NINE 10-Q
Nine Energy Service, Inc. (NINE)
10-Q
2021-08-05
For: 2021-06-30
View Original
Added on
April 06, 2026
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, 2021
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
__________________________________________________________________
(Exact name of registrant as specified in its charter)
__________________________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(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 | ||||||
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 | ☐ | |||||||||||
| ☒ | 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 2, 2021 was 31,350,677 .
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, 2020. These factors, some of which are beyond our control, include the following:
•Our business is cyclical and depends on capital spending and well completions by the onshore oil and natural gas industry, and the level of such activity is volatile and strongly influenced by current and expected oil and natural gas prices. If the prices of oil and natural gas continue to decline or remain depressed for a lengthy period, our business, financial condition, results of operations, cash flows, and prospects may be materially and adversely affected.
•The recent coronavirus pandemic and related economic repercussions have had, and are expected to continue to have, a significant adverse impact on our business, and depending on the duration of the pandemic and its effect on the oil and gas industry, could have a material adverse effect on our business, liquidity, results of operations, and financial condition.
•Our substantial debt obligations could have significant adverse consequences on our business and future prospects, and restrictions in our debt agreements could limit our growth and our ability to engage in certain activities.
•We may be unable to maintain existing prices or implement price increases on our products and services, and intense competition in the markets for our dissolvable plug products may lead to pricing pressures, reduced sales, or reduced market share.
•Our current and potential competitors may have longer operating histories, significantly greater financial or technical resources, and greater name recognition than we do.
•Our operations are subject to 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.
•If we are unable to accurately predict customer demand or if customers cancel their orders on short notice, we may hold excess or obsolete inventory, which would reduce gross margins. Conversely, insufficient inventory would result in lost revenue opportunities and potentially in loss of market share and damaged customer relationships.
•We are dependent on customers in a single industry. The loss of one or more significant customers could adversely affect our financial condition, prospects, and results of operations.
•We may be subject to claims for personal injury and property damage or other litigation, which could materially adversely affect our financial condition, prospects, and results of operations.
•We are subject to federal, state, and local laws and regulations regarding issues of health, safety, and protection of the environment. Under these laws and regulations, we may become liable for penalties, damages, or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business.
•Our success may be affected by the use and protection of our proprietary technology as well as our ability to enter into license agreements.
•Our success may be affected by our ability to implement new technologies and services.
•Our future financial condition and results of operations could be adversely impacted by asset impairment charges.
•Increased attention to climate change and conservation measures may reduce oil and natural gas demand, and we face various risks associated with increased activism against oil and natural gas exploration and development activities.
•Seasonal and adverse weather conditions adversely affect demand for our products and services.
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, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Income taxes receivable | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right of use assets, net | |||||||||||
| Finance lease right of use assets, net | |||||||||||
| Intangible assets, net | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Current portion of long-term debt | |||||||||||
| Current portion of operating lease obligations | |||||||||||
| Current portion of finance lease obligations | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities | |||||||||||
| Long-term debt | |||||||||||
| Long-term operating lease obligations | |||||||||||
| Long-term finance lease obligations | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Stockholders’ equity | |||||||||||
Common stock ( | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | ( | ||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
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, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Service | $ | $ | $ | $ | |||||||||||||||||||
| Product | |||||||||||||||||||||||
| Cost and expenses | |||||||||||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | |||||||||||||||||||||||
| Service | |||||||||||||||||||||||
| Product | |||||||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| Amortization of intangibles | |||||||||||||||||||||||
| Impairment of goodwill | |||||||||||||||||||||||
| (Gain) loss on revaluation of contingent liabilities | ( | ||||||||||||||||||||||
| (Gain) loss on sale of property and equipment | ( | ( | |||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| Gain on extinguishment of debt | ( | ( | ( | ||||||||||||||||||||
| Other income | ( | ( | |||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Provision (benefit) for income taxes | ( | ( | |||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Loss per share | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
Foreign currency translation adjustments, net of $ | $ | $ | $ | $ | ( | ||||||||||||||||||
| Total other comprehensive income (loss), net of tax | ( | ||||||||||||||||||||||
| Total comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Issuance of common stock under stock compensation plan, net of forfeitures | ( | — | — | — | — | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amounts | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Issuance of common stock under stock compensation plan, net of forfeitures | ( | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amounts | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Issuance of common stock under stock compensation plan, net of forfeitures | ( | — | — | — | — | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amounts | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Issuance of common stock under stock compensation plan, net of forfeitures | ( | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
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, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | |||||||||||
| Depreciation | |||||||||||
| Amortization of intangibles | |||||||||||
| Amortization of operating leases | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Provision (benefit) for doubtful accounts | ( | ||||||||||
| Benefit for deferred income taxes | ( | ||||||||||
| Provision for inventory obsolescence | |||||||||||
| Stock-based compensation expense | |||||||||||
| Impairment of goodwill | |||||||||||
| Gain on extinguishment of debt | ( | ( | |||||||||
| (Gain) loss on sale of property and equipment | ( | ||||||||||
| (Gain) loss on revaluation of contingent liabilities | ( | ||||||||||
| Changes in operating assets and liabilities | |||||||||||
| Accounts receivable, net | ( | ||||||||||
| Inventories, net | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Income taxes receivable/payable | |||||||||||
| Other assets and liabilities | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities | |||||||||||
| Proceeds from sales of property and equipment | |||||||||||
| Proceeds from property and equipment casualty losses | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Cash flows from financing activities | |||||||||||
| Purchases of Senior Notes | ( | ( | |||||||||
| Payments on Magnum Promissory Notes | ( | ||||||||||
| Payments on finance leases | ( | ( | |||||||||
| Payments of contingent liability | ( | ( | |||||||||
| Vesting of restricted stock | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Impact of foreign currency exchange on cash | ( | ( | |||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents | |||||||||||
| Cash and cash equivalents beginning of period | |||||||||||
| Cash and cash equivalents end of period | $ | $ | |||||||||
4
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash refunded for income taxes | $ | $ | |||||||||
| Cash paid for operating leases | $ | $ | |||||||||
| Right of use assets obtained in exchange for operating lease obligations | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Capital expenditures in accounts payable and accrued expenses | $ | $ | |||||||||
| Receivable from property and equipment sale (including insurance) | $ | $ | |||||||||
| Termination of contingent liability related to business acquisition | $ | $ | |||||||||
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.
The Company’s chief operating decision maker, which is its Chief Executive Officer, and its board of directors allocate resources and assess performance based on financial information presented at a consolidated level. Accordingly, the Company determined that it operates as one reportable segment.
Risks and Uncertainties
The Company’s business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. In 2020, the coronavirus pandemic, coupled with production disputes amongst the Organization of the Petroleum Exporting Countries and other oil producing nations, led to a massive decline in the demand for oil and a risk of a substantial increase in supply, which led to extreme activity levels and pricing declines across all of the Company’s service offerings for the entire year. Although oil and natural gas prices have rebounded in 2021, the Company’s customers remain committed to capital discipline, and activity has only moderately increased. As pricing continues to remain depressed as a result of this level of activity, the Company is focused on strategically implementing modest price increases where it is able to do so without sacrificing its market share of customers. Thus, even with further improvements in commodity prices, the Company’s business in the near or medium term may not improve materially or at all depending on, among other things, the Company’s customers’ activity plans, its ability to implement price increases, and its ability to find and retain qualified personnel.
Historically, the Company has met its liquidity needs principally from cash on hand, cash flow from operations and, if needed, external borrowings. Based on its current forecasts, the Company believes that cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility (as defined in Note 8 – Debt Obligations), should be sufficient to fund its capital requirements for at least the next twelve months from the issuance date of its condensed consolidated financial statements.
2. Basis of Presentation
Condensed Consolidated Financial Information
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of June 30, 2021, and its results of operations for the three and six months ended June 30, 2021, and 2020, and cash flows for the six months ended June 30, 2021, and 2020. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), in a manner consistent with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, unless otherwise disclosed herein, and should be read in conjunction therewith. The Condensed Consolidated Balance Sheet at December 31, 2020 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Nine and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
6
3. New Accounting Standards
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for public businesses for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect the standard to have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for public businesses for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in ASU 2016-13 replace the current incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. ASU 2016-13 is effective for SEC filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
7
4. Revenues
Disaggregation of Revenue
Disaggregated revenue for the three and six months ended June 30, 2021 and 2020 was as follows:
| Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | ||||||||||
| (in thousands) | (in thousands) | ||||||||||
| Cement | $ | $ | |||||||||
| Tools | |||||||||||
| Wireline | |||||||||||
| Coiled tubing | |||||||||||
| Total revenues | $ | $ | |||||||||
| Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | ||||||||||
| (in thousands) | (in thousands) | ||||||||||
| Cement | |||||||||||
| Tools | |||||||||||
| Wireline | |||||||||||
| Coiled tubing | |||||||||||
| Total revenues | $ | $ | |||||||||
| Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | ||||||||||
| (in thousands) | (in thousands) | ||||||||||
Service(1) | $ | $ | |||||||||
Product(1) | |||||||||||
| Total revenues | $ | $ | |||||||||
| Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | ||||||||||
| (in thousands) | (in thousands) | ||||||||||
Service(1) | $ | $ | |||||||||
Product(1) | |||||||||||
| Total revenues | $ | $ | |||||||||
(1) The Company recognizes revenues from the sales of products at a point in time and revenues from the sales of services over time.
Performance Obligations
At June 30, 2021 and December 31, 2020, the amount of remaining performance obligations was not material.
Contract Balances
At June 30, 2021 and December 31, 2020, the amount of contract assets and contract liabilities was not material.
5. Inventories
8
Inventories, net as of June 30, 2021 and December 31, 2020 were comprised of the following:
| June 30, 2021 | December 31, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Raw materials | $ | $ | |||||||||
| Work in progress | |||||||||||
| Finished goods | |||||||||||
| Inventories | |||||||||||
| Reserve for obsolescence | ( | ( | |||||||||
| Inventories, net | $ | $ | |||||||||
6. Intangible Assets and Goodwill
Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets as of June 30, 2021 and December 31, 2020 was as follows:
| June 30, 2021 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Amortization Period | ||||||||||||||||||||
| (in thousands, except weighted average amortization period information) | |||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||||||||
| Non-compete agreements | ( | ||||||||||||||||||||||
| Technology | ( | ||||||||||||||||||||||
| In-process research and development | — | Indefinite | |||||||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Amortization Period | ||||||||||||||||||||
| (in thousands, except weighted average amortization period information) | |||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||||||||
| Non-compete agreements | ( | ||||||||||||||||||||||
| Technology | ( | ||||||||||||||||||||||
| In-process research and development | — | Indefinite | |||||||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||||||||
Amortization of intangibles expense was $4.1 million and $8.2 million for the three and six months ended June 30, 2021, respectively. Amortization of intangibles expense was $4.1 million and $8.3 million for the three and six months ended June 30, 2020, respectively.
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Future estimated amortization of intangibles is as follows:
| Year Ending December 31, | (in thousands) | ||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | $ | ||||
Q1 2020 Goodwill Impairment
With a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as sharp declines in oil and natural gas prices, the outlook for expected future cash flows associated with the Company’s reporting units decreased dramatically in the first quarter of 2020.
Based on these events, an indication of impairment associated with the Company’s reporting units occurred, triggering an interim goodwill impairment test of the Level 3 fair value of each reporting unit under Accounting Standards Codification 350, Intangibles - Goodwill and Other (“ASC 350”) at March 31, 2020.
As such, based on its Level 3 fair value determination in connection with the interim goodwill impairment test under ASC 350, the Company recorded goodwill impairment charges of $296.2 million in the first quarter of 2020 associated with its tools, cementing, and wireline reporting units. These charges represented a full write-off of goodwill and were due to the events described above, coupled with an increased weighted average cost of capital driven by a reduction in the Company’s stock price and the Level 2 fair value of its Senior Notes (as defined in Note 8 – Debt Obligations). These charges are included in the line item “Impairment of goodwill” in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the six months ended June 30, 2020.
7. Accrued Expenses
Accrued expenses as of June 30, 2021 and December 31, 2020 consisted of the following:
| June 30, 2021 | December 31, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Accrued interest | $ | $ | |||||||||
| Accrued compensation and benefits | |||||||||||
| Accrued legal fees and settlements | |||||||||||
| Other accrued expenses | |||||||||||
| Accrued expenses | $ | $ | |||||||||
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8. Debt Obligations
The Company’s debt obligations as of June 30, 2021 and December 31, 2020 were as follows:
| June 30, 2021 | December 31, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Senior Notes | $ | $ | |||||||||
| Magnum Promissory Notes | |||||||||||
| Total debt before deferred financing costs | $ | $ | |||||||||
| Deferred financing costs | ( | ( | |||||||||
| Total debt | $ | $ | |||||||||
| Less: Current portion of long-term debt | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
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, 2021.
Upon an event of default, the trustee or the holders of at least 25 % in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to the Company, any restricted subsidiary of the Company that is a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.
Unamortized deferred financing costs associated with the Senior Notes were $3.9 million and $5.1 million at June 30, 2021 and December 31, 2020, respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method.
Extinguishment of Debt
During the six months ended June 30, 2021, the Company repurchased approximately $26.3 million of Senior Notes at a repurchase price of approximately $8.4 million in cash. Deferred financing costs associated with these repurchases were $0.3 million. As a result, for the six months ended June 30, 2021, the Company recorded a $17.6 million gain 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 six months ended June 30, 2021. The Company did not repurchase any Senior Notes during the three months ended June 30, 2021.
During the three and six months ended June 30, 2020, 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, 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, the Company recorded an $11.6 million gain and $21.7 million gain on the extinguishment of debt for the three and six months ended June 30, 2020, respectively, 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
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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, respectively.
2018 ABL Credit Facility
On October 25, 2018, the Company entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”), by and among the Company, Nine Energy Canada, Inc., JP Morgan Chase Bank, N.A., as administrative agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.
Loans to the Company and its domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or LIBOR loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be Canadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75 % to 1.25 %, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75 % to 2.25 %, in each case depending on the Company’s leverage ratio. In addition, a commitment fee of 0.50 % per annum will be charged on the average daily unused portion of the revolving commitments.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below $18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. The Company was in compliance with all covenants under the 2018 ABL Credit Agreement at June 30, 2021.
All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties, excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.
At June 30, 2021, the Company’s availability under the 2018 ABL Credit Facility was approximately $52.3 million, net of outstanding letters of credit of $0.5 million. As of June 30, 2021 and December 31, 2020, the Company had no
Magnum Promissory Notes
On October 25, 2018, pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), the Company acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum”). The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60 % of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019 (the “Magnum Earnout”).
On June 30, 2020, pursuant to an amendment to the Magnum Purchase Agreement to terminate the remaining Magnum Earnout and all obligations related thereto (the “Magnum Purchase Agreement Amendment”), the Company issued promissory notes with an aggregated principal amount of $2.3 million (the “Magnum Promissory Notes”) to the sellers of Magnum. The Magnum Promissory Notes bear interest at a rate of 6.0 % per annum. The principal amount of the Magnum Promissory Notes are paid in equal quarterly installments which began January 1, 2021. The entire unpaid principal amount will be due and payable on the maturity date, which is the earlier of October 1, 2022 or the business day after the date on which the Company sells, transfers or otherwise disposes of the “E-Set” tools business to an unaffiliated third party, unless such sale, transfer or disposition is made, directly or indirectly, as part of the sale, transfer or disposition of the Dissolvable Plugs Business or due to the occurrence of a Change of Control Event (each as defined in the Magnum Purchase Agreement).
For additional information regarding the termination of the Magnum Earnout, see Note 10 – Commitments and
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Contingencies.
Fair Value of Debt Instruments
The estimated fair value of the Company’s debt obligations as of June 30, 2021 and December 31, 2020 was as follows:
| June 30, 2021 | December 31, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Senior Notes | $ | $ | |||||||||
| Magnum Promissory Notes | $ | $ | |||||||||
The fair value of the Senior Notes, 2018 ABL Credit Facility, and the Magnum Promissory Notes is classified as Level 2 in the fair value hierarchy. The fair value of the Senior Notes is established based on observable inputs in less active markets. The fair value of the Magnum Promissory Notes approximates their carrying value.
9. Related Party Transactions
The Company leases office space, yard facilities, and equipment and purchases building maintenance services from entities owned by David Crombie, an executive officer of the Company. Total lease expense and building maintenance expense associated with these entities was $0.2 million and $0.4 million for the three and six months ended June 30, 2021, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2020, respectively. The Company also purchased $0.6 million and $0.8 million of products and services during the three and six months ended June 30, 2021, respectively, and $0.4 million and $0.5 million for the three and six months ended June 30, 2020, respectively, from an entity in which Mr. Crombie is a limited partner. There were outstanding payables due to this entity relating to equipment purchases of $0.2
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 $0.4 million and $0.7 million for the three and six months ended June 30, 2021, respectively, and $0.4 million and $0.7 million for the three and six months ended June 30, 2020, respectively. There were net outstanding payables due to this entity of $0.1 1.6 million and $1.9 million, respectively. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.
The Company purchases cable for its wireline trucks from an entity owned by Forum Energy Technologies (“Forum”). Two of the Company’s directors serve as directors of Forum. The Company was billed $0.1 million and $0.2 million for the three and six months ended June 30, 2021, respectively, and $0.0 million and $0.4 million for the three and six months ended June 30, 2020, respectively. There were outstanding payables due to this entity of $0.1 2.4 million and $3.9 million for coiled tubing string for the three and six months ended June 30, 2021, respectively, and $0.2 million and $2.1 million for the three and six months ended June 30, 2020, respectively. There were outstanding payables due to this entity of $1.1 million and $0.9 million at June 30, 2021 and December 31, 2020, respectively.
The Company purchases chemical additives used in cementing from Select Energy Services, Inc. (“Select”). One of the Company’s directors also serves as a director of Select. The Company was billed $0.3 million and $0.6 million for the three and six months ended June 30, 2021, respectively, and $0.2 million and $0.8 million for the three and six months ended June 30, 2020, respectively. There were outstanding payables due to Select of $0.1 million and $0.2 million at June 30, 2021 and December 31, 2020, respectively.
The Company provides products and rentals to National Energy Reunited Corp. (“NESR”), where one of the Company’s directors serves as a director. The Company billed NESR $0.8 million and $1.0 million for the three and six months ended June 30, 2021, respectively, and $0.9 million and $1.2 million for the three and six months ended June 30, 2020, respectively. During the fourth quarter of 2019, the Company sold coiled tubing equipment for $5.9 million to NESR with payments due in 24 equal monthly installments beginning on January 31, 2020. Total outstanding receivables due to the Company from NESR (inclusive of the equipment sale above) were $2.5 million and $3.7 million at June 30, 2021 and December 31, 2020, respectively.
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10. Commitments and Contingencies
Litigation
The Company records accruals related to litigation and other legal proceedings when they are either known or considered probable and can be reasonably estimated. Legal proceedings are inherently unpredictable and subject to significant uncertainties, and significant judgment is required to determine both probability and the estimated amount. Some of these uncertainties include the stage of litigation, available facts, uncertainty as to the outcome of any legal proceedings or settlement discussions, and any novel legal issues presented. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending litigation. As of June 30, 2021 and December 31, 2020, the Company recorded a $2.2 million and a $0.2 million accrual, respectively, for liabilities related to legal matters, which is included under the caption “Accrued expenses” in its Condensed Consolidated Balance Sheets.
In addition to the matter disclosed below, from time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.
On May 21, 2018, a certified class action was filed in the United States District Court, District of New Mexico by Jacob Rodriguez on behalf of similarly situated employees. The class action alleges certain wage and overtime related claims and violations of the New Mexico Minimum Wage Act, which is a state law similar to the Fair Labor Standards Act. The Company disputes the claims and violations and the timing and amount of resolution is uncertain.
Self-insurance
The Company uses a combination of third-party insurance and self-insurance for health insurance claims. The self-insured liability represents an estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. The estimate is based on an analysis of trailing months of incurred medical claims to project the amount of incurred but not reported claims liability. The estimated liability for self-insured medical claims was $0.9 million and $1.3 million at June 30, 2021 and December 31, 2020, respectively, and is included under the caption “Accrued expenses” in the Company’s Condensed Consolidated Balance Sheets.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, the self-insurance liability could be affected if future claims experience differs significantly from historical trends and actuarial assumptions.
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Contingent Liabilities
The Company’s contingent liabilities (Level 3) at June 30, 2021 and 2020 were as follows:
| Frac Tech | |||||
| (in thousands) | |||||
| Balance at December 31, 2020 | $ | ||||
| Revaluation adjustments | ( | ||||
| Payments | ( | ||||
| Balance at June 30, 2021 | $ | ||||
| Magnum | Frac Tech | Total | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | |||||||||||||||||
| Revaluation adjustments | ( | |||||||||||||||||||
| Payments | ( | ( | ||||||||||||||||||
| Terminations | $ | ( | $ | $ | ( | |||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | |||||||||||||||||
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 $0.2 0.2 million and $0.4 million reported in “Other long-term liabilities” at June 30, 2021 and December 31, 2020, respectively, in the Company’s Condensed Consolidated Balance Sheets. The impact of the revaluation adjustments is included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
Frac Tech Earnout
On October 1, 2018, pursuant to the terms and conditions of a Securities Purchase Agreement (the “Frac Tech Purchase Agreement”), the Company acquired Frac Technology AS, a Norwegian private limited company (“Frac Tech”) focused on the development of downhole technology, including a casing flotation tool and a number of patented downhole completion tools. The Frac Tech Purchase Agreement, as amended, includes, among other things, the potential for additional future payments, based on certain Frac Tech revenue metrics through December 31, 2025.
Magnum Earnout
The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60 % of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019.
In 2019, the Company did not meet the sales requirement of certain dissolvable plug products during the year.
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11. Taxes
The Company’s provision (benefit) for income taxes included in its Condensed Consolidated Statements of Income and Comprehensive Income (Loss) was as follows:
| Three Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands, except percentages) | |||||||||||
| Provision (benefit) for income taxes | $ | $ | ( | ||||||||
| Effective tax rate | ( | % | % | ||||||||
| Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands, except percentages) | |||||||||||
| Provision (benefit) for income taxes | $ | $ | ( | ||||||||
| Effective tax rate | ( | % | % | ||||||||
Our effective income tax rate fluctuates from the U.S. statutory tax rate based on, among other factors, the impact of U.S. state and local taxes, the realizability of deferred tax assets, differences related to the recognition of income and expense between U.S. GAAP and tax accounting, and changes in pre-tax income in jurisdictions with varying statutory tax rates.
The Company recorded an income tax provision of $0.1 0.2 million and $2.3 million for the three and six months ended June 30, 2020, respectively. The difference in tax position is primarily a result of the discrete tax impact from the Coronavirus Aid, Relief, and Economic Security Act, and the goodwill impairment recorded during the first quarter of 2020.
12. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of shares outstanding during each period and the exercise of potentially dilutive stock options assumed to be purchased from the proceeds using the average market price of the Company’s stock for each of the periods presented as well as the potentially dilutive restricted stock, restricted stock units, and performance stock units.
Basic and diluted earnings (loss) per common share was computed as follows:
| Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||
| Net Loss | Average Shares Outstanding | Loss Per Share | Net Loss | Average Shares Outstanding | Loss Per Share | ||||||||||||||||||||||||||||||
| (in thousands, except share and per share amounts) | |||||||||||||||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Assumed exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||
| Unvested restricted stock and stock units | — | — | — | — | |||||||||||||||||||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||
| Net Loss | Average Shares Outstanding | Loss Per Share | Net Loss | Average Shares Outstanding | Loss Per Share | ||||||||||||||||||||||||||||||
| (in thousands, except share and per share amounts) | |||||||||||||||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Assumed exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||
| Unvested restricted stock and stock units | — | — | — | — | |||||||||||||||||||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
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The diluted earnings (loss) per share calculation excludes all stock options, unvested restricted stock, unvested restricted stock units, and unvested performance stock units for the three and six months ended June 30, 2021 and 2020 because their inclusion would be anti-dilutive given the Company was in a net loss position. The average number of securities that were excluded from diluted earnings (loss) per share that would potentially dilute earnings (loss) per share for the periods in which the Company experienced a net loss were as follows:
| 2021 | 2020 | ||||||||||
| Three months ended June 30, | |||||||||||
| Six months ended June 30, | |||||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements for the three and six months ended June 30, 2021, included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “Critical Accounting Policies,” included in our Annual Report on Form 10-K for the year ended December 31, 2020.
This section contains forward-looking statements based on our current expectations, estimates, and projections about our operations and the industry in which we operate. Our actual results may differ materially from those discussed in any forward-looking statement because of various risks and uncertainties, including those described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q, and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.
OVERVIEW
Company Description
Nine Energy Service, Inc. (either individually or together with its subsidiaries, as the context requires, the “Company,” “Nine” “we,” “us,” and “our”) is a leading North American onshore completion services provider that targets unconventional oil and gas resource development. We partner with our exploration and production (“E&P”) customers across all major onshore basins in the United States (the “U.S.”), as well as within Canada and abroad to design and deploy downhole solutions and technology to prepare horizontal, multistage wells for production. We focus on providing our customers with cost-effective and comprehensive completion solutions designed to maximize their production levels and operating efficiencies. We believe our success is a product of our culture, which is driven by our intense focus on performance and wellsite execution as well as our commitment to forward-leaning technologies that aid us in the development of smarter, customized applications that drive efficiencies.
We provide (i) cementing services, which consist of blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped between the casing and the wellbore of the well, (ii) an innovative portfolio of completion tools, including those that provide pinpoint frac sleeve system technologies as well as a portfolio of completion technologies used for completing the toe stage of a horizontal well and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug-and-perf operations, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns and isolating tools to a specified depth, and (iv) coiled tubing services, which perform wellbore intervention operations utilizing a continuous steel pipe that is transported to the wellsite wound on a large spool in lengths of up to 30,000 feet and which provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well.
How We Generate Revenue and the Costs of Conducting Our Business
We generate our revenues by providing completion services to E&P customers across all major onshore basins in the U.S., as well as within Canada and abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically enter into a Master Service Agreement (“MSA”) with each customer that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Each specific job is obtained through competitive bidding or as a result of negotiations with customers. The rate we charge is determined by location, complexity of the job, operating conditions, duration of the contract, and market conditions. In addition to MSAs, we have entered into a select number of longer-term contracts with certain customers relating to our wireline and cementing services, and we may enter into similar contracts from time to time to the extent beneficial to the operation of our business. These longer-term contracts address pricing and other details concerning our services, but each job is performed on a standalone basis.
The principal expenses involved in conducting our business include labor costs, materials and freight, the costs of maintaining our equipment, and fuel costs. Our direct labor costs vary with the amount of equipment deployed and the utilization of that equipment. Another key component of labor costs relates to the ongoing training of our field service employees, which improves safety rates and reduces employee attrition.
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How We Evaluate Our Operations
We evaluate our performance based on a number of financial and non-financial measures, including the following:
•Revenue: We compare actual revenue achieved each month to the most recent projection for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the performance of our operations compared to historical revenue drivers or market metrics. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes.
•Adjusted Gross Profit (Loss): Adjusted gross profit (loss) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). Costs of revenues include direct and indirect labor costs, costs of materials, maintenance of equipment, fuel and transportation freight costs, contract services, crew cost, and other miscellaneous expenses. For additional information, see “Non-GAAP Financial Measures” below.
•Adjusted EBITDA: We define Adjusted EBITDA as net income (loss) before interest, taxes, and depreciation and amortization, further adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business. For additional information, see “Non-GAAP Financial Measures” below.
•Return on Invested Capital (“ROIC”): We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on extinguishment of debt, and (vii) the provision (benefit) for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis. For additional information, see “Non-GAAP Financial Measures” below.
•Safety: We measure safety by tracking the total recordable incident rate (“TRIR”), which is reviewed on a monthly basis. TRIR is a measure of the rate of recordable workplace injuries, defined below, normalized and stated on the basis of 100 workers for an annual period. The factor is derived by multiplying the number of recordable injuries in a calendar year by 200,000 (i.e., the total hours for 100 employees working 2,000 hours per year) and dividing this value by the total hours actually worked in the year. A recordable injury includes occupational death, nonfatal occupational illness, and other occupational injuries that involve loss of consciousness, restriction of work or motion, transfer to another job, or medical treatment other than first aid.
Recent Events, Industry Trends, and Outlook
Our business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are typically strongly influenced by the current and expected oil and natural gas prices. During 2020, due the coronavirus pandemic, North American activity levels decreased by nearly 50% versus 2019, which led to extreme pricing declines across all of our service offerings, but especially within our completion tools and wireline business. Even with increased commodity prices thus far in 2021, we have only seen moderate activity increases in North America, as our customers remain committed to capital discipline. For example, for the first half of 2021, the average West Texas Intermediate crude price has averaged $62, an increase of approximately 8% over the average for the first half of 2019. However, the rig count for the first half of 2021 has averaged 423, a decrease of approximately 58% over the average for the first half of 2019. Because of sustained lower activity in 2021, we expect pricing will remain depressed for the near to medium term, offsetting much of the anticipated revenue increase. We did, however, begin to implement modest net price increases within our cementing and coiled tubing service lines during the second quarter of 2021, and June 2021 was one of our strongest months from a revenue perspective since the first quarter of 2020.
For the remainder of 2021, we anticipate only moderate activity increases, with revenues in the third quarter of 2021 expected to be higher than in the second quarter of 2021. We continue to navigate cost inflation, with finding and retaining
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qualified labor currently being our largest challenge as we continue to rebuild the oilfield services sector and compete with other industries for labor. Thus, even with further improvements in commodity prices, our business in the near or medium term may not improve materially or at all depending on, among other things, our customers’ activity plans, our ability to implement price increases, and our ability to find and retain qualified personnel.
Other significant factors that are likely to affect commodity prices moving forward include the extent to which members of Organization of the Petroleum Exporting Countries and other oil producing nations, including Russia, continue to reduce oil export prices and increase production; the effect of energy, monetary, and trade policies of the United States; the pace of economic growth in the United States and throughout the world, including the potential for macro weakness; geopolitical and economic developments in the United States and globally; new energy policies put in place by the new administration and the Environmental Protection Agency; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows. Even with price improvements in oil and natural gas, operator activity may not materially increase, as operators remain focused on operating within their capital plans, and uncertainty remains around supply and demand fundamentals.
We will continue to focus on generating returns and cash flow. Due to our high level of variable costs and the asset-light make-up of our business, we have been able to quickly implement cost-cutting measures and will continue to adapt as the market dictates.
Results of Operations
Results for the Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
| Three Months Ended June 30, | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Revenues | $ | 84,832 | $ | 52,735 | $ | 32,097 | |||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 76,638 | 56,703 | 19,935 | ||||||||||||||
| Adjusted gross profit (loss) | $ | 8,194 | $ | (3,968) | $ | 12,162 | |||||||||||
| General and administrative expenses | $ | 12,167 | $ | 11,284 | $ | 883 | |||||||||||
| Depreciation | 7,438 | 8,449 | (1,011) | ||||||||||||||
| Amortization of intangibles | 4,091 | 4,116 | (25) | ||||||||||||||
| Loss on revaluation of contingent liabilities | 45 | 910 | (865) | ||||||||||||||
| (Gain) loss on sale of property and equipment | 950 | (1,790) | 2,740 | ||||||||||||||
| Loss from operations | (16,497) | (26,937) | 10,440 | ||||||||||||||
| Non-operating (income) expense | 7,938 | (2,580) | 10,518 | ||||||||||||||
| Loss before income taxes | (24,435) | (24,357) | (78) | ||||||||||||||
| Provision (benefit) for income taxes | 95 | (186) | 281 | ||||||||||||||
| Net loss | $ | (24,530) | $ | (24,171) | $ | (359) | |||||||||||
Revenues
Revenues increased $32.1 million, or 61%, to $84.8 million for the second quarter of 2021. The increase in comparison to the second quarter of 2020 was prevalent across all lines of service and in line with a 15% increase in rig count, a 128% increase in active frac crews, and the re-opening of field offices, in comparison to the second quarter of 2020. More specifically, tools revenue increased $9.4 million, or 62%, as completion tools stages increased by 120% in comparison to the second quarter of 2020. In addition, wireline revenue increased $9.0 million, or 93%, as total completed wireline stages increased by 108%, in comparison to the second quarter of 2020, coiled tubing revenue increased by $6.9 million, or 91%, as total days worked increased by 78% in comparison to the second quarter of 2020 and cementing revenue (including pump downs) increased by $6.8 million, or 34%, as total cement job count increased 45% in comparison to the second quarter of 2020.
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Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased $19.9 million, or 35%, to $76.6 million for the second quarter of 2021. The increase in comparison to the second quarter of 2020 was prevalent across all lines of service and was primarily related to increased activity despite continued pricing pressure within the market. More specifically, the increase was primarily related to a $17.5 million increase in materials installed and consumed while performing services and a $4.2 million increase in employee costs in comparison to the second quarter of 2020. The overall increase was partially offset by a $1.8 million decrease in bad debt expense between periods.
Adjusted Gross Profit (Loss)
Adjusted gross profit increased $12.2 million to $8.2 million for the second quarter of 2021 due to the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses increased $0.9 million to $12.2 million for the second quarter of 2021. The increase was primarily related to a $2.2 million increase in professional fees in comparison to the second quarter of 2020. The overall increase was partially offset by a $1.3 million decrease in employee costs mainly due to headcount and salary reductions in comparison to the second quarter of 2020.
Depreciation
Depreciation expense decreased $1.0 million to $7.4 million for the second quarter of 2021. The decrease in comparison to the second quarter of 2020 was associated with all lines of service and was primarily due to certain assets becoming fully depreciated in recent periods..
Amortization of Intangibles
We recorded $4.1 million in intangible amortization for both the second quarter of 2021 and the second quarter of 2020 primarily attributed to technology and customer relationships.
(Gain) Loss on Revaluation of Contingent Liabilities
We recorded a less than $0.1 million loss on the revaluation of contingent liabilities for the second quarter of 2021 compared to a $0.9 million loss on the revaluation of contingent liabilities for the second quarter of 2020. The decreased loss between periods was primarily related to a $0.6 million loss on the revaluation of contingent liabilities associated with the Magnum Earnout (as defined in Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) in the second quarter of 2020 that did not recur in the second quarter of 2021. The Magnum Earnout was terminated in the second quarter of 2020. The overall decrease was also partly attributed to a $0.2 million reduction on the loss on the revaluation of the earnout associated with our acquisition of Frac Technology AS between periods.
Non-Operating (Income) Expenses
We recorded $7.9 million in non-operating expenses for the second quarter of 2021 compared to $2.6 million in non-operating income for the second quarter of 2020. The $10.5 million decrease in non-operating income was primarily related to a $11.6 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined and described in “Liquidity and Capital Resources”) in the second quarter of 2020 that did not recur in the second quarter of 2021, coupled with a $0.1 million reduction in interest and other income between periods. The overall decrease in non-operating income is partially offset by a $1.2 million reduction in interest expense mainly due to a reduced debt balance attributed to repurchases of Senior Notes in recent periods.
Provision (Benefit) for Income Taxes
We recorded an income tax provision of less than $0.1 million for the second quarter of 2021 compared to an income tax benefit of $0.2 million for the second quarter of 2020. The difference in tax position is primarily a result of discrete tax items recorded in the second quarter of 2020 related to our state tax position.
Adjusted EBITDA
Adjusted EBITDA increased $10.6 million to a $0.4 million loss for the second quarter of 2021. The Adjusted
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EBITDA increase was primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.
Results for the Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
| Six Months Ended June 30, | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Revenues | $ | 151,458 | $ | 199,359 | $ | (47,901) | |||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 138,921 | 182,711 | (43,790) | ||||||||||||||
| Adjusted gross profit | $ | 12,537 | $ | 16,648 | $ | (4,111) | |||||||||||
| General and administrative expenses | $ | 22,391 | $ | 27,679 | $ | (5,288) | |||||||||||
| Depreciation | 15,227 | 16,990 | (1,763) | ||||||||||||||
| Amortization of intangibles | 8,183 | 8,285 | (102) | ||||||||||||||
| Impairment of goodwill | — | 296,196 | (296,196) | ||||||||||||||
| (Gain) loss on revaluation of contingent liabilities | (145) | 484 | (629) | ||||||||||||||
| (Gain) loss on sale of property and equipment | 677 | (2,365) | 3,042 | ||||||||||||||
| Loss from operations | (33,796) | (330,621) | 296,825 | ||||||||||||||
| Non-operating income | (1,142) | (3,239) | 2,097 | ||||||||||||||
| Loss before income taxes | (32,654) | (327,382) | 294,728 | ||||||||||||||
| Provision (benefit) for income taxes | 122 | (2,311) | 2,433 | ||||||||||||||
| Net loss | $ | (32,776) | $ | (325,071) | $ | 292,295 | |||||||||||
Revenues
Revenues decreased $47.9 million, or 24%, to $151.5 million for the first six months of 2021. The decrease was prevalent across all lines of service and was primarily related to reduced activity and pricing pressure that began in the second quarter of 2020 and was caused by poor market conditions as a result of the coronavirus pandemic. To a lesser extent, the decrease was also a result of reduced activity caused by weather-related shutdowns in the first quarter of 2021. More specifically, wireline revenue decreased $23.3 million, or 43%, as total completed wireline stages decreased by 29%, in comparison to the first six months of 2020 and cementing revenue (including pump downs) decreased by $18.9 million, or 27%, as total cement job count decreased 15% in comparison to the first six months of 2020. In addition, coiled tubing revenue decreased by $2.9 million, or 10%, although total days worked increased by 2% in comparison to the first six months of 2020 and tools revenue decreased $2.8 million, or 6%, as completion tools stages increased by 25% in comparison to the first six months of 2020.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues decreased $43.8 million, or 24%, to $138.9 million for the first six months of 2021. The decrease was prevalent across all lines of service and was primarily related to reduced activity caused by poor market conditions, and, to a lesser extent, reduced activity caused by weather-related shutdowns, in comparison to the first six months of 2020. More specifically, the decrease was primarily related to a $19.0 million decrease in employee costs, a $16.8 million decrease in materials installed and consumed while performing services, and a $8.0 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses.
Adjusted Gross Profit (Loss)
Adjusted gross profit decreased $4.1 million to $12.5 million for the first six months of 2021 due to the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses decreased $5.3 million to $22.4 million for the first six months of 2021. The decrease was primarily related to a $5.4 million decrease in employee costs mainly due to headcount and salary reductions in
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comparison to the first six months of 2020 as well as a $1.8 million decrease in other general and administrative expenses such as restructuring, travel, vehicle and marketing expenses in comparison to the first six months of 2020. The overall decrease was partially offset by a $1.9 million increase in professional fees between periods.
Depreciation
Depreciation expense decreased $1.8 million to $15.2 million for the first six months of 2021. The decrease in comparison to the first six months of 2020 was associated with all lines of service and was primarily due to certain assets becoming fully depreciated in recent periods.
Amortization of Intangibles
We recorded $8.2 million in intangible amortization for the first six months of 2021 and $8.3 million in the first six months of 2020 primarily attributed to technology and customer relationships. The $0.1 million decrease is related to certain intangible assets being fully amortized in the first six months of 2021.
Impairment of Goodwill
In the first six months of 2020, we recorded goodwill impairment charges of $296.2 million in our tools, cementing, and wireline reporting units due to sharp declines in global crude oil demand, an economic recession associated with the coronavirus pandemic, sharp declines in oil and natural gas prices, and an increased weighted average cost of capital driven by a reduction in our stock price and the Level 2 fair value of our Senior Notes. These goodwill impairment charges did not recur in the first six months of 2021.
(Gain) Loss on Revaluation of Contingent Liabilities
We recorded a $0.1 million gain on the revaluation of contingent liabilities for the first six months of 2021 compared to a $0.5 million loss on the revaluation of contingent liabilities for the first six months of 2020. The $0.6 million change was primarily related to a $0.8 million loss on the revaluation of contingent liabilities associated with the Magnum Earnout (as defined in Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) in the first six months of 2020 that did not recur in the first six months of 2021. The Magnum Earnout was terminated in the second quarter of 2020. The overall change was partially offset by a reduced gain of $0.2 million on the revaluation of the earnout associated with our acquisition of Frac Technology AS between periods.
Non-Operating (Income) Expenses
We recorded $1.1 million in non-operating income for the first six months of 2021 compared to $3.2 million in non-operating income for the first six months of 2020. The $2.1 million decrease was primarily related to a $4.1 million reduction in gains on the extinguishment of debt attributed to the repurchase of Senior Notes in the first six months of 2021 compared to the first six months of 2020, coupled with a $0.5 million reduction in interest income between periods. The overall decrease in non-operating income is partially offset by a $2.4 million reduction in interest expense mainly due to a reduced debt balance attributed to repurchases of Senior Notes in recent periods and a $0.1 million reduction in other income between periods.
Provision (Benefit) for Income Taxes
We recorded an income tax provision of $0.1 million for the first six months of 2021 compared to an income tax benefit of $2.3 million for the first six months of 2020. The difference in tax position is primarily a result of the discrete tax impact from the Coronavirus Aid, Relief, and Economic Security Act and the goodwill impairment charge recorded during the first quarter of 2020.
Adjusted EBITDA
Adjusted EBITDA decreased $3.0 million to a $3.8 million loss for the first six months of 2021. The Adjusted EBITDA decrease was primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.
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Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures that are used by management and external users of our financial statements, such as industry analysts, investors, lenders, and rating agencies.
We define EBITDA as net income (loss) before interest, taxes, depreciation, and amortization.
We define Adjusted EBITDA as EBITDA further adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business.
Management believes EBITDA and Adjusted EBITDA are useful because they allow us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above from net income (loss) in arriving at these measures because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, and the method by which the assets were acquired. These measures should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”) or as an indicator of our operating performance. Certain items excluded from these measures are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of these measures. Our computations of these measures may not be comparable to other similarly titled measures of other companies. We believe that these are widely followed measures of operating performance.
The following table presents a reconciliation of the non-GAAP financial measures of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) for the three and six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| EBITDA reconciliation: | |||||||||||||||||||||||
| Net loss | $ | (24,530) | $ | (24,171) | $ | (32,776) | $ | (325,071) | |||||||||||||||
| Interest expense | 7,981 | 9,186 | 16,566 | 19,014 | |||||||||||||||||||
| Interest income | (8) | (179) | (21) | (550) | |||||||||||||||||||
| Provision (benefit) for income taxes | 95 | (186) | 122 | (2,311) | |||||||||||||||||||
| Depreciation | 7,438 | 8,449 | 15,227 | 16,990 | |||||||||||||||||||
| Amortization of intangibles | 4,091 | 4,116 | 8,183 | 8,285 | |||||||||||||||||||
| EBITDA | $ | (4,933) | $ | (2,785) | $ | 7,301 | $ | (283,643) | |||||||||||||||
| Adjusted EBITDA reconciliation: | |||||||||||||||||||||||
| EBITDA | $ | (4,933) | $ | (2,785) | $ | 7,301 | $ | (283,643) | |||||||||||||||
| Impairment of goodwill | — | — | — | 296,196 | |||||||||||||||||||
| Transaction and integration costs | — | — | — | 146 | |||||||||||||||||||
Loss (gain) on revaluation of contingent liabilities (1) | 45 | 910 | (145) | 484 | |||||||||||||||||||
| Gain on extinguishment of debt | — | (11,587) | (17,618) | (21,703) | |||||||||||||||||||
| Restructuring charges | 745 | 2,094 | 1,213 | 4,423 | |||||||||||||||||||
| Stock-based compensation expense | 1,028 | 2,105 | 3,038 | 5,697 | |||||||||||||||||||
| (Gain) loss on sale of property and equipment | 950 | (1,790) | 677 | (2,365) | |||||||||||||||||||
Legal fees and settlements (2) | 1,735 | 20 | 1,747 | 24 | |||||||||||||||||||
| Adjusted EBITDA | $ | (430) | $ | (11,033) | $ | (3,787) | $ | (741) | |||||||||||||||
(1)Amounts relate to the revaluation of contingent liabilities associated with our 2018 acquisitions. The impact is included in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss). For additional information
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on contingent liabilities, see Note 10 – Commitments and Contingencies included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
(2)Amounts represent fees, legal settlements and/or accruals associated with legal proceedings brought pursuant to the Fair Labor Standards Act and/or similar state laws.
Return on Invested Capital
ROIC is a supplemental non-GAAP financial measure. We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on extinguishment of debt, and (vii) the provision (benefit) for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis.
Management believes ROIC is a meaningful measure because it quantifies how well we generate operating income relative to the capital we have invested in our business and illustrates the profitability of a business or project taking into account the capital invested. Management uses ROIC to assist them in capital resource allocation decisions and in evaluating business performance. Although ROIC is commonly used as a measure of capital efficiency, definitions of ROIC differ, and our computation of ROIC may not be comparable to other similarly titled measures of other companies.
The following table provides an explanation of our calculation of ROIC for the three and six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Net loss | $ | (24,530) | $ | (24,171) | $ | (32,776) | $ | (325,071) | |||||||||||||||
| Add back: | |||||||||||||||||||||||
| Impairment of goodwill | — | — | — | 296,196 | |||||||||||||||||||
| Transaction and integration costs | — | — | — | 146 | |||||||||||||||||||
| Interest expense | 7,981 | 9,186 | 16,566 | 19,014 | |||||||||||||||||||
| Interest income | (8) | (179) | (21) | (550) | |||||||||||||||||||
| Restructuring charges | 745 | 2,094 | 1,213 | 4,423 | |||||||||||||||||||
| Gain on extinguishment of debt | — | (11,587) | (17,618) | (21,703) | |||||||||||||||||||
| Benefit for deferred income taxes | — | — | — | (1,588) | |||||||||||||||||||
| After-tax net operating loss | $ | (15,812) | $ | (24,657) | $ | (32,636) | $ | (29,133) | |||||||||||||||
| Total capital as of prior period-end: | |||||||||||||||||||||||
| Total stockholders’ equity | $ | 14,083 | $ | 91,851 | $ | 20,409 | $ | 389,877 | |||||||||||||||
| Total debt | 322,031 | 386,171 | 348,637 | 400,000 | |||||||||||||||||||
| Less cash and cash equivalents | (52,982) | (90,116) | (68,864) | (92,989) | |||||||||||||||||||
| Total capital as of prior period-end | $ | 283,132 | $ | 387,906 | $ | 300,182 | $ | 696,888 | |||||||||||||||
| Total capital as of period-end: | |||||||||||||||||||||||
| Total stockholders’ equity | $ | (9,731) | $ | 69,950 | $ | (9,731) | $ | 69,950 | |||||||||||||||
| Total debt | 322,031 | 372,584 | 322,031 | 372,584 | |||||||||||||||||||
| Less cash and cash equivalents | (33,128) | (88,678) | (33,128) | (88,678) | |||||||||||||||||||
| Total capital as of period-end | $ | 279,172 | $ | 353,856 | $ | 279,172 | $ | 353,856 | |||||||||||||||
| Average total capital | $ | 281,152 | $ | 370,881 | $ | 289,677 | $ | 525,372 | |||||||||||||||
| ROIC | (22.5)% | (26.6)% | (22.5)% | (11.1)% | |||||||||||||||||||
Adjusted Gross Profit (Loss)
GAAP defines gross profit (loss) as revenues less cost of revenues and includes depreciation and amortization in costs of revenues. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit (loss) because we do not include the impact of depreciation and amortization, which represent non-cash expenses.
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Management uses adjusted gross profit (loss) to evaluate operating performance. We prepare adjusted gross profit (loss) to eliminate the impact of depreciation and amortization because we do not consider depreciation and amortization indicative of our core operating performance. Adjusted gross profit (loss) should not be considered as an alternative to gross profit (loss), operating income (loss), or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted gross profit (loss) may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted gross profit (loss) or similarly titled measures in the same manner as we do.
The following table presents a reconciliation of adjusted gross profit (loss) to GAAP gross profit (loss) for the three and six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Calculation of gross profit (loss) | |||||||||||||||||||||||
| Revenues | $ | 84,832 | $ | 52,735 | $ | 151,458 | $ | 199,359 | |||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 76,638 | 56,703 | 138,921 | 182,711 | |||||||||||||||||||
| Depreciation (related to cost of revenues) | 6,917 | 7,858 | 14,161 | 15,801 | |||||||||||||||||||
| Amortization of intangibles | 4,091 | 4,116 | 8,183 | 8,285 | |||||||||||||||||||
| Gross loss | $ | (2,814) | $ | (15,942) | $ | (9,807) | $ | (7,438) | |||||||||||||||
| Adjusted gross profit (loss) reconciliation: | |||||||||||||||||||||||
| Gross loss | $ | (2,814) | $ | (15,942) | $ | (9,807) | $ | (7,438) | |||||||||||||||
| Depreciation (related to cost of revenues) | 6,917 | 7,858 | 14,161 | 15,801 | |||||||||||||||||||
| Amortization of intangibles | 4,091 | 4,116 | 8,183 | 8,285 | |||||||||||||||||||
| Adjusted gross profit (loss) | $ | 8,194 | $ | (3,968) | $ | 12,537 | $ | 16,648 | |||||||||||||||
Liquidity and Capital Resources
Sources and Uses of Liquidity
Historically, we have met our liquidity needs principally from cash on hand, cash flows from operating activities and, if needed, external borrowings and issuances of debt securities. Our principal uses of cash are to fund capital expenditures, service our outstanding debt, fund our working capital requirements and, historically, fund acquisitions. Due to our high level of variable costs and the asset-light make-up of our business, we have historically been able to quickly implement cost-cutting measures and will continue to adapt as the market dictates. We have also used cash to make open market repurchases of our debt and may, from time to time, continue to make such repurchases (including with respect to our Senior Notes when it is opportunistic to do so to manage our debt maturity profile.
We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue to access outside sources of capital. In addition, our ability to satisfy our liquidity requirements depends on our future operating performance, which is affected by prevailing economic conditions, the level of drilling, completion and production activity for North American onshore oil and natural gas resources, and financial and business and other factors, many of which are beyond our control.
At June 30, 2021, we had $33.1 million of cash and cash equivalents and $52.3 million of availability under the 2018 ABL Credit Facility (as defined below), which resulted in a total liquidity position of $85.4 million. Although we believe our total liquidity position will continue to materially erode, due in large part to interest payments due on the Senior Notes, we believe that, based on our current forecasts, our cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility, should be sufficient to fund our capital requirements for at least the next twelve months from the issuance date of our condensed consolidated financial statements. However, we can make no assurance regarding our ability to achieve our forecasts, which are materially dependent on our financial performance and the ever-changing market.
Senior Notes
On October 25, 2018, we issued $400.0 million of 8.750% Senior Notes due 2023 (the “Senior Notes”) under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among us, including certain of our subsidiaries, and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable on May 1 and
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November 1 of each year, and the first interest payment was due on May 1, 2019. Based on current amounts outstanding as of June 30, 2021, the semi-annual interest payments are $14.0 million each. The Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed on a senior unsecured basis by each of our current domestic subsidiaries and by certain future subsidiaries.
The Indenture contains covenants that limit our ability and the ability of our restricted subsidiaries to engage in certain activities. We were in compliance with the provisions of the Indenture at June 30, 2021.
Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to us, any of our restricted subsidiaries that are a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.
During the six months ended June 30, 2021, we repurchased approximately $26.3 million of Senior Notes at a repurchase price of approximately $8.4 million in cash. Deferred financing costs associated with these repurchases were $0.3 million. As a result, for the six months ended June 30, 2021, we recorded a $17.6 million gain 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. We also repurchased approximately $53.3 million of Senior Notes at a repurchase price of approximately $14.6 million in cash during the year ended December 31, 2020. As of June 30, 2021, there were approximately $320.3 million aggregate principal amount of Senior Notes outstanding.
In addition to repurchases, from time to time, we have explored, and may continue to further consider, transactions to restructure or refinance a portion of the Senior Notes. Any such transactions may involve the issuance of additional equity or convertible debt securities that could result in material dilution to our stockholders, and these or other securities issued in any such transactions could have rights superior to holders of our common stock or holders of the Senior Notes and could contain covenants that will restrict our operations.
2018 ABL Credit Facility
On October 25, 2018, we entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”) that permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.
Loans to us and our domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or London Interbank Offered Rate (“LIBOR”) loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be Canadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on our leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions) and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below $18.75 million or a default has occurred, until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. We were in compliance with all covenants under the 2018 ABL Credit Agreement at June 30, 2021.
All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.
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At June 30, 2021, we had no borrowings outstanding under the 2018 ABL Credit Facility, and our availability under the 2018 ABL Credit Facility was approximately $52.3 million, net of outstanding letters of credit of $0.5 million.
Cash Flows
Cash flows provided by (used in) operations by type of activity were as follows for the six months ended June 30, 2021 and 2020:
| Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Operating activities | $ | (24,869) | $ | 2,359 | |||||||
| Investing activities | (1,137) | 1,768 | |||||||||
| Financing activities | (9,706) | (8,263) | |||||||||
| Impact of foreign exchange rate on cash | (24) | (175) | |||||||||
| Net change in cash and cash equivalents | $ | (35,736) | $ | (4,311) | |||||||
Operating Activities
Net cash used in operating activities was $24.9 million during the first six months of 2021 compared to $2.4 million in net cash provided by operating activities in the first six months of 2020. The $27.3 million decrease in net cash provided by operating activities was primarily a result of an $32.1 million decrease in working capital, including a reduction in cash collections, in comparison to the first six months of 2020. The overall decrease in net cash provided by operating activities was partially offset by an increase of $4.8 million in cash flow provided by operations, adjusted for any non-cash items, in comparison to the first six months of 2020.
Investing Activities
Net cash used in investing activities was $1.1 million in the first six months of 2021 compared to $1.8 million in net cash provided by investing activities in the first six months of 2020. The $2.9 million decrease in net cash provided by investing activities was primarily related to a $2.7 million decrease in proceeds from the sale of property and equipment (including insurance) in comparison to the first six months of 2020, coupled with a $0.2 million increase in cash purchases of property and equipment between periods.
Financing Activities
Net cash used in financing activities was $9.7 million in the first six months of 2021 compared to $8.3 million in net cash used in financing activities in the first six months of 2020. The $1.4 million increase in net cash used in financing activities was primarily related to $0.9 million increase in purchases of the Senior Notes, a $0.3 million increase in payments on the Magnum Promissory Notes (as defined in Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) and a $0.3 million increase in cash used for the vesting of restricted stock during the first six months of 2021 in comparison to the first six months of 2020. The overall increase in net cash used for financing activities was partially offset by a $0.1 million reduction in payments of contingent liabilities between periods.
Contractual Obligations
As a “smaller reporting company”, as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide this information.
Off-Balance Sheet Arrangements
At June 30, 2021, we had letters of credit of $0.5 million, which represented off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. As of June 30, 2021, no liability has been recognized in our Condensed Consolidated Balance Sheets for the letters of credit.
Recent Accounting Pronouncements
See Note 3 – New Accounting Standards included in Item 1 of Part I of this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company”, as defined under the Exchange Act, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by an issuer in the reports the issuer files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time period specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports filed or submitted under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2021. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarterly period ended June 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we have various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, we believe any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our business, operating results, or financial condition.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. For a detailed discussion of known material factors which could materially affect our business, financial condition, or future results, refer to “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The exhibits required to be filed or furnished by Item 601 of Regulation S-K are listed below.
| Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101* | Interactive Data Files (Formatted as inline XBRL). | |||||||
| 104* | Cover Page Interactive Data File (Formatted as inline XBRL and contained in Exhibit 101). | |||||||
* Filed herewith.
** Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Nine Energy Service, Inc. | |||||||||||||||||
| Date: | August 4, 2021 | By: | /s/ Ann G. Fox | ||||||||||||||
| Ann G. Fox | |||||||||||||||||
| President, Chief Executive Officer and Director | |||||||||||||||||
| (Principal Executive Officer) | |||||||||||||||||
| Date: | August 4, 2021 | By: | /s/ Guy Sirkes | ||||||||||||||
| Guy Sirkes | |||||||||||||||||
| Senior Vice President and Chief Financial Officer | |||||||||||||||||
| (Principal Financial Officer) | |||||||||||||||||
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