$	913,458
Average total capital	$	338,268	$	960,441	$	509,784	$	939,833
ROIC	(29.3)%		4.1%		(14.1)%		8.1%

Adjusted Gross Profit (Loss)

GAAP defines gross profit (loss) as revenues less cost of revenues and includes depreciation and amortization in costs of revenues. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit (loss) because we do not include the impact of depreciation and amortization, which represent non-cash expenses.

Management uses adjusted gross profit (loss) to evaluate operating performance. We prepare adjusted gross profit (loss) to eliminate the impact of depreciation and amortization because we do not consider depreciation and amortization indicative of our core operating performance. Adjusted gross profit (loss) should not be considered as an alternative to gross profit (loss), operating income (loss), or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted gross profit (loss) may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted gross profit (loss) or similarly titled measures in the same manner as we do.

The following table presents a reconciliation of adjusted gross profit (loss) to GAAP gross profit (loss) for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Calculation of gross profit (loss)
Revenues	$	49,521	$	202,305	$	248,880	$	669,527
Cost of revenues (exclusive of depreciation and amortization shown separately below)	52,483		166,849		235,194		529,994
Depreciation (related to cost of revenues)	7,219		11,994		23,020		38,916
Amortization of intangibles	4,091		4,609		12,376		13,925
Gross profit (loss)	$	(14,272)	$	18,853	$	(21,710)	$	86,692
Adjusted gross profit (loss) reconciliation:
Gross profit (loss)	$	(14,272)	$	18,853	$	(21,710)	$	86,692
Depreciation (related to cost of revenues)	7,219		11,994		23,020		38,916
Amortization of intangibles	4,091		4,609		12,376		13,925
Adjusted gross profit (loss)	$	(2,962)	$	35,456	$	13,686	$	139,533

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. Our principal uses of cash are to fund capital expenditures and acquisitions, to service our outstanding debt, and to fund our working capital requirements. We may also, from time to time, make open market debt repurchases (including our Senior Notes as defined and described below) when it is opportunistic to do to manage our debt maturity profile. In 2018, we issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”) to, together with cash on hand and borrowings under the 2018 ABL Credit Facility (as defined and described below), fund the Magnum Acquisition as well as fully repay and terminate the term loan borrowings and the outstanding revolving credit commitments under our prior credit facility. For additional information regarding the Senior Notes, see “Senior Notes” below. In the third quarter of 2019, we divested the Production Solutions segment for approximately $17.1 million in cash. We used such proceeds to support working capital requirements and fund a portion of our 2020 capital expenditures.

We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue to access outside sources of capital. In addition, our ability to satisfy our liquidity requirements depends on our future operating performance, which is affected by prevailing economic conditions, the level of drilling, completion and production activity for North American onshore oil and natural gas resources, and financial and business and other factors, many of which are beyond our control.

Although we do not budget for acquisitions, pursuing growth through acquisitions may continue to be a significant part of our business strategy. Our ability to make significant additional acquisitions for cash will require us to obtain additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.

At September 30, 2020, we had $80.3 million of cash and cash equivalents and $39.5 million of availability under the 2018 ABL Credit Facility (as defined below), which resulted in a total liquidity position of $119.8 million. In response to rapidly deteriorating market conditions driven in large part by the coronavirus pandemic and international pricing and production disputes, we have implemented certain cost-cutting measures across the organization to continue to maintain our current liquidity position. Based on our current forecasts, we believe that, cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility, should be sufficient to fund our capital requirements for at least the next twelve months from the issuance date of our condensed consolidated financial statements. However, we can make no assurance regarding our ability to achieve our forecasts. Furthermore, depending on our financial performance and the ever-changing market, we may implement additional cost-cutting measures, as necessary, to continue to meet our liquidity and capital resource needs for at least the next twelve months from the issuance date of our condensed consolidated financial statements. We can make no assurance regarding our ability to successfully implement such measures, or whether such measures would be sufficient to mitigate a decline in our financial performance.

Senior Notes

On October 25, 2018, we issued the Senior Notes due 2023 under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among us, including certain of our subsidiaries, and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year, and the first interest payment was due on May 1, 2019. The Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed on a senior unsecured basis by each of our current domestic subsidiaries and by certain future subsidiaries.

The Indenture contains covenants that limit our ability and the ability of our restricted subsidiaries to engage in certain activities. We were in compliance with the provisions of the Indenture at September 30, 2020.

Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to us, any of our restricted subsidiaries that are a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.

We repurchased approximately $23.1 million and $52.8 million of Senior Notes at a repurchase price of approximately $7.0 million and $14.4 million in cash for the three and nine months ended September 30, 2020, respectively. Deferred financing costs associated with these transactions were $0.4 million and $0.9 million for the three and nine months ended September 30, 2020, respectively. As a result, for the three and nine months ended September 30, 2020, we recorded a $15.8 million gain and a $37.5 million gain, respectively, on the extinguishment of debt.

Subsequent to September 30, 2020, we repurchased an additional $0.5 million of the Senior Notes for a repurchase price of approximately $0.2 million in cash.

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”), by and among us, Nine Energy Canada, Inc., JP Morgan Chase Bank, N.A. as administrative agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.

Loans to us and our domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or London Interbank Offered Rate (“LIBOR”) loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be Canadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on our leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments.

The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions) and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below $18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. We were in compliance with all covenants under the 2018 ABL Credit Agreement at September 30, 2020.

liens) in substantially all of the personal property of Canadian Credit Parties excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.

At September 30, 2020, our availability under the 2018 ABL Credit Facility was approximately $39.5 million, net of outstanding letters of credit of $0.4 million.

Cash Flows

Cash flows provided by (used in) operations by type of activity were as follows for the nine months ended September 30, 2020 and 2019:


	Nine Months Ended September 30,
	2020		2019
	(in thousands)
Operating activities	$	4,640	$	86,808
Investing activities	(550)		(19,593)
Financing activities	(16,637)		(37,546)
Impact of foreign exchange rate on cash	(104)		37
Net change in cash and cash equivalents	$	(12,651)	$	29,706

Operating Activities

Net cash provided by operating activities was $4.6 million for the first nine months of 2020 compared to $86.8 million in net cash provided by operating activities for the first nine months of 2019. The $82.2 million decrease in net cash provided by operating activities was primarily a result of a $102.8 million decrease in cash flow provided by operations, adjusted for any non-cash items, primarily due to a decrease in revenue for the first nine months of 2020 compared to the first nine months of 2019. The overall decrease in net cash provided by operating activities was partially offset by an increase of $20.6 million in cash collections and other changes in working capital which provided an increased source of cash flow for the first nine months of 2020 in comparison to the first nine months of 2019.

Investing Activities

Net cash used in investing activities was $0.6 million for the first nine months of 2020 compared to $19.6 million in net cash used in investing activities for the first nine months of 2019. The $19.0 million decrease in net cash used in investing activities was primarily related to a decrease of $41.8 million in cash purchases of property and equipment for the first nine months of 2020 in comparison to the first nine months of 2019. The overall decrease was also partly due to an increase in proceeds from sales of property and equipment (including insurance) of $3.1 million in the first nine months of 2020 compared to the first nine months of 2019. The overall decrease in net cash used in investing activities was partially offset by $17.2 million in proceeds from the sale of subsidiaries and $7.6 million in proceeds from notes receivable payments, which were received in the first nine months of 2019 but did not recur in the first nine months of 2020.

Financing Activities

Net cash used in financing activities was $16.6 million for the first nine months of 2020 compared to $37.5 million in net cash flow used in financing activities for the first nine months of 2019. The $20.9 million decrease in net cash used in financing activities was primarily related to $45.0 million in payments on the 2018 ABL Credit Facility in the first nine months of 2019 that did not recur in the first nine months of 2020. The overall decrease was also partly due to a decrease of $1.5 million in cash used for the vesting of restricted stock in the first nine months of 2020 compared to net cash used in the first nine months of 2019. The overall decrease in net cash used in financing activities was partially offset by $14.4 million of purchases of the Senior Notes in the first nine months of 2020 that did not occur in the first nine months of 2019, coupled with $10.0 million in proceeds from the 2018 ABL Credit Facility in the first nine months of 2019 that did not recur in the first nine months of 2020 as well as an additional $1.1 million in payments of contingent liabilities in the first nine months of 2020 in comparison to the first nine months of 2019.

Contractual Obligations

Our contractual obligations at September 30, 2020 did not change materially, outside the normal course of business, from those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations” in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2019.

Off-Balance Sheet Arrangements

At September 30, 2020, we had letters of credit of $0.4 million, which represented off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. As of September 30, 2020, 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2020. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2020, due to the material weakness in internal control over financial reporting described below.

Material Weakness in Internal Control over Financial Reporting. As reported in Item 9A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2019, we did not design and maintain adequate controls to address the segregation of certain accounting duties related to journal entries, account reconciliations, and other accounting functions. Certain accounting personnel had the ability to prepare and post journal entries, as well as reconcile accounts, without an independent review by someone other than the preparer. Specifically, our internal controls were not designed or operating effectively to evidence that journal entries were appropriately recorded or were properly reviewed for validity, accuracy, and completeness. Immaterial misstatements were identified related to the inadequate segregation of accounting duties. This material weakness could result in misstatement of the aforementioned accounts and disclosures that would result in a material misstatement in our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

Remediation Efforts to Address the Material Weakness. In response to the material weakness described above, our management has dedicated significant time and effort to improve our internal control over financial reporting and develop a detailed action plan to fully remediate the material weakness, as follows:

Previously Completed Remediation Actions

•Replaced the less sophisticated accounting systems used by the majority of our newly acquired subsidiaries with the enterprise resource planning system used by the majority of our existing subsidiaries.

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

•Substantially completed a comprehensive risk assessment of the design of internal controls, including the implementation of new internal controls as needed to ensure the segregation of certain accounting duties related to journal entries, account reconciliations, and other accounting functions.

•Designed and implemented a monitoring control that captures key roles and responsibilities within our enterprise resource planning system with consideration of mitigating business process controls designed to reduce the risk of material misstatement related to inadequate segregation of certain accounting duties related to journal entries, account reconciliations, and other accounting functions. Our management continues to assess the effectiveness of this control.

•Instituted additional training programs for appropriate personnel regarding the application of our enterprise resource planning system.

As we continue to evaluate and work to improve our internal control over financial reporting, our management may determine to take additional measures to address the material weakness identified above or determine to modify the remediation steps described above. Until the remediation steps set forth above are fully developed, implemented, and operating for a sufficient amount of time to validate the remediation, the material weakness described above will continue to exist.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarterly period ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

Except as set forth in “Risk Factors” in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. 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 of our Annual Report on Form 10-K for the year ended December 31, 2019 and in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE AND SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The exhibits required to be filed or furnished by Item 601 of Regulation S-K are listed below.


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

3.2						Fourth Amended and Restated Bylaws of Nine Energy Service, Inc., dated January 23, 2018 (Incorporated by reference to Exhibit 3.2 of Nine Energy Service, Inc.’s Current Report on Form 8-K filed on January 23, 2018).

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

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

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

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

101*						Interactive Data Files

* Filed herewith.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Nine Energy Service, Inc.

Date:

November 5, 2020

By:

/s/ Ann G. Fox

Ann G. Fox

President, Chief Executive Officer and Director

(Principal Executive Officer)

Date:

November 5, 2020

By:

/s/ Guy Sirkes

Guy Sirkes

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)