NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Company and Organization
Background
Nine Energy Service, Inc. (the “Company” or “Nine”), a Delaware corporation, is an oilfield services business that provides services integral to the completion of unconventional wells through a full range of tools and methodologies. The Company is headquartered in Houston, Texas.
The Company’s chief operating decision maker, which is its Chief Executive Officer, and its board of directors allocate resources and assess performance based on financial information presented at a consolidated level. Accordingly, the Company determined that it operates as one reportable segment.
Risks and Uncertainties
The Company’s business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. The worldwide coronavirus outbreak in early 2020, which was declared a pandemic by the World Health Organization in March 2020, the uncertainty regarding its impact, and various governmental actions taken to mitigate its impact have resulted in an unprecedented decline in demand for oil. In the midst of the ongoing pandemic, the Organization of the Petroleum Exporting Countries and other oil producing nations, including Russia, were initially unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. The convergence of these events created the unprecedented dual impact of a massive decline in the demand for oil, coupled with the risk of a substantial increase in supply, which has directly affected the Company. While the Company cannot predict the length of time that market disruptions resulting from the coronavirus pandemic and efforts to mitigate its effects will continue, the ultimate impact on its business, or the pace or extent of any subsequent recovery, the Company expects the coronavirus pandemic and related effects to continue to have a material adverse impact on commodity prices and its business generally.
Historically, the Company has met its liquidity needs principally from cash on hand, cash flow from operations and, if needed, external borrowings. In response to the above events, the Company has implemented certain cost-cutting measures across the organization to continue to maintain its current liquidity position. Based on its current forecasts, the Company believes that cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility (as defined in Note 8 – Debt Obligations), should be sufficient to fund its capital requirements for at least the next twelve months from the issuance date of its condensed consolidated financial statements.
2. Basis of Presentation
Condensed Consolidated Financial Information
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of March 31, 2021, and its results of operations for the three months ended March 31, 2021, and 2020, and cash flows for the three months ended March 31, 2021, and 2020. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), in a manner consistent with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, unless otherwise disclosed herein, and should be read in conjunction therewith. The Condensed Consolidated Balance Sheet at December 31, 2020 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Nine and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Such estimates include fair value assumptions used in analyzing goodwill, definite and indefinite-lived intangible assets, and property and equipment for possible impairment, useful lives used in depreciation and amortization expense, stock-based compensation fair value, estimated realizable value on excess and obsolete inventories, deferred taxes and income tax contingencies, and losses on accounts receivable. It is at least reasonably possible that the estimates used will change within the next year.
3. New Accounting Standards
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The adoption of this standard does not have a material impact on the Company’s condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for public businesses for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect the standard to have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for public businesses for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in ASU 2016-13 replace the current incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. ASU 2016-13 is effective for SEC filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
4. Revenues
Disaggregation of Revenue
Disaggregated revenue for the three months ended March 31, 2021 and 2020, respectively, was as follows:
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|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
Three Months Ended March 31, 2020
|
|
(in thousands)
|
(in thousands)
|
Cement
|
$
|
22,922
|
|
|
$
|
48,637
|
|
Tools
|
20,009
|
|
|
32,223
|
|
Wireline
|
12,752
|
|
|
45,033
|
|
Coiled tubing
|
10,943
|
|
|
20,731
|
|
Total revenues
|
$
|
66,626
|
|
|
$
|
146,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
Three Months Ended March 31, 2020
|
|
(in thousands)
|
(in thousands)
|
Service(1)
|
$
|
46,617
|
|
|
$
|
114,401
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|
Product(1)
|
20,009
|
|
|
32,223
|
|
Total revenues
|
$
|
66,626
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|
|
$
|
146,624
|
|
(1) The Company recognizes revenues from the sales of products at a point in time and revenues from the sales of services over time.
Performance Obligations
At March 31, 2021 and December 31, 2020, the amount of remaining performance obligations was not material.
Contract Balances
At March 31, 2021 and December 31, 2020, contract assets and contract liabilities were not material.
5. Inventories
Inventories, consisting primarily of finished goods and raw materials, are stated at the lower of cost or net realizable value. Cost is determined on an average cost basis. The Company reviews its inventory balances and writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The reserve for obsolescence was $12.6 million and $13.3 million at March 31, 2021 and December 31, 2020, respectively.
Inventories, net as of March 31, 2021 and December 31, 2020 were comprised of the following:
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|
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|
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March 31, 2021
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December 31,
2020
|
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(in thousands)
|
Raw materials
|
$
|
31,178
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|
|
$
|
33,361
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|
Work in progress
|
219
|
|
|
367
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|
Finished goods
|
19,932
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|
|
17,952
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|
Inventories
|
51,329
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|
|
51,680
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|
Reserve for obsolescence
|
(12,570)
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|
|
(13,278)
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Inventories, net
|
$
|
38,759
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|
|
$
|
38,402
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|
6. Intangible Assets and Goodwill
Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets as of March 31, 2021 and December 31, 2020 was as follows:
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March 31, 2021
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Gross Carrying Amount
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Accumulated Amortization
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Net Carrying Amount
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Weighted Average Amortization Period
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|
(in thousands, except weighted average amortization period information)
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Customer relationships
|
$
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63,270
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|
|
$
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(39,896)
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|
|
$
|
23,374
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|
|
5.4
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Non-compete agreements
|
6,500
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|
|
(5,466)
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|
|
1,034
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|
|
2.6
|
Technology
|
125,110
|
|
|
(22,086)
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|
|
103,024
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|
|
12.4
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In-process research and development
|
1,000
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|
|
—
|
|
|
1,000
|
|
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Indefinite
|
Total
|
$
|
195,880
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|
|
$
|
(67,448)
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|
|
$
|
128,432
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted Average Amortization Period
|
|
(in thousands, except weighted average amortization period information)
|
Customer relationships
|
$
|
63,270
|
|
|
$
|
(38,084)
|
|
|
$
|
25,186
|
|
|
5.5
|
Non-compete agreements
|
6,500
|
|
|
(5,366)
|
|
|
1,134
|
|
|
2.8
|
Technology
|
125,110
|
|
|
(19,906)
|
|
|
105,204
|
|
|
12.7
|
In-process research and development
|
1,000
|
|
|
—
|
|
|
1,000
|
|
|
Indefinite
|
Total
|
$
|
195,880
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|
|
$
|
(63,356)
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|
|
$
|
132,524
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|
|
|
Amortization of intangibles expense was $4.1 million and $4.2 million for the three months ended March 31, 2021 and 2020, respectively.
Future estimated amortization of intangibles is as follows:
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Year Ending December 31,
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(in thousands)
|
2021
|
$
|
12,024
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|
2022
|
13,463
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|
2023
|
11,516
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|
2024
|
11,183
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2025
|
11,183
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2026
|
11,082
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|
Thereafter
|
56,981
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|
Total
|
$
|
127,432
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Q1 2020 Goodwill Impairment
With a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as sharp declines in oil and natural gas prices, the outlook for expected future cash flows associated with the Company’s reporting units decreased dramatically in the first quarter of 2020.
Based on these events, an indication of impairment associated with the Company’s reporting units occurred, triggering an interim goodwill impairment test of the Level 3 fair value of each reporting unit under Accounting Standards Codification 350, Intangibles - Goodwill and Other (“ASC 350”) at March 31, 2020.
As such, based on its Level 3 fair value determination in connection with the interim goodwill impairment test under ASC 350, the Company recorded goodwill impairment charges of $296.2 million in the first quarter of 2020 associated with its
tools, cementing, and wireline reporting units. These charges represented a full write-off of goodwill and were due to the events described above, coupled with an increased weighted average cost of capital driven by a reduction in the Company’s stock price and the Level 2 fair value of its Senior Notes (as defined in Note 8 – Debt Obligations). These charges are included in the line item “Impairment of goodwill” in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended March 31, 2020.
7. Accrued Expenses
Accrued expenses as of March 31, 2021 and December 31, 2020 consisted of the following:
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|
|
March 31, 2021
|
|
December 31, 2020
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(in thousands)
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Accrued interest
|
$
|
11,931
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|
|
$
|
5,313
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|
Accrued compensation and benefits
|
6,798
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|
|
5,430
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|
Other accrued expenses
|
5,818
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|
|
6,396
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Accrued expenses
|
$
|
24,547
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|
|
$
|
17,139
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|
8. Debt Obligations
The Company’s debt obligations as of March 31, 2021 and December 31, 2020 were as follows:
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|
|
March 31,
2021
|
|
December 31,
2020
|
|
(in thousands)
|
Senior Notes
|
$
|
320,343
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|
|
$
|
346,668
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Magnum Promissory Notes
|
1,688
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|
|
1,969
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Total debt before deferred financing costs
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$
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322,031
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$
|
348,637
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Deferred financing costs
|
(4,277)
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|
(5,079)
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Total debt
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$
|
317,754
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|
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$
|
343,558
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Less: Current portion of long-term debt
|
(844)
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|
|
(844)
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Long-term debt
|
$
|
316,910
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|
|
$
|
342,714
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|
Senior Notes
Background
On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The Senior Notes were issued under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among the Company, certain subsidiaries of the Company and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year, and the first interest payment was due on May 1, 2019. The Senior Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s current domestic subsidiaries and by certain future subsidiaries.
The Indenture contains covenants that limit the Company’s ability and the ability of its restricted subsidiaries to engage in certain activities. The Company was in compliance with the provisions of the Indenture at March 31, 2021.
Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to the Company, any restricted subsidiary of the Company that is a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.
Unamortized deferred financing costs associated with the Senior Notes were $4.3 million and $5.1 million at March 31, 2021 and December 31, 2020, respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method.
Extinguishment of Debt
The Company repurchased approximately $26.3 million and $13.8 million of Senior Notes at a repurchase price of approximately $8.4 million and $3.5 million in cash during the three months ended March 31, 2021 and 2020, respectively. Deferred financing costs associated with these transactions were $0.3 million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively. As a result, for the three months ended March 31, 2021 and 2020, the Company recorded a $17.6 million gain and a $10.1 million gain, respectively, on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by the deferred financing costs. The gain on extinguishment of debt is included as a separate line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended March 31, 2021 and March 31, 2020.
2018 ABL Credit Facility
On October 25, 2018, the Company entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”), by and among the Company, Nine Energy Canada, Inc., JP Morgan Chase Bank, N.A., as administrative agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.
Loans to the Company and its domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or LIBOR loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be Canadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on the Company’s leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below $18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. The Company was in compliance with all covenants under the 2018 ABL Credit Agreement at March 31, 2021.
All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties, excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.
At March 31, 2021, the Company’s availability under the 2018 ABL Credit Facility was approximately $45.8 million, net of outstanding letters of credit of $0.5 million. As of March 31, 2021 and December 31, 2020, the Company had no outstanding borrowings under its 2018 ABL Credit Facility.
Magnum Promissory Notes
On October 25, 2018, pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), the Company acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum”). The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019 (the “Magnum Earnout”).
On June 30, 2020, pursuant to an amendment to the Magnum Purchase Agreement to terminate the remaining Magnum Earnout and all obligations related thereto (the “Magnum Purchase Agreement Amendment”), the Company issued promissory notes with an aggregated principal amount of $2.3 million (the “Magnum Promissory Notes”) to the sellers of
Magnum. The Magnum Promissory Notes bear interest at a rate of 6.0% per annum. The principal amount of the Magnum Promissory Notes are paid in equal quarterly installments which began January 1, 2021. The entire unpaid principal amount will be due and payable on the maturity date, which is the earlier of October 1, 2022 or the business day after the date on which the Company sells, transfers or otherwise disposes of the “E-Set” tools business to an unaffiliated third party, unless such sale, transfer or disposition is made, directly or indirectly, as part of the sale, transfer or disposition of the Dissolvable Plugs Business or due to the occurrence of a Change of Control Event (each as defined in the Magnum Purchase Agreement).
For additional information regarding the termination of the Magnum Earnout, see Note 10 – Commitments and Contingencies.
Fair Value of Debt Instruments
The estimated fair value of the Company’s debt obligations as of March 31, 2021 and December 31, 2020 was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
(in thousands)
|
Senior Notes
|
$
|
112,120
|
|
|
$
|
156,001
|
|
Magnum Promissory Notes
|
$
|
1,688
|
|
|
$
|
1,969
|
|
The fair value of the Senior Notes, 2018 ABL Credit Facility, and the Magnum Promissory Notes is classified as Level 2 in the fair value hierarchy. The fair value of the Senior Notes is established based on observable inputs in less active markets. The fair value of the Magnum Promissory Notes approximates their carrying value.
9. Related Party Transactions
The Company leases office space, yard facilities, and equipment and purchases building maintenance services from entities owned by David Crombie, an executive officer of the Company. Total lease expense and building maintenance expense associated with these entities was $0.2 million for both the three months ended March 31, 2021 and 2020, respectively. The Company also purchased $0.2 million and $0.1 million of equipment during the three months ended March 31, 2021 and 2020, respectively, from an entity in which Mr. Crombie is a limited partner. There were outstanding payables due to this entity relating to equipment purchases of $0.1 million and $0.2 million at March 31, 2021 and December 31, 2020, respectively.
In addition, the Company leases office space in Corpus Christi and Midland, Texas from an entity affiliated with Warren Lynn Frazier, a beneficial owner of more than 5% of the Company’s stock. In the third quarter of 2020, another entity affiliated with Mr. Frazier began to sub-lease a portion of such space in Corpus Christi, Texas from the Company. Total rental expense associated with this office space, net of sub-leasing income, was $0.3 million for both the three months ended March 31, 2021 and 2020, respectively. There were net outstanding payables due to this entity of $0.1 million at both March 31, 2021 and December 31, 2020, respectively. Additionally, on June 30, 2020, the Company issued the Magnum Promissory Notes to the sellers of Magnum, including Mr. Frazier. At March 31, 2021 and December 31, 2020, the outstanding principal balance payable to Mr. Frazier was $1.6 million and $1.9 million, respectively. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.
The Company purchases cable for its wireline trucks from an entity owned by Forum Energy Technologies (“Forum”). Two of the Company’s directors serve as directors of Forum. The Company was billed $0.1 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively. There were outstanding payables due to this entity of $0.1 million at December 31, 2020. The Company purchases coiled tubing string from another entity owned by Forum. The Company was billed $1.5 million and $1.9 million for coiled tubing string for the three months ended March 31, 2021 and 2020, respectively. There were outstanding payables due to this entity of $1.0 million and $0.9 million at March 31, 2021 and December 31, 2020, respectively.
The Company purchases chemical additives used in cementing from Select Energy Services, Inc. (“Select”). One of the Company’s directors also serves as a director of Select. The Company was billed $0.3 million and $0.6 million for the three months ended March 31, 2021 and 2020, respectively. There were outstanding payables due to Select of $0.2 million at both March 31, 2021 and December 31, 2020, respectively.
The Company provides products and rentals to National Energy Reunited Corp. (“NESR”), where one of the Company’s directors serves as a director. The Company billed NESR $0.2 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively. During the fourth quarter of 2019, the Company sold coiled tubing equipment for $5.9
million to NESR with payments due in 24 equal monthly installments beginning on January 31, 2020. Total outstanding receivables due to the Company from NESR (inclusive of the equipment sale above) were $2.6 million and $3.7 million at March 31, 2021 and December 31, 2020, respectively.
On June 5, 2019, Ann G. Fox, President and Chief Executive Officer and a director of the Company, was elected as a director of Devon Energy Corporation (“Devon”). The Company generated revenue from Devon of $1.0 million and $1.7 million for the three months ended March 31, 2021 and 2020, respectively. There were outstanding receivables due from Devon of $0.4 million at both March 31, 2021 and December 31, 2020, respectively.
10. Commitments and Contingencies
Litigation
From time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.
Self-insurance
The Company uses a combination of third-party insurance and self-insurance for health insurance claims. The self-insured liability represents an estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. The estimate is based on an analysis of trailing months of incurred medical claims to project the amount of incurred but not reported claims liability. The estimated liability for self-insured medical claims was $0.9 million and $1.3 million at March 31, 2021 and December 31, 2020, respectively, and is included under the caption “Accrued expenses” in the Company’s Condensed Consolidated Balance Sheets.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, the self-insurance liability could be affected if future claims experience differs significantly from historical trends and actuarial assumptions.
Contingent Liabilities
The Company’s contingent liabilities (Level 3) at March 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
Frac Tech
|
|
(in thousands)
|
Balance at December 31, 2020
|
$
|
604
|
|
Revaluation adjustments
|
(190)
|
|
Payments
|
(30)
|
|
Balance at March 31, 2021
|
$
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magnum
|
|
Frac Tech
|
|
Total
|
|
|
(in thousands)
|
Balance at December 31, 2019
|
|
$
|
2,609
|
|
|
$
|
1,359
|
|
|
$
|
3,968
|
|
Revaluation adjustments
|
|
141
|
|
|
(567)
|
|
|
(426)
|
|
Payments
|
|
—
|
|
|
(98)
|
|
|
(98)
|
|
Balance at March 31, 2020
|
|
$
|
2,750
|
|
|
$
|
694
|
|
|
$
|
3,444
|
|
The contingent consideration related to the contingent liabilities is reported at fair value, based on a Monte Carlo simulation model. Significant inputs used in the fair value measurement include estimated gross margin related to forecasted sales of the plugs, term of the agreement, and a risk adjusted discount factor. Contingent liabilities include $0.1 million and $0.2 million reported in “Accrued expenses” at March 31, 2021 and December 31, 2020, respectively and $0.3 million and $0.4 million reported in “Other long-term liabilities” at March 31, 2021 and December 31, 2020, respectively, in the Company’s Condensed Consolidated Balance Sheets. Revaluation adjustments resulting in a $0.2 million gain and a $0.4 million gain for the three months ended March 31, 2021 and March 31, 2020, respectively, are included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
Frac Tech Earnout
On October 1, 2018, pursuant to the terms and conditions of a Securities Purchase Agreement (the “Frac Tech Purchase Agreement”), the Company acquired Frac Technology AS, a Norwegian private limited company (“Frac Tech”) focused on the development of downhole technology, including a casing flotation tool and a number of patented downhole completion tools. The Frac Tech Purchase Agreement, as amended, includes, among other things, the potential for additional future payments, based on certain Frac Tech revenue metrics through December 31, 2025.
Magnum Earnout
The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019.
In 2019, the Company did not meet the sales requirement of certain dissolvable plug products during the year.
Pursuant to the Magnum Purchase Agreement Amendment, which terminated the remaining Magnum Earnout and all obligations related thereto, the Company made a cash payment of $1.1 million and issued the Magnum Promissory Notes with an aggregated principal amount of $2.3 million to the sellers of Magnum. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.
11. Taxes
The Company’s provision (benefit) for income taxes included in its Condensed Consolidated Statements of Income and Comprehensive Income (Loss) was as follows:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
|
(in thousands, except percentages)
|
Provision (benefit) for income taxes
|
$
|
27
|
|
|
$
|
(2,125)
|
|
Effective tax rate
|
(0.3)
|
%
|
|
0.7
|
%
|
The Company recorded an income tax provision of less than $0.1 million for the first quarter of 2021, compared to an income tax benefit of $2.1 million for the first quarter of 2020. The difference in tax position is primarily a result of the discrete tax impact from the Coronavirus Aid, Relief, and Economic Security Act and the goodwill impairment recorded during the first quarter of 2020.
12. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of shares outstanding during each period and the exercise of potentially dilutive stock options assumed to be purchased from the proceeds using the average market price of the Company’s stock for each of the periods presented as well as the potentially dilutive restricted stock, restricted stock units, and performance stock units.
Basic and diluted earnings (loss) per common share was computed as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
Three Months Ended March 31, 2020
|
|
Net Loss
|
|
Average Shares Outstanding
|
|
Loss Per Share
|
|
Net Loss
|
|
Average Shares Outstanding
|
|
Loss Per Share
|
|
(in thousands, except share and per share amounts)
|
Basic
|
$
|
(8,246)
|
|
|
29,878,426
|
|
|
$
|
(0.28)
|
|
|
$
|
(300,900)
|
|
|
29,430,475
|
|
|
$
|
(10.22)
|
|
Assumed exercise of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Unvested restricted stock and stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted
|
$
|
(8,246)
|
|
|
29,878,426
|
|
|
$
|
(0.28)
|
|
|
$
|
(300,900)
|
|
|
29,430,475
|
|
|
$
|
(10.22)
|
|
The diluted earnings (loss) per share calculation excludes all stock options, unvested restricted stock, unvested restricted stock units, and unvested performance stock units for the three months ended March 31, 2021 and 2020 because their inclusion would be anti-dilutive given the Company was in a net loss position. The average number of securities that were excluded from diluted earnings (loss) per share that would potentially dilute earnings (loss) per share for the periods in which the Company experienced a net loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Three months ended March 31,
|
1,033,743
|
|
119,075
|