UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
OR
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
x
 
Smaller reporting company
 
 
 
Emerging growth company
x
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 8, 2019 was 30,569,546.
 
 
 
 
 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





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, 2018. 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;
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;
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, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. and realize anticipated revenues, cost savings, or other benefits of such acquisition.
Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial, or that could apply to any company could also materially adversely affect our business, financial condition, or future results.
These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.




PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
September 30,
2019
 
December 31,
2018
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
93,321

 
$
63,615

Accounts receivable, net
118,428

 
154,783

Inventories, net
66,475

 
91,435

Prepaid expenses and other current assets
14,312

 
15,717

Notes receivable from shareholders (Note 9)

 
7,626

Total current assets
292,536

 
333,176

Property and equipment, net
198,879

 
211,644

Definite-lived intangible assets, net
159,526

 
173,451

Goodwill
316,469

 
307,804

Indefinite-lived intangible assets
108,711

 
108,711

Other long-term assets
5,462

 
6,386

Total assets
$
1,081,583

 
$
1,141,172

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
32,027

 
$
46,132

Accrued expenses
40,473

 
61,434

Current portion of capital lease obligations
973

 
665

Income taxes payable
308

 
57

Total current liabilities
73,781

 
108,288

Long-term liabilities
 
 
 
Long-term debt
391,539

 
424,978

Deferred income taxes
3,039

 
5,915

Long-term capital lease obligations
2,458

 
2,330

Other long-term liabilities
3,987

 
4,838

Total liabilities
474,804

 
546,349

Commitments and contingencies (Note 10)


 


Stockholders’ equity
 
 
 
Common stock (120,000,000 shares authorized at $.01 par value; 30,582,584 and 30,163,408 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively)
306

 
302

Additional paid-in capital
755,349

 
746,428

Accumulated other comprehensive loss
(4,582
)
 
(4,843
)
Accumulated deficit
(144,294
)
 
(147,064
)
Total stockholders’ equity
606,779

 
594,823

Total liabilities and stockholders’ equity
$
1,081,583

 
$
1,141,172

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

1



NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share amounts)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
202,305

 
$
218,427

 
$
669,527

 
$
597,726

Cost and expenses
 
 
 
 
 
 
 
Cost of revenues (exclusive of depreciation and amortization shown separately below)
166,849

 
165,882

 
529,994

 
467,700

General and administrative expenses
19,222

 
21,816

 
60,979

 
51,837

(Gain) loss on revaluation of contingent liabilities
(5,771
)
 
45

 
(20,701
)
 
1,715

Loss on sale of subsidiaries
15,834

 

 
15,834

 

Depreciation
12,196

 
13,661

 
39,572

 
39,982

Amortization of intangibles
4,609

 
1,857

 
13,925

 
5,653

Gain on sale of property and equipment
(466
)
 
(1,190
)
 
(799
)
 
(1,701
)
Income (loss) from operations
(10,168
)
 
16,356

 
30,723

 
32,540

Interest expense
9,843

 
1,756

 
29,940

 
6,763

Interest income
(111
)
 
(188
)
 
(439
)
 
(450
)
Income (loss) before income taxes
(19,900
)
 
14,788

 
1,222

 
26,227

Provision (benefit) for income taxes
727

 
1,130

 
(1,548
)
 
1,875

Net income (loss)
$
(20,627
)
 
$
13,658

 
$
2,770

 
$
24,352

Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
(0.70
)
 
$
0.57

 
$
0.09

 
$
1.05

Diluted
$
(0.70
)
 
$
0.56

 
$
0.09

 
$
1.03

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
29,361,633

 
23,971,032

 
29,288,113

 
23,264,014

Diluted
29,361,633

 
24,389,295

 
29,397,636

 
23,603,922

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of $0 tax in each period
$
(179
)
 
$
207

 
$
261

 
$
(437
)
Total other comprehensive income (loss), net of tax
(179
)
 
207

 
261

 
(437
)
Total comprehensive income (loss)
$
(20,806
)
 
$
13,865

 
$
3,031

 
$
23,915

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2



NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Accumulated Deficit)
 
Total
Stockholders’ Equity
 
Shares
 
Amounts
 
 
 
Balance, June 30, 2019
30,683,009

 
$
307

 
$
752,072

 
$
(4,403
)
 
$
(123,667
)
 
$
624,309

Issuance of common stock under stock compensation plan
(98,954
)
 
(1
)
 
1

 

 

 

Stock-based compensation expense

 

 
3,286

 

 

 
3,286

Exercise of stock options

 

 

 

 

 

Vesting of restricted stock
(1,471
)
 

 
(10
)
 

 

 
(10
)
Other comprehensive loss

 

 

 
(179
)
 

 
(179
)
Net loss

 

 

 

 
(20,627
)
 
(20,627
)
Balance, September 30, 2019
30,582,584

 
$
306

 
$
755,349

 
$
(4,582
)
 
$
(144,294
)
 
$
606,779


 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Accumulated Deficit)
 
Total
Stockholders’ Equity
 
Shares
 
Amounts
 
 
 
 
Balance, June 30, 2018
25,030,863

 
$
250

 
$
559,645

 
$
(4,328
)
 
$
(83,387
)
 
$
472,180

Issuance of common stock under stock compensation plan
13,728

 

 

 

 

 

Stock-based compensation expense

 

 
3,508

 

 

 
3,508

Exercise of stock options
96,367

 
1

 
1,866

 

 

 
1,867

Vesting of restricted stock
(26,361
)
 

 
(790
)
 

 

 
(790
)
Other comprehensive income

 

 

 
207

 

 
207

Net income

 

 

 

 
13,658

 
13,658

Balance, September 30, 2018
25,114,597

 
$
251

 
$
564,229

 
$
(4,121
)
 
$
(69,729
)
 
$
490,630




3



 
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
489,529

 
5

 
(5
)
 

 

 

Stock-based compensation expense

 

 
10,553

 

 

 
10,553

Exercise of stock options
674

 

 
15

 

 

 
15

Vesting of restricted stock
(71,027
)
 
(1
)
 
(1,642
)
 

 

 
(1,643
)
Other comprehensive income

 

 

 
261

 

 
261

Net income

 

 

 

 
2,770

 
2,770

Balance, September 30, 2019
30,582,584

 
$
306

 
$
755,349

 
$
(4,582
)
 
$
(144,294
)
 
$
606,779


 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Accumulated Deficit)
 
Total
Stockholders’ Equity
 
Shares
 
Amounts
 
 
 
 
Balance, December 31, 2017
15,810,540

 
$
158

 
$
384,965

 
$
(3,684
)
 
$
(94,081
)
 
$
287,358

Issuance of common stock in IPO, net of offering costs
8,050,000

 
81

 
168,180

 

 

 
168,261

Issuance of common stock under stock compensation plan
1,171,008

 
11

 
(11
)
 

 

 

Stock-based compensation expense

 

 
9,719

 

 

 
9,719

Exercise of stock options
96,367

 
1

 
1,866

 

 

 
1,867

Vesting of restricted stock
(26,361
)
 

 
(790
)
 

 

 
(790
)
Other issuances of common stock
13,043

 

 
300

 

 

 
300

Other comprehensive loss

 

 

 
(437
)
 

 
(437
)
Net income

 

 

 

 
24,352

 
24,352

Balance, September 30, 2018
25,114,597

 
$
251

 
$
564,229

 
$
(4,121
)
 
$
(69,729
)
 
$
490,630


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4



NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities
 

 
 

Net income
$
2,770

 
$
24,352

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
39,572

 
39,982

Amortization of intangibles
13,925

 
5,653

Amortization of deferred financing costs
2,238

 
1,191

 Provision for (recovery of) doubtful accounts
236

 
(319
)
(Benefit) provision for deferred income taxes
(2,876
)
 
965

Provision for inventory obsolescence
4,502

 
278

Stock-based compensation expense
10,553

 
9,719

Gain on sale of property and equipment
(799
)
 
(1,701
)
(Gain) loss on revaluation of contingent liabilities
(20,701
)
 
1,715

Loss on equity method of investment

 
270

Loss on sale of subsidiaries
15,834

 

Changes in operating assets and liabilities, net of effects from acquisitions
 
 
 
Accounts receivable, net
20,453

 
(62,702
)
Inventories, net
17,634

 
(7,705
)
Prepaid expenses and other current assets
(405
)
 
1,760

Accounts payable and accrued expenses
(16,953
)
 
38,117

Income taxes receivable/payable
674

 
(666
)
Other assets and liabilities
151

 
(153
)
Net cash provided by operating activities
86,808

 
50,756

Cash flows from investing activities
 
 
 
Acquisitions, net of cash acquired
1,020

 

Proceeds from sale of subsidiaries
17,222

 

Proceeds from sales of property and equipment
1,934

 
1,791

Proceeds from property and equipment casualty losses
1,503

 
1,743

Proceeds from notes receivable payments
7,626

 

Purchases of property and equipment
(48,898
)
 
(29,545
)
Net cash used in investing activities
(19,593
)
 
(26,011
)
Cash flows from financing activities
 
 
 
Proceeds from revolving credit facilities
10,000

 

Payments on revolving credit facilities
(45,000
)
 
(96,182
)
Proceeds from term loan

 
125,000

Payments on term loans

 
(155,701
)
Payments on capital leases
(668
)
 

Payments of contingent liability
(250
)
 

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

 
171,450

Proceeds from other issuances of common stock

 
300

Proceeds from exercise of stock options
15

 
1,867

Vesting of restricted stock
(1,643
)
 
(790
)
Cost of debt issuance

 
(1,385
)
Net cash provided by (used in) financing activities
(37,546
)
 
44,559

Impact of foreign currency exchange on cash
37

 
(283
)
Net increase in cash and cash equivalents
29,706

 
69,021

Cash and cash equivalents
 
 
 
Cash and cash equivalents beginning of year
63,615

 
17,513

Cash and cash equivalents end of period
$
93,321

 
$
86,534

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
19,619

 
$
4,363

Cash paid for income taxes
$
649

 
$
1,582

Capital expenditures in accounts payable and accrued expenses
$
1,183

 
$
11,946

Property and equipment obtained by capital lease
$
1,621

 
$
1,679

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5



NINE ENERGY SERVICE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Company and Organization
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.
On August 30, 2019 (the “Divestiture Date”), the Company sold its Production Solutions segment to Brigade Energy Services LLC (“Brigade”). For additional information on the Production Solutions divestiture, see Note 4 – Business Acquisitions and Divestitures.
2. Basis of Presentation
Condensed Consolidated Financial Information
The accompanying Condensed Consolidated Financial Statements have not been audited by the Company’s independent registered public accounting firm, except that the Condensed Consolidated Balance Sheet at December 31, 2018 and the Condensed Consolidated Statements of Stockholders’ Equity as of December 31, 2018 and 2017 are derived from audited Consolidated Financial Statements. In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for the fair statement of the Company’s financial position have been included. These Condensed Consolidated Financial Statements include all accounts of the Company.
These Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the 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, 2018, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of Nine and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Such estimates include fair value assumptions used in purchase accounting and in analyzing goodwill, 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. “(Gain) loss on revaluation of contingent liabilities” and “Interest income” are presented as separate line items in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss). Additionally, “(Gain) loss on equity method investment” is no longer shown as a separate line item but is included within the “General and administrative expenses” line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

6



3. New Accounting Standards
Accounting Standards Update 2014-09
Background
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the current revenue recognition guidance. The standard is based on the principle that revenue is recognized to depict the transfer of goods and services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and asset recognized from costs incurred to obtain or fulfill a contract. The FASB subsequently issued ASU No. 2016-08, ASU No. 2016-10, and ASU No. 2016-12 which provide additional guidance around Topic 606. These amendments are encompassed in the Company’s reference to ASU No. 2014-09 below.
As an emerging growth company, the Company is permitted to, and will, apply ASU No. 2014-09 to annual reporting periods beginning after December 15, 2018 and interim reporting periods within annual reporting periods beginning after December 15, 2019. In the fourth quarter of 2019, the Company, as an emerging growth company, expects to adopt ASU No. 2014-09 for the annual period ending December 31, 2019 (effective January 1, 2019) utilizing the modified retrospective approach. The Company will continue to report revenues under current accounting standards until it formally adopts ASU No. 2014-09.
Status of Management’s Implementation Efforts of ASU No. 2014-09
During 2018, in preparation for the adoption of ASU No. 2014-09, the Company reviewed the various types of customer contract arrangements for each of its businesses. These reviews included the following:
accumulating all customer contractual arrangements;
identifying the individual performance obligations pursuant to each arrangement;
quantifying the considerations under each arrangement;
allocating the consideration under each arrangement to the identified performance obligation; and
determining the timing of revenue recognition pursuant to each arrangement.
The Company has completed these contract reviews and has determined there will be no material adjustment to retained earnings upon adoption of ASU No. 2014-09, effective January 1, 2019. The Company is currently updating and implementing revised accounting system processes in order to capture information required to be disclosed under ASU No. 2014-09.
The Company is also in the process of updating its current accounting policies to align with revenue recognition practices under ASU No. 2014-09. In 2019, as part of its ongoing evaluation of contracts with customers, the Company is holding regular meetings with key stakeholders across the organization to determine any impact ASU No. 2014-09 may have on its current or new business processes. Additionally, the Company continues to evaluate its internal processes to address risks associated with incorporating ASU No. 2014-09. Upon adoption, the Company will also implement new internal controls associated with incorporating ASU No. 2014-09, which is not expected to result in a material change in its existing control environment.
Disclosure Requirements for ASU No. 2014-09
The Company’s disclosures related to revenue recognition will be significantly expanded under ASU No. 2014-09, specifically around the quantitative and qualitative information associated with performance obligations, changes in contract assets and liabilities, and the disaggregation of revenue. The Company is currently in the process of evaluating the impact of these disclosure requirements.

7



Other Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard, which requires the use of a modified retrospective transition approach, includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued a new, optional transition method that will give companies the option to use the effective date as the date of initial application on transition. Based on initial evaluation, the Company expects to include operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. The Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio under the new standard. The Company will provide additional information about the expected financial impact as it progresses through the evaluation and implementation of the standard. Although the standard is effective for public business entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the Company, as an emerging growth company, is permitted, and plans, to adopt the standard for the fiscal years beginning after December 15, 2019 and the interim periods within the fiscal years beginning after December 15, 2020.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice, including: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the fiscal years beginning after December 15, 2018 and the interim periods within fiscal years beginning after December 15, 2019. The Company will apply the guidance retrospectively and is currently evaluating the impact of the standard on its Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this standard provide a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the integrated set of assets and activities is not a business. The Company is currently evaluating the impact of the standard on its Condensed Consolidated Financial Statements. Although the standard is generally effective for fiscal years beginning after December 15, 2017, the Company, as an emerging growth company, is permitted, and plans, to adopt the standard for the fiscal years beginning after December 15, 2018 and the interim periods within annual periods beginning after December 15, 2019. Entities are required to apply the guidance prospectively when adopted.
In August 2018, the FASB issued ASU No. 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 ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The ASU is required to be applied retrospectively, except the new Level 3 disclosure requirements are applied prospectively. The Company is currently evaluating the impact of the standard on its Condensed Consolidated Financial Statements.

8



In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU No. 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in ASU No. 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for public businesses for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the annual reporting periods beginning after December 15, 2020 and the interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of the standard on its Condensed Consolidated Financial Statements.
4. Business Acquisitions and Divestitures
Magnum Acquisition
On October 25, 2018 (the “Closing Date”), pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), the Company acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum”) for approximately $334.5 million in upfront cash consideration, subject to customary adjustments, and 5.0 million shares of the Company’s common stock, which were issued to the sellers of Magnum in a private placement. The Magnum Purchase Agreement also includes the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019 (the “Magnum Earnout”).
The Magnum Acquisition has been accounted for as a business combination using the acquisition method. Under the acquisition method of accounting, the fair value of the consideration transferred is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date, with the remaining unallocated amount recorded as goodwill.
The following table summarizes the fair value of purchase consideration transferred on the Closing Date:
 
Fair Value
 
(in thousands)
Proceeds from newly issued Senior Notes and 2018 ABL Credit Facility(1)
$
296,622

Cash provided from operations
57,740

Total upfront cash consideration
$
354,362

 
 
Issuance of the Company’s common shares
$
177,350

Contingent consideration(2)
23,029

Total purchase consideration
$
554,741

(1)     Senior Notes and 2018 ABL Credit Facility are defined in Note 8 – Debt Obligations.

(2)     The estimated fair value of the Magnum Earnout was based on a Monte Carlo simulation model with estimated outcomes ranging from $0 to $25.0 million. The estimated fair value of the Magnum Earnout was based upon available information and certain assumptions, known at the time of the Closing Date, which management believed were reasonable. Any difference in the actual Magnum Earnout from the estimated fair value of the Magnum Earnout is recorded in operating income (loss) in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).



9



The following table summarizes the allocation of the purchase price of the Magnum Acquisition to the assets acquired and liabilities assumed based on the fair value as of the Closing Date, with the excess of the purchase price over the estimated fair value of the identifiable net assets acquired recorded as goodwill:
 
Purchase Price Allocation
 
(in thousands)
Cash and cash equivalents
$
8,509

Accounts receivable, net
30,898

Income taxes receivable
695

Inventories, net
52,249

Prepaid expenses and other current assets
1,147

Property and equipment, net
3,729

Goodwill
234,504

Definite-lived intangible assets, net
148,000

Indefinite-lived intangible assets
96,000

Other long-term assets
1,055

Accounts payable
(3,626
)
Accrued expenses
(18,404
)
Other long-term liabilities
(15
)
Total net assets acquired
$
554,741

All goodwill acquired is attributable to expected synergies gained through the Magnum Acquisition as well as the assembled workforce. In addition, all goodwill acquired is included in the Completion Solutions segment and is deductible for tax purposes. For additional information on goodwill, see Note 6 – Goodwill and Intangible Assets.
The Company finalized its purchase price allocation in connection with the Magnum Acquisition during the three months ended September 30, 2019. As a result, the Company recorded measurement period adjustments to the fair value of assets acquired and liabilities assumed at the Closing Date due to the refinement of its valuation models, assumptions, and inputs. The updated assumptions and inputs incorporated additional information obtained about facts and circumstances that existed at the Closing Date. These final purchase price allocation adjustments recorded during the three months ended September 30, 2019 related to the finalization of contractual obligations and the finalization of working capital adjustments, which decreased working capital by $1.0 million, and increased accrued expenses by $7.7 million. Total adjustments recorded during the three months ended September 30, 2019 increased goodwill by $8.7 million.
Magnum’s results of operations are included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss), as part of its Completion Solutions segment, for the three and nine months ended September 30, 2019. It is impractical to quantify the contribution of Magnum since the Closing Date, as the business was fully integrated into the Company’s existing operations in 2018.  

10



Frac Tech Acquisition
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. This acquisition was not material to the Company’s Condensed Consolidated Financial Statements.
Production Solutions Divestiture
On August 30, 2019, the Company entered into a Membership Interest Purchase Agreement (“Production Solutions Purchase Agreement”) with 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 for approximately $17.4 million in cash. The closing consideration is subject to working capital and other customary post-closing adjustments. The Production Solutions Purchase Agreement contained customary representations and warranties, covenants, and indemnification provisions. The Company recorded a loss of $15.8 million in connection with this divestiture during the third quarter of 2019. This divestiture does not qualify as discontinued operations at September 30, 2019 in accordance with ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity as it does not represent a strategic shift that has a major effect on the Company’s operations and financial results.

11



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 $5.6 million and $1.9 million at September 30, 2019 and December 31, 2018, respectively.
Inventories, net as of September 30, 2019 and December 31, 2018 were comprised of the following: 
 
September 30, 2019
 
December 31,
2018
 
(in thousands)
Raw materials
$
37,398

 
$
38,890

Work in progress
597

 
130

Finished goods
34,072

 
54,301

Inventories
72,067

 
93,321

Reserve for obsolescence
(5,592
)
 
(1,886
)
Inventories, net
$
66,475

 
$
91,435


12



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, 2019 were as follows: 
 
Goodwill
 
Gross Value
 
Accumulated
Impairment Loss
 
Net
 
(in thousands)
Balance as of December 31, 2018
$
400,067

 
$
(92,263
)
 
$
307,804

Purchase price adjustments (1)
8,665

 

 
8,665

Balance as of September 30, 2019
$
408,732

 
$
(92,263
)
 
$
316,469

(1)     The Company recorded adjustments to the fair value of goodwill in relation to the Magnum Acquisition. For additional information on the Magnum Acquisition and related purchase price adjustments, see Note 4 – Business Acquisitions and Divestitures.
Intangible Assets
The changes in the net carrying value of the components of intangible assets for the nine months ended September 30, 2019 were as follows: 
 
Intangible Assets
 
Customer Relationships
 
Non- Compete Agreements
 
Technology
 
Definite-Lived Intangible Asset Total
 
Trade Names
 
Other Intangible Assets
 
Indefinite-Lived Intangible Asset Total
 
(in thousands, except weighted average amortization period information)
Balance as of December 31, 2018
$
47,964

 
$
2,850

 
$
122,637

 
$
173,451

 
$
107,700

 
$
1,011

 
$
108,711

Additions

 

 

 

 

 

 

Amortization expense
(6,255
)
 
(1,133
)
 
(6,537
)
 
(13,925
)
 

 

 

Balance as of September 30, 2019
$
41,709

 
$
1,717

 
$
116,100

 
$
159,526

 
$
107,700

 
$
1,011

 
$
108,711

Weighted average amortization period
6.8
 
3.9
 
13.8
 
 
 
Indefinite
 
Indefinite
 
 
Amortization of intangibles expense was $4.6 million and $13.9 million for the three and nine months ended September 30, 2019, respectively. Amortization of intangibles expense was $1.9 million and $5.7 million for the three and nine months ended September 30, 2018, respectively.

Future estimated amortization of intangibles is as follows:
(in thousands)
Year Ending December 31,
 
2019
$
4,443

2020
17,227

2021
16,876

2022
14,223

2023
12,275

Thereafter
94,482

Total
$
159,526


13



7. Accrued Expenses
Accrued expenses as of September 30, 2019 and December 31, 2018 consisted of the following:
 
September 30, 2019
 
December 31, 2018
 
(in thousands)
Accrued compensation and benefits
$
15,140

 
$
11,930

Accrued bonus
2,067

 
13,250

Sales tax payable
724

 
1,185

Contingent liabilities
778

 
20,922

Interest payable
14,841

 
7,031

Other accrued expenses
6,923

 
7,116

Accrued expenses
$
40,473

 
$
61,434

8. Debt Obligations
The Company’s debt obligations as of September 30, 2019 and December 31, 2018 were as follows: 
 
September 30,
2019
 
December 31,
2018
 
(in thousands)
Senior Notes
$
400,000

 
$
400,000

2018 ABL Credit Facility

 
35,000

Total debt before deferred financing costs
$
400,000

 
$
435,000

Deferred financing costs
(8,461
)
 
(10,022
)
Total debt
$
391,539

 
$
424,978

Less: Current portion of long-term debt

 

Long-term debt
$
391,539

 
$
424,978

Senior Notes
On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The Senior Notes were issued under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among the Company, certain subsidiaries of the Company and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year with the first interest payment being due on May 1, 2019. The Senior Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s current domestic subsidiaries and by certain future subsidiaries.
The Indenture contains covenants that limit the Company’s ability and the ability of its restricted subsidiaries to engage in certain activities. The Company was in compliance with the provisions of the Indenture at September 30, 2019.
Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to the Company, any restricted subsidiary of the Company that is a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.
Unamortized deferred financing costs associated with the Senior Notes were $8.5 million and $10.0 million at September 30, 2019 and December 31, 2018, respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method.

14



2018 ABL Credit Facility
On October 25, 2018, the Company entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”), by and among the Company, Nine Energy Canada, Inc., JP Morgan Chase Bank, N.A. (“JP Morgan”) as administrative agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.
Loans to the Company and its domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or LIBOR loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be CDOR loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on the Company’s leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments. The weighted average interest rate was 2.63% during the nine months ended September 30, 2019.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below a certain threshold or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. The Company was in compliance with all covenants under the 2018 ABL Credit Agreement at September 30, 2019.
All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties, excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.
Concurrent with the effectiveness of the 2018 ABL Credit Facility, the Company borrowed approximately $35.0 million to fund a portion of the upfront cash purchase of the Magnum Acquisition. The Company is permitted to repay any amounts borrowed prior to the maturity date without any premium or penalty, subject to minimum amounts of prepayments and customary LIBOR breakage costs. During the first nine months of 2019, the Company repaid its outstanding revolver borrowings in full.
At September 30, 2019, the Company’s availability under the 2018 ABL Credit Facility was approximately $118.0 million, net of an outstanding letter of credit of $0.2 million.

15



Prior Credit Agreements
On September 14, 2017, the Company entered into a credit agreement (as amended on November 20, 2017, the “2018 IPO Credit Agreement”) with JP Morgan as administrative agent and certain other financial institutions that became effective upon the consummation of the initial public offering (“IPO”) in January 2018 (the “Effective Date”). Pursuant to the terms of the 2018 IPO Credit Agreement, the Company and its domestic restricted subsidiaries were entitled to borrow $125.0 million of term loans (the “2018 IPO Term Loan Credit Facility”), which the Company drew in full on the Effective Date. In January 2018, the Company also made a mandatory prepayment of $9.7 million against the 2018 IPO Term Loan Credit Facility, which approximated 50.0% of the estimated net proceeds from the IPO in excess of $150.0 million, as prescribed under the 2018 IPO Credit Agreement. In addition, under the 2018 IPO Credit Agreement, the Company and its domestic restricted subsidiaries were entitled to borrow up to $50.0 million (including letters of credit) as revolving credit loans under the revolving commitments. Loans to the Company and its domestic restricted subsidiaries under the 2018 IPO Credit Agreement were either base rate loans or LIBOR loans. The applicable margin for base rate loans varied from 1.50% to 2.75%, and the applicable margin for LIBOR loans varied from 2.50% to 3.75%, in each case depending on the Company’s leverage ratio. In addition, a commitment fee of 0.50% per annum was charged on the average daily unused portion of the revolving commitments. On October 25, 2018, the Company fully repaid and terminated the 2018 IPO Credit Agreement.
In 2014, the Company entered into the Amended and Restated Credit Agreement (as amended, the “Legacy Nine Credit Agreement”) with HSBC Bank USA, N.A., as U.S. administrative agent, HSBC Bank Canada, as Canadian agent, and certain other financial institutions. All loans and other obligations under the Legacy Nine Credit Agreement were scheduled to mature on May 31, 2018. In 2014, Beckman Production Services, Inc. entered into a credit agreement (as amended, the “Legacy Beckman Credit Agreement” and together with the Legacy Nine Credit Agreement, the “Legacy Credit Agreements”) with Wells Fargo Bank, National Association, as administrative agent, and certain other financial institutions. All loans and other obligations under the Legacy Beckman Credit Agreement were scheduled to mature on June 30, 2018. Concurrent with the effectiveness of the 2018 IPO Credit Agreement in January 2018, the Company repaid all indebtedness under the Legacy Credit Agreements, which approximated $242.2 million.
Debt Extinguishment Costs
During the first quarter of 2018, the Company recorded debt extinguishment costs of approximately $0.7 million in unamortized deferred financing costs associated with the termination of the Legacy Credit Agreements. These unamortized deferred financing costs were being amortized through the maturity dates of each agreement using the effective interest method. These debt extinguishment costs are included in “Interest expense” in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the nine months ended September 30, 2018.
Fair Value of Debt Instruments
The estimated fair value of the Company’s debt obligations as of September 30, 2019 and December 31, 2018 was as follows:
 
September 30, 2019
 
December 31, 2018
 
(in thousands)
Senior Notes
$
324,000

 
$
376,000

2018 ABL Credit Facility
$

 
$
35,000

The fair value of the Senior Notes is classified as Level 2 in the fair value hierarchy and is established based on observable inputs in less active markets. The 2018 ABL Credit Facility is also classified within Level 2 of the fair value hierarchy. The fair value of the 2018 ABL Credit Facility approximates its carrying value.

16



9. Related Party Transactions
As part of the acquisition of Crest Pumping Technologies, LLC (“Crest”) in 2014, the Company issued promissory notes totaling $9.4 million to former owners of Crest, including David Crombie, who is an executive officer of the Company. The principal was due on June 30, 2019. The interest rate was based on the prime rate, the federal funds rate, or LIBOR, plus a margin to be determined in connection with the Company’s credit agreement and was due quarterly. Mr. Crombie paid $1.8 million during 2016 to pay his promissory note in full. At December 31, 2018, the outstanding principal balance of the notes of the remaining individuals totaled $7.6 million, and unpaid interest, included in “Prepaid expenses and other current assets” in the Company’s Condensed Consolidated Balance Sheets, totaled $10,000. During the nine months ended September 30, 2019, the Company received the full principal balance of the notes outstanding as well as any unpaid interest.
The Company leases office space, yard facilities, and equipment and purchases building maintenance services from entities owned by Mr. Crombie. Total lease expense and building maintenance expense associated with these entities was $0.2 million and $0.6 million for the three and nine months ended September 30, 2019 and $0.2 million and $0.6 million for the three and nine months ended September 30, 2018, respectively. The Company also purchased $0.7 million and $1.3 million of equipment during the three and nine months ended September 30, 2019, respectively, from an entity in which Mr. Crombie is a limited partner. The Company purchased $0.6 million of equipment from this entity during the three and nine months ended September 30, 2018. There were outstanding payables due to this entity relating to equipment purchases of $0.1 million at September 30, 2019.
In addition, the Company leases office space in Corpus Christi and Midland, Texas from an entity affiliated with Lynn Frazier, a beneficial owner of more than 5% of the Company’s stock. Total rental expense associated with this office space was $0.4 million and $1.1 million for the three and nine months ended September 30, 2019, respectively. There were no outstanding payables due to the entity at September 30, 2019 and December 31, 2018.
At December 31, 2018, the Company had an open receivable due from the sellers of Magnum primarily related to sales commissions paid to an intercompany entity that was not included in the Magnum Acquisition. The Company received payment in full in the first quarter of 2019.
The Company provides services to Citation Oil & Gas Corp., an entity owned by Curtis F. Harrell, a director of the Company. The Company billed $0.2 million and $0.4 million for services provided to this entity during the three and nine months ended September 30, 2019, respectively, and billed $0.0 million and $0.5 million for the three and nine months ended September 30, 2018, respectively. There was an outstanding receivable due from this entity of $0.2 million and $0.1 million at September 30, 2019 and December 31, 2018, respectively.
The Company provides services in the ordinary course of business to EOG Resources, Inc. (“EOG”). Gary L. Thomas, a director of the Company, acted as the President of EOG until his retirement from EOG at December 31, 2018. The Company generated revenue from EOG of $12.1 million and $31.8 million for the three and nine months ended September 30, 2018, respectively. There was an outstanding receivable due from this entity of $7.0 million at December 31, 2018.
On June 5, 2019, Ann G. Fox, President and Chief Executive Officer and a director of the Company, was elected as a director of Devon Energy Corporation (“Devon”). The Company generated revenue from Devon of $5.4 million and $15.8 million for the three and nine months ended September 30, 2019, respectively. There was an outstanding receivable due from Devon of $2.0 million at September 30, 2019.

17



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.
On August 31, 2017, an accident occurred while a five-employee crew of Big Lake Services, LLC, a subsidiary of Nine (“Big Lake Services”), was performing workover services at an oil and gas wellsite near Midland, Texas, operated by Pioneer Natural Resources USA, Inc. (“Pioneer Natural Resources”), resulting in the death of a Big Lake Services employee, Juan De La Rosa. On December 7, 2017, a lawsuit was filed on behalf of Mr. De La Rosa’s minor children in the Midland County District Court against Pioneer Natural Resources, Big Lake Services, and Phillip Hamilton related to this accident. The petition alleged, among other things, that the defendants acted negligently, resulting in the death of Mr. De La Rosa. On March 14, 2018, a plea in intervention was filed on behalf of Mr. De La Rosa’s parents, alleging similar claims. The plaintiffs and intervenors sought money damages, including punitive damages. On December 17, 2018, a mediation was held, and the parties reached an agreement in principle to settle this matter. In May 2019, the parties entered into settlement agreements, which have been approved by the court, and the court has dismissed the case. The Company has tendered this matter to its insurance company for defense and indemnification of Big Lake Services and the other defendants, and this settlement has been fully funded by its insurance company.
Self-insurance
The Company uses a combination of third-party insurance and self-insurance for health insurance clams. The self-insured liability represents an estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. The estimate is based on an analysis of trailing months of incurred medical claims to project the amount of incurred but not reported claims liability. The estimated liability for self-insured medical claims was $1.6 million at September 30, 2019 and December 31, 2018 and is included under the caption “Accrued expenses” on the Condensed Consolidated Balance Sheets.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, the self-insurance liability could be affected if future claims experience differs significantly from historical trends and actuarial assumptions.
Contingent Liabilities
The Company has recorded the following contingent liabilities at September 30, 2019:
Magnum Earnout
The Magnum Purchase Agreement includes the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019. For additional information on the Magnum Acquisition, see Note 4 – Business Acquisitions and Divestitures.
Frac Tech Earnout
On October 1, 2018, pursuant to the terms and conditions of the Frac Tech Purchase Agreement, the Company acquired Frac Tech. The Frac Tech Purchase Agreement includes, among other things, the potential for additional future payments, based on certain Frac Tech sales volume metrics through December 31, 2023.
 

18



The following is a reconciliation of the beginning and ending amounts of the contingent liabilities (Level 3) for the nine months ended September 30, 2019:
 
Magnum
 
Frac Tech
 
Total
 
(in thousands)
Balance at December 31, 2018
$
24,521

 
$
1,008

 
$
25,529

Payments

 
(250
)
 
(250
)
Revaluation adjustments
(21,436
)
 
735

 
(20,701
)
Balance at September 30, 2019
$
3,085

 
$
1,493

 
$
4,578

The contingent consideration related to the 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 $0.8 million and $20.9 million reported in “Accrued expenses” at September 30, 2019 and December 31, 2018, respectively, and $3.8 million and $4.6 million reported in “Other long-term liabilities” at September 30, 2019 and December 31, 2018, respectively, in the Company’s Condensed Consolidated Balance Sheets. The impact of the revaluation 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) were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except percentages)
Income tax expense (benefit)
$
727

 
$
1,130

 
$
(1,548
)
 
$
1,875

Effective tax rate
(3.7
)%
 
7.6
%
 
(126.7
)%
 
7.1
%
Generally, the Company’s effective tax rate is lower than the statutory federal rate of 21% in most periods due to its valuation allowance position, offset by state and foreign income taxes. The effective tax rate for the nine months ended September 30, 2019 also includes the discrete tax impact from the Production Solutions divestiture. All other changes in the effective tax rate are attributable to the current year impact of the Company’s valuation allowance positions, levels of pre-tax income, and state and non-U.S. income taxes.

19



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 assumed exercise of potentially dilutive stock options, restricted stock, and restricted stock units.
Basic and diluted earnings (loss) per common share was computed as follows: 
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
 
Net Loss
 
Average Shares Outstanding
 
Loss Per Share
 
Net Income
 
Average Shares Outstanding
 
Earnings Per Share
 
(in thousands, except share and per share amounts)
Basic
$
(20,627
)
 
29,361,633

 
$
(0.70
)
 
$
13,658

 
23,971,032

 
$
0.57

Assumed exercise of stock options

 

 

 

 
41,341

 

Unvested restricted stock and stock units

 

 

 

 
376,922

 

Diluted
$
(20,627
)
 
29,361,633

 
$
(0.70
)
 
$
13,658

 
24,389,295

 
$
0.56

 

 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
 
Net Income
 
Average Shares Outstanding
 
Earnings Per Share
 
Net Income
 
Average Shares Outstanding
 
Earnings Per Share
 
(in thousands, except share and per share amounts)
Basic
$
2,770

 
29,288,113

 
$
0.09

 
$
24,352

 
23,264,014

 
$
1.05

Assumed exercise of stock options

 

 

 

 
31,879

 

Unvested restricted stock and stock units

 
109,523

 

 

 
308,029

 

Diluted
$
2,770

 
29,397,636

 
$
0.09

 
$
24,352

 
23,603,922

 
$
1.03

For the three months ended September 30, 2019, the computation of diluted earnings (loss) per share excluded stock options, unvested restricted stock, and unvested restricted stock units because their inclusion would be anti-dilutive given the Company was in a net loss position.

20



13. Segment Information
On August 30, 2019, the Company sold its Production Solutions segment to Brigade. For additional information on the Production Solutions divestiture, see Note 4 – Business Acquisitions and Divestitures. Prior to the Divestiture Date, 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.
Financial data through the Divestiture Date is reported below for the Production Solutions segment. 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,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Revenues
 

 
 

 
 
 
 
Completion Solutions
$
186,252

 
$
196,608

 
$
611,255

 
$
536,363

Production Solutions
16,053

 
21,819

 
58,272

 
61,363

 
$
202,305

 
$
218,427

 
$
669,527

 
$
597,726

Cost of revenues (exclusive of depreciation and amortization shown separately below)
 
 
 
 
 
 
 
Completion Solutions
$
152,679

 
$
147,178

 
$
480,140

 
$
414,606

Production Solutions
14,170

 
18,704

 
49,854

 
53,094

 
$
166,849

 
$
165,882

 
$
529,994

 
$
467,700

Adjusted gross profit
 
 
 
 
 
 
 
Completion Solutions
$
33,573

 
$
49,430

 
$
131,115

 
$
121,757

Production Solutions
1,883

 
3,115

 
8,418

 
8,269

 
$
35,456

 
$
52,545

 
$
139,533

 
$
130,026

 
 
 
 
 
 
 
 
General and administrative expenses
19,222

 
21,816

 
60,979

 
51,837

(Gain) loss on revaluation of contingent liabilities
(5,771
)
 
45

 
(20,701
)
 
1,715

Loss on sale of subsidiaries
15,834

 

 
15,834

 

Depreciation
12,196

 
13,661

 
39,572

 
39,982

Amortization of intangibles
4,609

 
1,857

 
13,925

 
5,653

Gain on sale of property and equipment
(466
)
 
(1,190
)
 
(799
)
 
(1,701
)
Income (loss) from operations
$
(10,168
)
 
$
16,356

 
$
30,723

 
$
32,540

Non-operating expenses
9,732

 
1,568

 
29,501

 
6,313

Income (loss) before income taxes
(19,900
)
 
14,788

 
1,222

 
26,227

Provision (benefit) for income taxes
727

 
1,130

 
(1,548
)
 
1,875

Net income (loss)
$
(20,627
)
 
$
13,658

 
$
2,770

 
$
24,352


Capital expenditures by segment for the three and nine months ended September 30, 2019 and 2018, were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Completion Solutions
$
9,146

 
$
10,723

 
$
44,343

 
$
26,636

Production Solutions
804

 
665

 
2,790

 
2,312

Corporate

 
92

 
93

 
597

 
$
9,950

 
$
11,480

 
$
47,226

 
$
29,545


21




Total assets by segment as of September 30, 2019 and December 31, 2018 were as follows:
 
September 30, 2019
 
December 31, 2018
 
(in thousands)
Completion Solutions
$
977,633

 
$
1,045,643

Production Solutions

 
35,086

Corporate
103,950

 
60,443

 
$
1,081,583

 
$
1,141,172


22



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, 2019, 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, 2018.
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 section titled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018.
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 U.S. 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.
Recent Events
Production Solutions Divestiture
On August 30, 2019 (the “Divestiture Date”), 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 approximately $17.4 million in cash. The closing consideration is subject to working capital and other customary post-closing adjustments. We recorded a loss of $15.8 million in connection with this divestiture during the third quarter of 2019. For additional information on this divestiture, see Note 4 – Business Acquisitions and Divestitures included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Magnum Acquisition
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”), we 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” and such acquisition, the “Magnum Acquisition”) for approximately $334.5 million in upfront cash consideration, subject to customary adjustments, and 5.0 million shares of our common stock, which were issued to the sellers of Magnum in a private placement. The Magnum Purchase Agreement also includes the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019. For additional information on the Magnum Acquisition, see Note 4 – Business Acquisitions and Divestitures included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Senior Notes
On October 25, 2018, we issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The proceeds from the Senior Notes, together with cash on hand and borrowings under the 2018 ABL Credit Facility (as defined below), were used to (i) fund a portion of the upfront cash purchase price of the Magnum Acquisition, (ii) repay all indebtedness under the credit facility entered into in conjunction with our initial public offering (the “IPO”), and (iii) pay fees and expenses associated with the issuance of the Senior Notes, the Magnum Acquisition, and the 2018 ABL Credit Facility (as

23



described below). For additional information on the Senior Notes, see Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
2018 ABL Credit Facility
On October 25, 2018, we entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”) that permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). Concurrent with the effectiveness of the 2018 ABL Credit Facility, we borrowed approximately $35.0 million to fund a portion of the upfront cash purchase price of the Magnum Acquisition. During the first six months of 2019, we fully repaid the outstanding revolver balance. For additional information on the 2018 ABL Credit Facility, see Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Initial Public Offering
In January 2018, we completed our IPO of 8,050,000 shares of common stock (including 1,050,000 shares pursuant to an over-allotment option) at a price to the public of $23.00 per share.
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 the Divestiture Date, we sold the Production Solutions segment to Brigade. For additional information on the Production Solutions divestiture, see Note 4 – Business Acquisitions and Divestitures. Prior to the Divestiture Date, 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 U.S. 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.

24



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 (Excluding Depreciation and Amortization): Adjusted gross profit (excluding depreciation and amortization) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (excluding depreciation and amortization) 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, 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 expense, 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 and our IPO, (iii) loss or gain from discontinued operations, (iv) loss or gain on revaluation of contingent liabilities, (v) loss or gain on equity method investment, (vi) stock-based compensation expense, (vii) loss or gain on sale of property and equipment, (viii) restructuring charges, (ix) loss or gain on the sale of subsidiaries, and (x) 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 and restructuring costs. 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) transaction and integration costs related to acquisitions and our IPO, (ii) property and equipment, goodwill, and/or intangible asset impairment charges, (iii) interest expense (income), (iv) restructuring charges, (v) loss or gain on the sale of subsidiaries, and (vi) the provision or benefit for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute 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 the Magnum Acquisition and partially due to our divestiture of the Production Solutions segment.

25



The historical results of operations for the three and nine months ended September 30, 2019 included in this Quarterly Report on Form 10-Q include activity related to the Magnum Acquisition whereas the historical results of operations for the three and nine months ended September 30, 2018 do not include activity related to the Magnum Acquisition. As a result, the historical results of operations for the three and nine months ended September 30, 2018 may not give an accurate indication of what our actual results would have been if the Magnum Acquisition had been completed at the beginning of the period presented, or of what our future results of operations are likely to be for the following reasons:

As a result of the Magnum Acquisition and the application of purchase accounting, these identifiable net assets have been adjusted to their estimated fair value as of October 25, 2018, the closing date of the Magnum Acquisition (the “Closing Date”). These adjusted valuations increase our operating expenses in periods after the Closing Date primarily due to an increase in the amortization of intangible assets with definite lives.

Transaction and integration costs associated with the Magnum Acquisition increase operating expenses in periods after the Closing Date.

Our completion tools line constitutes a larger portion of our business, due in large part to the Magnum Acquisition. We expect that the Magnum Acquisition will generate additional free cash flow, reduce overall capital intensity, and improve our margins. We also expect that the Magnum Acquisition will further diversify our basin exposure and add significant size and scale.

We incurred significant indebtedness in connection with the consummation of the Magnum Acquisition, and our related interest expense is expected to be significantly higher than in prior periods.

In addition, the historical results of operations for the three and nine months ended September 30, 2019 included in this Quarterly Report on Form 10-Q include activity related to the Production Solutions segment only through August 30, 2019 (which is the Divestiture Date) whereas the historical results of operations for the three and nine months ended September 30, 2018 include activity related to the Production Solutions segment for the entire periods. Furthermore, future results of operations will not include activity related to the Production Solutions segment. For additional information on the Magnum Acquisition and on the divestiture of the Production Solutions segment, see Note 4 – Business Acquisitions and Divestitures included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
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 onshore in North America. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. During 2018, oil prices rose to their highest levels since the downturn that began in late 2014. However, during the fourth quarter of 2018, oil prices declined approximately 40%, which is generally believed to be due to concerns over a worldwide oversupply of oil as well as concerns over the possible slowing of global demand growth. In response, at the beginning of 2019, OPEC members and some nonmembers, including Russia, renewed pledges to reduce planned production in an effort to draw down a global oversupply and to rebalance supply and demand. These and other events provided support for an increase in oil prices during the first several months of 2019. Since then, due to, among other things, global geopolitical tensions, oil prices have slightly decreased, despite renewed pledges by OPEC members and some non-members, including Russia, to extend production cuts into 2020. We expect ongoing oil price volatility as compliance with the output reduction agreements, changes in oil inventories, GDP growth, and actual demand growth are reported. Similarly, natural gas prices have decreased significantly throughout 2019 and are expected to continue to be volatile, causing many operators in the more gas-exposed regions to curtail activity. Significant factors that are likely to affect 2019 commodity prices include the effect of U.S. energy, monetary, and trade policies; the pace of economic growth in the U.S. and throughout the world, including the potential for macro weakness; geopolitical and economic developments in the U.S. and globally; the extent to which members of OPEC and other oil exporting nations adhere to and agree to further extend the agreed oil production cuts; and overall North American natural gas supply and demand fundamentals, including the pace at which export capacity grows.

Customer budgets for 2019 were set at the end of 2018. As discussed above, there was a sharp decline in oil price during the fourth quarter of 2018. As a result, customer budgets for 2019 are more limited than previously anticipated, and on average, customers have decreased E&P investments in 2019 as compared to 2018, which could adversely affect our business. With this overall reduction, there has been a strong commitment from E&P operators to stay within capital budgets, prompting many of them to begin to scale back activity in the third quarter of 2019 and likely into the fourth quarter of 2019. Even if there

26



is price improvement in oil and natural gas during the remainder of 2019, it is expected that operator activity would not materially increase, as operators would likely remain focused on operating within their previously set capital plans.

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, 2019 Compared to the Three Months Ended September 30, 2018
 
Three Months Ended September 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands)
 
 
Revenues
 

 
 

 
 

Completion Solutions
$
186,252

 
$
196,608

 
$
(10,356
)
     Production Solutions (1)
16,053

 
21,819

 
(5,766
)
 
$
202,305

 
$
218,427

 
$
(16,122
)
Cost of revenues (exclusive of depreciation and amortization shown separately below)
 
 
 
 
 
Completion Solutions
$
152,679

 
$
147,178

 
$
5,501

     Production Solutions (1)
14,170

 
18,704

 
(4,534
)
 
$
166,849

 
$
165,882

 
$
967

Adjusted gross profit
 
 
 
 
 
Completion Solutions
$
33,573

 
$
49,430

 
$
(15,857
)
     Production Solutions (1)
1,883

 
3,115

 
(1,232
)
 
$
35,456

 
$
52,545

 
$
(17,089
)
 
 
 
 
 
 
General and administrative expenses
$
19,222

 
$
21,816

 
$
(2,594
)
(Gain) loss on revaluation of contingent liabilities
(5,771
)
 
45

 
(5,816
)
Loss on sale of subsidiaries
15,834

 

 
15,834

Depreciation
12,196

 
13,661

 
(1,465
)
Amortization of intangibles
4,609

 
1,857

 
2,752

Gain on sale of property and equipment
(466
)
 
(1,190
)
 
724

Income (loss) from operations
(10,168
)
 
16,356

 
(26,524
)
Non-operating expenses
9,732

 
1,568

 
8,164

Income (loss) before income taxes
(19,900
)
 
14,788

 
(34,688
)
Provision (benefit) for income taxes
727

 
1,130

 
(403
)
Net income (loss)
$
(20,627
)
 
$
13,658

 
$
(34,285
)
 
(1)We sold the Production Solutions segment to Brigade on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 4 – Business Acquisitions and Divestitures.


27



Revenues
Revenues decreased $16.1 million, or 7%, to $202.3 million for the third quarter of 2019 which is primarily related to pricing pressure across the company. The Completion Solutions segment and the historical Production Solutions segment 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 2019, the average closing price of oil was $56.34 per barrel, and the average closing price of natural gas was $2.38 per MMBtu. During the third quarter of 2018, the average closing price per barrel of oil was $69.69, and the average closing price of natural gas was $2.93 per MMBtu. The overall decrease is partially offset with an increase in completion tools revenue from the first nine months of 2018, due in large part to the Magnum Acquisition in the fourth quarter of 2018.
Additional information with respect to revenues by reportable segment is discussed below.
Completion Solutions: Revenues decreased $10.4 million, or 5%, to $186.3 million for the third quarter of 2019. The decrease was primarily related to a decrease in coiled tubing revenue of $16.8 million, or 35%, as total job count decreased by 39% in comparison to the third quarter of 2018. In addition, the decrease was partly related to a decrease in wireline revenue of $8.9 million, or 13%, mainly related to pricing pressure. Total completed wireline stages increased 10% in comparison to the third quarter of 2018. The overall decrease in Completions Solutions revenues was partially offset by an increase in completion tools revenue of $12.6 million, or 45%. The increase was primarily due to an increase of 10% in completion tool stages with a corresponding increase of 32% in completion tools revenues by stage due in large part to the Magnum Acquisition in the fourth quarter of 2018. Cementing revenues (including pump downs) also increased by $2.6 million, or 5%, which is in conjunction with the increase in cement job count of 4% quarter-over-quarter.
Production Solutions: Revenues decreased $5.8 million, or 26%, to $16.1 million for the third quarter of 2019. The overall decrease in revenue was primarily related to the fact that the Production Solutions segment was sold on August 30, 2019 and therefore only recorded two months of revenue in the third quarter of 2019 compared to recording three months of revenue in the third quarter of 2018.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased $1.0 million, or 1%, to $166.8 million for the third quarter of 2019. The increase was primarily related to additional costs of $5.8 million for materials installed and consumed while performing services. The increase in these costs was due in large part to the Magnum Acquisition in the fourth quarter of 2018. In addition, the overall increase in cost of revenues was partly related to an increase in severance and other cost of revenue type restructuring charges of $1.8 million mainly associated with the third quarter of 2019 wind-down of our wireline service offerings in Canada. The overall increase in cost of revenues was partially offset by a decrease of $5.4 million in other employee-related costs, as well as a decrease of $1.2 million in other costs, which was mainly driven by reductions in repairs and maintenance, travel and meals and entertainment expenses in comparison to the third quarter of 2018.
Additional information with respect to cost of revenues by reportable segment is discussed below.
Completion Solutions: Cost of revenues increased $5.5 million, or 4%, to $152.7 million for the third quarter of 2019 primarily related to additional costs of $7.0 million for materials installed and consumed while performing services. The increase in these costs was due in large part to the Magnum Acquisition in the fourth quarter of 2018. In addition, the overall increase in cost of revenues was partly related to an increase in severance and other cost of revenue type restructuring charges of $1.8 million mainly associated with the third quarter of 2019 wind-down of our wireline service offerings in Canada. The overall increase in cost of revenues was partially offset by a decrease of $2.8 million in other employee-related costs, as well as a decrease of $0.5 million in other costs, which was mainly driven by reductions in repairs and maintenance, travel and meals and entertainment in comparison to the third quarter of 2018.
Production Solutions: Cost of revenues decreased $4.5 million, or 24%, to $14.2 million for the third quarter of 2019. Employee-related costs decreased by $2.6 million while costs related to materials consumed while performing services decreased by $1.3 million, and other costs such as repairs and maintenance, vehicle and facilities expenses, decreased by $0.7 million in the third quarter of 2019. The primary driver behind the reduction of these costs of revenues related to the sale of the Production Solutions segment on August 30, 2019 as only two months of cost of revenues was recorded in the third quarter of 2019 compared to three months of cost of revenues recorded in the third quarter of 2018.

28



Adjusted Gross Profit
Completion Solutions: Adjusted gross profit (excluding depreciation and amortization) decreased $15.9 million to $33.6 million for the third quarter of 2019 due to the factors described above under “Revenues” and “Cost of Revenues.”
Production Solutions: Adjusted gross profit (excluding depreciation and amortization) decreased $1.2 million to $1.9 million for the third quarter of 2019 as a result of the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses decreased $2.6 million to $19.2 million for the third quarter of 2019. The decrease was primarily related to a decrease of $1.9 million in employee-related costs in comparison to the third quarter of 2018. The decrease is also partly related to a third quarter of 2018 settlement of $1.5 million associated with the Fair Labor Standards Act (“FLSA”) that did not recur in the third quarter of 2019, coupled with certain transaction costs recorded in the third quarter of 2018 associated with the Magnum Acquisition that also did not recur in the third quarter of 2019. The overall decrease in general and administrative expenses was partially offset by an increase in severance and other general and administrative type restructuring charges of $1.4 million mainly associated with the third quarter of 2019 wind-down of our wireline service offerings in Canada. General and administrative expenses as a percentage of revenue was 9.5% for the third quarter of 2019, compared to 10.0% for the third quarter of 2018.
(Gain) Loss on Revaluation of Contingent Liabilities
(Gain) loss on the revaluation of contingent liabilities changed $5.8 million from a loss of less than $0.1 million to a gain of $5.8 million for the third quarter of 2019. The change was primarily related to a reduction in the estimated sales of certain dissolvable plug products in 2019 associated with the Magnum Acquisition, which contributed to the reduction in fair value during the current quarter.
(Gain) Loss on Sale of Subsidiaries
Loss on the sale of subsidiaries was approximately $15.8 million for the third quarter of 2019 and was related to the sale of the Production Solutions segment on August 30, 2019. We did not record a loss on the sale of subsidiaries for the third quarter of 2018.
Depreciation
Depreciation expense decreased $1.5 million to $12.2 million for the third quarter of 2019. The overall decrease was primarily within service offerings in the Production Solutions segment as we recorded a property and equipment impairment charge recorded in the fourth quarter of 2018. Furthermore, the remaining property and equipment associated with the Production Solutions segment was sold on August 30, 2019.
Amortization of Intangibles
Amortization of intangibles increased $2.8 million to $4.6 million for the third quarter of 2019, primarily due to a $3.1 million increase in amortization associated with intangible assets acquired as part of the Magnum Acquisition and the acquisition of Frac Technology AS, a Norwegian private limited company (the “Frac Tech Acquisition”). The overall increase was partially offset by a reduction in amortization of $0.3 million associated with intangible assets in the Production Solutions segment, which were fully impaired in the fourth quarter of 2018.
Non-Operating Expenses
Non-operating expenses increased $8.2 million to $9.7 million for the third quarter of 2019. The increase in comparison to the third quarter of 2018 was primarily related to an increase in interest expense related to higher indebtedness and an increased interest rate in conjunction with the Senior Notes, which were entered into in the fourth quarter of 2018 in connection with the Magnum Acquisition.
Provision (Benefit) for Income Taxes
Our tax provision for the third quarter of 2019 was approximately $0.7 million as compared to a tax provision of $1.1 million for the third quarter of 2018. The $0.4 million decrease in the tax provision was primarily a result of the discrete tax impact from the sale of the Production Solutions segment on August 30, 2019, coupled with changes in pre-tax income between periods.

29



Adjusted EBITDA
Adjusted EBITDA decreased $14.1 million to $24.2 million for the third quarter of 2019. The Adjusted EBITDA decrease is 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, 2019 Compared to the Nine Months Ended September 30, 2018
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands)
 
 
Revenues
 
 
 
 
 
Completion Solutions
$
611,255

 
$
536,363

 
$
74,892

     Production Solutions (1)
58,272

 
61,363

 
(3,091
)
 
$
669,527

 
$
597,726

 
$
71,801

Cost of revenues (exclusive of depreciation and amortization shown separately below)
 
 
 
 
 
Completion Solutions
$
480,140

 
$
414,606

 
$
65,534

     Production Solutions (1)
49,854

 
53,094

 
(3,240
)
 
$
529,994

 
$
467,700

 
$
62,294

Adjusted gross profit
 
 
 
 
 
Completion Solutions
$
131,115

 
$
121,757

 
$
9,358

     Production Solutions (1)
8,418

 
8,269

 
149

 
$
139,533

 
$
130,026

 
$
9,507

 
 
 
 
 
 
General and administrative expenses
$
60,979

 
$
51,837

 
$
9,142

(Gain) loss on revaluation of contingent liabilities
(20,701
)
 
1,715

 
(22,416
)
Loss on sale of subsidiaries
15,834

 

 
15,834

Depreciation
39,572

 
39,982

 
(410
)
Amortization of intangibles
13,925

 
5,653

 
8,272

Gain on sale of property and equipment
(799
)
 
(1,701
)
 
902

Income from operations
30,723

 
32,540

 
(1,817
)
Non-operating expenses
29,501

 
6,313

 
23,188

Income before income taxes
1,222

 
26,227

 
(25,005
)
Provision (benefit) for income taxes
(1,548
)
 
1,875

 
(3,423
)
Net income
$
2,770

 
$
24,352

 
$
(21,582
)
(1)We sold the Production Solutions segment to Brigade on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 4 – Business Acquisitions and Divestitures.
Revenues
Revenues increased $71.8 million, or 12%, to $669.5 million for the first nine months of 2019. The increase is primarily related to an increase in completion tools revenue from the first nine months of 2018, due in large part to the Magnum Acquisition in the fourth quarter of 2018. The overall increase is partially offset with pricing pressure across the company. The Completion Solutions segment and the historical Production Solutions segment 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 2019, the average closing price of oil was $57.04 per barrel, and the average closing price of natural gas was $2.62 per MMBtu. During the first nine months of 2018, the average closing price per barrel of oil was $66.93, and the average closing price of natural gas was $2.95 per MMBtu.
Additional information with respect to revenues by reportable segment is discussed below.

30



Completion Solutions: Revenues increased $74.9 million, or 14%, to $611.3 million for the first nine months of 2019. The increase was primarily related to an increase in completion tools revenue of $78.0 million, or 107%, with a corresponding increase of 65% in completion tool stages and 26% in completion tools revenues by stage due in large part to the Magnum Acquisition in the fourth quarter of 2018. In addition, the increase was partly attributable to an increase in wireline revenue of $7.8 million, or 4%, as total wireline stages completed increased 19% due to an increase in activity in comparison to the first nine months of 2018. Furthermore, cementing revenues (including pump downs) increased by $19.0 million, or 13%, primarily due to a 12% increase in cement job count during the first nine months of 2019. The increase was partially offset with a decrease in coiled tubing revenue of $29.8 million, or 22%, as total job count decreased by 34% in comparison to the first nine months of 2018.
Production Solutions: Revenues decreased $3.1 million, or 5%, to $58.3 million for the first nine months of 2019 primarily related to a reduction of activity. The Production Solutions segment was sold on August 30, 2019.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased $62.3 million, or 13%, to $530.0 million for the first nine months of 2019. The increase was primarily related to increased revenues described above in comparison to the first nine months of 2018, which was due in large part to the Magnum Acquisition in the fourth quarter of 2018.
Additional information with respect to cost of revenues by reportable segment is discussed below.
Completion Solutions: Cost of revenues increased $65.5 million, or 16%, to $480.1 million for the first nine months of 2019. Costs related to materials installed and consumed while performing services increased $53.4 million and other employee-related costs increased $8.0 million in comparison to the first nine months of 2018, due in large part to the Magnum Acquisition in the fourth quarter of 2018. In addition, Magnum integration costs associated with cost of revenues was approximately $3.2 million in the third quarter of 2019. These costs did not occur in the third quarter of 2018. Furthermore, the increase in cost of revenues was partly related to an increase in severance and other cost of revenue type restructuring charges of $1.8 million mainly associated with the third quarter of 2019 wind-down of our wireline service offerings in Canada. The overall increase in cost of revenues was partially offset by a decrease of $0.9 million in other costs, which was mainly driven by reductions in repairs and maintenance, travel and meals and entertainment in comparison to the first nine months of 2018.
Production Solutions: Cost of revenues decreased $3.2 million, or 6%, to $49.9 million for the first nine months of 2019. Costs related to materials consumed while performing services decreased $1.7 million, employee-related costs decreased $1.2 million, and other costs such as repairs and maintenance, vehicle and facilities expenses, decreased $0.3 million in the third quarter of 2019. The primary drivers behind the reduction of these costs of revenues related to a reduction in activity for the first nine months of 2019 coupled with the ultimate sale of the Production Solutions segment on August 30, 2019.
Adjusted Gross Profit
Completion Solutions: Adjusted gross profit (excluding depreciation and amortization) increased $9.4 million to $131.1 million for the first nine months of 2019 due to the factors described above under “Revenues” and “Cost of Revenues.”
Production Solutions: Adjusted gross profit (excluding depreciation and amortization) increased $0.1 million to $8.4 million for the first nine months of 2019 as a result of the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses increased $9.1 million to $61.0 million for the first nine months of 2019. The increase in comparison to the first nine months of 2018 was primarily related to additional general and administrative costs, including integration, compensation, and benefits costs, associated with the Magnum Acquisition in the fourth quarter of 2018. General and administrative expenses as a percentage of revenue was 9.1% for the first nine months of 2019, compared to 8.7% for the first nine months of 2018.
(Gain) Loss on Revaluation of Contingent Liabilities
(Gain) loss on the revaluation of contingent liabilities changed $22.4 million from a loss of $1.7 million for the first nine months of 2018 to a gain of $20.7 million for the first nine months of 2019. The change was primarily related to a reduction in the estimated sales of certain dissolvable plug products in 2019 associated with the Magnum Acquisition, which contributed to the reduction in fair value during the first nine months of 2019.

31



(Gain) Loss on Sale of Subsidiaries
Loss on the sale of subsidiaries was approximately $15.8 million for the first nine months of 2019 and was related to the sale of the Production Solutions segment. We did not record a loss on the sale of subsidiaries for the first nine months of 2018.
Depreciation
Depreciation expense decreased $0.4 million to $39.6 million for the first nine months of 2019. The decrease was primarily within service offerings in the Production Solutions segment as we recorded a property and equipment impairment charge recorded in the fourth quarter of 2018. Furthermore, the remaining property and equipment associated with the Production Solutions segment was sold in the third quarter of 2019. The overall decrease is partially offset with an increase in depreciation expense in other lines of service where capital expenditure activity was larger in the first nine months of 2019 in comparison to the first nine months of 2018.
Amortization of Intangibles
Amortization of intangibles increased $8.3 million to $13.9 million for the first nine months of 2019, primarily due to a $9.4 million increase in amortization associated with intangible assets acquired as part of the Magnum Acquisition and Frac Tech Acquisition. The overall increase was partially offset by a reduction in amortization of $0.8 million associated with intangible assets in the Production Solutions segment, which were fully impaired in the fourth quarter of 2018.
Non-Operating Expenses
Non-operating expenses increased $23.2 million to $29.5 million for the first nine months of 2019. The increase in comparison to the first nine months of 2018 was primarily related to an increase in interest expense related to higher indebtedness and an increased interest rate in conjunction with the Senior Notes, which were entered into in the fourth quarter of 2018 in connection with the Magnum Acquisition.
Provision (Benefit) for Income Taxes
Our tax benefit for the first nine months of 2019 was approximately $1.5 million as compared to a tax provision of $1.9 million for the first nine months of 2018. The $3.4 million decrease in our tax provision was primarily related to changes in pre-tax income between periods coupled with the discrete tax impact from the sale of the Production Solutions segment during the first nine months of 2019.
Adjusted EBITDA
Adjusted EBITDA increased $8.3 million to $101.4 million for the first nine months of 2019. The Adjusted EBITDA increase is 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 expense, depreciation, amortization of intangibles, and provision (benefit) for income taxes.
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 and our IPO, (iii) loss or gain from discontinued operations, (iv) loss or gain on revaluation of contingent liabilities, (v) loss or gain on equity method investment, (vi) stock-based compensation expense, (vii) loss or gain on sale of property and equipment, and (viii) restructuring charges, (ix) loss or gain on the sale of subsidiaries, and (x) 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 and restructuring costs.

32



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 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, 2019 and 2018: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
EBITDA reconciliation:
 
 
 
 
 
 
 
Net income (loss)
$
(20,627
)
 
$
13,658

 
$
2,770