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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020
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
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  x
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding at August 3, 2020 was 31,642,601.
 
 
 
 
 




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, 2019 and “Risk Factors” in Item 1A of Part II in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. These factors, some of which are beyond our control, include the following:
the level of capital spending and well completions by the onshore oil and natural gas industry;
oil and natural gas commodity prices;
general economic conditions;
the impact of the coronavirus pandemic and the actions of certain oil and natural gas producing countries on our business and the business of our customers, including the effects of the resulting excess supply of oil;
our ability to employ, or maintain the employment of, a sufficient number of key employees, technical personnel, and other skilled and qualified workers;
our ability to implement price increases or maintain existing prices on our products and services;
pricing pressures, reduced sales, or reduced market share as a result of intense competition in the markets for our composite and dissolvable plug products;
our ability to accurately predict customer demand;
conditions inherent in the oilfield services industry, such as equipment defects, liabilities arising from accidents or damage involving our fleet of trucks or other equipment, explosions and uncontrollable flows of gas or well fluids, and loss of well control;
our ability to implement new technologies and services;
seasonal and adverse weather conditions;
our ability to maintain compliance with the New York Stock Exchange continued listing requirements and avoid the delisting of our common stock;
changes in laws or regulations regarding issues of health, safety, and protection of the environment, including those relating to hydraulic fracturing, greenhouse gases, and climate change; and
our ability to successfully integrate the assets and operations that we acquired with our acquisition of Magnum Oil Tools International, LTD and its affiliates (the “Magnum Acquisition”) and realize anticipated revenues, cost savings, or other benefits of such acquisition.
Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial, or that could apply to any company could also materially adversely affect our business, financial condition, or future results.
These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.




PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
June 30,
2020
 
December 31,
2019
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
88,678

 
$
92,989

Accounts receivable, net
39,376

 
96,889

Income taxes receivable
630

 
660

Inventories, net
59,333

 
60,945

Prepaid expenses and other current assets
19,291

 
17,434

Total current assets
207,308

 
268,917

Property and equipment, net
115,258

 
128,604

Intangible assets, net
140,706

 
148,991

Goodwill

 
296,196

Other long-term assets
5,587

 
8,187

Total assets
$
468,859

 
$
850,895

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
11,114

 
$
35,490

Accrued expenses
16,056

 
24,730

Current portion of long-term debt
563

 

Current portion of capital lease obligations
1,043

 
995

Total current liabilities
28,776

 
61,215

Long-term liabilities
 
 
 
Long-term debt
365,632

 
392,059

Deferred income taxes

 
1,588

Long-term capital lease obligations
1,667

 
2,201

Other long-term liabilities
2,834

 
3,955

Total liabilities
398,909

 
461,018

Commitments and contingencies (Note 10)


 


Stockholders’ equity
 
 
 
Common stock (120,000,000 shares authorized at $.01 par value; 31,652,635 and 30,555,677 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively)
317

 
306

Additional paid-in capital
764,382

 
758,853

Accumulated other comprehensive loss
(4,863
)
 
(4,467
)
Accumulated deficit
(689,886
)
 
(364,815
)
Total stockholders’ equity
69,950

 
389,877

Total liabilities and stockholders’ equity
$
468,859

 
$
850,895

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 June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Revenues
 
 
 
 
 
 
 
Service
$
37,673

 
$
181,450

 
$
152,074

 
$
357,440

Product
15,062

 
56,067

 
47,285

 
109,782

 
52,735

 
237,517

 
199,359

 
467,222

Cost and expenses
 
 
 
 
 
 
 
Cost of revenues (exclusive of depreciation and amortization shown separately below)
 
 
 
 
 
 
 
Service
41,865

 
144,875

 
141,063

 
285,461

Product
14,838

 
39,680

 
41,648

 
77,684

General and administrative expenses
11,284

 
21,818

 
27,679

 
41,757

Depreciation
8,449

 
13,846

 
16,990

 
27,376

Amortization of intangibles
4,116

 
4,628

 
8,285

 
9,316

Impairment of goodwill

 

 
296,196

 

(Gain) loss on revaluation of contingent liabilities
910

 
(975
)
 
484

 
(14,930
)
Gain on sale of property and equipment
(1,790
)
 
(310
)
 
(2,365
)
 
(333
)
Income (loss) from operations
(26,937
)
 
13,955

 
(330,621
)
 
40,891

Interest expense
9,186

 
10,771

 
19,014

 
20,097

Interest income
(179
)
 
(168
)
 
(550
)
 
(328
)
Gain on extinguishment of debt
(11,587
)
 

 
(21,703
)
 

Income (loss) before income taxes
(24,357
)
 
3,352

 
(327,382
)
 
21,122

Benefit for income taxes
(186
)
 
(2,735
)
 
(2,311
)
 
(2,275
)
Net income (loss)
$
(24,171
)
 
$
6,087

 
$
(325,071
)
 
$
23,397

Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
(0.81
)
 
$
0.21

 
$
(10.97
)
 
$
0.80

Diluted
$
(0.81
)
 
$
0.21

 
$
(10.97
)
 
$
0.80

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
29,844,240

 
29,349,396

 
29,637,358

 
29,250,744

Diluted
29,844,240

 
29,473,037

 
29,637,358

 
29,423,163

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

 
$
192

 
$
(396
)
 
$
440

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

 
192

 
(396
)
 
440

Total comprehensive income (loss)
$
(23,964
)
 
$
6,279

 
$
(325,467
)
 
$
23,837

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

2



NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Accumulated Deficit)
 
Total
Stockholders’ Equity
 
Shares
 
Amounts
 
 
 
 
Balance, March 31, 2020
30,406,994

 
$
304

 
$
762,332

 
$
(5,070
)
 
$
(665,715
)
 
$
91,851

Issuance of common stock under stock compensation plan, net of forfeitures
1,294,688

 
13

 
(13
)
 

 

 

Stock-based compensation expense

 

 
2,105

 

 

 
2,105

Exercise of stock options

 

 

 

 

 

Vesting of restricted stock
(49,047
)
 

 
(42
)
 

 

 
(42
)
Other comprehensive income

 

 

 
207

 

 
207

Net loss

 

 

 

 
(24,171
)
 
(24,171
)
Balance, June 30, 2020
31,652,635

 
$
317

 
$
764,382

 
$
(4,863
)
 
$
(689,886
)
 
$
69,950

 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Accumulated Deficit)
 
Total
Stockholders’ Equity
 
Shares
 
Amounts
 
 
 
 
Balance, March 31, 2019
30,782,600

 
$
308

 
$
749,508

 
$
(4,595
)
 
$
(129,754
)
 
$
615,467

Issuance of common stock under stock compensation plan, net of forfeitures
(33,538
)
 

 

 

 

 

Stock-based compensation expense

 

 
4,114

 

 

 
4,114

Exercise of stock options

 

 

 

 

 

Vesting of restricted stock
(66,053
)
 
(1
)
 
(1,550
)
 

 

 
(1,551
)
Other comprehensive income

 

 

 
192

 

 
192

Net income

 

 

 

 
6,087

 
6,087

Balance, June 30, 2019
30,683,009

 
$
307

 
$
752,072

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

 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Accumulated Deficit)
 
Total
Stockholders’ Equity
 
Shares
 
Amounts
 
 
 
Balance, December 31, 2019
30,555,677

 
$
306

 
$
758,853

 
$
(4,467
)
 
$
(364,815
)
 
$
389,877

Issuance of common stock under stock compensation plan, net of forfeitures
1,245,679

 
12

 
(12
)
 

 

 

Stock-based compensation expense

 

 
5,697

 

 

 
5,697

Exercise of stock options

 

 

 

 

 

Vesting of restricted stock
(148,721
)
 
(1
)
 
(156
)
 

 

 
(157
)
Other comprehensive loss

 

 

 
(396
)
 

 
(396
)
Net loss

 

 

 

 
(325,071
)
 
(325,071
)
Balance, June 30, 2020
31,652,635

 
$
317

 
$
764,382

 
$
(4,863
)
 
$
(689,886
)
 
$
69,950

 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Accumulated Deficit)
 
Total
Stockholders’ Equity
 
Shares
 
Amounts
 
 
 
 
Balance, December 31, 2018
30,163,408

 
$
302

 
$
746,428

 
$
(4,843
)
 
$
(147,064
)
 
$
594,823

Issuance of common stock under stock compensation plan, net of forfeitures
588,483

 
6

 
(6
)
 

 

 

Stock-based compensation expense

 

 
7,267

 

 

 
7,267

Exercise of stock options
674

 

 
15

 

 

 
15

Vesting of restricted stock
(69,556
)
 
(1
)
 
(1,632
)
 

 

 
(1,633
)
Other comprehensive income

 

 

 
440

 

 
440

Net income

 

 

 

 
23,397

 
23,397

Balance, June 30, 2019
30,683,009

 
$
307

 
$
752,072

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


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

3



NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2020
 
2019
Cash flows from operating activities
 

 
 

Net income (loss)
$
(325,071
)
 
$
23,397

Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Depreciation
16,990

 
27,376

Amortization of intangibles
8,285

 
9,316

Amortization of deferred financing costs
1,455

 
1,492

Provision for doubtful accounts
1,453

 
48

Benefit for deferred income taxes
(1,588
)
 
(3,019
)
Provision for inventory obsolescence
512

 
2,080

Stock-based compensation expense
5,697

 
7,267

Impairment of goodwill
296,196

 

Gain on extinguishment of debt
(21,703
)
 

Gain on sale of property and equipment
(2,365
)
 
(333
)
(Gain) loss on revaluation of contingent liabilities
484

 
(14,930
)
Changes in operating assets and liabilities, net of effects from acquisitions
 
 
 
Accounts receivable, net
56,043

 
(14,560
)
Inventories, net
959

 
1,566

Prepaid expenses and other current assets
(1,658
)
 
(1,952
)
Accounts payable and accrued expenses
(36,156
)
 
(20,061
)
Income taxes receivable/payable
30

 
40

Other assets and liabilities
2,796

 
(319
)
Net cash provided by operating activities
2,359

 
17,408

Cash flows from investing activities
 
 
 
Proceeds from sales of property and equipment
4,105

 
1,187

Proceeds from property and equipment casualty losses
555

 
1,480

Proceeds from notes receivable payments

 
7,626

Purchases of property and equipment
(2,892
)
 
(37,363
)
Net cash provided by (used in) investing activities
1,768

 
(27,070
)
Cash flows from financing activities
 
 
 
Purchases of Senior Notes
(7,414
)
 

Proceeds from 2018 ABL Credit Facility

 
10,000

Payments on 2018 ABL Credit Facility

 
(45,000
)
Payments on capital leases
(486
)
 
(429
)
Payments of contingent liability
(206
)
 
(138
)
Proceeds from exercise of stock options

 
15

Vesting of restricted stock
(157
)
 
(1,633
)
Net cash used in financing activities
(8,263
)
 
(37,185
)
Impact of foreign currency exchange on cash
(175
)
 
118

Net decrease in cash and cash equivalents
(4,311
)
 
(46,729
)
Cash and cash equivalents
 
 
 
Cash and cash equivalents beginning of year
92,989

 
63,615

Cash and cash equivalents end of period
$
88,678

 
$
16,886

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
17,834

 
$
19,386

Cash paid (refunded) for income taxes
$
(1,061
)
 
$
694

Capital expenditures in accounts payable and accrued expenses
$
2,118

 
$
3,079

Property and equipment obtained by capital lease
$

 
$
1,310

Receivable from property and equipment sale (including insurance)
$
4,958

 
$

Termination of contingent liability related to business acquisition
$
3,375

 
$

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

4



NINE ENERGY SERVICE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Company and Organization
Background
Nine Energy Service, Inc. (the “Company” or “Nine”), a Delaware corporation, is an oilfield services business that provides services integral to the completion of unconventional wells through a full range of tools and methodologies. The Company is headquartered in Houston, Texas.
Risks and Uncertainties
The Company’s business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. The worldwide coronavirus outbreak in early 2020, which was declared a pandemic by the World Health Organization in March 2020, the uncertainty regarding its impact, and various governmental actions taken to mitigate its impact have resulted in an unprecedented decline in demand for oil. In the midst of the ongoing pandemic, the Organization of Petroleum Exporting Countries and other oil producing nations, including Russia, were initially unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. The convergence of these events created the unprecedented dual impact of a massive decline in the demand for oil, coupled with the risk of a substantial increase in supply, which has directly affected the Company. While the Company cannot predict the length of time that market disruptions resulting from the coronavirus pandemic and efforts to mitigate its effects will continue, the ultimate impact on its business, or the pace or extent of any subsequent recovery, the Company expects the coronavirus pandemic and related effects to continue to have an adverse impact on commodity prices and its business generally.
Historically, the Company has met its liquidity needs principally from cash on hand, cash flow from operations and, if needed, external borrowings. In response to the above events, the Company has implemented certain cost-cutting measures across the organization to continue to maintain its current liquidity position. Based on its current forecasts, the Company believes that cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility (as defined in Note 8 – Debt Obligations), should be sufficient to fund its capital requirements for at least the next twelve months from the issuance date of its condensed consolidated financial statements.
2. Basis of Presentation
Condensed Consolidated Financial Information
The Condensed Consolidated Balance Sheet at December 31, 2019 and the Condensed Consolidated Statement of Stockholders’ Equity as of December 31, 2019 and 2018 are derived from audited consolidated financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for the fair statement of the Company’s financial position have been included. These condensed consolidated financial statements include all accounts of the Company.
These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Nine and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

5



Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Such estimates include fair value assumptions used in purchase accounting and in analyzing goodwill, definite and indefinite-lived intangible assets, and property and equipment for possible impairment, useful lives used in depreciation and amortization expense, stock-based compensation fair value, estimated realizable value on excess and obsolete inventories, deferred taxes and income tax contingencies, and losses on accounts receivable. It is at least reasonably possible that the estimates used will change within the next year.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications primarily relate to presenting “Revenues” and “Cost of revenues” by product and service and by presenting “Interest income” as a separate line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
3. New Accounting Standards
Accounting Pronouncements Recently Adopted
In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The standard is required to be applied retrospectively, except the new Level 3 disclosure requirements are applied prospectively. The Company adopted ASU 2018-13 in the first quarter of 2020, and it had an immaterial impact on the Company’s condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard, which requires the use of a modified retrospective transition approach, includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued a new, optional transition method that will give companies the option to use the effective date as the date of initial application on transition. For emerging growth entities, the standard is effective for the fiscal years beginning after December 15, 2020 and interim periods within the fiscal years beginning after December 15, 2021. Early adoption is allowed, and the Company, as an emerging growth company, plans to early adopt the standard for the fiscal years beginning after December 15, 2019 and interim periods within the fiscal years beginning after December 15, 2020. To support the accounting and disclosure requirements under the new standard, the Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio and developing and implementing appropriate changes to its internal processes and controls. Based on initial evaluation, the Company expects to recognize a lease liability and offsetting right-of-use asset for all of its operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. The Company will provide additional information about the expected financial impact as it progresses through the evaluation and implementation of the standard.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic

6



350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for public businesses for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in ASU 2016-13 replace the current incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. ASU 2016-13 is effective for SEC filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
4. Revenue
Disaggregation of Revenue
The Company adopted Accounting Standards Codification 606 (“ASC 606”) on December 31, 2019, effective January 1, 2019, using the modified retrospective method. Accordingly, results for the year ended December 31, 2019 and periods thereafter are presented in accordance with ASC 606 while prior period results, including those presented below for the three and six months ended June 30, 2019, have not been adjusted and are reported under the previous revenue recognition guidance.
Disaggregated revenue for the three and six months ended June 30, 2020 and June 30, 2019 was as follows:
 
Three Months Ended June 30, 2020
 
Three Months Ended June 30, 2019
 
Completion Solutions
 
Total
 
Completion Solutions
 
Production Solutions(2)
 
Total
 
(in thousands)
 
(in thousands)
Coiled tubing
$
7,566

 
$
7,566

 
$
38,897

 
$

 
$
38,897

Cement
20,431

 
20,431

 
56,742

 

 
56,742

Tools
15,062

 
15,062

 
56,067

 

 
56,067

Wireline
9,676

 
9,676

 
64,165

 

 
64,165

Well service

 

 

 
21,646

 
21,646

Total revenues
$
52,735

 
$
52,735

 
$
215,871

 
$
21,646

 
$
237,517

 
Six Months Ended June 30, 2020
 
Six Months Ended June 30, 2019
 
Completion Solutions
 
Total
 
Completion Solutions
 
Production Solutions(2)
 
Total
 
(in thousands)
 
(in thousands)
Coiled tubing
$
28,297

 
$
28,297

 
$
77,540

 
$

 
$
77,540

Cement
69,068

 
69,068

 
110,000

 

 
110,000

Tools
47,285

 
47,285

 
109,782

 

 
109,782

Wireline
54,709

 
54,709

 
127,681

 

 
127,681

Well service

 

 

 
42,219

 
42,219

Total revenues
$
199,359

 
$
199,359

 
$
425,003

 
$
42,219

 
$
467,222


7



 
Three Months Ended June 30, 2020
 
Three Months Ended June 30, 2019
 
Completion Solutions
 
Total
 
Completion Solutions
 
Production Solutions(2)
 
Total
 
(in thousands)
 
(in thousands)
Services(1)
$
37,673

 
$
37,673

 
$
159,804

 
$
21,646

 
$
181,450

Products(1)
15,062

 
15,062

 
56,067

 

 
56,067

Total revenues
$
52,735

 
$
52,735

 
$
215,871

 
$
21,646

 
$
237,517

 
Six Months Ended June 30, 2020
 
Six Months Ended June 30, 2019
 
Completion Solutions
 
Total
 
Completion Solutions
 
Production Solutions(2)
 
Total
 
(in thousands)
 
(in thousands)
Services(1)
$
152,074

 
$
152,074

 
$
315,221

 
$
42,219

 
$
357,440

Products(1)
47,285

 
47,285

 
109,782

 

 
109,782

Total revenues
$
199,359

 
$
199,359

 
$
425,003


$
42,219

 
$
467,222

(1)     The Company recognizes revenues from the sales of products at a point in time and revenues from the sales of services over time.
(2)     The Production Solutions segment was sold to Brigade Energy Service LLC (“Brigade”) on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 13 – Segment Information.
Performance Obligations
At June 30, 2020 and December 31, 2019, the amount of remaining performance obligations were immaterial.
Contract Balances
At June 30, 2020 and December 31, 2019, contract assets and contract liabilities were immaterial.
5. Inventories
Inventories, consisting primarily of finished goods and raw materials, are stated at the lower of cost or net realizable value. Cost is determined on an average cost basis. The Company reviews its inventory balances and writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The reserve for obsolescence was $5.0 million and $5.4 million at June 30, 2020 and December 31, 2019, respectively.
Inventories, net as of June 30, 2020 and December 31, 2019 were comprised of the following: 
 
June 30, 2020
 
December 31,
2019
 
(in thousands)
Raw materials
$
41,129

 
$
38,823

Work in progress
91

 

Finished goods
23,126

 
27,555

Inventories
64,346

 
66,378

Reserve for obsolescence
(5,013
)
 
(5,433
)
Inventories, net
$
59,333

 
$
60,945



8



6. Goodwill and Intangible Assets
Goodwill
The changes in the net carrying amount of the components of goodwill for the six months ended June 30, 2020 were as follows: 
 
Goodwill
 
Gross Value
 
Accumulated
Impairment Loss
 
Net
 
(in thousands)
Balance as of December 31, 2019
$
408,732

 
$
(112,536
)
 
$
296,196

Impairment

 
(296,196
)
 
(296,196
)
Balance as of June 30, 2020
$
408,732

 
$
(408,732
)
 
$

Q1 2020 Goodwill Impairment
With a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes, the outlook for expected future cash flows associated with the Company’s reporting units decreased dramatically in the first quarter of 2020.
Based on the above events, an indication of impairment associated with the Company’s reporting units occurred, triggering an interim goodwill impairment test of the Level 3 fair value of each reporting unit under Accounting Standards Codification 350, Intangibles - Goodwill and Other (“ASC 350”) at March 31, 2020. The Level 3 fair value of each reporting unit was determined by using the income approach (discounted cash flows of forecasted income) based on the Company’s best internal projections and the likelihood of various outcomes.
Determining fair value requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating profit margins, weighted average cost of capital, terminal growth rates, future market share, the impact of new product development, and future market conditions, among others. The Company believes that the estimates and assumptions used in the interim goodwill impairment test are reasonable and appropriate.
Based on its Level 3 fair value determination in connection with the interim goodwill impairment test under ASC 350, the Company recorded goodwill impairment charges of $296.2 million in the first quarter of 2020 associated with its tools, cementing, and wireline reporting units. These charges represented a full write-off of goodwill and were primarily attributed to the events described above, coupled with an increased weighted average cost of capital driven by a reduction in the Company’s stock price and the Level 2 fair value of its Senior Notes (as defined in Note 8 – Debt Obligations).
These charges are included in the line item “Impairment of goodwill” in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the six months ended June 30, 2020.
Intangible Assets
The changes in the net carrying value of the components of intangible assets for the six months ended June 30, 2020 were as follows: 
 
Customer Relationships
 
Non- Compete Agreements
 
Technology
 
In-process R&D
 
Total
 
(in thousands, except weighted average amortization period information)
Balance as of December 31, 2019
$
32,536

 
$
1,534

 
$
113,921

 
$
1,000

 
$
148,991

Amortization expense
(3,726
)
 
(200
)
 
(4,359
)
 

 
(8,285
)
Balance as of June 30, 2020
$
28,810

 
$
1,334

 
$
109,562

 
$
1,000

 
$
140,706

Weighted average amortization period
5.7
 
3.3
 
13.1
 
Indefinite
 
 

Amortization of intangibles expense was $4.1 million and $8.3 million for the three and six months ended June 30, 2020, respectively. Amortization of intangibles expense was $4.6 million and $9.3 million for the three and six months ended June 30, 2019, respectively.

9



Future estimated amortization of intangibles is as follows:
Year Ending December 31,
(in thousands)
2020
$
8,182

2021
16,116

2022
13,463

2023
11,516

2024
11,183

Thereafter
79,246

Total
$
139,706


With a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes, the carrying amount of long-lived assets (inclusive of definite-lived intangible assets and property and equipment) associated with the Company’s asset groups may not be recoverable. As such, the Company performed an impairment assessment of long-lived assets in its asset groups under Accounting Standards Codification 360, Property, Plant and Equipment (“ASC 360”) at March 31, 2020, based on its best internal projections and the likelihood of various outcomes.
Based on its assessment, the Company determined that the estimated future undiscounted cash flows derived from long-lived assets associated with its asset groups exceeded the carrying amount of long-lived assets associated with its asset groups, and no impairment to long-lived assets was required.
No events triggered additional impairment tests under ASC 360 through June 30, 2020. However, the occurrence of future events or deteriorating market conditions could result in additional impairment assessments under ASC 360 subsequent to June 30, 2020.
7. Accrued Expenses
Accrued expenses as of June 30, 2020 and December 31, 2019 consisted of the following:
 
June 30, 2020
 
December 31, 2019
 
(in thousands)
Accrued compensation and benefits
$
4,340

 
$
7,009

Accrued interest
5,655

 
6,091

Accrued bonus

 
5,043

Accrued sales tax
244

 
820

Contingent liabilities
306

 
391

Other accrued expenses
5,511

 
5,376

Accrued expenses
$
16,056

 
$
24,730



10



8. Debt Obligations
The Company’s debt obligations as of June 30, 2020 and December 31, 2019 were as follows: 
 
June 30,
2020
 
December 31,
2019
 
(in thousands)
Senior Notes
$
370,334

 
$
400,000

2018 ABL Credit Facility

 

Magnum Promissory Notes
2,250

 

Total debt before deferred financing costs
$
372,584

 
$
400,000

Deferred financing costs
(6,389
)
 
(7,941
)
Total debt
$
366,195

 
$
392,059

Less: Current portion of long-term debt
(563
)
 

Long-term debt
$
365,632

 
$
392,059


Senior Notes
Background
On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The Senior Notes were issued under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among the Company, certain subsidiaries of the Company and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year, and the first interest payment was due on May 1, 2019. The Senior Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s current domestic subsidiaries and by certain future subsidiaries.
The Indenture contains covenants that limit the Company’s ability and the ability of its restricted subsidiaries to engage in certain activities. The Company was in compliance with the provisions of the Indenture at June 30, 2020.
Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to the Company, any restricted subsidiary of the Company that is a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.
Unamortized deferred financing costs associated with the Senior Notes were $6.4 million and $7.9 million at June 30, 2020 and December 31, 2019, respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method.
Extinguishment of Debt
The Company repurchased approximately $15.9 million and $29.7 million of Senior Notes at a repurchase price of approximately $3.9 million and $7.4 million in cash for the three and six months ended June 30, 2020, respectively. Deferred financing costs associated with these transactions were $0.3 million and $0.5 million for the three and six months ended June 30, 2020, respectively. As a result, for the three and six months ended June 30, 2020, the Company recorded a $11.6 million gain and a $21.7 million gain, respectively, on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by the deferred financing costs. The gain on extinguishment of debt is included as a separate line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended June 30, 2020.
2018 ABL Credit Facility
On October 25, 2018, the Company entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”), by and among the Company, Nine Energy Canada, Inc., JP Morgan Chase Bank, N.A., as administrative agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days

11



before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.
Loans to the Company and its domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or LIBOR loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be Canadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on the Company’s leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below $18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. The Company was in compliance with all covenants under the 2018 ABL Credit Agreement at June 30, 2020.
All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties, excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.
At June 30, 2020, the Company’s availability under the 2018 ABL Credit Facility was approximately $44.8 million, net of outstanding letters of credit of $0.5 million.
Magnum Promissory Notes
On October 25, 2018, pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), the Company acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum”). The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019 (the “Magnum Earnout”).
On June 30, 2020, pursuant to an amendment to the Magnum Purchase Agreement to terminate the remaining Magnum Earnout and all obligations related thereto (the “Magnum Purchase Agreement Amendment”), the Company issued promissory notes with an aggregated principal amount of $2.3 million (the “Magnum Promissory Notes”) to the sellers of Magnum. The Magnum Promissory Notes bear interest at a rate of 6.0% per annum. The principal amount of the Magnum Promissory Notes will be paid in equal quarterly installments beginning January 1, 2021. The entire unpaid principal amount will be due and payable on the maturity date, which is the earlier of October 1, 2022 and the business day after the date on which the Company sells, transfers or otherwise disposes of the “E-Set” tools business to an unaffiliated third party, unless such sale, transfer or disposition is made, directly or indirectly, as part of the sale, transfer or disposition of the Dissolvable Plugs Business or due to the occurrence of a Change of Control Event (each as defined in the Magnum Purchase Agreement).
For additional information regarding the termination of the Magnum Earnout, see Note 10 – Commitments and Contingencies.

12



Fair Value of Debt Instruments
The estimated fair value of the Company’s debt obligations as of June 30, 2020 and December 31, 2019 was as follows:
 
June 30, 2020
 
December 31, 2019
 
(in thousands)
Senior Notes
$
177,760

 
$
324,000

2018 ABL Credit Facility
$

 
$

Magnum Promissory Notes
$
2,250

 
$


The fair value of the Senior Notes, 2018 ABL Credit Facility, and the Magnum Promissory Notes is classified as Level 2 in the fair value hierarchy. The fair value of the Senior Notes is established based on observable inputs in less active markets. The fair value of the 2018 ABL Credit Facility and the Magnum Promissory Notes approximates their carrying value.
9. Related Party Transactions
The Company leases office space, yard facilities, and equipment and purchases building maintenance services from entities owned by David Crombie, an executive officer of the Company. Total lease expense and building maintenance expense associated with these entities was $0.2 million and $0.4 million for the three and six months ended June 30, 2020, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2019, respectively. The Company also purchased $0.4 million and $0.5 million of equipment during the three and six months ended June 30, 2020, respectively, and $0.5 million and $0.6 million of equipment during the three and six months ended June 30, 2019, respectively, from an entity in which Mr. Crombie is a limited partner. There were outstanding payables due to this entity relating to equipment purchases of $0.2 million and $0.1 million at June 30, 2020 and December 31, 2019, respectively.
In addition, the Company leases office space in Corpus Christi and Midland, Texas from an entity affiliated with Warren Lynn Frazier, a beneficial owner of more than 5% of the Company’s stock. Total rental expense associated with this office space was $0.4 million and $0.7 million for the three and six months ended June 30, 2020, respectively, and $0.3 million and $0.7 million for the three and six months ended June 30, 2019, respectively. Additionally, on June 30, 2020, the Company issued the Magnum Promissory Notes to the sellers of Magnum, including Mr. Frazier. At June 30, 2020, the outstanding principal balance payable to Mr. Frazier was $2.1 million. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.
The Company purchases cable for its wireline trucks from an entity owned by Forum Energy Technologies (“Forum”). Two of the Company’s directors serve as directors of Forum. The Company was billed $0.0 million and $0.4 million for the three and six months ended June 30, 2020, respectively, and $0.5 million and $0.9 million for the three and six months ended June 30, 2019, respectively. There was an outstanding payable due to the entity of $0.3 million at December 31, 2019. The Company purchases coiled tubing string from another entity owned by Forum. The Company was billed $0.2 million and $2.1 million for coiled tubing string for the three and six months ended June 30, 2020, respectively, and $1.9 million and $4.2 million for the three and six months ended June 30, 2019, respectively. There was an outstanding payable due to the entity of $0.9 million at December 31, 2019.
The Company purchases chemical additives used in cementing from Select Energy Services, Inc. (“Select”). One of the Company’s directors also serves as a director of Select. The Company was billed $0.2 million and $0.8 million for the three and six months ended June 30, 2020, respectively, and $0.5 million and $1.1 million for the three and six months ended June 30, 2019, respectively. There was an outstanding payable due to Select of $0.1 million at both June 30, 2020 and December 31, 2019.
The Company provides products and rentals to National Energy Reunited Corp. (“NESR”), where one of the Company’s directors serves as a director. The Company billed NESR $0.9 million and $1.2 million for the three and six months ended June 30, 2020, respectively, and $0.0 million for both the three and six months ended June 30, 2019. During the fourth quarter of 2019, the Company sold coiled tubing equipment for $5.9 million to NESR with payments due in 24 monthly equal installments beginning on January 31, 2020. Total outstanding receivable due to the Company from NESR (inclusive of the above sale) was $7.1 million and $6.8 million at June 30, 2020 and December 31, 2019, respectively.
On June 5, 2019, Ann G. Fox, President and Chief Executive Officer and a director of the Company, was elected as a director of Devon Energy Corporation (“Devon”). The Company generated revenue from Devon of $1.7 million and $3.4 million for the three and six months ended June 30, 2020, respectively, and $4.9 million and $10.4 million for the three and six

13



months ended June 30, 2019, respectively. There was an outstanding receivable due from Devon of $0.6 million and $1.0 million at June 30, 2020 and December 31, 2019, respectively.
10. Commitments and Contingencies
Litigation
From time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.
Self-insurance
The Company uses a combination of third-party insurance and self-insurance for health insurance claims. The self-insured liability represents an estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. The estimate is based on an analysis of trailing months of incurred medical claims to project the amount of incurred but not reported claims liability. The estimated liability for self-insured medical claims was $1.8 million at both June 30, 2020 and December 31, 2019 and is included under the caption “Accrued expenses” in the Company’s Condensed Consolidated Balance Sheets.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, the self-insurance liability could be affected if future claims experience differs significantly from historical trends and actuarial assumptions.
Contingent Liabilities
The Company has recorded the following contingent liabilities at June 30, 2020:
Magnum Earnout
The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019.
In 2019, the Company did not meet the sales requirement of certain dissolvable plug products during the year.
Pursuant to the Magnum Purchase Agreement Amendment terminating the remaining Magnum Earnout and all obligations related thereto, the Company made a cash payment of $1.1 million and issued the Magnum Promissory Notes with an aggregated principal amount of $2.3 million to the sellers of Magnum. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.
Frac Tech Earnout
On October 1, 2018, pursuant to the terms and conditions of a Securities Purchase Agreement (the “Frac Tech Purchase Agreement”), the Company acquired Frac Technology AS, a Norwegian private limited company (“Frac Tech”) focused on the development of downhole technology, including a casing flotation tool and a number of patented downhole completion tools. The Frac Tech Purchase Agreement includes, among other things, the potential for additional future payments, based on certain Frac Tech sales volume metrics through December 31, 2023.

14



The changes in the components of contingent liabilities for the six months ended June 30, 2020 were as follows: 
 
Magnum
 
Frac Tech
 
Total
 
(in thousands)
Balance at December 31, 2019
$
2,609

 
$
1,359

 
$
3,968

Revaluation adjustments
766

 
(282
)
 
484

Payments

 
(206
)
 
(206
)
Termination
(3,375
)
 

 
(3,375
)
Balance at June 30, 2020
$

 
$
871

 
$
871


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 $0.3 million and