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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 September 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)
__________________________________________________________________
Delaware80-0759121
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareNINENew York Stock Exchange
      
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
   Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  x
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding at November 2, 2020 was 31,561,578.



TABLE OF CONTENTS
 
  
   
   
   
   
   
  
  
  
  
  
  
  
  
  
  
   




CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans, and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q; we disclaim any obligation to update these statements unless required by law, and we caution you not to place undue reliance on them. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved.
We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, 2019 and “Risk Factors” in Item 1A of Part II in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. These factors, some of which are beyond our control, include the following:
the level of capital spending and well completions by the onshore oil and natural gas industry;
oil and natural gas commodity prices;
general economic conditions;
the impact of the coronavirus pandemic on our business and the business of our customers, including the effects of the resulting excess supply of oil;
geopolitical factors, including actions by the Organization of the Petroleum Exporting Countries (“OPEC”) and other significant oil-producing countries and the ability of such producers to agree to and maintain oil price and production controls;
our ability to employ, or maintain the employment of, a sufficient number of key employees, technical personnel, and other skilled and qualified workers;
our ability to implement price increases or maintain existing prices on our products and services;
pricing pressures, reduced sales, or reduced market share as a result of intense competition in the markets for our composite and dissolvable plug products;
our ability to accurately predict customer demand;
conditions inherent in the oilfield services industry, such as equipment defects, liabilities arising from accidents or damage involving our fleet of trucks or other equipment, explosions and uncontrollable flows of gas or well fluids, and loss of well control;
our ability to implement new technologies and services;
seasonal and adverse weather conditions;
our ability to maintain compliance with the New York Stock Exchange continued listing requirements and avoid the delisting of our common stock;
changes in laws or regulations regarding issues of health, safety, and protection of the environment, including those relating to hydraulic fracturing, greenhouse gases, and climate change; and
our ability to successfully integrate the assets and operations that we acquired with our acquisition of Magnum Oil Tools International, LTD and its affiliates (the “Magnum Acquisition”) and realize anticipated revenues, cost savings, or other benefits of such acquisition.



Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial, or that could apply to any company could also materially adversely affect our business, financial condition, or future results.
These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.



PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 September 30,
2020
December 31,
2019
Assets  
Current assets  
Cash and cash equivalents$80,338 $92,989 
Accounts receivable, net34,805 96,889 
Income taxes receivable1,246 660 
Inventories, net52,683 60,945 
Prepaid expenses and other current assets19,526 17,434 
Total current assets188,598 268,917 
Property and equipment, net108,986 128,604 
Intangible assets, net136,615 148,991 
Goodwill 296,196 
Other long-term assets4,260 8,187 
Total assets$438,459 $850,895 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$10,022 $35,490 
Accrued expenses23,236 24,730 
Current portion of long-term debt844  
Current portion of capital lease obligations1,067 995 
Total current liabilities35,169 61,215 
Long-term liabilities
Long-term debt343,036 392,059 
Deferred income taxes 1,588 
Long-term capital lease obligations1,391 2,201 
Other long-term liabilities5,264 3,955 
Total liabilities384,860 461,018 
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock (120,000,000 shares authorized at $0.01 par value; 31,570,926 and 30,555,677 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively)
316 306 
Additional paid-in capital766,402 758,853 
Accumulated other comprehensive loss(4,731)(4,467)
Accumulated deficit(708,388)(364,815)
Total stockholders’ equity53,599 389,877 
Total liabilities and stockholders’ equity$438,459 $850,895 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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,
 2020201920202019
Revenues
Service$35,639 $161,632 $187,713 $519,072 
Product13,882 40,673 61,167 150,455 
49,521 202,305 248,880 669,527 
Cost and expenses
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Service38,445 134,984 179,508 420,445 
Product14,038 31,865 55,686 109,549 
General and administrative expenses10,701 19,222 38,380 60,979 
Depreciation7,763 12,196 24,753 39,572 
Amortization of intangibles4,091 4,609 12,376 13,925 
Impairment of goodwill  296,196  
(Gain) loss on revaluation of contingent liabilities297 (5,771)781 (20,701)
Loss on sale of subsidiaries 15,834  15,834 
Gain on sale of property and equipment(535)(466)(2,900)(799)
Income (loss) from operations(25,279)(10,168)(355,900)30,723 
Interest expense9,130 9,843 28,144 29,940 
Interest income(43)(111)(593)(439)
Gain on extinguishment of debt(15,798) (37,501) 
Other income(29) (29) 
Income (loss) before income taxes(18,539)(19,900)(345,921)1,222 
Provision (benefit) for income taxes(37)727 (2,348)(1,548)
Net income (loss)$(18,502)$(20,627)$(343,573)$2,770 
Earnings (loss) per share
Basic$(0.62)$(0.70)$(11.56)$0.09 
Diluted$(0.62)$(0.70)$(11.56)$0.09 
Weighted average shares outstanding
Basic29,849,753 29,361,633 29,708,673 29,288,113 
Diluted29,849,753 29,361,633 29,708,673 29,397,636 
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of $0 tax in each period
$132 $(179)$(264)$261 
Total other comprehensive income (loss), net of tax132 (179)(264)261 
Total comprehensive income (loss)$(18,370)$(20,806)$(343,837)$3,031 
The accompanying notes are an integral part of these condensed consolidated financial statements.
2


NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
Common StockAdditional
Paid-in Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated Deficit)
Total
Stockholders’ Equity
SharesAmounts
Balance, June 30, 202031,652,635 $317 $764,382 $(4,863)$(689,886)$69,950 
Issuance of common stock under stock compensation plan, net of forfeitures(80,882)(1)1 — —  
Stock-based compensation expense— — 2,020 — — 2,020 
Exercise of stock options— — — — —  
Vesting of restricted stock(827)— (1)— — (1)
Other comprehensive income— — 132 — 132 
Net loss— — — (18,502)(18,502)
Balance, September 30, 202031,570,926 $316 $766,402 $(4,731)$(708,388)$53,599 
Common StockAdditional
Paid-in Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated Deficit)
Total
Stockholders’ Equity
SharesAmounts
Balance, June 30, 201930,683,009 $307 $752,072 $(4,403)$(123,667)$624,309 
Issuance of common stock under stock compensation plan, net of forfeitures(98,954)(1)1 — —  
Stock-based compensation expense— — 3,286 — — 3,286 
Exercise of stock options— — — — —  
Vesting of restricted stock(1,471)— (10)— — (10)
Other comprehensive loss— — (179)— (179)
Net loss— — — (20,627)(20,627)
Balance, September 30, 201930,582,584 $306 $755,349 $(4,582)$(144,294)$606,779 
Common StockAdditional
Paid-in Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated Deficit)
Total
Stockholders’ Equity
SharesAmounts
Balance, December 31, 201930,555,677 $306 $758,853 $(4,467)$(364,815)$389,877 
Issuance of common stock under stock compensation plan, net of forfeitures1,164,797 11 (11)— —  
Stock-based compensation expense— — 7,717 — — 7,717 
Exercise of stock options— — — — —  
Vesting of restricted stock(149,548)(1)(157)— — (158)
Other comprehensive loss— — (264)— (264)
Net loss— — — (343,573)(343,573)
Balance, September 30, 202031,570,926 $316 $766,402 $(4,731)$(708,388)$53,599 
Common StockAdditional
Paid-in Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated Deficit)
Total
Stockholders’ Equity
SharesAmounts
Balance, December 31, 201830,163,408 $302 $746,428 $(4,843)$(147,064)$594,823 
Issuance of common stock under stock compensation plan, net of forfeitures489,529 5 (5)— —  
Stock-based compensation expense— — 10,553 — — 10,553 
Exercise of stock options674 — 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, 201930,582,584 $306 $755,349 $(4,582)$(144,294)$606,779 

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)
Nine Months Ended September 30,
 20202019
Cash flows from operating activities  
Net income (loss)$(343,573)$2,770 
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation24,753 39,572 
Amortization of intangibles12,376 13,925 
Amortization of deferred financing costs2,160 2,238 
Provision for doubtful accounts2,121 236 
Benefit for deferred income taxes(1,588)(2,876)
Provision for inventory obsolescence1,919 4,502 
Stock-based compensation expense7,717 10,553 
Impairment of goodwill296,196  
Gain on extinguishment of debt(37,501) 
Gain on sale of property and equipment(2,900)(799)
(Gain) loss on revaluation of contingent liabilities781 (20,701)
Loss on sale of subsidiaries 15,834 
Changes in operating assets and liabilities, net of effects from acquisitions
Accounts receivable, net59,964 20,453 
Inventories, net6,244 17,634 
Prepaid expenses and other current assets(1,457)(405)
Accounts payable and accrued expenses(27,073)(16,953)
Income taxes receivable/payable(586)674 
Other assets and liabilities5,087 151 
Net cash provided by operating activities4,640 86,808 
Cash flows from investing activities
Acquisitions, net of cash acquired 1,020 
Proceeds from the sale of subsidiaries 17,222 
Proceeds from sales of property and equipment5,948 1,934 
Proceeds from property and equipment casualty losses555 1,503 
Proceeds from notes receivable payments 7,626 
Purchases of property and equipment(7,053)(48,898)
Net cash used in investing activities(550)(19,593)
Cash flows from financing activities
Purchases of Senior Notes(14,410) 
Proceeds from 2018 ABL Credit Facility 10,000 
Payments on 2018 ABL Credit Facility (45,000)
Payments on capital leases(738)(668)
Payments of contingent liability(1,331)(250)
Proceeds from exercise of stock options 15 
Vesting of restricted stock(158)(1,643)
Net cash used in financing activities(16,637)(37,546)
Impact of foreign currency exchange on cash(104)37 
4


Net decrease in cash and cash equivalents(12,651)29,706 
Cash and cash equivalents
Cash and cash equivalents beginning of year92,989 63,615 
Cash and cash equivalents end of period$80,338 $93,321 
Supplemental disclosures of cash flow information:
Cash paid for interest$18,901 $19,619 
Cash paid (refunded) for income taxes$(482)$649 
Capital expenditures in accounts payable and accrued expenses$150 $1,183 
Property and equipment obtained by capital lease$ $1,621 
Receivable from property and equipment sale (including insurance)$4,359 $ 
Termination of contingent liability related to business acquisition$3,375 $ 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5


NINE ENERGY SERVICE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Company and Organization
Background
Nine Energy Service, Inc. (the “Company” or “Nine”), a Delaware corporation, is an oilfield services business that provides services integral to the completion of unconventional wells through a full range of tools and methodologies. The Company is headquartered in Houston, Texas.
Risks and Uncertainties
The Company’s business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. The worldwide coronavirus outbreak in early 2020, which was declared a pandemic by the World Health Organization in March 2020, the uncertainty regarding its impact, and various governmental actions taken to mitigate its impact have resulted in an unprecedented decline in demand for oil. In the midst of the ongoing pandemic, the Organization of the Petroleum Exporting Countries and other oil producing nations, including Russia, were initially unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. The convergence of these events created the unprecedented dual impact of a massive decline in the demand for oil, coupled with the risk of a substantial increase in supply, which has directly affected the Company. While the Company cannot predict the length of time that market disruptions resulting from the coronavirus pandemic and efforts to mitigate its effects will continue, the ultimate impact on its business, or the pace or extent of any subsequent recovery, the Company expects the coronavirus pandemic and related effects to continue to have a material adverse impact on commodity prices and its business generally.
Historically, the Company has met its liquidity needs principally from cash on hand, cash flow from operations and, if needed, external borrowings. In response to the above events, the Company has implemented certain cost-cutting measures across the organization to continue to maintain its current liquidity position. Based on its current forecasts, the Company believes that cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility (as defined in Note 8 – Debt Obligations), should be sufficient to fund its capital requirements for at least the next twelve months from the issuance date of its condensed consolidated financial statements.
2. Basis of Presentation
Condensed Consolidated Financial Information
The Condensed Consolidated Balance Sheet at December 31, 2019 and the Condensed Consolidated Statement of Stockholders’ Equity as of December 31, 2019 and 2018 are derived from audited consolidated financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for the fair statement of the Company’s financial position have been included. These condensed consolidated financial statements include all accounts of the Company.
These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Nine and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
6


Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Such estimates include fair value assumptions used in purchase accounting and in analyzing goodwill, definite and indefinite-lived intangible assets, and property and equipment for possible impairment, useful lives used in depreciation and amortization expense, stock-based compensation fair value, estimated realizable value on excess and obsolete inventories, deferred taxes and income tax contingencies, and losses on accounts receivable. It is at least reasonably possible that the estimates used will change within the next year.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications relate to presenting “Revenues” and “Cost of revenues” by product and service as separate line items in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
3. New Accounting Standards
Accounting Pronouncements Recently Adopted
In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The standard is required to be applied retrospectively, except the new Level 3 disclosure requirements are applied prospectively. The Company adopted ASU 2018-13 in the first quarter of 2020, and it had an immaterial impact on the Company’s condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard, which requires the use of a modified retrospective transition approach, includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued a new, optional transition method that gives companies the option to use the effective date as the date of initial application on transition. For emerging growth entities, the standard is effective for the fiscal years beginning after December 15, 2021 and interim periods within the fiscal years beginning after December 15, 2022. Early adoption is allowed, and the Company, as an emerging growth company, plans to early adopt the standard for the fiscal years beginning after December 15, 2019 and interim periods within the fiscal years beginning after December 15, 2020. To support the accounting and disclosure requirements under the new standard, the Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio and developing and implementing appropriate changes to its internal processes and controls. Based on initial evaluation, the Company expects to recognize a lease liability and offsetting right-of-use asset for all of its operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. The Company will provide additional information about the expected financial impact as it progresses through the evaluation and implementation of the standard.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
7


Contract. ASU 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for public businesses for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in ASU 2016-13 replace the current incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. ASU 2016-13 is effective for SEC filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
4. Revenue
Disaggregation of Revenue
The Company adopted Accounting Standards Codification 606 (“ASC 606”) on December 31, 2019, effective January 1, 2019, using the modified retrospective method. Accordingly, results for the year ended December 31, 2019 and periods thereafter are presented in accordance with ASC 606 while prior period results, including those presented below for the three and nine months ended September 30, 2019, have not been adjusted and are reported under the previous revenue recognition guidance.
Disaggregated revenue for the three and nine months ended September 30, 2020 and September 30, 2019 was as follows:
Three Months Ended September 30, 2020Three Months Ended September 30, 2019
Completion SolutionsTotalCompletion Solutions
Production Solutions(2)
Total
(in thousands)(in thousands)
Coiled tubing$7,278 $7,278 $31,064 $ $31,064 
Cement15,332 15,332 55,799  55,799 
Tools13,882 13,882 40,673  40,673 
Wireline13,029 13,029 58,716  58,716 
Well service   16,053 16,053 
Total revenues$49,521 $49,521 $186,252 $16,053 $202,305 
Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
Completion SolutionsTotalCompletion Solutions
Production Solutions(2)
Total
(in thousands)(in thousands)
Coiled tubing$35,575 $35,575 $108,604 $ $108,604 
Cement84,400 84,400 165,799  165,799 
Tools61,167 61,167 150,455  150,455 
Wireline67,738 67,738 186,397  186,397 
Well service   58,272 58,272 
Total revenues$248,880 $248,880 $611,255 $58,272 $669,527 
8


Three Months Ended September 30, 2020Three Months Ended September 30, 2019
Completion SolutionsTotalCompletion Solutions
Production Solutions(2)
Total
(in thousands)(in thousands)
Service(1)
$35,639 $35,639 $145,579 $16,053 $161,632 
Product(1)
13,882 13,882 40,673  40,673 
Total revenues$49,521 $49,521 $186,252 $16,053 $202,305 
Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
Completion SolutionsTotalCompletion Solutions
Production Solutions(2)
Total
(in thousands)(in thousands)
Service(1)
$187,713 $187,713 $460,800 $58,272 $519,072 
Product(1)
61,167 61,167 150,455  150,455 
Total revenues$248,880 $248,880 $611,255 $58,272 $669,527 
(1)     The Company recognizes revenues from the sales of products at a point in time and revenues from the sales of services over time.
(2)     The Production Solutions segment was sold to Brigade Energy Service LLC (“Brigade”) on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 13 – Segment Information.
Performance Obligations
At September 30, 2020 and December 31, 2019, the amount of remaining performance obligations were immaterial.
Contract Balances
At September 30, 2020 and December 31, 2019, contract assets and contract liabilities were immaterial.
5. Inventories
Inventories, consisting primarily of finished goods and raw materials, are stated at the lower of cost or net realizable value. Cost is determined on an average cost basis. The Company reviews its inventory balances and writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The reserve for obsolescence was $6.1 million and $5.4 million at September 30, 2020 and December 31, 2019, respectively.
Inventories, net as of September 30, 2020 and December 31, 2019 were comprised of the following: 
 September 30, 2020December 31,
2019
 (in thousands)
Raw materials$35,968 $38,823 
Work in progress93  
Finished goods22,685 27,555 
Inventories58,746 66,378 
Reserve for obsolescence(6,063)(5,433)
Inventories, net$52,683 $60,945 
9


6. Goodwill and Intangible Assets
Goodwill
The changes in the net carrying amount of the components of goodwill for the nine months ended September 30, 2020 were as follows: 
 Goodwill
 Gross ValueAccumulated
Impairment Loss
Net
 (in thousands)
Balance as of December 31, 2019$408,732 $(112,536)$296,196 
Impairment— (296,196)(296,196)
Balance as of September 30, 2020$408,732 $(408,732)$ 
Q1 2020 Goodwill Impairment
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 nine months ended September 30, 2020.
Intangible Assets
The changes in the net carrying value of the components of intangible assets for the nine months ended September 30, 2020 were as follows: 
Customer RelationshipsNon- Compete AgreementsTechnologyIn-process R&DTotal
(in thousands, except weighted average amortization period information)
Balance as of December 31, 2019$32,536 $1,534 $113,921 $1,000 $148,991 
Amortization expense(5,538)(300)(6,538)— (12,376)
Balance as of September 30, 2020$26,998 $1,234 $107,383 $1,000 $136,615 
Weighted average amortization period5.63.112.9Indefinite
Amortization of intangibles expense was $4.1 million and $12.4 million for the three and nine months ended September 30, 2020, respectively. Amortization of intangibles expense was $4.6 million and $13.9 million for the three and nine months ended September 30, 2019, respectively.
10


Future estimated amortization of intangibles is as follows:
Year Ending December 31,(in thousands)
2020$4,091 
202116,116 
202213,463 
202311,516 
202411,183 
Thereafter79,246 
Total$135,615 
With a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes, the carrying amount of long-lived assets (inclusive of definite-lived intangible assets and property and equipment) associated with the Company’s asset groups may not be recoverable. As such, the Company performed an impairment assessment of long-lived assets in its asset groups under Accounting Standards Codification 360, Property, Plant and Equipment (“ASC 360”) at March 31, 2020, based on its best internal projections and the likelihood of various outcomes.
Based on its assessment, the Company determined that the estimated future undiscounted cash flows derived from long-lived assets associated with its asset groups exceeded the carrying amount of long-lived assets associated with its asset groups, and no impairment to long-lived assets was required.
No events triggered additional impairment tests under ASC 360 through September 30, 2020. However, the occurrence of future events or deteriorating market conditions could result in additional impairment assessments under ASC 360 subsequent to September 30, 2020.
7. Accrued Expenses
Accrued expenses as of September 30, 2020 and December 31, 2019 consisted of the following:
September 30, 2020December 31, 2019
(in thousands)
Accrued compensation and benefits$5,519 $7,009 
Accrued interest12,948 6,091 
Accrued bonus 5,043 
Accrued sales tax303 820 
Contingent liabilities396 391 
Other accrued expenses4,070 5,376 
Accrued expenses$23,236 $24,730 
11


8. Debt Obligations
The Company’s debt obligations as of September 30, 2020 and December 31, 2019 were as follows: 
 September 30,
2020
December 31,
2019
 (in thousands)
Senior Notes$347,168 $400,000 
2018 ABL Credit Facility  
Magnum Promissory Notes2,250  
Total debt before deferred financing costs$349,418 $400,000 
Deferred financing costs(5,538)(7,941)
Total debt$343,880 $392,059 
Less: Current portion of long-term debt(844) 
Long-term debt$343,036 $392,059 
Senior Notes
Background
On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The Senior Notes were issued under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among the Company, certain subsidiaries of the Company and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year, and the first interest payment was due on May 1, 2019. The Senior Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s current domestic subsidiaries and by certain future subsidiaries.
The Indenture contains covenants that limit the Company’s ability and the ability of its restricted subsidiaries to engage in certain activities. The Company was in compliance with the provisions of the Indenture at September 30, 2020.
Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to the Company, any restricted subsidiary of the Company that is a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.
Unamortized deferred financing costs associated with the Senior Notes were $5.5 million and $7.9 million at September 30, 2020 and December 31, 2019, respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method.
Extinguishment of Debt
The Company repurchased approximately $23.1 million and $52.8 million of Senior Notes at a repurchase price of approximately $7.0 million and $14.4 million in cash for the three and nine months ended September 30, 2020, respectively. Deferred financing costs associated with these transactions were $0.4 million and $0.9 million for the three and nine months ended September 30, 2020, respectively. As a result, for the three and nine months ended September 30, 2020, the Company recorded a $15.8 million gain and a $37.5 million gain, respectively, on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by the deferred financing costs. The gain on extinguishment of debt is included as a separate line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and nine months ended September 30, 2020.
Subsequent to September 30, 2020, the Company repurchased an additional $0.5 million of the Senior Notes for a repurchase price of approximately $0.2 million in cash.
2018 ABL Credit Facility
On October 25, 2018, the Company entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”), by and among the Company, Nine Energy Canada, Inc., JP Morgan Chase Bank, N.A., as administrative
12


agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.
Loans to the Company and its domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or LIBOR loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be Canadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on the Company’s leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below $18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. The Company was in compliance with all covenants under the 2018 ABL Credit Agreement at September 30, 2020.
All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties, excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.
At September 30, 2020, the Company’s availability under the 2018 ABL Credit Facility was approximately $39.5 million, net of outstanding letters of credit of $0.4 million.
Magnum Promissory Notes
On October 25, 2018, pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), the Company acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum”). The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019 (the “Magnum Earnout”).
On June 30, 2020, pursuant to an amendment to the Magnum Purchase Agreement to terminate the remaining Magnum Earnout and all obligations related thereto (the “Magnum Purchase Agreement Amendment”), the Company issued promissory notes with an aggregated principal amount of $2.3 million (the “Magnum Promissory Notes”) to the sellers of Magnum. The Magnum Promissory Notes bear interest at a rate of 6.0% per annum. The principal amount of the Magnum Promissory Notes will be paid in equal quarterly installments beginning January 1, 2021. The entire unpaid principal amount will be due and payable on the maturity date, which is the earlier of October 1, 2022 and the business day after the date on which the Company sells, transfers or otherwise disposes of the “E-Set” tools business to an unaffiliated third party, unless such sale, transfer or disposition is made, directly or indirectly, as part of the sale, transfer or disposition of the Dissolvable Plugs Business or due to the occurrence of a Change of Control Event (each as defined in the Magnum Purchase Agreement).
For additional information regarding the termination of the Magnum Earnout, see Note 10 – Commitments and Contingencies.
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Fair Value of Debt Instruments
The estimated fair value of the Company’s debt obligations as of September 30, 2020 and December 31, 2019 was as follows:
 September 30, 2020December 31, 2019
 (in thousands)
Senior Notes$102,415 $324,000 
2018 ABL Credit Facility$ $ 
Magnum Promissory Notes$2,250 $ 
The fair value of the Senior Notes, 2018 ABL Credit Facility, and the Magnum Promissory Notes is classified as Level 2 in the fair value hierarchy. The fair value of the Senior Notes is established based on observable inputs in less active markets. The fair value of the 2018 ABL Credit Facility and the Magnum Promissory Notes approximates their carrying value.
9. Related Party Transactions
The Company leases office space, yard facilities, and equipment and purchases building maintenance services from entities owned by David Crombie, an executive officer of the Company. Total lease expense and building maintenance expense associated with these entities was $0.2 million and $0.6 million for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2019, respectively. The Company also purchased $0.8 million and $1.3 million of equipment during the three and nine months ended September 30, 2020, respectively, and $0.7 million and $1.3 million of equipment during the three and nine months ended September 30, 2019, respectively, from an entity in which Mr. Crombie is a limited partner. There were outstanding payables due to this entity relating to equipment purchases of $0.1 million at both September 30, 2020 and December 31, 2019.
In addition, the Company leases office space in Corpus Christi and Midland, Texas from an entity affiliated with Warren Lynn Frazier, a beneficial owner of more than 5% of the Company’s stock. In the third quarter of 2020, another entity affiliated with Mr. Frazier began to sub-lease a portion of such space in Corpus Christi, Texas from the Company. Total rental expense associated with this office space, net of sub-leasing income, was $0.3 million and $1.0 million for the three and nine months ended September 30, 2020, respectively, and $0.4 million and $1.1 million for the three and nine months ended September 30, 2019, respectively. There were net outstanding payables due to the entity of $0.1 million at September 30, 2020. Additionally, on June 30, 2020, the Company issued the Magnum Promissory Notes to the sellers of Magnum, including Mr. Frazier. At September 30, 2020, the outstanding principal balance payable to Mr. Frazier was $2.1 million. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.
The Company purchases cable for its wireline trucks from an entity owned by Forum Energy Technologies (“Forum”). Two of the Company’s directors serve as directors of Forum. The Company was billed $0.0 million and $0.4 million for the three and nine months ended September 30, 2020, respectively, and $0.6 million and $1.5 million for the three and nine months ended September 30, 2019, respectively. There were outstanding payables due to the entity of $0.3 million at December 31, 2019. The Company purchases coiled tubing string from another entity owned by Forum. The Company was billed $0.9 million and $3.0 million for coiled tubing string for the three and nine months ended September 30, 2020, respectively, and $2.0 million and $6.2 million for the three and nine months ended September 30, 2019, respectively. There were outstanding payables due to the entity of $0.2 million and $0.9 million at September 30, 2020 and December 31, 2019, respectively.
The Company purchases chemical additives used in cementing from Select Energy Services, Inc. (“Select”). One of the Company’s directors also serves as a director of Select. The Company was billed $0.2 million and $1.0 million for the three and nine months ended September 30, 2020, respectively, and $0.5 million and $1.6 million for the three and nine months ended September 30, 2019, respectively. There were outstanding payables due to Select of $0.1 million at both September 30, 2020 and December 31, 2019.
The Company provides products and rentals to National Energy Reunited Corp. (“NESR”), where one of the Company’s directors serves as a director. The Company billed NESR $0.2 million and $1.4 million for the three and nine months ended September 30, 2020, respectively, and issued credit memos of $0.5 million for both the three and nine months ended September 30, 2020. The Company billed NESR $0.6 million for both the three and nine months ended September 30, 2019. During the fourth quarter of 2019, the Company sold coiled tubing equipment for $5.9 million to NESR with payments due in 24 monthly equal installments beginning on January 31, 2020. Total outstanding receivables due to the Company from NESR (inclusive of the equipment sale above) were $4.4 million and $6.8 million at September 30, 2020 and December 31, 2019, respectively.
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On June 5, 2019, Ann G. Fox, President and Chief Executive Officer and a director of the Company, was elected as a director of Devon Energy Corporation (“Devon”). The Company generated revenue from Devon of $1.2 million and $4.6 million for the three and nine months ended September 30, 2020, respectively, and $5.4 million and $15.8 million for the three and nine months ended September 30, 2019, respectively. There were outstanding receivables due from Devon of $0.4 million and $1.0 million at September 30, 2020 and December 31, 2019, respectively.
10. Commitments and Contingencies
Litigation
From time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.
Self-insurance
The Company uses a combination of third-party insurance and self-insurance for health insurance claims. The self-insured liability represents an estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. The estimate is based on an analysis of trailing months of incurred medical claims to project the amount of incurred but not reported claims liability. The estimated liability for self-insured medical claims was $1.5 million and $1.8 million at September 30, 2020 and December 31, 2019, respectively, and is included under the caption “Accrued expenses” in the Company’s Condensed Consolidated Balance Sheets.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, the self-insurance liability could be affected if future claims experience differs significantly from historical trends and actuarial assumptions.
Contingent Liabilities
The Company has recorded the following contingent liabilities at September 30, 2020:
Magnum Earnout
The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019.
In 2019, the Company did not meet the sales requirement of certain dissolvable plug products during the year.
Pursuant to the Magnum Purchase Agreement Amendment, which terminated the remaining Magnum Earnout and all obligations related thereto, the Company made a cash payment of $1.1 million and issued the Magnum Promissory Notes with an aggregated principal amount of $2.3 million to the sellers of Magnum. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.
Frac Tech Earnout
On October 1, 2018, pursuant to the terms and conditions of a Securities Purchase Agreement (the “Frac Tech Purchase Agreement”), the Company acquired Frac Technology AS, a Norwegian private limited company (“Frac Tech”) focused on the development of downhole technology, including a casing flotation tool and a number of patented downhole completion tools. The Frac Tech Purchase Agreement includes, among other things, the potential for additional future payments, based on certain Frac Tech sales volume metrics through December 31, 2023.
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The changes in the components of contingent liabilities for the nine months ended September 30, 2020 were as follows: 
MagnumFrac TechTotal
(in thousands)
Balance at December 31, 2019$2,609 $1,359 $3,968 
Revaluation adjustments766 15 781 
Payments (206)(206)
Termination(3,375) (3,375)
Balan