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As filed with the Securities and Exchange Commission on January 9, 2018

Registration No. 333-217601

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 6

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Nine Energy Service, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware    1389    80-0759121
(State or other jurisdiction of
incorporation or organization)
   (Primary Standard Industrial
Classification Code Number)
   (IRS Employer
Identification No.)

16945 Northchase Drive, Suite 1600

Houston, TX 77060

(281) 730-5100

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Theodore R. Moore

Senior Vice President and General Counsel

16945 Northchase Drive, Suite 1600

Houston, TX 77060

(281) 730-5100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Sarah K. Morgan

Lanchi D. Huynh

Vinson & Elkins L.L.P.

1001 Fannin, Suite 2500

Houston, Texas 77002

(713) 758-2222

  

Matthew R. Pacey

Justin F. Hoffman

Kirkland & Ellis LLP

609 Main Street

Houston, Texas 77002

(713) 836-3600

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer       Accelerated filer         Non-accelerated filer       Smaller reporting company  
    (Do not check if a 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 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed maximum

aggregate offering
price(1)(2)

 

Amount of

registration

fee(3)

Common Stock, par value $0.01 per share

  $185,150,000.00   $23,051.18
 

 

(1)   Includes shares issuable upon exercise of the underwriters’ option to purchase additional shares of common stock.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3)   The registrant previously paid $11,590.00 of the total registration fee in connection with the previous filing of this Registration Statement.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. The securities described herein may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated January 9, 2018

Prospectus

7,000,000 shares

 

 

LOGO

Nine Energy Service, Inc.

Common stock

This is the initial public offering of common stock of Nine Energy Service, Inc. We are offering 7,000,000 shares of common stock. The estimated initial public offering price of our common stock is between $20.00 and $23.00 per share.

We have been approved, subject to official notice of issuance, to list our common stock on the New York Stock Exchange under the symbol “NINE.”

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, and as such, we have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings. See “Risk factors” and “Prospectus summary—Emerging growth company.”

 

        Per share        Total  

Initial public offering price

     $                     $               

Underwriting discounts and commissions(1)

     $        $  

Proceeds to us, before expenses

     $        $  

 

(1)   See “Underwriting (conflicts of interest)” for additional information regarding underwriting compensation.

We have granted the underwriters an option for a period of 30 days to purchase up to an aggregate of 1,050,000 additional shares of our common stock on the same terms and conditions set forth above.

Investing in our common stock involves risks. See “Risk factors” beginning on page 26.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock on or about                     , 2018.

 

J.P. Morgan                   Goldman Sachs & Co. LLC   Wells Fargo Securities
BofA Merrill Lynch   Credit Suisse
Raymond James                    

Simmons & Company International

Energy Specialists of Piper Jaffray

  Tudor, Pickering, Holt & Co.
HSBC   Scotia Howard Weil   UBS Investment Bank

                    , 2018


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Table of contents

 

Prospectus summary

     1  

Risk factors

     26  

Cautionary note regarding forward-looking statements

     51  

Use of proceeds

     52  

Dividend policy

     54  

Capitalization

     55  

Dilution

     57  

Selected financial data

     58  

Management’s discussion and analysis of financial condition and results of operations

     64  

Business

     84  

Management

     112  

Executive compensation

     119  

Certain relationships and related party transactions

     131  

Security ownership of certain beneficial owners and management

     138  

Description of capital stock

     139  

Certain ERISA considerations

    
144
 

Shares eligible for future sale

     147  

Material U.S. federal income tax considerations for non-U.S. holders

     149  

Underwriting (conflicts of interest)

     153  

Legal matters

     162  

Experts

     162  

Where you can find more information

     163  

Index to combined financial statements

     F-1  

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus and any free writing prospectus. We and the underwriters are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. See “Risk factors” and “Cautionary note regarding forward-looking statements.”

Until                     , 2018 (25 days after commencement of this offering), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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Presentation of information

Unless otherwise indicated, information presented in this prospectus (i) assumes that the underwriters’ option to purchase additional common stock is not exercised, (ii) except in our historical financial statements included in this prospectus, is adjusted to reflect the approximately 8.0256 for 1 stock split effected immediately prior to the consummation of this offering (the “Stock Split”), (iii) assumes that the initial public offering price of the shares of our common stock will be $21.50 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus) and (iv) assumes the filing and effectiveness of the Third Amended and Restated Certificate of Incorporation (our “charter”) and the Fourth Amended and Restated Bylaws (our “bylaws”), both of which will be adopted immediately prior to the consummation of this offering. Please see “Description of capital stock” for a description of our charter and bylaws.

In addition, except as expressly stated or the context otherwise requires, our financial and other information in this prospectus relating to periods prior to the Combination (as defined in “Prospectus summary”) gives effect to the Combination and related transactions. See “Prospectus summary—Our history and the Combination” for more information regarding the Combination. In this prospectus, unless the context otherwise requires, the term “SCF” refers to SCF-VII, L.P. and SCF-VII(A), L.P., collectively, or any of them individually.

Industry and market data

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. The industry data sourced from Spears & Associates, Inc. is from a report published in the third quarter of 2017. The industry data sourced from Baker Hughes is from its “North America Rotary Rig Count” published on December 29, 2017. Although we believe these third-party sources are reliable as of their respective dates, neither we nor the underwriters have independently verified the accuracy or completeness of this information. Some data is also based on our good faith estimates and our management’s understanding of industry conditions. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled “Risk factors.” These and other factors could cause results to differ materially from those expressed in these publications.

Trademarks and trade names

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and does not imply, a relationship with us or an endorsement or sponsorship by or of us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.

 

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Prospectus summary

This summary provides a brief overview of information contained elsewhere in this prospectus. Because it is abbreviated, this summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully before making an investment decision, including the information presented under the headings “Risk factors,” “Cautionary note regarding forward-looking statements” and “Management’s discussion and analysis of financial condition and results of operations” and the historical combined financial statements and related notes thereto included elsewhere in this prospectus.

On February 28, 2017, Nine Energy Service, Inc. (“Nine”) merged (the “Combination”) with Beckman Production Services, Inc. (“Beckman”). In this prospectus, unless the context otherwise requires, the terms “Nine,” “we,” “us,” “our” and the “Company” refer to (i) Nine Energy Service, Inc. and its subsidiaries together with Beckman prior to the Combination and (ii) Nine Energy Service, Inc. and its subsidiaries after the Combination. In the Combination, all of the issued and outstanding shares of Beckman common stock were converted into shares of common stock of Nine Energy Service, Inc., other than 1.6% of Beckman shares paid in cash, and Beckman became a wholly owned subsidiary of Nine. See “Presentation of information.”

Company overview

We are a leading North American onshore completion and production services provider that targets unconventional oil and gas resource development. We partner with our exploration and production (“E&P”) customers across all major onshore basins in both the U.S. and Canada 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 our comprehensive completion solutions across a diverse set of well-types, including on the most complex, technically demanding unconventional wells. Modern, high-intensity completion techniques are a more effective way for our customers to maximize resource extraction from horizontal oil and gas wells. These completion techniques provide improved estimated ultimate recovery (“EUR”) per lateral foot and a superior return on investment, which make them attractive to operators despite their associated increased well cost. We compete with a limited number of service companies for the most intricate and demanding projects, which are characterized by extended reach horizontal laterals, increased stage counts per well and increased proppant loading per lateral foot. As stage counts per well increase, so do our operating leverage and returns, as we are able to complete more jobs and stages with the same number of units and crews. Service providers for these demanding projects are selected based on their technical expertise and ability to execute safely and efficiently, rather than only price.

We offer a variety of completion applications and technologies to match customer needs across the broadest addressable completions market. Our comprehensive well solutions range from cementing the well at the initial stages of the completion, preparing the well for stimulation, isolating all the stages of an extended reach lateral, and drilling out plugs and performing associated remedial work as production comes online. Our completion techniques are specifically tailored to the customer and geology of each well. At the initial stage of a well completion, our lab facilities produce customized cementing slurries used to secure the production casing to ensure well integrity throughout the life of the well. Once the casing is in place, we utilize our proprietary tools at the toe (end) of the well, often called stage one, to prepare for the well stimulation process. We provide

 

 

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customers with plug-and-perf or pinpoint frac sleeve system technology to complete the remaining stages of the well. Through our wireline units, we provide plug-and-perf services that, when combined with our fully-composite or dissolvable frac plugs, create perforations to isolate and divert the fracture to the correct stage. Our pinpoint frac sleeve system involves packers, either hydraulic or swellable, to isolate sections of the wellbore and frac sleeves to provide access to each stage for stimulation and production. Our equipment also includes high-specification coiled tubing units and workover rigs that are capable of reaching the farthest depths for the removal of plugs and cleaning of the wellbore to prepare for production. Once a well is producing, we are able to offer a range of production enhancement and well workover services through our fleet of well service rigs and ancillary equipment.

The following graphic provides a summary of our comprehensive well solutions that span the life cycle of a well completion.

 

 

LOGO

Our services

We operate in two segments: Completion Solutions and Production Solutions. Our Completion Solutions segment provides services integral to the completion of unconventional wells through a full range of tools and methodologies. Our Production Solutions segment provides a range of production enhancement and well workover services that are performed with a well servicing rig and ancillary equipment.

Completion Solutions

The following is a description of the primary service offerings and deployment methods within the Completion Solutions business segment:

Cementing services:    Our cementing services 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

 

 

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well. We currently have three high-quality laboratory facilities capable of designing and testing all of the current industry cement designs. The laboratory facilities operate twenty-four hours a day and are fully staffed by qualified technicians with the latest equipment and modeling software. Additionally, our technicians and engineers ensure that all tests are performed to API specifications and results are delivered to customers promptly. Our cement slurries are designed to achieve the proper cement thickening time, compressive strength and fluid loss control. Our slurries can be modified to address a wide range of downhole needs of our E&P customers, including varying well depths, downhole temperatures, pressures and formation characteristics. We deploy our slurries by using our customized design twin-pumping units, which are fully redundant and significantly decrease our risk of downtime due to mechanical failure. From January 2014 to September 2017, we completed approximately 10,500 cementing jobs, with an on-time rate of approximately 90%. Punctuality of service has become one of the primary metrics that E&P operators use to evaluate the cementing services they receive. Key contributors to our 90% on-time rate include our lab capabilities, personnel, close proximity to our customers’ acreage, dual-sided bulk loading plants and our service-driven culture.

Completion tools:    We provide unconventional and conventional downhole solutions and technology used for multistage completions. Our comprehensive completion service offerings are complemented by our unconventional open hole and cemented completion tool products, such as liner hangers and accessories, fracture isolation packers, frac sleeves, stage one prep tools, fully composite and dissolvable frac plugs and specialty open hole float equipment and centralizers. Our completion tools provide pinpoint frac sleeve system technologies that enable comparable rates per stage while providing more control over fracture initiation. A few examples of our innovative portfolio of completion tools are: (i) the Scorpion Fully-Composite PlugTM, a patented packer-style fully composite plug designed to provide zonal isolation in a multi-stage well completion; we offer a diverse product group of fully-composite plugs designed for 3.5” to 5.5” well casings as well as a unique Scorpion Extended Range plug, which is used in demanding well applications where operators have to negotiate through internal diameter restrictions, (ii) the Scorpion Dissolvable Plug, a high performance plug designed to provide zonal isolation, is made entirely from proprietary materials that dissolve over time, leaving the wellbore unobstructed for production and eliminating the risk and costs of conventional plug removal, (iii) the SmartStart PLUSTM, an interventionless time-delayed pressure-activated sleeve that we have the exclusive distribution rights to in the northeastern U.S. and with certain customers in other regions, that eliminates the need for tubing or pipe-conveyed perforating when completing the toe stage of horizontal wells, (iv) the Storm Re-Frac PackerTM, a system that allows our customers to re-stimulate their existing wells using standard size plug-and-perf procedures to extend and enhance their production profiles with minimal flow restriction during stimulation, (v) the FlowGunTM, a stage one interventionless casing-conveyed perforating technology that eliminates the need to run wireline or coil tubing and requires no electronic detonation allowing our customers to perform a maximum pressure test and perforate stage one more efficiently with less risk and with no lateral length limitations, (vi) the Coil Frac Sleeve System, a system that utilizes coiled tubing to deploy a resettable frac packer, that we have the exclusive distribution rights to in the U.S., which is used to open and isolate frac sleeves that have been installed as an integral part of the casing, and (vii) the EON Ball Drop system, an interventionless single-size ball activated pinpoint frac sleeve system, that we have exclusive distributions rights to in the U.S. and Canada. Our systems provide completion efficiencies at the wellsite by reducing our customers’ equipment needs and stimulation time and allowing for specific zonal treatment. From March 2011 to September 2017, we have deployed approximately 65,000 swell and hydro-mechanical packers and approximately 18,000 frac sleeves for downhole completions.

Additionally, we offer a portfolio of completion technologies used for completing the toe stage of a horizontal well, as well as fully-composite, dissolvable and extended-range frac plugs to isolate stages during plug-and-perf operations.

 

 

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Wireline services:    Our wireline services involve the use of a wireline unit equipped with a spool of wireline that is unwound and lowered into oil and gas wells to convey specialized tools or equipment for well completion, well intervention or pipe recovery. Our wireline units are equipped with the latest technology utilized to service long lateral completions, including head tension tools, ballistic release tools and addressable switches. The majority of our wireline work consists of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns to a specified depth. We deploy proprietary specialized tools like our fully-composite frac plugs through our wireline units. From January 2014 to September 2017, we have completed approximately 62,000 wireline stages in the U.S. with a success rate of over 99%.

Coiled tubing services:    Coiled tubing services 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 25,000 feet. Coiled tubing provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well using specialized well-control equipment. The live well work capability limits the customer’s risk of formation damage associated with “killing” a well (the temporary placement of heavy fluids in a wellbore to keep reservoir fluids in place), while allowing for safer operations due to minimal equipment handling. Coiled tubing facilitates a variety of services in both new and old wells, such as milling, drilling, fishing, production logging, artificial lift installation, cementing, stimulation and restimulation services. In addition, our units are also used in conjunction with pinpoint hydraulic fracturing operations. Most of our coiled tubing units are capable of reaching total measured depths of 21,500 feet and beyond; including lateral lengths in excess of 12,500 feet, keeping pace with the industry’s most challenging downhole environments. While we specialize in larger-diameter (2 3/8” and 2 5/8”) applications, we also offer 2” and 1  1/4” diameter solutions to our customers. From April 2014 to September 2017, we have performed approximately 5,400 jobs and deployed more than 103 million running feet of coiled tubing, with a success rate of over 99%.

Production Solutions

The following is a description of the primary service offerings conducted within the Production Solutions business segment:

Well services:    Our well servicing business encompasses a full range of services performed with a mobile well servicing rig (or workover rig) and ancillary equipment throughout a well’s life cycle from completion to plugging and abandonment. Our rigs and personnel install and remove downhole equipment and eliminate obstructions in the well to facilitate the flow of oil and natural gas, often immediately increasing a well’s production. We believe the production increases generated by our well services substantially enhance our customers’ returns and significantly reduce their payback periods. Activities performed with our well servicing rigs can range from the milling of plugs following a plug-and-perf completion, to the installation in repair of artificial lift, to the ultimate plug and abandonment of a depleted well. Key components of our well services success include our geographic footprint, employee culture, fleet of rigs and inventory of equipment. Our operations extend across six major onshore U.S. basins, and our employee culture fosters local relationships within this expansive geographic footprint through excellent customer service and basin-level expertise.

We utilize a fleet of more than 100 rigs, approximately 40% of which are capable of performing completion-oriented work. This fleet and the inventory of equipment maintained at each of our regional locations are tailored to the needs of our customers in each particular basin. The high-specification rigs we utilize are engineered to perform in the most demanding laterals being drilled in the U.S. today. From January 2014 to September 2017, we operated more than 850,000 rig hours. According to the Association of Energy Service

 

 

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Companies (“AESC”), only 53% of industry reported well service rigs were active or available from January 2015 to September 2017. In contrast, approximately 67% of our rigs have remained utilized in the same period.

Our competitive strengths

We believe that the following strengths differentiate us from many of our competitors and will contribute to our ongoing success:

Technology-driven business model enhances ability to capitalize on industry trend towards more technically demanding unconventional wells

We invest in innovative technology and equipment designed for modern completion and production techniques that increase efficiencies and production for our customers. North American unconventional onshore wells are increasingly characterized by extended lateral lengths, tighter spacing between hydraulic fracturing stages, increased cluster density and heightened proppant loads. Drilling and completion activities for wells in unconventional resource plays are extremely complex, and downhole risks and operating costs increase as the complexity and lateral length of these wells increase. For these reasons, E&P companies with complex wells generally prefer to partner with technically-proficient, established service companies that are capable of providing the necessary equipment and techniques to complete the services safely, efficiently and with a focus on operational excellence. We believe that these unconventional wells will comprise a growing portion of the market, and that our comprehensive completion service and solutions offerings position us well to capture this growing market.

We have developed a suite of proprietary downhole tools, products and techniques, such as the Scorpion Fully-Composite PlugTM, Scorpion Dissolvable Plug, SmartStart PLUSTM, Flow GunTM, Coil Frac Sleeve System, EON Ball Drop System and Storm Re-Frac PackerTM, through both internal resources as well as strategic partnerships with manufacturers and engineering companies looking for a reliable and expansive channel to market. We have also made an investment in an advanced electromagnetic (EM) fracture monitoring service, Deep Imaging Technologies, which allows our customers to measure fracture efficacy, informing well spacing and infill development decisions. We believe we have become a “go-to” service provider for piloting new technologies across the U.S. and Canada because of our service quality and scale. These strategic partnerships provide us and our customers with access to unique downhole technology from independent innovators. This also allows us to minimize exposure to potential technology adoption risks and the significant costs associated with developing and implementing research and development (“R&D”) internally. Our internal resources are focused on evolving our existing proprietary tools to stay on trend and ensure quicker, lower cost completions for our customers.

Customized solutions offerings and a differentiated level of customer service

We are able to provide customized solutions for all completion types across North America, including plug-and-perf, pinpoint frac sleeve systems and hybrid wells. Our comprehensive completion service offerings, together with our complementary production services, enable us to deliver the most value to our customers throughout the life of the well. Through our strong relationships with our customers, we maintain a continuous dialogue and real-time feedback loop, allowing us to remain nimble and evolve our service offerings in concert with changing demands from our customers. We believe that our ability to be highly responsive to customers and nimbly address requests for changes in service delivery is a distinct competitive advantage and a cornerstone of our brand.

 

 

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Established presence in all major onshore basins in both the U.S. and Canada

We operate in all major onshore basins in both the U.S. and Canada, including the Permian Basin, Marcellus and Utica Shales, Eagle Ford Shale, SCOOP / STACK Formation, Bakken Formation, Haynesville Formation and Western Canada Sedimentary Basin. We provide our services through strategically placed operating facilities located in-basin throughout North America. This local presence allows us to quickly respond to customer demands and operate efficiently. Additionally, through our extensive footprint, we are able to track and implement best practices around completion and production trends and technology across all divisions and geography.

The following map demonstrates our geographic footprint.

 

 

LOGO

We believe that our strategic geographic positioning will benefit us as activity increases in our core operating areas. Our broad geographic footprint provides us with exposure to the ongoing recovery in drilling and completion activity and will allow us to opportunistically pursue new business in basins with the most active drilling environments.

 

 

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Returns-focused business model with high operational leverage

We are focused on generating attractive returns on capital for our stockholders. Our completion and production services require less equipment and fewer people than many other oilfield service lines. Unlike pressure pumping, the increase in oil and gas well completion intensity does not significantly impact our equipment. The rising level of completion intensity in our core operating areas contributes to improved margins and returns for us on a per job basis. This provides us significant operational leverage, and we believe positions us well to continue to generate attractive returns on capital as industry activity increases and the market for oilfield services improves. As part of our returns-focused approach to capital spending, we are focused on maintaining a capital efficient program with respect to the development of new products. We do not make large investments in R&D; instead we primarily rely on strategic partnerships with oilfield product development companies, who view us as an attractive distribution platform for their products. This allows us to benefit from new products and technologies while minimizing our R&D expenditures. We believe our return on invested capital (“ROIC”) generally exceeds that of many other oilfield service providers. For a definition of ROIC, which is a non-GAAP financial measure, see “—Summary financial data—Non-GAAP financial measures.”

Experienced and entrepreneurial management team and board of directors with a successful track record of executing growth and acquisition strategies

The members of our management team and board of directors have a blend of operating, financial and leadership experience in the industry, that we believe provides us with a competitive advantage. We have a deep management team, with experienced mid-level and field managers, many of whom previously started and managed smaller independent onshore oilfield services companies. Our management team has an average of over 20 years of experience in the oilfield service industry, and our field managers have expertise in the geological basins in which they operate and understand the regional challenges that our customers face. We believe this experience provides our management team with an in-depth understanding of our customers’ needs, which enhances our ability to deliver innovative, customer-driven solutions throughout varying industry cycles, which in turn strengthens our relationships with our customers. Many members of our senior management team are entrepreneurs and company founders who joined our company and remain major stockholders, and over 80% of company founders who joined our company continue to be a part of our company today. This is an important part of our growth-focused corporate culture. We focus on partnering with the right management teams and companies, which has enabled us to identify and acquire high-quality businesses with a similar culture to us and synergistically integrate them into our existing operation. Nine has completed four acquisitions as well as the Combination with Beckman. We believe this significant experience in identifying and closing acquisitions will help us identify additional attractive acquisition opportunities in the future. In addition, we believe that our extensive industry contacts and those of SCF Partners, L.P. (“SCF Partners”), our equity sponsor, will facilitate the identification of acquisition opportunities. See “—Our equity sponsor” for information regarding SCF Partners.

Balance sheet flexibility to selectively pursue accretive growth avenues

On a pro forma basis giving effect to (i) the entry into a new term loan and revolving credit facility (our “new credit facility”) and (ii) this offering and the use of a portion of the net proceeds therefrom, together with term loan borrowings under our new credit facility, to fully repay all outstanding borrowings under the Existing Nine Credit Facility and the Existing Beckman Credit Facility, as defined and described in “Management’s discussion and analysis of financial condition and results of operations—Our credit facilities,” as of September 30, 2017, we would have had $52.7 million of cash on hand, $125 million in term loan borrowings and $50 million of undrawn revolver

 

 

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capacity under our new credit facility, providing us with the flexibility to pursue opportunities to grow our business. See “—Recent Developments—Our new credit facility” for information regarding our new credit facility, under which we expect to make term loan borrowings concurrently with, and conditioned upon, the consummation of this offering. Given our broad geographic and services footprint and strong reputation in the industry, we believe that we will have significant optionality to grow in existing service areas or expand into new areas as demanded by our customers.

Our business strategies

Our company strategy is very focused on returns on invested capital achieved through serving our customers’ needs to help maximize production and drive cost efficiencies through a unique combination of technology and service. We expect to achieve this through the following strategies:

Continue to innovate and enhance our technology-driven offerings

We intend to continue to invest and develop new technologies, techniques and equipment to provide our customers with continuously innovating services and the tools of tomorrow needed to efficiently complete and produce the most complex wells. The growth of unconventional oil and gas resources drives the need for new technologies, completion techniques and equipment to increase recovery rates, lower production costs and accelerate field development. Our customers operate in an extremely competitive environment, and they demand technology-driven service and innovative tools suitable for the most modern completion and production techniques. We have instilled in our employees a culture of innovation and open communication with both our customers and management to be the first responders to our customers’ need for the next innovation or tool. We will continue to listen and learn from operators and experts in the field to facilitate a fast and informative feedback loop that allows us to stay ahead of customers’ needs and share industry best practices across basins. With this real-time information, we seek strategic partnerships and accretive acquisitions with companies and innovators that specialize in developing new production equipment and technologies. We believe that our real-time access to information and focus on technology-driven innovation and efficiency will continue to differentiate us from our competitors and will drive our success with customers that demand a technologically focused and tailored approach.

Continue to focus on service quality and flawless wellsite execution

A successful completion requires both the implementation of a variety of technologies and the commitment to wellsite execution. As well complexities continue to increase, service quality becomes a key criteria used by operators in selecting their oilfield service providers. An E&P operator’s downhole risks and operating costs increase as the complexity and lateral lengths of wells increase. Our customers demand high quality service with fast and nimble responses. We seek to meet this demand by developing our employees through extensive classroom and on the job training, as well as health, safety and environmental (“HSE”) and the U.S. Department of Transportation (the “DOT”) training programs. This also enables us to have a flatter organization and empower employees throughout all levels of the company. Our employees’ extensive knowledge and training allows for more autonomy in the field, ultimately reducing response time and establishing trust with our customers. We continue to develop and implement comprehensive metrics and company standards while allowing our regional leadership to operate autonomously in accordance with those standards. We believe this nimble, customer-focused approach to service will allow us to increase efficiencies for our customers and drive success for our company.

 

 

 

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Continue to capitalize on efficiencies being demanded by our customer base

Our customers are increasingly focused on driving efficiencies in drilling and completion techniques of unconventional wells. This focus has led to an increase in the adoption of pad drilling, zipper fracs and other techniques intended to reduce the time and cost inherent in drilling and completing wells. We believe that we are well-positioned to benefit from these efficiencies, which allow us to complete a greater number of jobs (such as stages, plugs or drillouts) with fewer workers and minimal capital maintenance and equipment, ultimately generating additional revenue and better margins. Prior to the adoption of longer laterals, more stages and pad drilling, the completion of 100 stages would require approximately ten wireline, coil or workover units (one unit per well). The increase in operating efficiencies of our E&P customers produced by developments in horizontal drilling have produced efficiencies in our operations. For example, operators in the current environment are completing 100 stages at a single pad, allowing us to send one unit and two crews to location. We now require less people and equipment to generate the same stage counts or drillouts. In 2014, we averaged approximately 5.5 stages per employee per month compared to approximately 7.1 stages per employee per month in 2016 and approximately 7.3 stages per employee per month throughout the first nine months of 2017. Additionally, we completed approximately 27 stages per well in 2014, 28 stages per well in 2015, 40 stages per well in 2016 and 48 stages per well throughout the first nine months of 2017. We have and will continue to be aligned to our customers’ efficiencies, which drive down our costs and increase our utilization.

Leverage our strategic footprint to pilot new technologies and share best practices

Our strategy includes leveraging our broad geographic and services footprint, customer network and strong reputation in the industry to serve as a channel to market for new and innovative technology and communicate best practices internally and to our customers. Having a local presence within each basin allows us to provide more responsive customer service, as well as significant exposure to every type of completion methodology and technology across North America. This expertise and knowledge is quickly shared across the company allowing us to inform customers, modify techniques and introduce new technology across all basins. For example, we have successfully leveraged our Canadian team that has helped introduce new technologies across the company, including a new coated wireline recently deployed in the SCOOP / STACK formation and the Permian Basin. We will continue to bring innovative best practices to our customers and alter completion applications to help customers maximize production. With a broad geographic footprint, we are also the ideal service provider for manufacturing, engineering and independent innovators looking for a reliable channel to market for new technology. We provide exposure to a large customer base across all major North American basins coupled with a high quality sales team with the ability to capture market share and promote new products in every onshore basin in North America. We will continue to establish regional locations to maintain high quality customer service, implement best practices and seek strategic partnerships.

Grow our product and service offerings through internal development, strategic partnerships and accretive acquisitions

We anticipate demand for our services to increase over the medium- and long-term throughout all onshore basins in North America. We plan to drive growth both organically and through strategic partnerships and accretive acquisitions. Our organic growth strategies, which focus on continuing to provide customers with exceptional service and a comprehensive array of technology-based solutions, give us a cost effective way of growing our revenue base by leveraging our existing infrastructure and customer network. Our organic growth initiatives target areas that are expected to provide the highest economic return while taking into consideration strategic

 

 

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goals, such as growing or maintaining our key customer relationships. To complement our organic growth, we intend to continue to enter into strategic partnerships, including with technology-focused companies to enhance our ability to provide technologically-advanced solutions at a comparatively lower cost. We also intend to continue to actively pursue targeted, accretive acquisitions that will enhance our portfolio of products and services, market positioning or geographic presence. We seek potential acquisition targets with cultures compatible with our recognized service quality and forward-looking company culture. While we operate in all major onshore basins in both the U.S. and Canada, we do not currently offer all of our services in each of these basins. We plan to efficiently leverage our existing infrastructure in select basins to grow the breadth of our service offerings. We believe this will provide us with a cost-effective way to offer additional, complementary services to existing customers, thereby offering them a more comprehensive service offering and allowing us to respond more quickly to their needs and enhancing our revenue generation potential.

Maintain a strong balance sheet to preserve operational and strategic flexibility

We intend to maintain a conservative approach to managing our balance sheet, which allows us to better react to changes in commodity prices and related demand for our services as well as overall market conditions. We carefully manage our liquidity and debt position through monitoring our cash flows and spending levels. We intend to use a portion of the proceeds from this offering and term loan borrowings under our new credit facility to repay all outstanding borrowings under the Existing Nine Credit Facility and the Existing Beckman Credit Facility. We also intend to improve our liquidity with availability under our new credit facility. On a pro forma basis giving effect to (i) the entry into our new credit facility and (ii) this offering and the use of a portion of the net proceeds therefrom, together with term loan borrowings under our new credit facility, to fully repay all outstanding borrowings under the Existing Nine Credit Facility and the Existing Beckman Credit Facility, as of September 30, 2017, we would have had $52.7 million of cash on hand, $125 million in term loan borrowings and $50 million of undrawn revolver capacity under our new credit facility, providing us with the flexibility to pursue opportunities to grow our business.

Recent developments

July 2017 Subscription Offer

On July 25, 2017, we provided notice to all existing holders of the Company’s common stock that we were offering for sale up to approximately $20 million of the Company’s common stock to those stockholders who were accredited investors (the “July 2017 Subscription Offer”). We closed the July 2017 Subscription Offer on August 23, 2017. We received consent from all the lenders under the Existing Nine Credit Facility for the cash proceeds from the July 2017 Subscription Offer to be deposited in a segregated account that does not constitute collateral for the indebtedness thereunder.

Our new credit facility

We have received commitments from a syndicate of commercial banks to provide a new credit facility with JPMorgan Chase Bank, N.A. as administrative agent, consisting of $125 million of term loans and $50 million of revolving credit commitments, which will be secured by first priority security interests (subject to permitted liens) in substantially all of our, and our domestic restricted subsidiaries’, personal property. Upon consummation of this offering, we expect to borrow $125 million of term loans and to have $50 million of undrawn revolver capacity under our new credit facility. Our new credit facility is scheduled to mature two and a half years from the initial date on which we borrow loans thereunder.

 

 

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Preliminary Estimate of Selected Fourth Quarter 2017 Financial Results

Although our results of operations as of and for the three months ended December 31, 2017 are not yet final, based on the information and data currently available, we estimate, on a preliminary basis, that revenue will be within a range of $150.0 million to $152.0 million for the three months ended December 31, 2017, as compared to $80.0 million for the same period in 2016. This increase is primarily attributable to a significant increase in activity and increased pricing in response to industry conditions.

Based on currently available information, we also estimate that our net loss will be within a range of $1.7 million to $3.5 million for the three months ended December 31, 2017, as compared to a net loss of $25.8 million for the same period in 2016. The change is primarily attributable to the increase in revenue resulting from increased activity and pricing. Net losses for the three months ended September 30, 2017 and December 31, 2017 include accruals of $3.6 million and $2.7 million, respectively, for annual cash bonuses, which collectively represent 100% of the bonus accruals for 2017.

In addition, we estimate that Adjusted EBITDA will be within a range of $15.3 million to $16.2 million for the three months ended December 31, 2017, as compared to $5.2 million for the same period in 2016. This increase is primarily attributable to the increase in revenue.

Fourth quarter financial results are often lower than third quarter financial results due to the effects of seasonality with weather and holidays.

Adjusted EBITDA is a non-GAAP financial measure. For a definition of Adjusted EBITDA, see “—Summary financial data—Non-GAAP financial measures” below. The following table presents a reconciliation of the non-GAAP financial measures of EBITDA and Adjusted EBITDA to the GAAP financial measure of net loss for the three months ended December 31, 2017 (estimated) and 2016 (actual):

 

      Quarter ended December 31,  
     2017     2016  
(in thousands)    Low     High     Actual  
     (unaudited)  

Net Loss

   $ (3,520   $ (1,650   $ (25,752

Interest expense

     4,100       3,850       3,504  

Depreciation

     13,100       13,030       13,481  

Amortization

     2,220       2,120       2,289  

Provision (benefit) from income taxes

     (4,400     (4,300     (7,269
  

 

 

   

 

 

   

 

 

 

EBITDA

   $ 11,500     $ 13,050     $ (13,747

Impairment of goodwill and other intangible assets

     100       —         12,207  

Transaction expenses

     100       50       —    

Loss or gains from the revaluation of contingent liabilities

     250       150       1,735  

Loss on equity investment

     250       150       —    

Non-cash stock-based compensation expense

     2,600       2,470       1,397  

Loss or gains on sale of assets

     200       100       900  

Legal fees and settlements

     220       190       2,624  

Inventory writedown

     100       —         —    

Restructuring costs

     —         —         104  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 15,320     $ 16,160     $ 5,220  

 

  

 

 

   

 

 

   

 

 

 

 

 

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We have prepared these estimates on a materially consistent basis with the financial information presented elsewhere in this prospectus and in good faith based upon our internal reporting as of and for the three months ended December 31, 2017. These estimated ranges are preliminary and unaudited and are thus inherently uncertain and subject to change as we complete our financial results for the three months ended December 31, 2017. We are in the process of completing our customary quarterly close and review procedures as of and for the three months ended December 31, 2017, and there can be no assurance that our final results for this period will not differ from these estimates. During the course of the preparation of our consolidated financial statements and related notes as of and for the three months ended December 31, 2017, we may identify items that could cause our final reported results to be materially different from the preliminary financial estimates presented herein. Important factors that could cause actual results to differ from our preliminary estimates are set forth under the headings “Risk factors” and “Cautionary note regarding forward-looking statements.”

These estimates should not be viewed as a substitute for full interim financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In addition, these preliminary estimates for the three months ended December 31, 2017 are not necessarily indicative of the results to be achieved for any future period. Our consolidated financial statements and related notes as of and for the three months ended December 31, 2017 are not expected to be filed with the SEC until after this offering is completed. The preliminary estimates have been prepared by and are the responsibility of management. In addition, the preliminary financial results presented above have not been audited, reviewed, or compiled by our independent registered public accounting firm. Accordingly, our independent registered public accounting firm does not express an opinion or any other form of assurance with respect thereto and assumes no responsibility for, and disclaims any association with, this information.

Risk factors

Investing in our common stock involves risks. You should read carefully the section of this prospectus entitled “Risk factors” for an explanation of these risks before investing in our common stock. In particular, the following considerations may offset our competitive strengths or have a negative effect on our strategy or operating activities, which could cause a decrease in the price of our common stock and result in a loss of all or a portion of your investment:

 

 

Our business is cyclical and depends on capital spending and well completions by the onshore oil and natural gas industry in North America, and the level of such activity is volatile. Our business has been, and may continue to be, adversely affected by industry and financial market conditions that are beyond our control.

 

 

A decline in oil and natural gas commodity prices may adversely affect the demand for our services and the rates we are able to charge.

 

 

We may be unable to employ, or maintain the employment of, a sufficient number of key employees, technical personnel and other skilled and qualified workers.

 

 

We may be unable to implement price increases or maintain existing prices on our services.

 

 

Our operations are subject to conditions inherent in the oilfield services industry.

 

 

Restrictions in our debt agreements could limit our growth and our ability to engage in certain activities.

 

 

Our current and potential competitors may have longer operating histories, significantly greater financial or technical resources and greater name recognition than we do.

 

 

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Our success may be affected by our ability to implement new technologies and services.

 

 

Our success may be affected by the use and protection of our proprietary technology as well as our ability to enter into license agreements. There are limitations to our intellectual property rights and, thus, our right to exclude others from the use of such proprietary technology.

 

 

The growth of our business through acquisitions may expose us to various risks, including those relating to difficulties in identifying suitable, accretive acquisition opportunities and integrating businesses, assets and personnel, as well as difficulties in obtaining financing for targeted acquisitions and the potential for increased leverage or debt service requirements.

 

 

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.

 

 

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 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.

 

 

SCF controls a significant percentage of our voting power.

 

 

SCF and its affiliates are not limited in their ability to compete with us, and the corporate opportunity provisions in our charter could enable SCF to benefit from corporate opportunities that may otherwise be available to us.

Our equity sponsor

We have a valuable relationship with SCF Partners, which has made significant equity investments in us since our formation. At an institutional level, SCF Partners has specialized in investments in the oilfield services sector since it was founded in 1989, and has been instrumental in working with our management team to develop and execute our business strategies. SCF Partners is focused exclusively on oilfield services companies and has supported the development of 15 leading public companies in the sector, including National Oilwell Varco (NYSE: NOV), Oil States International (NYSE: OIS), Complete Production Services (merged into Superior Energy Services) (NYSE: CPX/SPN) and Forum Energy Technologies (NYSE: FET). We believe we will benefit from SCF Partners’ investment experience in the oilfield services sector, its expertise in mergers and acquisitions and its support on various near-term and long-term strategic initiatives.

Upon completion of this offering, SCF will own approximately 39% of our common stock (or 37% of our common stock if the underwriters exercise in full their option to purchase additional shares of common stock) and will therefore be able to strongly influence all matters that require approval by our stockholders, including the election and removal of directors, changes to our organizational documents and approval of acquisition offers and other significant corporate transactions. SCF’s interests may not coincide with the interests of other holders of our common stock. Additionally, SCF Partners is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. We have renounced any interest in specified business opportunities, and SCF and its director nominees on our board of directors generally have no obligation to offer us those opportunities. L.E. Simmons & Associates,

 

 

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Incorporated, a Delaware corporation (“LESA”), SCF Partners’ ultimate general partner, may allocate any potential opportunities to its other portfolio companies where LESA determines, in its discretion, such opportunities are the most logical strategic and operational fit. See “Risk factors—Risks related to this offering and owning our common stock—SCF and its affiliates are not limited in their ability to compete with us, and the corporate opportunity provisions in our charter could enable SCF to benefit from corporate opportunities that may otherwise be available to us.”

Our history and the Combination

We were formed on February 28, 2013 through a combination of three service companies owned by SCF, the first of which was acquired in March 2011. Our foundation consisted of an entrepreneurial team with proven industry expertise and technological solutions for well completions, which we have continued to build upon organically and through acquisitions. We subsequently acquired Peak Pressure Control in August 2013, Dak-Tana Wireline in April 2014, Crest Pumping Technologies in June 2014 and G8 Oil Tool and its intellectual property related to its Scorpion frac plug in September 2015. These acquisitions provided us additional size, scale, product and service diversity and capabilities as well as an expanded geographic footprint. We have focused on the integration of these companies to create one united brand, culture and vision, while combining their expertise to develop customized completion solutions to the market.

On February 28, 2017, we merged with Beckman, a growth-oriented oilfield services company that provides a wide range of well service and coiled tubing services. Pursuant to the Combination, all of the issued and outstanding shares of Beckman common stock were converted into shares of our common stock, other than 1.6% of Beckman shares paid in cash. Prior to the Combination, Beckman was also an SCF Partners portfolio company since July 2012. A key strategic rationale for the Combination was to enhance our ability to serve customers and our growth potential through broader product lines and basin diversification, enabling us to cross-sell our products and compete with larger companies. For more information on the Combination, see “Certain relationships and related party transactions—The Combination.”

In connection with the Combination, we collectively issued 769,162 shares of our common stock and 79,890 warrants to purchase additional shares of our common stock in connection with the Nine and Combined Nine Subscription Offers and subsequent conversion of Beckman shares and warrants issued in connection with the Beckman Subscription Offer, each as defined and described in “Certain relationships and related party transactions—Subscription and warrants agreements.” The warrants held by our existing shareholders were called by us on July 25, 2017, and 297 warrants were exercised for proceeds of $74,330. All warrants that were not exercised by August 23, 2017 expired and are deemed cancelled.

Emerging growth company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as we are an emerging growth company, unlike public companies that are not emerging growth companies under the JOBS Act, we will not be required to:

 

 

provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);

 

 

provide more than two years of audited financial statements and related management’s discussion and analysis of financial condition and results of operations;

 

 

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comply with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

 

provide certain disclosures regarding executive compensation required of larger public companies or hold stockholder advisory votes on executive compensation required by the Dodd-Frank Wall Street Reform and Consumer Protection Act; or

 

 

obtain stockholder approval of any golden parachute payments not previously approved.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for adopting new or revised financial accounting standards. We intend to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until we are no longer an emerging growth company. Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. See ‘‘Risk factors—Risk related to this offering and owning our common stock—Taking advantage of the reduced disclosure requirements applicable to ‘emerging growth companies’ may make our common stock less attractive to investors.” If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

We will cease to be an emerging growth company upon the earliest of:

 

 

the last day of the fiscal year in which we have $1.07 billion or more in annual revenues;

 

 

the date on which we become a “large accelerated filer” (the fiscal year-end on which the total market value of our common equity securities held by non-affiliates is $700 million or more as of June 30);

 

 

the date on which we issue more than $1.0 billion of non-convertible debt securities over a three-year period; or

 

 

the last day of the fiscal year following the fifth anniversary of our initial public offering.

Corporate information

Our principal executive offices are located at 16945 Northchase Drive, Suite 1600, Houston, TX 77060, and our telephone number at that address is (281) 730-5100. Our website is available at www.nineenergyservice.com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (the “SEC”), available free of charge through our website as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference herein and does not constitute a part of this prospectus.

 

 

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The offering

 

Issuer

Nine Energy Service, Inc.

 

Common stock offered by us

7,000,000 shares (or 8,050,000 shares if the underwriters exercise in full their option to purchase additional shares of common stock).

 

Common stock outstanding after this offering(1)

23,300,596 shares (or 24,350,596 shares if the underwriters exercise in full their option to purchase additional shares of common stock).

 

Underwriters’ option to purchase additional shares

We have granted the underwriters an option for a period of 30 days to purchase up to an aggregate of 1,050,000 additional shares of our common stock.

 

Use of proceeds

We will receive net proceeds from this offering of approximately $138.3 million, assuming an initial public offering price of $21.50 per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated expenses and underwriting discounts and commissions payable by us. Each $1.00 increase (decrease) in the public offering price would increase (decrease) our net proceeds by approximately $6.6 million. See “Use of proceeds.”

 

  We intend to use a portion of the net proceeds from this offering, together with $125 million of term loan borrowings under our new credit facility, to fully repay the outstanding borrowings under the Existing Nine Credit Facility and the Existing Beckman Credit Facility and the remainder for general corporate purposes. As of September 30, 2017, we had $119.8 million and $121.0 million of outstanding borrowings under the Existing Nine Credit Facility and the Existing Beckman Credit Facility, respectively. See “Use of proceeds.”

 

  Affiliates of several of the underwriters are lenders under the Existing Nine Credit Facility or the Existing Beckman Credit Facility and, accordingly, will receive a portion of the net proceeds from this offering. See “Use of proceeds” and “Underwriting (conflicts of interest).”

 

Dividend policy

We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. In addition, our new credit facility will place restrictions on our ability to pay cash dividends.

 

Directed share program

The underwriters have reserved for sale at the initial public offering price up to 5% of the common stock being offered by this prospectus for sale to our employees, executive officers, directors and director nominees who have expressed an interest in purchasing common stock in this offering. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Please read “Underwriting (conflicts of interest).”

 

 

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Risk factors

You should carefully read and consider the information set forth under the heading “Risk factors” beginning on page 26 of this prospectus and all other information set forth in this prospectus before deciding to invest in our common stock.

 

Listing and trading symbol

We have been approved, subject to official notice of issuance, to list our common stock on the NYSE under the symbol “NINE.”

 

Conflicts of interest

The net proceeds from this offering will be used to repay borrowings under the Existing Nine Credit Facility and the Existing Beckman Credit Facility. See “Use of proceeds.” Because an affiliate of Wells Fargo Securities, LLC is a lender under the Existing Nine Credit Facility and the Existing Beckman Credit Facility, and an affiliate of J.P. Morgan Securities LLC is a lender under the Existing Nine Credit Facility, and such affiliates may receive 5% or more of the net proceeds of this offering due to the repayment of borrowings thereunder, each of Wells Fargo Securities, LLC and J.P. Morgan Securities LLC may be deemed to have a “conflict of interest” under Rule 5121 of the Financial Industry Regulatory Authority, Inc. (“FINRA”), and as a result, this offering will be conducted under that rule. Pursuant to FINRA Rule 5121, a “qualified independent underwriter” meeting certain standards is required to participate in the preparation of the registration statement and prospectus and exercise the usual standards of due diligence with respect thereto. Goldman Sachs & Co. LLC has agreed to act as a “qualified independent underwriter” within the meaning of FINRA Rule 5121 in connection with this offering. Goldman Sachs & Co. LLC will not receive any additional fees for serving as qualified independent underwriter in connection with this offering. We have agreed to indemnify Goldman Sachs & Co. LLC against liabilities incurred in connection with acting as a qualified independent underwriter, including liabilities under the Securities Act. See “Underwriting (conflicts of interest).”

 

(1)   The number of shares of common stock that will be outstanding after this offering excludes (a) the shares of common stock reserved and available for issuance under the Nine Energy Service, Inc. 2011 Stock Incentive Plan as of December 20, 2017, which consists of 1,872,080 shares of common stock and 12% of the total shares of common stock issued by the Company in connection with this offering and (b) 1,206,811 shares of common stock issuable upon the exercise of options outstanding as of December 20, 2017 under the 2011 Stock Incentive Plan. The number of outstanding shares of common stock that will be outstanding after this offering includes 422,089 shares of restricted common stock issued to our directors, officers and other employees under our stock incentive plan that are subject to vesting.

 

 

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Summary financial data

The following table presents our summary financial data for the periods and as of the dates indicated. The financial data set forth below, as well as our audited combined financial statements and related notes thereto and our unaudited condensed consolidated financial statements and related notes thereto, each included elsewhere in this prospectus and, except as otherwise indicated, all financial data provided in this prospectus, give effect to the Combination and represent the combined results of Nine and Beckman and their respective subsidiaries.

The summary historical combined financial data as of and for the years ended December 31, 2015 and 2016 are derived from our audited historical combined financial statements and related notes thereto included elsewhere in this prospectus. The summary financial data for the nine months ended September 30, 2016 and 2017, and as of September 30, 2017, are derived from our unaudited historical condensed consolidated financial statements and related notes thereto included elsewhere in this prospectus and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the unaudited interim periods. The summary historical combined financial data as of and for the year ended December 31, 2014 are derived from our unaudited combined financial statements not included in this prospectus, which were derived from the audited financial statements of Nine as of and for the year ended December 31, 2014 and the audited financial statements of Beckman as of and for the year ended December 31, 2014, also not included in this prospectus. The 2014 unaudited combined data of Nine and Beckman was prepared on the same basis as the audited combined financial statements included in this prospectus. The selected historical condensed consolidated financial data for the three months ended March 31, 2017, June 30, 2017 and September 30, 2017 are derived from our unaudited historical condensed consolidated financial statements, not included in this prospectus.

Historical results are not necessarily indicative of our future results of operations, financial position and cash flows.

 

 

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The data presented below should be read in conjunction with, and are qualified in their entirety by reference to, “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations” and our combined historical financial statements and the notes thereto included elsewhere in this prospectus. Among other things, those historical financial statements and related notes thereto include more detailed information regarding the basis of presentation for the following information.

 

     Nine months ended
September 30,
    Year ended December 31,  
(in thousands, except share and per share
information)
  2017     2016     2016     2015     2014(1)  
    (unaudited)                 (unaudited)  

Statement of operations data:

         

Revenues

  $ 389,380     $ 202,368     $ 282,354     $ 478,522     $ 663,191  

Cost and expenses

         

Cost of revenues (exclusive of depreciation and amortization shown separately below)

    322,901       178,676       246,109       373,191       434,064  

General and administrative expenses

    37,628       26,194       39,387       42,862       51,321  

Depreciation

    40,326       41,779       55,260       58,894       40,173  

Impairment of goodwill

                12,207       35,540        

Amortization of intangibles

    6,601       6,794       9,083       8,650       6,389  

Loss on equity investment

    255                          

Loss on sale of property and equipment

    4,793       2,420       3,320       2,004       971  
 

 

 

 

Income (loss) from operations

    (23,124     (53,495     (83,012     (42,619     130,273  
 

 

 

 

Other expense

         

Interest expense

    11,780       10,681       14,185       9,886       9,586  
 

 

 

 

Total other expense

    11,780       10,681       14,185       9,886       9,586  
 

 

 

 

Income (loss) from continuing operations before income taxes

    (34,904     (64,176     (97,197     (52,505     120,687  

Provision (benefit) for income taxes

    2,967       (19,017     (26,286     (14,323     44,515  
 

 

 

 

Income (loss) from continuing operations (net of tax)

    (37,871     (45,159     (70,911     (38,182     76,172  

Loss from discontinued operations, net of tax ($0, $0, $0, $513 and $11,158)(2)

                      (935     (28,207
 

 

 

 

Net income (loss)

    (37,871     (45,159     (70,911     (39,117     47,965  
 

 

 

 

Other comprehensive income, net of tax

         

Foreign currency translation adjustments, net of tax of $0, $0, $0, $0 and $58

    (192     203       210       (4,067     181  
 

 

 

 

Total other comprehensive income (loss), net of tax

    (192     203       210       (4,067     181  
 

 

 

 

Total comprehensive income (loss)

  $ (38,063   $ (44,956   $ (70,701   $ (43,184   $ 48,146  
 

 

 

 

Historical earnings per share data(3):

         

Weighted average shares outstanding—basic

    1,805,816       1,651,240       1,653,277       1,643,912       1,374,510  

Income (loss) from continuing operations per share—basic

  $ (20.97   $ (27.35   $ (42.89   $ (23.23   $ 55.42  

Loss from discontinued operations per share—basic

  $     $     $     $ (0.57   $ (20.52

Net income (loss) per share-basic

  $ (20.97   $ (27.35   $ (42.89   $ (23.80   $ 34.90  

Weighted average shares outstanding—fully diluted

    1,805,816       1,651,240       1,653,277       1,643,912       1,597,866  

Income (loss) from continuing operations per share-fully diluted

  $ (20.97   $ (27.35   $ (42.89   $ (23.23   $ 47.67  

Loss from discontinued operations per share-fully diluted

  $     $     $     $ (0.57   $ (17.65

Net income (loss) per share—fully diluted

  $ (20.97   $ (27.35   $ (42.89   $ (23.80   $ 30.02  

Pro forma earnings per share data(4) (Unaudited):

         

Pro forma weighted average shares outstanding—basic and diluted

    21,492,757         20,268,540      

Pro forma loss per share—basic and diluted

  $ (1.76     $ (3.50    

 

   

 

 

 

 

 

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     Nine months ended
September 30,
    Year ended December 31,  
(in thousands)   2017     2016     2016     2015     2014(1)  
    (unaudited)                 (unaudited)  

Balance sheet data at period end:

         

Cash and cash equivalents

  $ 30,171       $ 4,074     $ 18,877     $ 24,236  

Property and equipment, net

    264,300         273,210       325,894       376,920  

Total assets

    628,382         576,094       658,434       869,933  

Debt

    240,840         245,888       252,378       379,658  

Total stockholders’ equity

    315,987         288,186       352,676       389,644  

 

   

 

 

 

Statement of cash flows data:

         

Net cash (used in) provided by operating activities

  $ 3,775       1,200     $ (3,290   $ 140,367     $ 127,188  

Net cash used in investing activities

    (29,816     (2,723     (4,176     (19,251     (456,955

Net cash (used in) provided by financing activities

    52,223       (10,852     (7,315     (126,878     335,813  

Other financial data:

         

EBITDA(5) (unaudited)

  $ 23,803     $ (4,922   $ (18,669   $ 23,990     $ 148,628  

Adjusted EBITDA(5) (unaudited)

    40,869       4,604       9,824       73,901       188,192  

ROIC(5) (unaudited)

    (6 )%      (9 )%      (11 )%      (5 )%      16%  

Adjusted gross profit (excluding depreciation and amortization)(5) (unaudited)

  $ 66,479     $ 23,692     $ 36,245     $ 105,331     $ 229,127  

 

   

 

 

 

 

(1)   We closed the acquisitions of Dak-Tana Wireline on April 30, 2014 and Crest Pumping Technologies on June 30, 2014 and Beckman closed the acquisitions of RedZone Coil Tubing on May 2, 2014 and Big Lake Services, LLC on August 29, 2014. As a result, financial results relating to each acquisition for periods prior to the close of each of the aforementioned acquisitions are not reflected in the full year 2014 results.

 

(2)   For 2014, represents a non-cash impairment charge related to the divestiture of certain assets of a subsidiary whose primary focus was conventional completions. See “Note 14—Discontinued Operations” to the financial statements included in this registration statement for additional detail regarding the Tripoint divestiture.

 

(3)   Historical share and per share information does not give effect to the approximately 8.0256 for 1 stock split of our issued and outstanding common stock effected immediately prior to the consummation of this offering.

 

(4)   Pro forma earnings per share data give effect to (i) the approximately 8.0256 for 1 stock split of our issued and outstanding common stock effected immediately prior to the consummation of this offering and (ii) the issuance by us of 7,000,000 shares of common stock pursuant to this offering, and the application of the net proceeds from this offering as set forth under “Use of proceeds,” assuming an initial public offering price of $21.50 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus). This pro forma earnings per share data is presented for informational purposes only and does not purport to represent what our pro forma net income (loss) or earnings (loss) per share actually would have been had the Stock Split occurred on January 1, 2016 or to project our net income or earnings per share for any future period.

 

(5)   EBITDA, Adjusted EBITDA, ROIC and adjusted gross profit (excluding depreciation and amortization) are non-GAAP financial measures. For definitions of these measures, a reconciliation of EBITDA and Adjusted EBITDA to our net income (loss), an explanation of our calculation of ROIC and a reconciliation of adjusted gross profit (excluding depreciation and amortization) to gross profit (loss), see “—Non-GAAP financial measures” below.

 

 

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      Three months ended  
     

September 30,
2017

   

June 30,

2017

   

March 31,

2017

 
           (unaudited)  

Statement of operations data:

      

Revenues

   $ 148,167     $ 135,860     $ 105,353  

Loss from operations

     (193     (8,141     (14,790

Net loss

     (5,052     (12,105     (20,714

Other financial data:

      

EBITDA(1) (unaudited)

     15,157       7,674       972  

Adjusted EBITDA(1) (unaudited)

     18,088       16,727       6,054  

ROIC(1) (unaudited)

     0     (6 )%      (13 )% 

Adjusted gross profit (excluding depreciation and amortization)(1) (unaudited)

   $ 28,258     $ 24,256     $ 13,965  

 

 

 

(1)   EBITDA, Adjusted EBITDA, ROIC and adjusted gross profit (excluding depreciation and amortization) are non-GAAP financial measures. For definitions of these measures, a reconciliation of EBITDA and Adjusted EBITDA to our net income (loss), an explanation of our calculation of ROIC and a reconciliation of adjusted gross profit (excluding depreciation and amortization) to gross profit (loss), see “—Non-GAAP financial measures” below.

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 combined financial statements, such as industry analysts, investors, lenders and rating agencies.

We define EBITDA as net income (loss) before interest expense, depreciation, amortization and income tax expense. EBITDA is not a measure of net income or cash flows as determined by GAAP.

We define Adjusted EBITDA as EBITDA further adjusted for (i) impairment of goodwill and other intangible assets, (ii) transaction expenses related to acquisitions or the Combination, (iii) loss from discontinued operations, (iv) loss or gains from the revaluation of contingent liabilities, (v) non-cash stock-based compensation expense, (vi) loss or gains on sale of assets, (vii) inventory writedown and (viii) adjustment for other expenses or charges, to exclude certain items which we believe are not reflective of ongoing performance of our business, such as costs related to this offering, legal expenses and settlement costs related to litigation outside the ordinary course of business, and restructuring costs.

Management believes EBITDA and Adjusted EBITDA are useful because they allow for a more effective evaluation of our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at these measures because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. These measures should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with 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

 

 

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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):

 

     Nine months ended
September 30,
    Three months
ended
    Year ended December 31,     Six months
ended
    Six months
ended
 

(in thousands)

(unaudited)

  2017     2016     September 30,
2017
    June 30,
2017
    March 31,
2017
    2016     2015     2014(1)     June 30,
2014(1)
    December 31,
2014(1)
 

EBITDA reconciliation:

                   

Net income
(loss)

  $ (37,871   $ (45,159   $ (5,052   $ (12,105   $ (20,714   $ (70,911   $ (39,117   $ 47,965     $ 27,059     $ 20,906  

Interest expense

    11,780       10,681       4,093       3,929       3,758       14,185       9,886       9,586       2,838       6,748  

Depreciation

    40,326       41,779       13,150       13,615       13,561       55,260       58,894       40,173       13,080       27,093  

Amortization

    6,601       6,794       2,200       2,200       2,201       9,083       8,650       6,389       2,056       4,333  

Provision (benefit) from income
taxes

    2,967       (19,017     766       35       2,166       (26,286     (14,323     44,515       16,957       27,558  
 

 

 

   

 

 

 

EBITDA

  $ 23,803     $ (4,922   $ 15,157     $ 7,674     $ 972     $ (18,669   $ 23,990     $ 148,628     $ 61,990     $ 86,638  
 

 

 

   

 

 

 

Adjusted EBITDA reconciliation:

                   

EBITDA

  $ 23,803     $ (4,922   $ 15,157     $ 7,674     $ 972     $ (18,669   $ 23,990     $ 148,628     $ 61,990     $ 86,638  

Impairment of goodwill and other intangible assets

                                  12,207       35,540                    

Transaction
expenses

    3,415             50       370       2,995             208       3,911       2,817       1,094  

Loss from discontinued operations(2)

                                        935       28,207       1,963       26,244  

Loss or gains from the revaluation of contingent liabilities(3)

    421             277       57       87       1,735       (293                  

Loss on equity investment

    255             83       172                                      

Non-cash stock-based compensation expense

    6,380       4,314       2,185       2,659       1,536       5,711       5,473       5,445       1,947       3,498  

Loss or gains on sale of assets

    4,793       2,420       148       4,421       224       3,320       2,004       971       46       925  

Legal fees and settlements(4)

    778       1,521       188       350    

 

240

 

    4,145                          

Inventory writedown

    1,024       287             1,024             287       2,772       1,030             1,030  

Restructuring costs

          984                         1,088       3,272                    
 

 

 

   

 

 

 

Adjusted EBITDA

  $ 40,869     $ 4,604     $ 18,088     $ 16,727     $ 6,054     $ 9,824     $ 73,901     $ 188,192     $ 68,763     $ 119,429  

 

   

 

 

 

 

(1)  

We closed the acquisitions of Crest Pumping Technologies on June 30, 2014 and Dak-Tana Wireline on April 30, 2014 and Beckman closed the acquisitions of RedZone Coil Tubing on May 2, 2014 and Big Lake Services, LLC on August 29, 2014. As a result, financial results relating to each acquisition for periods prior to the close of each of the aforementioned acquisitions are not reflected in the full year 2014 results. We believe that presenting investors with the selected information for the six months ended December 31, 2014 provides a representative period of the

 

 

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profitability of our business in a high demand environment, including six months of results from the acquisitions of Dak-Tana Wireline, Crest Pumping Technologies and RedZone Coil Tubing and the results of the acquisition of Big Lake Services, LLC from August 29, 2014 through December 31, 2014. For comparative purposes, we have also included such information for the six months ended June 30, 2014.

 

(2)   For 2014, represents a non-cash impairment charge related to the divestiture of certain assets of a subsidiary whose primary focus was conventional completions. See “Note 14—Discontinued Operations” to the financial statements included in this registration statement for additional detail regarding the Tripoint divestiture.

 

(3)   Loss or gain related to the revaluation of liability for contingent consideration relating to our acquisition of Scorpion to be paid in shares of Company common stock and in cash, contingent upon quantities of Scorpion Composite Plugs sold during 2016 and gross margin related to the product sales for three years following the acquisition.

 

(4)   Amount represents fees and legal settlements 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, divided by average total capital. We define after-tax net operating profit as income (loss) from continuing operations (net of tax) plus interest expense, less taxes on interest. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We then take the average of the current and prior year-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.

 

 

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The following table provides an explanation of our calculation of ROIC:

 

    

Nine months ended

September 30,

   

Three months ended

   

Year ended December 31,

 
(in thousands)   2017     2016     September 30,
2017
    June 30,
2017
    March 31,
2017
    2016     2015     2014  

Income (loss) from continuing operations (net of tax)

  $ (37,871   $ (45,159   $ (5,052   $ (12,105   $ (20,714   $ (70,911   $ (38,182   $ 76,172  

Add back:

               

Interest expense

    11,780       10,681       4,093       3,929       3,758       14,185       9,886       9,586  

Taxes on interest

    1,001       (3,165     448       283       270       (3,836     (2,697     (3,536
 

 

 

   

 

 

 

After-tax net operating profit

  $ (25,090   $ (37,643   $ (511   $ (7,893   $ (16,686   $ (60,562   $ (30,993)     $ 82,222  
 

 

 

   

 

 

 

Total capital as of prior year-end(1):

               

Total stockholders’ equity

  $ 288,186     $ 352,676     $ 288,186     $ 288,186     $ 288,186     $ 352,676     $ 389,644     $ 192,522  

Total debt

    245,888       252,378       245,888       245,888       245,888       252,378       379,658       140,767  

Less: Cash and cash equivalents

    (4,074     (18,877     (4,074     (4,074     (4,074     (18,877     (24,236     (18,505
 

 

 

   

 

 

 

Total capital

  $ 530,000     $ 586,177     $ 530,000     $ 530,000     $ 530,000     $ 586,177     $ 745,066     $ 314,784  
 

 

 

   

 

 

 

Total capital as of year-end/quarter-end:

               

Total stockholders’ equity

  $ 315,987     $ 312,036     $ 315,987     $ 298,883     $ 308,409     $ 288,186     $ 352,676     $ 389,644  

Total debt

    240,840       242,535       240,840       256,072       251,473       245,888       252,378       379,658  

Less: Cash and cash equivalents

    (30,171     (6,542     (30,171     (12,127     (27,039     (4,074     (18,877     (24,236
 

 

 

   

 

 

 

Total capital

  $ 526,656     $ 548,029     $ 526,656     $ 542,828     $ 532,843     $ 530,000     $ 586,177     $ 745,066  
 

 

 

   

 

 

 

Average total capital

  $ 528,328     $ 567,103     $ 528,328     $ 536,414     $ 531,422     $ 558,089     $ 665,622     $ 529,925  
 

 

 

   

 

 

 

ROIC

    (6)%       (9)%       0%       (6)%       (13)%       (11)%       (5)%       16%  

 

   

 

 

 
(1)   For 2014, total capital as of prior year-end is based on Beckman and Nine combined unaudited historical financial information not included in this prospectus.

Adjusted gross profit (excluding depreciation and amortization)

GAAP defines gross profit as revenues less cost of revenues, and includes in costs of revenues depreciation and amortization. We define adjusted gross profit (excluding depreciation and amortization) as revenues less cost of revenues (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit because we do not include the impact of depreciation and amortization, which represent non-cash expenses.

Management uses adjusted gross profit (excluding depreciation and amortization) to evaluate operating performance and to determine resource allocation between segments. We prepare adjusted gross profit (excluding depreciation and amortization) 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 (excluding depreciation and amortization) 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 (excluding depreciation and amortization) may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted gross profit (excluding depreciation and amortization) or similarly titled measures in the same manner as we do.

 

 

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The following table presents a reconciliation of adjusted gross profit (excluding depreciation and amortization) to GAAP gross profit (loss).

 

     Nine months ended
September 30,
    Three months ended     Year ended December 31,  
(in thousands)  

2017

   

2016

    September 30,
2017
   

June 30,

2017

   

March 31,

2017

    2016     2015     2014(1)  

Calculation of gross profit (loss):

               

Revenues

  $ 389,380     $ 202,368     $ 148,167     $ 135,860     $ 105,353     $ 282,354     $ 478,522     $ 663,191  

Cost of revenue (exclusive of depreciation and amortization)

    322,901       178,676       119,909       111,604       91,388       246,109       373,191       434,064  

Depreciation (related to cost of revenues)

    39,658       41,091       12,927       13,397       13,334       54,344       58,042       39,719  

Amortization

    6,601       6,794       2,200       2,200       2,201       9,083       8,650       6,389  
 

 

 

   

 

 

 

Gross (loss) profit

  $ 20,220     $ (24,193   $ 13,131     $ 8,659     $ (1,570   $ (27,182   $ 38,639     $ 183,019  
 

 

 

   

 

 

 

Adjusted gross profit (excluding depreciation and amortization) reconciliation:

               

Gross (loss) profit

  $ 20,220     $ (24,193   $ 13,131     $ 8,659     $ (1,570   $ (27,182   $ 38,639     $ 183,019  

Depreciation (related to cost of revenues)

    39,658       41,091       12,927       13,397       13,334       54,344       58,042       39,719  

Amortization

    6,601       6,794       2,200       2,200       2,201       9,083       8,650       6,389  
 

 

 

   

 

 

 

Adjusted gross profit (excluding depreciation and amortization)

  $ 66,479     $ 23,692     $ 28,258     $ 24,256     $ 13,965     $ 36,245     $ 105,331     $ 229,127  

 

   

 

 

 

 

(1)   We closed the acquisitions of Crest Pumping Technologies on June 30, 2014 and Dak-Tana Wireline on April 30, 2014 and Beckman closed the acquisitions of RedZone Coil Tubing on May 2, 2014 and Big Lake Services, LLC on August 29, 2014. As a result, financial results relating to each acquisition for periods prior to the close of each of the aforementioned acquisitions are not reflected in the full year 2014 results.

 

 

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Risk factors

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with other information set forth in this prospectus before investing in shares of our common stock. If any of the following risks or uncertainties actually occur, our business, financial condition, prospects, results of operations and cash flow could be materially adversely affected. The risks discussed below are not the only risks we face. Additional risks or uncertainties not currently known to us, or that we currently deem immaterial, may also have a material adverse effect on our business, financial condition, prospects, results of operations or cash flows. We cannot assure you that any of the events discussed in the risk factors below will not occur. In that case, the market price of our common stock could decline and you may lose all or a part of your investment.

Risks related to our business and our industry

Our business is cyclical and depends on capital spending and well completions by the onshore oil and natural gas industry in North America, and the level of such activity is volatile. Our business has been, and may continue to be, adversely affected by industry and financial market conditions that are beyond our control.

Our business is cyclical, and we depend on our customers’ willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas in North America, which, in turn, largely depends on prevailing industry and financial market conditions that are influenced by numerous factors beyond our control, including:

 

 

the level of prices, and expectations about future prices, for oil and natural gas;

 

 

the domestic and foreign supply of, and demand for, oil and natural gas and related products;

 

 

the level of global and domestic oil and natural gas production;

 

 

the supply of and demand for hydraulic fracturing and other oilfield services and equipment in North America;

 

 

governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves;

 

 

the cost of exploring for, developing, producing and delivering oil and natural gas;

 

 

available pipeline, storage and other transportation capacity;

 

 

worldwide political, military and economic conditions;

 

 

lead times associated with acquiring equipment and products and availability of qualified personnel;

 

 

the discovery rates of new oil and natural gas reserves;

 

 

federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as E&P activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry;

 

 

economic and political conditions in oil and natural gas producing countries;

 

 

actions of the Organization of the Petroleum Exporting Countries, its members and other state-controlled oil companies relating to oil price and production levels, including announcements of potential changes to such levels;

 

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advances in exploration, development and production technologies or in technologies affecting energy consumption;

 

 

activities by non-governmental organizations to restrict the exploration, development and production of oil and natural gas so as to minimize emissions of carbon dioxide, a greenhouse gas;

 

 

the price and availability of alternative fuels and energy sources;

 

 

global weather conditions and natural disasters; and

 

 

uncertainty in capital and commodities markets and the ability of oil and natural gas producers to access capital.

A decline in oil and natural gas commodity prices may adversely affect the demand for our services and the rates we are able to charge.

The demand for our services and the rates we are able to charge are primarily influenced by current and anticipated oil and natural gas commodity prices and the related level of capital spending and drilling and completion activity in the areas in which we have operations. Volatility or weakness in oil and natural gas commodity prices (or the perception that oil and natural gas commodity prices will decrease) affects the spending patterns of our customers and may result in the drilling of fewer new wells or lower production spending on existing wells. The products and services we provide are, to a substantial extent, deferrable in the event oil and natural gas companies reduce capital expenditures. As a result, we may experience lower utilization of, and may be forced to lower our rates for, our equipment and services in weak oil and natural gas commodity price environments. For example, between the third quarter of 2014 and the first quarter of 2016, oil and natural gas commodity prices declined significantly, which resulted in most of our customers reducing their exploration, development and production activities, which in turn resulted in a reduction in the demand for our services, as well as the rates we were able to charge and the utilization of our assets, during this period as compared to levels in mid-2014. Reduced discovery rates of new oil and natural gas reserves in our market areas as a result of decreased capital spending may also have a negative long-term impact on our business, even in an environment of stronger oil and natural gas prices, to the extent the reduced number of wells for us to service more than offsets increasing completion activity and intensity.

Historically, oil and natural gas commodity prices have been extremely volatile. During the past six years, the posted price for West Texas Intermediate oil has ranged from a low of $26.19 per Bbl in February 2016 to a high of $113.39 per Bbl in April 2011, and the Henry Hub spot market price of gas has ranged from a low of $1.49 per MMBtu in March 2016 to a high of $7.51 per MMBtu in January 2010. Oil and natural gas commodity prices are expected to continue to be volatile. For example, in 2017, oil prices increased to a high of $60.46 in December 2017, following a low of $42.48 in June 2017. This environment could cause prices to remain at current levels or fall to lower levels. If the prices of oil and natural gas reverse their recent increases, our business, financial condition, results of operations, cash flows and prospects may be materially and adversely affected.

Our business could be adversely affected by a decline in general economic conditions or a weakening of the broader energy industry.

A prolonged economic slowdown or recession in North America, adverse events relating to the energy industry or regional, national and global economic conditions and factors, particularly a slowdown in the E&P industry, could negatively impact our operations and therefore adversely affect our results. The risks associated with our business are more acute during periods of economic slowdown or recession because such periods may be accompanied by decreased exploration and development spending by our customers, decreased demand for oil and natural gas and decreased prices for oil and natural gas.

 

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We may be unable to employ, or maintain the employment of, a sufficient number of key employees, technical personnel and other skilled and qualified workers.

The delivery of our services and products requires personnel with specialized skills and experience, including personnel who can perform physically demanding work. Our ability to be profitable and productive will depend upon our ability to employ and retain skilled workers. Workers may choose to pursue employment with our competitors or in fields that offer a more desirable work environment as a result of the volatility in the oilfield service industry and the demanding nature of our work. The right-sizing of our and our competitors’ labor force over the recent sustained period of commodity price declines, as well as a significant decrease in the wages paid by us or our competitors as a result of reduced industry demand, has resulted in a reduction of the available skilled labor force to service the energy industry, and there is no assurance that the availability of skilled labor will improve following a subsequent increase in demand for our services or an increase in wage rates. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired.

We may be unable to implement price increases or maintain existing prices on our services.

We periodically seek to increase the prices on our services to offset rising costs and to generate higher returns for our stockholders. However, we operate in a very competitive industry and as a result, we are not always successful in raising, or maintaining, our existing prices. Additionally, during periods of increased market demand, a significant amount of new service capacity, including new well service rigs, wireline units and coiled tubing units, may enter the market, which also puts pressure on the pricing of our services and limits our ability to increase prices.

Even when we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset such rising costs. In periods of high demand for oilfield services, a tighter labor market may result in higher labor costs. During such periods, our labor costs could increase at a greater rate than our ability to raise prices for our services. Also, we may not be able to successfully increase prices without adversely affecting our activity levels. The inability to maintain our pricing and to increase our pricing as costs increase could have a material adverse effect on our business, financial position, results of operations and cash flows.

Our operations are subject to conditions inherent in the oilfield services industry.

Conditions inherent in the oil and natural gas industry can cause personal injury or loss of life, disruption or suspension in operations, damage to geological formations, damage to facilities, substantial revenue loss, business interruption and damage to, or destruction of, property, equipment and the environment. Such risks may include, but are not limited to:

 

 

equipment defects;

 

 

liabilities arising from accidents or damage involving our fleet of trucks and other equipment;

 

 

explosions and uncontrollable flows of gas or well fluids;

 

 

unusual or unexpected geological formations or pressures and industrial accidents;

 

 

blowouts;

 

 

fires;

 

 

cratering;

 

 

loss of well control;

 

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collapse of the borehole; and

 

 

damaged or lost equipment.

Defects or other performance problems in the products that we sell or services that we offer could result in our customers seeking damages from us for losses associated with these defects or other performance problems. In addition, our completion and production services could become a source of spills or releases of fluids, including chemicals used during hydraulic fracturing activities, at the site where such services are performed, or could result in the discharge of such fluids into underground formations that were not targeted for fracturing or well completion activities, such as potable aquifers, or at third party properties. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could result in a variety of claims, losses and remedial obligations that could have an adverse effect on our business and results of operations. For example, on August 31, 2017, an incident occurred at a wellsite operated by Pioneer Natural Resources USA, Inc. (“Pioneer Natural Resources”) resulting in the death of an employee of one of our subsidiaries. The subsidiary is a defendant in a lawsuit related to this incident. The existence, frequency and severity of such incidents could affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our safety record as unacceptable or otherwise experience material defects in our products or performance problems, which could cause us to lose customers and substantial revenue, and any litigation or claims, even if fully indemnified or insured, could negatively affect our reputation with our customers and the public and make it more difficult for us to compete effectively or obtain adequate insurance in the future.

We have operated at a loss in the past, and there is no assurance of our profitability in the future.

Historically, we have experienced periods of low demand for our services and have incurred operating losses. In the future, we may not be able to reduce our costs, increase our revenues or reduce our debt service obligations sufficiently to achieve or maintain profitability and generate positive operating income. Under such circumstances, we may incur further operating losses and experience negative operating cash flow.

Restrictions in our debt agreements could limit our growth and our ability to engage in certain activities.

We expect to make term loan borrowings under our new credit facility concurrently with, and conditioned upon, the consummation of this offering. The operating and financial restrictions and covenants in our new credit facility and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our new credit facility will restrict or limit our ability to:

 

 

pay dividends and move cash;

 

 

grant liens;

 

 

incur additional indebtedness;

 

 

engage in a merger, consolidation or dissolution;

 

 

enter into transactions with affiliates;

 

 

sell or otherwise dispose of assets, businesses and operations;

 

 

materially alter the character of our business as conducted at the closing of this offering; and

 

 

make acquisitions and investments.

Furthermore, our new credit facility contains certain other operating covenants. Our ability to comply with the covenants and restrictions contained in our new credit facility, and, as of the end of each quarter, compliance with a leverage ratio, an asset coverage ratio and a fixed charge coverage ratio, may be affected by events beyond our

 

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control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. Any violation of the restrictions, covenants, or ratio tests in our new credit facility could result in an event of default, which may cause a significant portion of our indebtedness becoming immediately due and payable, and our lenders’ commitment to provide further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of our new credit facility or any new indebtedness could have similar or greater restrictions. For more information about our new credit facility, please read “Management’s discussion and analysis of financial condition and results of operations—Our credit facilities—Our new credit facility.”

The Existing Nine Credit Facility and the Existing Beckman Credit Facility also contain various affirmative and negative covenants, including certain financial covenants. For the period ended March 31, 2017, Nine was in breach of the minimum EBITDA covenant and the fixed charge coverage ratio contained in the Existing Nine Credit Facility. However, Nine has cured such breaches by using a portion of the available proceeds from the Nine and Combined Nine Subscription Offers. See “Management’s discussion and analysis of financial condition and results of operations-Our credit facilities” for more information regarding the Existing Nine Credit Facility and the Existing Beckman Credit Facility and the restrictions and covenants contained therein.

We may incur additional indebtedness or issue additional equity securities to execute our long-term growth strategy, which may reduce our profitability or result in significant dilution to our stockholders.

We may require additional capital in the future to develop and execute our long-term growth strategy. For the year ended December 31, 2016 and the nine months ended September 30, 2017, we incurred approximately $9.1 million and $30.0 million, respectively, in capital expenditures and our capital expenditure budget for 2017, excluding possible acquisitions, is expected to be $45.0 million, of which $30.0 million has been spent through September 30, 2017. We continually evaluate our capital expenditures, and the amount we ultimately spend will depend on a number of factors including expected industry activity levels and company initiatives. We believe the net proceeds from this offering and borrowings under our new credit facility, together with cash flows from operations, should be sufficient to fund our capital requirements for the next twelve months. If we incur additional indebtedness or issue additional equity securities, our profitability may be reduced and our stockholders may experience significant dilution.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under applicable debt instruments, which may not be successful.

Our ability to make scheduled payments on or to refinance our indebtedness obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. For example, as of September 30, 2017, we had $119.8 million of debt outstanding under the Existing Nine Credit Facility and $121.0 million of debt outstanding under the Existing Beckman Credit Facility. As of December 31, 2016, we had $120.6 million of debt outstanding under the Existing Nine Credit Facility that was then scheduled to mature on January 1, 2018, which is within twelve months of the date of the issuance of our audited financial statements and thereby resulted in a “going concern” paragraph being included in our independent registered public accounting firm’s audit report. Delivery of audited financial statements including a going concern qualification would result in an event of default under the Existing Nine Credit Facility absent an amendment or waiver. On March 23, 2017, we received the requisite waiver from the lenders under the Existing Nine Credit Facility with respect to this potential event of default. On August 2, 2017, we also entered into an amendment to the Existing Nine Credit Facility, which extended the maturity to May 31, 2018. We plan to repay the Existing Nine Credit Facility and the Existing Beckman Credit Facility in full with a

 

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portion of the proceeds from this offering and $125 million of term loan borrowings under our new credit facility. See “Use of proceeds.” However, our ability to satisfy our liquidity requirements following this offering will depend on our future operating performance, which is affected by prevailing economic and competitive conditions, the level of drilling and completions activities in the North American E&P industry, and financial, business and other factors, many of which are beyond our control.

If our cash flows and capital resources are insufficient to fund debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital or restructure or refinance indebtedness. Our ability to restructure or refinance indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of sufficient cash flows and capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet debt service and other obligations. We may not be able to consummate those dispositions, and the proceeds of any such disposition may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet scheduled debt service obligations.

Our current and potential competitors may have longer operating histories, significantly greater financial or technical resources and greater name recognition than we do.

The oilfield services industry is highly competitive and fragmented and includes several large companies that compete in many of the markets we serve, as well as numerous small companies that compete with us on a local basis. The oilfield services industry competes primarily on a regional basis, and the intensity of competition may vary significantly from region to region at any particular time. We believe the principal competitive factors in the market areas we serve include price, equipment quality, supply chains, balance sheet strength and financial condition, product and service quality, safety record, availability of crews and equipment and technical proficiency.

Many of our existing and potential competitors have substantially greater financial, technical, manufacturing and other resources than we do. The greater size of many of our competitors provides them with cost advantages as a result of their economies of scale and their ability to obtain volume discounts and purchase raw materials at lower prices. As a result, such competitors may have stronger bargaining power with their suppliers and have an advantage over us in pricing as well as securing a sufficient supply of raw materials during times of shortage. Many of our competitors also have better brand name recognition, stronger presence in more geographic markets, more established distribution networks, larger customer bases, more in-depth knowledge of the target markets, and the ability to provide a much broader array of services. Some of our competitors may also be able to devote greater resources to the research and development, promotion and sale of their products and better withstand the evolving industry standards and changes in market conditions as compared to us. Our operations may be adversely affected if our competitors introduce new products or services with better features, performance, prices or other characteristics than our products and services or expand into service areas where we operate. Our operations may also be adversely affected if our competitors are able to respond more quickly to new or emerging technologies and services and changes in customer requirements.

Competitive pressures could reduce our market share or require us to reduce the price of our services and products, particularly during industry downturns, either of which would harm our business and operating results. Significant increases in overall market capacity have also caused active price competition and led to

 

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lower pricing and utilization levels for our services and products. The competitive environment has intensified since the recent industry downturn that began in late 2014, which caused an oversupply of, and reduced demand for, oilfield services, and we have seen substantial reductions in the prices we can charge for our services. Any significant future increase in overall market capacity for completion and production services may adversely affect our business, financial condition and results of operations.

Fuel conservation measures may reduce oil and natural gas demand.

Fuel conservation measures, alternative fuel requirements and increasing consumer demand for alternatives to oil and natural gas could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas may have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects. Additionally, the increased competitiveness of alternative energy sources (such as wind, solar geothermal, tidal, fuel cells and biofuels) could reduce demand for hydrocarbons and therefore for our services, which would lead to a reduction in our revenues.

Our success may be affected by our ability to implement new technologies and services. Additionally, we rely on a limited number of manufacturers to produce the proprietary products used in the provision of our services, which exposes us to risks.

Our success may be affected by the ongoing development and implementation of new product designs, methods and improvements, and our ability to protect, obtain and maintain intellectual property assets related to these developments. If we are not able to obtain patent or other protection of our technology, it may not be economical for us to continue to develop systems, services and technologies to meet evolving industry requirements at prices acceptable to its customers. Further, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Although we take measures to ensure that we use advanced technologies, changes in technology or improvements in our competitors’ equipment could make our equipment less competitive or require significant capital investments to keep our equipment competitive.

We currently rely on a limited number of manufacturers for production of the proprietary products used in the provision of our services. Termination of the manufacturing relationship with any of these manufacturers could affect our ability to provide services to our customers. Though other alternate sources of supply for our proprietary products exist, we would need to establish relationships with new manufacturers, which could potentially involve significant expense and delay. Any protracted curtailment or interruptions of the supply of any of our key products, whether or not as a result or termination of our manufacturing relationships, could have a material adverse effect on our financial condition, business and results of operations.

Some of our competitors are large national and multinational companies that may be able to devote greater financial, technical, manufacturing and marketing resources to research and development of new systems, services and technologies and may have a larger number of manufacturers for their products or ability to manufacture their own products. As competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage if we are not able to develop and implement new technologies or products on a timely basis or at an acceptable cost. If we are unable to compete effectively given these risks, our business and results of operations could be affected.

Our success may be affected by the use and protection of our proprietary technology as well as our ability to enter into license agreements. There are limitations to our intellectual property rights and, thus, our right to exclude others from the use of such proprietary technology.

Our success may be affected by our development and implementation of new product designs and improvements and by our ability to protect, obtain and maintain intellectual property assets related to these developments. We rely on a combination of patents and trade secret laws to establish and protect this

 

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proprietary technology. We have received patents and have filed patent applications with respect to certain aspects of our technology, and we generally rely on patent protection with respect to our proprietary technology, as well as a combination of trade secrets and copyright law, employee and third-party non-disclosure agreements and other protective measures to protect intellectual property rights pertaining to our products and technologies. In addition, we are a party to and rely on several arrangements with third parties, which give us exclusive distribution rights to certain product offerings with desirable intellectual property assets, and we may enter into similar arrangements in the future. Such measures may not provide meaningful protection of our trade secrets, know-how or other intellectual property in the event of any unauthorized use, misappropriation or disclosure. We cannot assure you that competitors will not infringe upon, misappropriate, violate or challenge our intellectual property rights in the future. If we are not able to adequately protect or enforce our intellectual property rights, such intellectual property rights may not provide significant value to our business, results of operations or financial condition.

Moreover, our rights in our confidential information, trade secrets, and confidential know-how will not prevent third parties from independently developing similar technologies or duplicating such technologies. Publicly available information (e.g., information in issued patents, published patent applications and scientific literature) can be used by third parties to independently develop technology, and we cannot provide assurance that this independently developed technology will not be equivalent or superior to our proprietary technology. In addition, while we have patented some of our key technologies, we do not patent all of our proprietary technology, even when regarded as patentable. The process of seeking patent protection can be long and expensive. There can be no assurance that patents will be issued from currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. Further, with respect to exclusive third-party arrangements, these arrangements could be terminated, which would result in our inability to provide the services and/or products covered by such arrangements.

We may be adversely affected by disputes regarding intellectual property rights and the value of our intellectual property rights is uncertain.

We may become involved in dispute resolution proceedings from time to time to protect and enforce our intellectual property rights. In these dispute resolution proceedings, a defendant may assert that our intellectual property rights are invalid or unenforceable. Third parties from time to time may also initiate dispute resolution proceedings against us by asserting that our businesses infringe, impair, misappropriate, dilute or otherwise violate another party’s intellectual property rights. We may not prevail in any such dispute resolution proceedings, and our intellectual property rights may be found invalid or unenforceable or our products and services may be found to infringe, impair, misappropriate, dilute or otherwise violate the intellectual property rights of others. The results or costs of any such dispute resolution proceedings may have an adverse effect on our business, operating results and financial condition. Any dispute resolution proceeding concerning intellectual property could be protracted and costly, is inherently unpredictable and could have an adverse effect on our business, regardless of its outcome.

We are exposed to the credit risk of our customers, and the deterioration of the financial condition of our customers could adversely affect our financial results.

We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic and Canadian E&P industry which, as described above, is subject to volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could

 

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have a material adverse effect on our business, financial condition, prospects and/or results of operations. In the course of our business we hold accounts receivable from our customers. In the event of the financial distress or bankruptcy of a customer, we could lose all or a portion of such outstanding accounts receivable associated with that customer. Further, if a customer was to enter into bankruptcy, it could also result in the cancellation of all or a portion of our service contracts with such customer at significant expense or loss of expected revenues to us.

In addition, during times when the oil or natural gas markets weaken, our customers are more likely to experience financial difficulties, including being unable to access debt or equity financing, which could result in a reduction in our customers’ spending for our services.

Our assets require capital for maintenance, upgrades and refurbishment, and we may require capital expenditures for new equipment.

Our equipment requires capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. For the year ended December 31, 2016 and the nine months ended September 30, 2017, we spent approximately $3.8 million and $8.1 million, respectively, on capital expenditures related to maintenance. Our equipment typically does not generate revenue while it is undergoing maintenance, refurbishment or upgrades. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Further, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service or our equipment may not be attractive to potential or current customers. Additionally, competition or advances in technology within our industry may require us to update our products and services. Such demands on our capital or reductions in demand and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations and may increase costs.

We may record losses or impairment charges related to idle assets or assets that we sell.

Prolonged periods of low utilization, changes in technology or the sale of assets below their carrying value may cause us to experience losses. These events could result in the recognition of impairment charges that increase our net loss. In 2015, we recognized $35.5 million of goodwill impairment charges for two reporting units, Crest Pumping Technologies and Dak-Tana. In 2016, we recognized $12.2 million of goodwill impairment in one of our operating units, Dak-Tana, due to persistent low completions activity in the market where the unit operates. Significant impairment charges as a result of a decline in market conditions or otherwise could have a material adverse effect on our results of operations in future periods.

Competition among oilfield service and equipment providers is affected by each provider’s reputation for safety and quality.

Our activities are subject to a wide range of national, state and local occupational health and safety laws and regulations. In addition, customers maintain their own compliance and reporting requirements. Failure to comply with these health and safety laws and regulations, or failure to comply with our customers’ compliance or reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position.

Seasonal and adverse weather conditions adversely affect demand for services and operations.

Weather can have a significant impact on demand as consumption of energy is seasonal, and any variation from normal weather patterns, cooler or warmer summers and winters, can have a significant impact on demand. Adverse weather conditions, such as hurricanes, tropical storms and severe cold weather, may interrupt or curtail operations, or customers’ operations, cause supply disruptions and result in a loss of revenue and

 

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damage to our equipment and facilities, which may or may not be insured. Specifically, we typically have experienced a pause by our customers around the holiday season in the fourth quarter, which may be compounded as our customers exhaust their annual capital spending budgets towards year end. Additionally, our operations are directly affected by weather conditions. During the winter months (first and fourth quarters) and periods of heavy snow, ice or rain, particularly in the northeastern U.S., Michigan, North Dakota, Wyoming and western Canada, our customers may delay operations or we may not be able to operate or move our equipment between locations. Also, during the spring thaw, which normally starts in late March and continues through June, some areas, primarily in western Canada, impose transportation restrictions to prevent damage caused by the spring thaw. For the year ended December 31, 2016 and the nine months ended September 30, 2017, we generated approximately 4.4% and 4.0%, respectively, of our revenue from our operations in western Canada. Lastly, throughout the year heavy rains adversely affect activity levels, as well locations and dirt access roads can become impassible in wet conditions.

Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us.

We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations.

The growth of our business through acquisitions may expose us to various risks, including those relating to difficulties in identifying suitable, accretive acquisition opportunities and integrating businesses, assets and personnel, as well as difficulties in obtaining financing for targeted acquisitions and the potential for increased leverage or debt service requirements.

As a component of our business strategy, we have pursued and intend to continue to pursue selected, accretive acquisitions of complementary assets, businesses and technologies. Acquisitions involve numerous risks, including:

 

 

unanticipated costs and assumption of liabilities and exposure to unforeseen liabilities of acquired businesses, including, but not limited to, environmental liabilities;

 

 

difficulties in integrating the operations and assets of the acquired business and the acquired personnel;

 

 

limitations on our ability to properly assess and maintain an effective internal control environment over an acquired business, in order to comply with public reporting requirements;

 

 

potential losses of key employees and customers of the acquired businesses;

 

 

inability to commercially develop acquired technologies;

 

 

risks of entering markets in which we have limited prior experience; and

 

 

increases in our expenses and working capital requirements.

The process of integrating an acquired business may involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a disproportionate amount of management attention and financial and other resources. Our failure to achieve consolidation savings, to incorporate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational

 

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difficulties could have a material adverse effect on our financial condition and results of operations. Furthermore, there is intense competition for acquisition opportunities in our industry. Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions.

In addition to potential future acquisitions, the ongoing integration of our business in connection with the Combination present a number of risks that could affect our results of operations. In particular, integrating the businesses from the Combination is difficult and involves a number of special risks, including the diversion of management’s attention to the assimilation of the operations, the unpredictability of costs related to the Combination and the difficulty of integration of the businesses, products, services, technology and employees. The ability to achieve the anticipated benefits of the Combination will depend, in part, upon whether the integration of the various businesses, products, services, technology and employees is accomplished in an efficient and effective manner, and there can be no assurance that this will occur.

Furthermore, we may not have sufficient capital resources to complete additional acquisitions. Historically, we have financed acquisitions primarily with funding from our equity investors, cash generated by operations and borrowings under debt facilities. We may incur substantial indebtedness to finance future acquisitions and also may issue equity, debt or convertible securities in connection with such acquisitions. Debt service requirements could represent a significant burden on our results of operations and financial condition and the issuance of additional equity or convertible securities could be dilutive to our existing stockholders. Furthermore, we may not be able to obtain additional financing on satisfactory terms. Even if we have access to the necessary capital, we may be unable to continue to identify additional suitable acquisition opportunities, negotiate acceptable terms or successfully acquire identified targets.

Our ability to grow through acquisitions and manage growth will require us to continue to invest in operational, financial and management information systems and to attract, retain, motivate and effectively manage our employees. The inability to effectively manage the integration of acquisitions could reduce our focus on current operations and subsequent acquisitions, which, in turn, could negatively impact our earnings and growth. Our financial position and results of operations may fluctuate significantly from period to period, based on whether or not significant acquisitions are completed in particular periods.

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 operations are subject to stringent federal, state, local and tribal laws and regulations relating to, among other things, protection of natural resources, clean air and drinking water, wetlands, endangered species, greenhouse gasses, nonattainment areas, the environment, occupational health and safety, chemical use and storage, waste management, waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability, including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations may impose strict liability, joint and several liability, or both. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we caused or contributed to the conditions. Additionally, environmental concerns, including clean air, drinking water contamination and seismic activity, have prompted investigations that could lead to the enactment of regulations, limitations, restrictions or moratoria that could potentially have a material adverse impact on our business. Actions arising under these laws and regulations could result in the shutdown of our operations, fines and penalties (administrative, civil or criminal), revocations of permits to conduct business, expenditures for remediation or other corrective measures and/or claims for liability for property damage, exposure to

 

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hazardous materials, exposure to hazardous waste, nuisance or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or criminal penalties, revocation of permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition, prospects and results of operations. Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria on oil and natural gas exploration and completion activities at a federal, state or local level could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the cost of our services, thereby possibly having a material adverse impact on our financial condition.

If we do not perform our operations in accordance with government, industry, customer or our own stringent occupational safety, health and environmental standards, we could lose business from our customers, many of whom have an increased focus on environmental and safety issues.

We are subject to the U.S. Environmental Protection Agency (the “EPA”), the DOT, U.S. Nuclear Regulation Commission, Bureau of Alcohol, Tobacco, Firearms and Explosives, OSHA and state regulatory agencies that regulate operations to prevent air, soil and water pollution. The energy extraction sector is one of the sectors designated for increased enforcement by the EPA, which will continue to regulate our industry in the years to come, potentially resulting in additional regulations that could have a material adverse impact on our business, prospects or financial condition.

The EPA regulates air emissions from all engines, including off-road diesel engines that are used by us to power equipment in the field under the federal Clean Air Act’s (“CAA”) Tier 4 emission standards. The Tier 4 standards require substantial reductions in emissions of particulate matter and nitrous oxide from off-road diesel engines. Such emission reductions can be achieved through the use of appropriate control technologies. Under these U.S. emission control regulations, we could be limited in the number of certain off-road diesel engines we can purchase if we are unable to find a sufficient number of Tier 4-compliant engines from manufacturers. Further, these emission control regulations could result in increased capital and operating costs.

Changes in environmental laws and regulations could lead to material increases in our costs, and liability exposure, for future environmental compliance and remediation. Additionally, if we expand the size or scope of our operations, we could be subject to regulatory requirements that are more stringent than the requirements under which we are currently allowed to operate or require additional authorizations to continue operations. Compliance with this additional regulatory burden could increase our operating or other costs.

Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could prohibit, restrict or limit hydraulic fracturing operations, or increase our operating costs.

Our business is dependent on hydraulic fracturing and horizontal drilling activities. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has asserted federal regulatory authority pursuant to the federal Safe Drinking Water Act over certain hydraulic fracturing activities involving the use of diesel fuels and published permitting guidance in February 2014 addressing the performance of such activities using diesel fuels. In 2016, the EPA issued final regulations under the federal Clean Air Act establishing performance standards, including standards for the capture of air emissions released during hydraulic fracturing. On June 5, 2017, the EPA stayed three portions of these standards for 90 days: fugitive emissions requirements, well site

 

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pneumatic pump standards, and requirements for certification of closed vent systems. This 90-day stay was vacated by the U.S. Court of Appeals for the D.C. Circuit on July 3, 2017, but the D.C. Circuit did not vacate the EPA’s June 16, 2017 proposal to stay these requirements for two years and revisit the entirety of the 2016 performance standards requirements. Comments to the EPA’s June 16, 2017 proposal were due August 9, 2017. As a result of these developments, future implementation of the 2016 performance standards requirements is uncertain at this time. Furthermore, in June 2017, the Bureau of Land Management (“BLM”) stayed a rule published in November 2016 that imposed requirements to reduce methane emissions from venting, flaring, and leaking on public lands from oil and gas operations that is similar to the EPA performance standards; that stay is subject to pending litigation. However, on October 5, 2017, the BLM published a proposed rule that would temporarily suspend or delay certain requirements contained in the November 2016 final rule until January 17, 2019. The comment period for this proposed rule ended on November 6, 2017. However, given the long-term trend towards increasing regulation, future federal regulation of methane and other greenhouse gas emissions from the oil and gas industry remain a possibility. The EPA also issued an advanced notice of proposed rulemaking under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing, and also finalized rules in June 2016 that prohibit the discharge of wastewater from hydraulic fracturing operations to publicly owned wastewater treatment plants. The BLM also finalized rules in March 2015 that impose new or more stringent standards for performing hydraulic fracturing on federal and Native American lands. The U.S. District Court of Wyoming struck down the rules in June 2016. In addition, following the issuance of a presidential executive order to review rules related to energy industry, on July 25, 2017, the BLM proposed to rescind its hydraulic fracturing rules. In September 2017, the Tenth Circuit issued a ruling to vacate this decision and dismiss the lawsuit challenging the rule in light of the BLM’s proposed rulemaking. The BLM issued a final rule repealing the 2015 hydraulic fracturing rule in December 2017. As a result of these developments, future implementation of the BLM rules is uncertain at this time. Also, Congress has from time to time considered legislation to provide for federal regulation of hydraulic fracturing under the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process. It is unclear how any additional federal regulation of hydraulic fracturing activities may affect our operations.

Various studies analyzing the potential environmental impacts of hydraulic fracturing have also been performed. For example, in December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources. The final report concluded that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources “under some circumstances,” noting that the following hydraulic fracturing water cycle activities and local- or regional-scale factors are more likely than others to result in more frequent or more severe impacts: water withdrawals for fracturing in times or areas of low water availability; surface spills during the management of fracturing fluids, chemicals or produced water; injection of fracturing fluids into wells with inadequate mechanical integrity; injection of fracturing fluids directly into groundwater resources; discharge of inadequately treated fracturing wastewater to surface waters; and disposal or storage of fracturing wastewater in unlined pits. As described elsewhere in this prospectus, these risks are regulated under various state, federal, and local laws.

Some states, counties and municipalities have enacted or are considering moratoria on hydraulic fracturing. For example, New York and Vermont have banned or are in the process of banning the use of high volume hydraulic fracturing. Alternatively, some municipalities are or have considered zoning and other ordinances, the conditions of which could impose a de facto ban on drilling and/or hydraulic fracturing operations. Further, some states, counties and municipalities are closely examining water use issues, such as permit and disposal options for processed water, which could have a material adverse impact on our financial condition, prospects and results of operations if such additional permitting requirements are imposed upon our industry. If the EPA or another federal or state-level agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, an additional level of regulation established at the federal or state level could lead to operational delays, reduce demand for our services, and increase our operating costs. At this time, it is not possible to estimate the potential

 

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impact on our business of the enactment of additional federal, state, or legislation or regulations affecting hydraulic fracturing. Compliance or the consequences of any failure to comply, such as the issuance of fines, penalties, or injunctions prohibiting some or all of our operations or the operations of our customers could have a material adverse effect on our business, financial condition, prospects and results of operations.

Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture and use of greenhouse gasses that could have a material adverse effect on our business, results of operations, prospects and financial condition.

Changes in environmental requirements related to greenhouse gas emissions and climate change may negatively impact demand for our services. For example, oil and natural gas E&P may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Federal, state and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration and use of greenhouse gasses that could have a material adverse effect on our business, results of operations, prospects and financial condition. Finally, some scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that could have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events; if such effects were to occur, they could have an adverse impact on our operations.

Studies by both state or federal agencies demonstrating a correlation between earthquakes and oil and natural gas activities could result in increased regulatory and operational burdens.

In light of concerns about seismic activity being triggered by the injection of produced waters into underground wells, certain regulators are also considering additional requirements related to seismic safety for hydraulic fracturing activities. A 2015 U.S. Geological Survey report identified eight states, including Texas, with areas of increased rates of induced seismicity that could be attributed to fluid injection or oil and gas extraction.

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.

Our services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. As the wells we service continue to become more complex, our exposure to such inherent risks becomes greater as downhole risks increase exponentially with an increase in complexity and lateral length. Our operations are also exposed to risks of labor organizing and risks of claims for alleged employment-related liabilities, including risks of claims related to alleged wrongful termination or discrimination, wage payment practices, retaliation claims and other human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. For example, transportation of heavy equipment creates the potential for our trucks to become involved in roadway accidents, which in turn could result in personal injury or property damages lawsuits being filed against us.

We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, especially as the inherent risks in our operations increase with increasing well complexity, and we are not fully insured against all risks.

 

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Further, our insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities that could have a material adverse effect on our business, financial condition, prospects or results of operations.

In recent years, oilfield services companies have been the subject of a significant volume of wage and hour-related litigation, including claims brought under the Federal Labor Standards Act, in which employee pay practices have been challenged. We have been named as defendants in these lawsuits. Some of these cases remain outstanding and are in various states of negotiation and/or litigation. The frequency and significance of wage- or other employment-related claims may affect expenses, costs and relationships with employees and regulators.

Our operations are subject to cyber security risks that could have a material adverse effect on our combined results of operations and combined financial condition.

The efficient operation of our business is dependent on our information technology (“IT”) systems. Accordingly, we rely upon the capacity, reliability and security of our IT hardware and software infrastructure and our ability to expand and update this infrastructure in response to our changing needs. Our IT systems are subject to possible breaches and other threats that could cause us harm. If our systems for protecting against cyber security risks prove not to be sufficient, we could be adversely affected by, among other things, loss or damage of intellectual property, proprietary information, or customer data; interruption of business operations; or additional costs to prevent, respond to, or mitigate cyber security attacks. These risks could have a material adverse effect on our business, financial condition and result of operations.

Changes in transportation regulations may increase our costs and negatively impact our results of operations.

We are subject to various transportation regulations including as a motor carrier by the DOT and by various federal, state and tribal agencies, whose regulations include certain permit requirements of highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. Certain motor vehicle operators are required to register with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria, and a revocation could result in a suspension of operations. Since 2010, the DOT has pursued its Compliance, Safety, Accountability (“CSA”) program in an effort to improve commercial truck and bus safety. A component of CSA is the Safety Measurement System (“SMS”), which analyzes all safety violations recorded by federal and state law enforcement personnel to determine a carrier’s safety performance. The SMS is intended to allow DOT to identify carriers with safety issues and intervene to address those problems.

The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. For example, in December 2016, the DOT finalized minimum training standards for new drivers seeking a commercial driver’s license, and

 

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effective December 2017, the Federal Motor Carrier Safety Administration has mandated electronic logging devices in all interstate commercial trucks. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase our operating costs. Also, state and local regulation of permitted routes and times on specific roadways could adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to what extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations.

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.

Our customers are engaged in the oil and natural gas E&P business in North America, which has been historically volatile. For the year ended December 31, 2016, our five largest customers, collectively accounted for approximately 30% of total revenues, and one customer, Pioneer Natural Resources Company, accounted for more than 10% of our revenue. If we were to lose several key alliances over a relatively short period of time or if one of our largest customers fails to pay or delays in paying a significant amount of our outstanding receivables, we could experience an adverse impact on our business, financial condition, results of operations, cash flows and prospects. Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, financial condition, results of operations and prospects.

Our executive officers and certain key personnel are critical to our business and these officers and key personnel may not remain with us in the future.

Our future success depends in substantial part on our ability to hire and retain our executive officers and other key personnel. In particular, we are highly dependent on certain of our executive officers, particularly our President and Chief Executive Officer, Ann G. Fox, and the President of our Completion Solutions segment, David Crombie. These individuals possess extensive expertise, talent and leadership, and they are critical to our success. The diminution or loss of the services of these individuals, or other integral key personnel affiliated with entities that we acquire in the future, could have a material adverse effect on our business. Furthermore, we may not be able to enforce all of the provisions in any employment agreement we have entered into with certain of our executive officers and such employment agreements may not otherwise be effective in retaining such individuals. In addition, we may not be able to retain key employees of entities that we acquire in the future. This may impact our ability to successfully integrate or operate the assets we acquire.

A terrorist attack or armed conflict could harm our business.

The occurrence or threat of terrorist attacks in the United States or other countries, anti-terrorist efforts and other armed conflicts involving the United States or other countries, including continued hostilities in the Middle East, may adversely affect the United States and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if wells, operations sites or other related facilities are direct

 

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targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for our products and services. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers’ operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies.

Delays or restrictions in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impair our business.

In most states, our operations and the operations of our customers require permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completion and production activities, including hydraulic fracturing. Such permits or approvals are typically required by state agencies, but federal and local governmental permits may also be required. We are also required to obtain federal, state, local and/or third-party permits and authorizations in some jurisdictions in connection with our wireline services and trucking operations. The requirements for permits or authorizations vary depending on the location where the associated activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities. In addition, some of our customers’ drilling and completion activities may take place on federal land or Native American lands, requiring leases and other approvals from the federal government or Native American tribes to conduct such drilling and completion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, financial condition, prospects or results of operations.

Our Canadian operations subject us to currency translation risk, which could cause our results to fluctuate significantly from period to period.

A portion of our revenues are derived from our Canadian activities and operations. As a result, we translate the results of our operations and financial condition of our Canadian operations into U.S. dollars. Therefore, our reported results of operations and financial condition are subject to changes in the exchange rate between the two currencies. Fluctuations in foreign currency exchange rates could affect our revenue, expenses and operating margins. Currently, we do not hedge our exposure to changes in foreign exchange rates.

Risks related to this offering and owning our common stock

SCF controls a significant percentage of our voting power.

Upon completion of this offering, SCF will own approximately 39% of our outstanding common stock (or 37% of our common stock if the underwriters exercise in full their option to purchase additional shares of common stock). In addition, certain of our directors are currently employed by SCF. Consequently, SCF will be able to strongly influence all matters that require approval by our stockholders, including the election and removal of directors, changes to our organizational documents and approval of acquisition offers and other significant corporate transactions. This concentration of ownership will limit your ability to influence corporate matters, and as a result, actions may be taken that you may not view as beneficial. This concentration of stock ownership may also adversely affect the trading price of our common stock to the extent investors perceive a disadvantage in owning stock of a company with a controlling stockholder.

 

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Certain of our directors may have conflicts of interest because they are also directors or officers of SCF. The resolution of these conflicts of interest may not be in our or your best interests.

Certain of our directors, namely David C. Baldwin and Andrew L. Waite, are currently officers of LESA. In addition, Mr. Baldwin and Mr. Waite are both directors of Forum Energy Technology, a corporation in which SCF and its affiliates own an approximate 21% equity interest as of September 30, 2017. These positions may conflict with such individuals’ duties as one of our directors or officers regarding business dealings and other matters between SCF and us. The resolution of these conflicts may not always be in our or your best interest.

SCF and its affiliates are not limited in their ability to compete with us, and the corporate opportunity provisions in our charter could enable SCF to benefit from corporate opportunities that may otherwise be available to us.

SCF and its affiliates have investments in other oilfield service companies that may compete with us, and SCF and its affiliates may invest in such other companies in the future. SCF, its other affiliates and its portfolio companies are referred to herein as the “SCF Group.” Conflicts of interest could arise in the future between us, on the one hand, and the SCF Group, on the other hand, concerning among other things, potential competitive business activities or business opportunities.

Our charter provides that, to the fullest extent permitted by applicable law, we renounce any interest or expectancy in any business opportunity that involves any aspect of the energy equipment or services business or industry and that may be from time to time presented to SCF or any of our directors or officers who is also an employee, partner, member, manager, officer or director of any SCF Group entity, even if the opportunity is one that we might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so. Our charter further provides that no such person or party shall be liable to us by reason of the fact that such person pursues any such business opportunity, or fails to offer any such business opportunity to us. As a result, any of our directors or officers who is also an employee, partner, member, manager, officer or director of any SCF Group entity may become aware, from time to time, of certain business opportunities, such as acquisition opportunities, and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities. As a result, by renouncing our interest and expectancy in any business opportunity that may be from time to time presented to any member of an SCF Group entity or any of our directors or officers who is also an employee, partner, member, manager, officer or director of any SCF Group entity, our business or prospects could be adversely affected if attractive business opportunities are procured by such parties for their own benefit rather than for ours. See “Certain relationships and related party transactions.” Our charter provides that any amendment to or adoption of any provision inconsistent with our charter’s provisions governing the renouncement of business opportunities must be approved by the holders of at least 80% of the voting power of the outstanding stock of the corporation entitled to vote thereon. See “Description of capital stock—Renouncement of business opportunities” for more information. Any actual or perceived conflicts of interest with respect to the foregoing could have an adverse impact on the trading price of our common stock.

The requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, and the requirements of the Sarbanes-Oxley Act and the NYSE, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company, we will need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and the requirements of the NYSE, with which we are not required to comply as a private company. Complying with these statutes,

 

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regulations and requirements will occupy a significant amount of time of our board of directors and management and will significantly increase our costs and expenses. We will need to:

 

 

institute a more comprehensive compliance function;

 

 

comply with rules promulgated by the NYSE;

 

 

continue to prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

 

 

establish new internal policies, such as those relating to insider trading; and

 

 

involve and retain to a greater degree outside counsel and accountants in the above activities.

In addition, we expect that being a public company subject to these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

We will be required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act as early as our fiscal year ending December 31, 2019. Section 404 requires that we document and test our internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. This section also requires that our independent registered public accounting firm opine on those internal controls upon becoming a large accelerated filer, as defined in the SEC rules, or otherwise ceasing to qualify as an emerging growth company under the JOBS Act. We are evaluating our existing controls against the standards adopted by the Committee of Sponsoring Organizations of the Treadway Commission. During the course of our ongoing evaluation and integration of the internal control over financial reporting, we may identify areas requiring improvement, and we may have to design enhanced processes and controls to address issues and prevent fraud identified through this review. For example, we anticipate the need to hire additional administrative and accounting personnel to conduct our financial reporting. We cannot be certain at this time that we will be able to successfully complete the procedures, certification and attestation requirements of Section 404.

We have identified material weaknesses in our internal control over financial reporting, with regard to the reporting of income tax expense (benefit), related balance sheet accounts and other comprehensive income and also with regard to segregation of certain accounting duties. We may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our reporting obligations.

In connection with the audit of our financial statements for the year ended December 31, 2016, we identified a material weakness in our internal control over the reporting of income tax expense (benefit), the related balance sheet accounts and other comprehensive income. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

During the first quarter of 2017, we hired a tax professional as our tax director, who performed a detailed review of our deferred taxes and our tax provision and identified certain immaterial errors in our income tax expense (benefit) and deferred tax balance for the years ended December 31, 2016 and 2015. Upon review of our internal controls in

 

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connection with the identification of these errors, we determined that we did not design and maintain an effective control environment with formal accounting policies and controls, and with trained professionals with an appropriate level of income tax knowledge and experience, to properly analyze, record and disclose the accounting matters commensurate with our financial reporting requirements related to income taxes. Specifically, we did not have controls designed to address the accuracy of income tax expense (benefit) and related combined balance sheet accounts, including deferred income taxes, as well as adequate procedures and controls to review the work of external experts engaged to assist in income tax matters or to monitor the presentation and disclosure of income taxes.

This material weakness resulted in the need to correct misstatements in our combined financial statements as of and for the years ended December 31, 2016 and 2015 prior to their issuance. The misstatements were not material to either 2016 or 2015.

As described above, during the first quarter of 2017, we hired a tax professional as our tax director, who identified the misstatements described above and will be responsible for performing a detailed review of our deferred taxes and our annual and quarterly tax provision for all future periods. Further, we have implemented additional review procedures within the accounting and finance department. These actions are subject to ongoing management review and the oversight of our board of directors.

In addition, in connection with the preparation of our financial statements for the nine months ended September 30, 2017, we identified a material weakness in our internal control over financial reporting, specifically as it related to segregation of certain accounting duties stemming from our decentralized accounting structure and limited number of accounting personnel. We did not design and maintain adequate controls to address segregation of certain accounting duties related to journal entries, account reconciliations and other accounting functions. Certain accounting personnel have the ability to prepare and post journal entries, as well as reconcile accounts, without an independent review by someone other than the preparer. Specifically, our internal controls were not designed or operating effectively to evidence that journal entries were appropriately recorded or were properly reviewed for validity, accuracy and completeness. No misstatement has been identified related to the inadequate segregation of accounting duties.

We have begun to remediate and plan to further remediate this material weakness relating to segregation of certain accounting duties. We have replaced the less sophisticated accounting systems used by some of our newly-acquired subsidiaries with the enterprise resource planning system used by the majority of our subsidiaries, and plan to complete the replacement process in the remaining subsidiaries during 2018. Also, we are working with third party consultants to identify internal control risks and implement remedies. These actions are subject to ongoing management review and the oversight of our board of directors.

The material weaknesses described above or any newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the control deficiencies that led to the material weaknesses in our internal control over financial reporting described above or to avoid potential future material weaknesses. In addition, neither our management nor an independent registered public accounting firm has ever performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses may have been identified.

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we are unable to successfully remediate our existing or any future material weakness in our internal control over

 

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financial reporting, or identify any additional material weaknesses that may exist, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, we may be unable to prevent fraud, investors may lose confidence in our financial reporting, and our stock price may decline as a result. Additionally, our reporting obligations as a public company could place a significant strain on our management, operational and financial resources and systems for the foreseeable future and may cause us to fail to timely achieve and maintain the adequacy of our internal control over financial reporting.

There is no existing market for our common stock, and a trading market that will provide you with adequate liquidity may not develop. The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for our common stock. After this offering, there will be only 7,000,000 publicly traded shares of common stock held by our public common stockholders (8,050,000 shares of common stock if the underwriters exercise in full their option to purchase additional shares of common stock). SCF will own 9,086,843 shares of common stock, representing an aggregate 39% of outstanding shares of our common stock. We do not know the extent to which investor interest will lead to the development of an active trading market or how liquid that market might become. If an active trading market does not develop, you may have difficulty reselling any of our common stock at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common stock and limit the number of investors who are able to buy the common stock.

The initial public offering price for the common stock offered hereby will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common stock that will prevail in the trading market. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in this offering.

The following is a non-exhaustive list of factors that could affect our stock price:

 

 

our operating and financial performance;

 

 

quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues;

 

 

the public reaction to our press releases, our other public announcements and our filings with the SEC;

 

 

strategic actions by our competitors;

 

 

our failure to meet revenue or earnings estimates by research analysts or other investors;

 

 

changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;

 

 

speculation in the press or investment community;

 

 

the failure of research analysts to cover our common stock;

 

 

sales of our common stock by us or other stockholders, or the perception that such sales may occur;

 

 

changes in accounting principles, policies, guidance, interpretations or standards;

 

 

additions or departures of key management personnel;

 

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actions by our stockholders;

 

 

general market conditions, including fluctuations in commodity prices;

 

 

domestic and international economic, legal and regulatory factors unrelated to our performance; and

 

 

the realization of any risks described under this “Risk factors” section.

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.

If securities or industry analysts do not publish research reports or publish unfavorable research about our business, the price and trading volume of our common stock could decline.

The trading market for our common stock will depend in part on the research reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us, the trading price for our common stock and other securities would be negatively affected. In the event we obtain securities or industry analyst coverage, and one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common stock and other securities and their trading volume to decline.

Our charter and bylaws contain provisions that could delay, discourage or prevent a takeover attempt even if a takeover might be beneficial to our stockholders, and such provisions may adversely affect the market price of our common stock.

Provisions contained in our charter and bylaws could make it more difficult for a third party to acquire us. Our charter and bylaws also impose various procedural and other requirements, which could make it more difficult for stockholders to effect certain corporate actions. For example, our charter authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock without any vote or action by our stockholders. Thus, our board of directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our capital stock. These rights may have the effect of delaying or deterring a change of control of our company. Additionally, for example, our bylaws (i) establish limitations on the removal of directors and on the ability of our stockholders to call special meetings, (ii) include advance notice requirements for nominations for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings, (iii) provide that our board of directors is expressly authorized to adopt, or to alter or repeal, our bylaws, and (iv) provide for a classified board of directors, consisting of three classes of approximately equal size, each class serving staggered three-year terms, so that only approximately one-third of our directors will be elected each year.

See “Description of capital stock—Anti-takeover effects of provisions of our charter, our bylaws and Delaware law.” These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock.

 

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Our charter designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

Our charter provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our charter or our bylaws or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our charter described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our charter inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

Investors in this offering will experience immediate and substantial dilution of $10.36 per share.

Based on an assumed initial public offering price of $21.50 per share (the midpoint of the price range set forth on the cover of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution of $10.36 per share in the net tangible book value per share of common stock from the initial public offering price, and our historical and pro forma net tangible book deficit as of September 30, 2017 would be $7.43 per share. Please see “Dilution.”

We do not intend to pay dividends on our common stock, and we expect that our debt agreements will place certain restrictions on our ability to do so. Consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We do not plan to declare dividends on shares of our common stock in the foreseeable future. Additionally, our new credit facility will place certain restrictions on our ability to pay cash dividends. Consequently, unless we revise our dividend policy, your only opportunity to achieve a return on your investment in us will be if you sell your common stock at a price greater than you paid for it. There is no guarantee that the price of our common stock that will prevail in the market will ever exceed the price that you pay in this offering.

Future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.

We may sell additional shares of common stock in subsequent public offerings. We may also issue additional shares of common stock or convertible securities. After the completion of this offering, we will have outstanding 23,300,596 shares of our common stock and SCF will own 9,086,843 shares of our common stock or approximately 39% of our total outstanding shares, all of which are restricted from immediate resale under the federal securities laws and are subject to the lock-up agreements with the underwriters described in “Underwriting (conflicts of interest),” but may be sold into the market in the future. Please see “Shares eligible for future sale.” SCF and certain of our other stockholders will be party to the Amended Stockholders Agreement (as defined and described in “Certain relationships and related party transactions—Stockholders agreement”), which will require us to effect the registration of their shares in certain circumstances no earlier

 

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than the expiration of the lock-up period contained in the underwriting agreement entered into in connection with this offering. Additionally, 7,213,669 shares held by our employees and others will be eligible for sale at various times and subject to a 180 day lock-up agreement contained in our existing stockholders agreement, including shares eligible for sale upon exercise of vested options, after the date of this prospectus pursuant to the provisions of Rule 144.

In connection with this offering, we intend to file a registration statement with the SEC on Form S-8 providing for the registration of shares of our common stock issued or reserved for issuance under our equity incentive plan. Subject to the satisfaction of vesting conditions, the expiration of lock-up agreements and the requirements of Rule 144, shares registered under the registration statement on Form S-8 will be available for resale immediately in the public market without restriction.

We cannot predict the size of future issuances of our common stock or securities convertible into common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock.

The underwriters of this offering may waive or release parties to the lock-up agreements entered into in connection with this offering, which could adversely affect the price of our common stock.

Prior to this offering, we, all of our directors and executive officers and SCF will enter into lock-up agreements with respect to their common stock, pursuant to which they are subject to certain resale restrictions for a period of 180 days following the effectiveness date of the registration statement of which this prospectus forms a part. J.P. Morgan Securities LLC, Goldman Sachs & Co. LLC and Wells Fargo Securities, LLC may, at any time and without notice, release all or any portion of the common stock subject to the foregoing lock-up agreements. If the restrictions under the lock-up agreements are waived, then common stock will be available for sale into the public markets, which could cause the market price of our common stock to decline and impair our ability to raise capital.

A significant reduction by SCF of its ownership interests in us could adversely affect us.

We believe that SCF’s substantial ownership interest in us provides them with an economic incentive to assist us to be successful. Upon the expiration or earlier waiver of the lock-up restrictions on transfers or sales of our securities following the completion of this offering, SCF will not be subject to any obligation to maintain its ownership interest in us and may elect at any time thereafter to sell all or a substantial portion of or otherwise reduce its ownership interest in us. If SCF sells all or a substantial portion of its ownership interest in us, it may have less incentive to assist in our success and its affiliates that are expected to serve as members of our board of directors may resign. Such actions could adversely affect our ability to successfully implement our business strategies which could adversely affect our cash flows or results of operations.

Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our common stock less attractive to investors.

We qualify as an “emerging growth company” as defined in the JOBS Act. An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise applicable generally to public companies. Pursuant to these reduced disclosure requirements, emerging growth companies are not required to, among other things, comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, provide certain disclosures regarding executive compensation, holding stockholder advisory votes on executive compensation or obtain stockholder approval of any golden parachute payments not previously approved. In addition, emerging growth companies have longer phase-in periods for the

 

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adoption of new or revised financial accounting. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.

We intend to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act, until we are no longer an emerging growth company. If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our common stock price may be more volatile. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.

We may not be able to utilize a portion of Beckman’s or our net operating loss carryforwards (“NOLs”) to offset future taxable income for U.S. federal or state tax purposes, which could adversely affect our net income and cash flows.

As of December 31, 2016, Beckman had federal and state income tax NOLs of approximately $130.9 million, which will begin to expire between 2020 and 2033 and Nine had federal and state income tax NOLs of approximately $7.7 million, which will begin to expire between 2022 and 2036. Utilization of these NOLs depends on many factors, including our future taxable income, which cannot be assured. In addition, Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”), generally imposes an annual limitation on the amount of an NOL that may be used to offset taxable income when a corporation has undergone an “ownership change” (as determined under Section 382). Determining the limitations under Section 382 is technical and highly complex. An ownership change generally occurs if one or more shareholders (or groups of shareholders) who are each deemed to own at least 5% of the corporation’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. In the event that an ownership change has occurred—or were to occur—with respect to a corporation following its recognition of an NOL, utilization of such NOL would be subject to an annual limitation under Section 382, generally determined by multiplying the value of the corporation’s stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in Section 382. However, this annual limitation would be increased under certain circumstances by recognized built-in gains of the corporation existing at the time of the ownership change. Any unused annual limitation with respect to an NOL generally may be carried over to later years, subject, in the case of an NOL that arose in a taxable year beginning before January 1, 2018, to the expiration of such NOL 20 years after it arose.

The issuance of stock contemplated herein may result in an ownership change under IRC Section 382 and we may be prevented from fully utilizing either Beckman’s NOLs or our NOL’s, as applicable, at the time of the ownership change prior to their expiration. Future changes in our stock ownership or future regulatory changes could also limit our ability to utilize Beckman’s or our NOLs. To the extent we are not able to offset future taxable income with Beckman’s or our NOLs, our net income and cash flows may be adversely affected.

 

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Cautionary note regarding forward-looking statements

This prospectus 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 included in this prospectus, 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 prospectus, 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.

Forward-looking statements may include statements about:

 

 

the volatility of future oil and natural gas prices;

 

 

our ability to successfully manage our growth, including risks and uncertainties associated with integrating and retaining key employees of the businesses we acquire;

 

 

availability of skilled and qualified labor and key management personnel;

 

 

our ability to accurately predict customer demand;

 

 

competition in our industry;

 

 

governmental regulation and taxation of the oil and natural gas industry;

 

 

environmental liabilities;

 

 

political and social issues affecting the countries in which we do business;

 

 

our ability to implement new technologies and services;

 

 

availability and terms of capital;

 

 

general economic conditions;

 

 

benefits of our acquisitions;

 

 

operating hazards inherent in our industry;

 

 

the continued influence of SCF;

 

 

our ability to establish and maintain effective internal controls over financial reporting;

 

 

our ability to operate effectively as a public traded company;

 

 

our financial strategy, budget, projections, operating results, cash flows and liquidity; and

 

 

our plans, business strategy and objectives, expectations and intentions that are not historical.

All forward-looking statements speak only as of the date of this prospectus; 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 prospectus 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” and “Management’s discussion and analysis of financial condition and results of operations” and elsewhere in this prospectus. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

 

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Use of proceeds

We will receive net proceeds of approximately $138.3 million from the sale of the common stock by us in this offering assuming an initial public offering price of $21.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting estimated expenses and underwriting discounts and commissions payable by us.

We intend to use a portion of the net proceeds from this offering and term loan borrowings under our new credit facility to fully repay the outstanding indebtedness under the two credit facilities we currently have in place and the remainder for general corporate purposes, which may include the acquisition of additional equipment and complementary businesses that enhance our existing service offerings, broaden our service offerings or expand our customer relationships.

The following table illustrates our anticipated use of the net proceeds from this offering:

 

Sources of funds (In millions)      Use of funds (In millions)  

Net proceeds from this offering

   $ 138.3     

Repayment of the Existing Nine Credit Facility(1)

   $ 119.8  

Term loans under new credit facility

   $ 125.0     

Repayment of Existing Beckman Credit Facility(2)

     121.0  
      Funding of general corporate purposes      22.5  
  

 

 

       

 

 

 

Total Sources of Funds

   $ 263.3     

Total Uses of Funds

   $ 263.3  

 

 

 

(1)   Pursuant to the Existing Nine Credit Facility, Nine has a $35.2 million term loan. At September 30, 2017, the weighted average interest rate of the term loan was approximately 5.7%. Also, as of September 30, 2017, Nine had $75.0 million of outstanding revolving borrowings (including letters of credit) under the Existing Nine U.S. Revolving Credit Facility (defined and described in “Management’s discussion and analysis of financial condition and results of operations—Our credit facilities”) and Nine Energy Canada Inc. had $9.6 million of outstanding revolving borrowings (including letters of credit) under the Existing Nine Canadian Revolving Credit Facility (defined and described in “Management’s discussion and analysis of financial condition and results of operations—Our credit facilities”). Borrowings under the Existing Nine Credit Facility bear interest at a variable rate. At September 30, 2017, the weighted average interest rates on borrowings under the Existing Nine U.S. Revolving Credit Facility and the Existing Nine Canadian Revolving Credit Facility, all of which were incurred to fund working capital, were each approximately 5.7%. All loans and other obligations under the Existing Nine Credit Facility are scheduled to mature on May 31, 2018. We intend to terminate the Existing Nine Credit Facility in connection with this offering. See “Management’s discussion and analysis of financial condition and results of operations—Our credit facilities—Existing Nine Credit Facility” for additional information regarding the Existing Nine Credit Facility.

 

(2)   Pursuant to the Existing Beckman Credit Facility, Beckman has a $6.0 million term loan tranche (with a weighted average interest rate of 7.0% at September 30, 2017) and a $105.5 million term loan tranche (with a weighted average interest rate of 5.7% at September 30, 2017). Also, as of September 30, 2017, Beckman had $9.5 million of outstanding revolving borrowings, which were incurred to fund working capital, under the Existing Beckman Revolving Facility (defined and described in “Management’s discussion and analysis of financial condition and results of operations—Our credit facilities”). Borrowings under the Existing Beckman Credit Facility bear interest at a variable rate. At September 30, 2017, the weighted average interest rate on borrowings under the Existing Beckman Revolving Facility was approximately 5.9%. All loans and other obligations under the Existing Beckman Credit Facility are scheduled to mature on June 30, 2018, except for a portion of the term loans, of which $0.8 million is due in the fourth quarter of 2017 and $0.8 million is due in the first quarter of 2018. We intend to terminate the Existing Beckman Credit Facility in connection with this offering. See “Management’s discussion and analysis of financial condition and results of operations—Our credit facilities—Existing Beckman Credit Facility” for additional information regarding the Existing Beckman Credit Facility.

Because an affiliate of Wells Fargo Securities, LLC is a lender under the Existing Nine Credit Facility and the Existing Beckman Credit Facility and an affiliate of J.P. Morgan Securities LLC is a lender under the Existing Nine Credit Facility and may receive 5% or more of the net proceeds of this offering, Wells Fargo Securities, LLC and J.P. Morgan Securities LLC may be deemed to have a “conflict of interest” under FINRA Rule 5121, and as a result, this offering will be conducted under that rule. Pursuant to FINRA Rule 5121, a “qualified independent underwriter” meeting certain standards is required to participate in the preparation of the registration statement and prospectus and exercise the usual standards of due diligence with respect thereto. Goldman Sachs & Co. LLC has agreed to act as a “qualified independent underwriter” within the meaning of FINRA Rule 5121 in connection with this offering. See “Underwriting (conflicts of interest).”

 

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A $1.00 increase or decrease in the assumed initial public offering price of $21.50 per share would cause the net proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses, received by us to increase or decrease, respectively, by approximately $6.6 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. If the proceeds increase due to a higher initial public offering price, we would use the additional net proceeds for general corporate purposes. If the proceeds decrease due to a lower initial public offering price, then we would first reduce by a corresponding amount the net proceeds directed to general corporate purposes and then, if necessary, the net proceeds directed to repay the outstanding borrowings under the Existing Nine Credit Facility and the Existing Beckman Credit Facility. We expect to borrow term loans under our new credit facility concurrently with the consummation of this offering, which we will use, along with a portion of the net proceeds them this offering, to fully repay the outstanding borrowings under the Existing Nine Credit Facility and the Existing Beckman Credit Facility. Availability under our new credit facility is conditioned upon the consummation of this offering as well as certain other closing conditions, including a closing liquidity requirement of $60.0 million (after giving effect to any borrowings to be made on the day on which we utilize our new credit facility, the issuance of any letters of credit on such date and the payment of all fees and expenses due under the new credit facility). Such closing liquidity consists of the sum of our unrestricted cash and cash equivalents and the availability under our new credit facility.

 

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Dividend policy

We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to fund our operations and to develop and grow our business. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors our board of directors deems relevant, including our results of operations, financial condition, capital requirements and investment opportunities. In addition, our new credit facility will place restrictions on our ability to pay cash dividends.

 

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Capitalization

The following table sets forth our capitalization as of September 30, 2017:

 

 

on an actual basis; and

 

 

on an as adjusted basis to give effect to (i) an increase in our authorized shares of capital stock, (ii) the consummation of the approximately 8.0256 for 1 stock split of our issued and outstanding common stock effected immediately prior to the consummation of this offering, (iii) the effectiveness of, and term loan borrowings under, our new credit facility and application of those proceeds and (iv) the sale by us of 7,000,000 shares of our common stock in this offering at an assumed initial offering price of $21.50 per share (which is the midpoint of the range set forth on the cover of this prospectus) and the application of the net proceeds from this offering as set forth under “Use of proceeds.”

The as adjusted information set forth in the table below is illustrative only and the as adjusted information will be adjusted based on the actual initial public offering price and other final terms of this offering. You should read the following table in conjunction with “Use of proceeds,” “Selected financial data,” “Management’s discussion and analysis of financial condition and results of operations” and our historical combined financial statements and related notes thereto appearing elsewhere in this prospectus.

 

      As of September 30, 2017  
(in thousands, except share and per share amounts)    Actual     As adjusted(1)  
              

Cash and cash equivalents

   $ 30,171     $ 52,668  
  

 

 

   

 

 

 

Long-term debt, excluding current maturities:

    

Existing Nine Credit Facility

   $ 119,790     $  

Existing Beckman Credit Facility

     121,050        

New credit facility(2)

    

Term loan borrowings

           125,000  

Revolving credit borrowings

            

Less: current maturities

     (240,840     (12,500
  

 

 

   

 

 

 

Total long-term debt(3)

   $     $ 112,500  
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, $0.01 par value; 6,000,000 shares authorized, actual; 120,000,000 shares authorized, as adjusted; 1,965,543 shares issued and outstanding, actual; 23,300,596 shares issued and outstanding, as adjusted

   $ 19     $ 233  

Preferred stock, $0.01 par value; 100,000 shares authorized, actual; 20,000,000 shares authorized, as adjusted; no shares issued and outstanding, actual and as adjusted

            

Additional paid-in capital

     383,916       522,143  

Retained earnings (accumulated deficit)

     (64,270     (64,270

Treasury stock

            

Accumulated other comprehensive loss

     (3,678     (3,678
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 315,987     $ 454,428  
  

 

 

   

 

 

 

Total capitalization

   $ 315,987     $ 566,928  

 

 

 

(1)  

A $1.00 increase (decrease) in the assumed initial public offering price of $21.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $6.6 million, $7.0 million, $7.0 million and $7.0 million, respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of one million

 

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shares offered by us at an assumed offering price of $21.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $20.2 million, $21.5 million, $21.5 million and $21.5 million, respectively, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(2)   Concurrently with, and conditioned upon, the consummation of this offering, we intend to satisfy the initial conditions to borrowing under our new credit facility. We expect to borrow $125 million in term loans upon consummation of this offering and to have $50 million of undrawn revolver capacity under our new credit facility at such time. Borrowings under our new credit facility may vary significantly from time to time depending on our cash needs at any given time.

 

(3)   Excludes deferred financing costs.

 

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Dilution

Purchasers of the common stock in this offering will experience immediate and substantial dilution in the net tangible book value per share of the common stock for accounting purposes. Our pro forma net tangible book value as of September 30, 2017 was approximately $121.2 million, or $7.43 per share of common stock. Pro forma net tangible book value per share is determined by dividing our tangible net worth (tangible assets less total liabilities) by the total number of outstanding shares of common stock that will be outstanding immediately prior to the closing of this offering (after giving effect to the Stock Split). After giving effect to the sale of 7,000,000 shares in this offering at an assumed initial public offering price of $21.50 per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting estimated discounts and commissions and offering expenses, our adjusted pro forma net tangible book value as of September 30, 2017 would have been approximately $259.5 million, or $11.14 per share. This represents an immediate increase in the net tangible book value of $3.71 per share to our existing stockholders and an immediate dilution (i.e., the difference between the offering price and the adjusted pro forma net tangible book value after this offering) to new investors purchasing shares in this offering of $10.36 per share. The following table illustrates the per share dilution to new investors purchasing shares in this offering:

 

Assumed initial public offering price per share

            $ 21.50  

Pro forma net tangible book value per share as of September 30, 2017

   $ 7.43     

Increase per share attributable to new investors in this offering

     3.71     
  

 

 

    

Adjusted pro forma net tangible book value per share

        11.14  
     

 

 

 

Dilution in adjusted pro forma net tangible book value per share to new investors in this offering

      $ 10.36  

 

 

The following table summarizes, on an adjusted pro forma basis as of September 30, 2017, the total number of shares of common stock owned by existing stockholders and to be owned by the new investors in this offering, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by the new investors in this offering at $21.50, the midpoint of the price range set forth on the cover page of this prospectus, calculated before deducting of estimated discounts and commissions and offering expenses:

 

      Shares acquired      Total consideration      Average price
per share
 
      Number      Percent      Amount      Percent     

Existing stockholders

     16,300,596        70%      $        0%      $ 21.50  

New investors in this offering

     7,000,000        30%        151        100%     
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

     23,300,596        100.0%      $ 151        100.0%     

 

 

Assuming the underwriters’ option to purchase additional shares is exercised in full, the number of shares held by new investors will be increased to 8,050,000, or 33% on an adjusted pro forma basis as of September 30, 2017.

A $1.00 increase or decrease in the assumed initial public offering price of $21.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease our adjusted pro forma net tangible book value as of September 30, 2017 by approximately $6.6 million, the adjusted pro forma net tangible book value per share after this offering by $0.28 per share and the dilution in adjusted pro forma net tangible book value per share to new investors in this offering by $0.28 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses.

 

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Selected financial data

The following table presents our selected financial data for the periods and as of the dates indicated. The financial data set forth below, as well as our audited combined financial statements and related notes thereto and our unaudited condensed consolidated financial statements and related notes thereto, each included elsewhere in this prospectus and, except as otherwise indicated, all financial data provided in this prospectus, give effect to the Combination and represent the combined results of Nine and Beckman and their respective subsidiaries.

The selected historical combined financial data as of and for the years ended December 31, 2015 and 2016 are derived from our audited historical combined financial statements and related notes thereto included elsewhere in this prospectus. The selected financial data for the nine months ended September 30, 2016 and 2017, and as of September 30, 2017, are derived from our unaudited historical condensed consolidated financial statements and related notes thereto included elsewhere in this prospectus. The selected historical combined financial data as of and for the year ended December 31, 2014 are derived from our unaudited combined financial statements not included in this prospectus, which were derived from the audited financial statements of Nine as of and for the year ended December 31, 2014 and the audited financial statements of Beckman as of and for the year ended December 31, 2014, also not included in this prospectus. The 2014 unaudited combined data of Nine and Beckman was prepared on the same basis as the audited combined financial statements included in this prospectus. The selected historical condensed consolidated financial data for the three months ended March 31, 2017, June 30, 2017 and September 30, 2017 are derived from our unaudited historical condensed consolidated financial statements, not included in this prospectus.

Historical results are not necessarily indicative of our future results of operations, financial position and cash flows.

The data presented below should be read in conjunction with, and are qualified in their entirety by reference to, “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations” and our combined historical financial statements and the notes thereto included elsewhere in this prospectus. Among other things, those historical combined financial statements and related notes thereto include more detailed information regarding the basis of presentation for the following information.

 

     Nine months ended
September 30,
           Year ended December 31,  
(in thousands, except share and per share information)   2017     2016            2016     2015     2014(1)  
    (unaudited)                       (unaudited)  

Statement of operations data:

           

Revenues

  $ 389,380     $ 202,368       $ 282,354     $ 478,522     $ 663,191  

Cost and expenses

           

Cost of revenues (exclusive of depreciation and amortization shown separately below)

    322,901       178,676         246,109       373,191       434,064  

General and administrative expenses

    37,628       26,194         39,387       42,862       51,321  

Depreciation

    40,326       41,779         55,260       58,894       40,173  

Impairment of goodwill

                  12,207       35,540        

Amortization of intangibles

    6,601       6,794         9,083       8,650       6,389  

Loss on equity investment

    255                            

Loss on sale of property and equipment

    4,793       2,420         3,320       2,004       971  
 

 

 

   

 

 

     

 

 

 

Income (loss) from operations

    (23,124     (53,495       (83,012     (42,619     130,273  
 

 

 

   

 

 

     

 

 

 

Other expense

           

Interest expense

    11,780       10,681         14,185       9,886       9,586  
 

 

 

   

 

 

     

 

 

 

Total other expense

    11,780       10,681         14,185       9,886       9,586  
 

 

 

   

 

 

     

 

 

 

Income (loss) from continuing operations before income taxes

    (34,904     (64,176       (97,197     (52,505     120,687  

Provision (benefit) for income taxes

    2,967       (19,017       (26,286     (14,323     44,515  
 

 

 

   

 

 

     

 

 

 

Income (loss) from continuing operations (net of tax)

    (37,871     (45,159       (70,911     (38,182     76,172  

Loss from discontinued operations, net of tax ($0, $0, $0, $513 and $11,158)(2)

                        (935     (28,207
 

 

 

   

 

 

     

 

 

 

Net income (loss)

    (37,871     (45,159       (70,911     (39,117     47,965  

 

 

 

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     Nine months ended
September 30,
    Year ended December 31,  
(in thousands, except share and per share
information)
  2017     2016     2016     2015     2014(1)  
    (unaudited)                 (unaudited)  

Other comprehensive income, net of tax

         

Foreign currency translation adjustments, net of tax of $0, $0, $0, $0 and $58

    (192     203       210       (4,067     181  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

    (192     203       210       (4,067     181  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

  $ (38,063   $ (44,956   $ (70,701   $ (43,184   $ 48,146  
 

 

 

   

 

 

   

 

 

   

 

 

 

Historical earnings per share data(3):

         

Weighted average shares outstanding—basic

    1,805,816       1,651,240       1,653,277       1,643,912       1,374,510  

Income (loss) from continuing operations per share—basic

  $ (20.97   $ (27.35   $ (42.89   $ (23.23   $ 55.42  

Loss from discontinued operations per share—basic

  $     $     $     $ (0.57   $ (20.52

Net income (loss) per share—basic

  $ (20.97   $ (27.35   $ (42.89   $ (23.80   $ 34.90  

Weighted average shares outstanding—fully diluted

    1,805,816       1,651,240       1,653,277       1,643,912       1,597,866  

Income (loss) from continuing operations per share—fully diluted

  $ (20.97   $ (27.35   $ (42.89   $ (23.23   $ 47.67  

Loss from discontinued operations per share—fully diluted

  $     $     $     $ (0.57   $ (17.65

Net income (loss) per share—fully diluted

  $ (20.97   $ (27.35   $ (42.89   $ (23.80   $ 30.02  

Pro forma earnings per share data(4) (Unaudited):

         

Pro forma weighted average shares outstanding—basic and diluted

    21,492,757         20,268,540      

Pro forma loss per share—basic and diluted

  $ (1.76     $ (3.50    

 

 

Balance sheet data at period end:

         

Cash and cash equivalents

  $ 30,171       $ 4,074     $ 18,877     $ 24,236  

Property and equipment, net

    264,300         273,210       325,894       376,920  

Total assets

    628,382         576,094       658,434       869,933  

Debt

    240,840         245,888       252,378       379,658  

Total stockholders’ equity

    315,987         288,186       352,676       389,644  

 

 

Statement of Cash Flows data:

         

Net cash (used in) provided by operating activities

  $ 3,775     $ 1,200     $ (3,290   $ 140,367     $ 127,188  

Net cash used in investing activities

    (29,816     (2,723     (4,176     (19,251     (456,955

Net cash (used in) provided by financing activities

    52,223       (10,852     (7,315     (126,878     335,813  

Other financial data:

         

EBITDA(5) (unaudited)

  $ 23,803     $ (4,922   $ (18,669   $ 23,990     $ 148,628  

Adjusted EBITDA(5) (unaudited)

    40,869       4,604       9,824       73,901       188,192  

ROIC(5) (unaudited)

    (6 )%      (9 )%      (11 )%      (5 )%      16

Adjusted gross profit (excluding depreciation and amortization)(5) (unaudited)

  $ 66,479     $ 23,692     $ 36,245     $ 105,331     $ 229,127  

 

 

 

(1)   We closed the acquisitions of Dak-Tana Wireline on April 30, 2014 and Crest Pumping Technologies on June 30, 2014 and Beckman closed the acquisitions of RedZone Coil Tubing on May 2, 2014 and Big Lake Services, LLC on August 29, 2014. As a result, financial results relating to each acquisition for periods prior to the close of each of the aforementioned acquisitions are not reflected in the full year 2014 results.

 

(2)   For 2014, represents a non-cash impairment charge related to the divestiture of certain assets of a subsidiary whose primary focus was conventional completions. See “Note 14—Discontinued Operations” to the financial statements included in this registration statement for additional detail regarding the Tripoint divestiture.

 

(3)   Historical share and per share information does not give effect to the approximately 8.0256 for 1 stock split of our issued and outstanding common stock effected immediately prior to the consummation of this offering.

 

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(4)   Pro forma earnings per share data give effect to (i) the approximately 8.0256 for 1 stock split of our issued and outstanding common stock effected immediately prior to the consummation of this offering and (ii) the issuance by us of 7,000,000 shares of common stock pursuant to this offering, and the application of the net proceeds from this offering as set forth under “Use of proceeds,” assuming an initial public offering price of $21.50 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus). This pro forma earnings per share data is presented for informational purposes only and does not purport to represent what our pro forma net income (loss) or earnings (loss) per share actually would have been had the Stock Split occurred on January 1, 2016 or to project our net income or earnings per share for any future period.

 

(5)   EBITDA, Adjusted EBITDA, ROIC and adjusted gross profit (excluding depreciation and amortization) are non-GAAP financial measures. For definitions of these measures, a reconciliation of EBITDA and Adjusted EBITDA to our net income (loss), an explanation of our calculation of ROIC and a reconciliation of adjusted gross profit (excluding depreciation and amortization) to gross profit (loss), see “—Non-GAAP financial measures” below.

 

      Three months ended  
      September 30,
2017
    June 30,
2017
    March 31,
2017
 
     (unaudited)  

Statement of operations data:

      

Revenues

   $ 148,167     $ 135,860     $ 105,353  

Loss from operations

     (193     (8,141     (14,790

Net loss

     (5,052     (12,105     (20,714

Other financial data:

      

EBITDA(1) (unaudited)

     15,157       7,674       972  

Adjusted EBITDA(1) (unaudited)

     18,088       16,727       6,054  

ROIC(1) (unaudited)

           (6 )%      (13 )% 

Adjusted gross profit (excluding depreciation and amortization)(1) (unaudited)

   $ 28,258     $ 24,256     $ 13,965  

 

 

 

(1)   EBITDA, Adjusted EBITDA, ROIC and adjusted gross profit (excluding depreciation and amortization) are non-GAAP financial measures. For definitions of these measures, a reconciliation of EBITDA and Adjusted EBITDA to our net income (loss), an explanation of our calculation of ROIC and a reconciliation of adjusted gross profit (excluding depreciation and amortization) to gross profit (loss), see “—Non-GAAP financial measures” below.

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 combined financial statements, such as industry analysts, investors, lenders and rating agencies.

We define EBITDA as net income (loss) before interest expense, depreciation, amortization and income tax expense. EBITDA is not a measure of net income or cash flows as determined by U.S. GAAP.

We define Adjusted EBITDA as EBITDA further adjusted for (i) impairment of goodwill and other intangible assets, (ii) transaction expenses related to acquisitions or the Combination, (iii) loss from discontinued operations, (iv) loss or gains from the revaluation of contingent liabilities, (v) non-cash stock-based compensation expense, (vi) loss or gains on sale of assets, (vii) inventory writedown, and (viii) adjustment for expenses or charges, to exclude certain items which we believe are not reflective of ongoing performance of our business, such as costs related to this offering, legal expenses and settlement costs related to litigation outside the ordinary course of business, and restructuring costs.

Management believes EBITDA and Adjusted EBITDA are useful because they allow for a more effective evaluation of our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at these measures because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the

 

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method by which the assets were acquired. These measures should not be considered as an alternative to, or more meaningful than, net income or cash flows from operating activities as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. 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 and may also be used by investors to measure our ability to meet debt service requirements.

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):

 

     Nine months ended
September 30,
    Three months ended     Year ended December 31,     Six months
ended
    Six months
ended
 
(in thousands)
(unaudited)
  2017     2016     September 30,
2017
    June 30,
2017
    March 31,
2017
    2016     2015     2014(1)     June 30,
2014(1)
    December 31,
2014(1)
 

EBITDA reconciliation:

                   

Net income (loss)

  $ (37,871   $ (45,159   $ (5,052   $ (12,105   $ (20,714   $ (70,911   $ (39,117   $ 47,965     $ 27,059     $ 20,906  

Interest expense

    11,780       10,681       4,093       3,929       3,758       14,185       9,886       9,586       2,838       6,748  

Depreciation

    40,326       41,779       13,150       13,615       13,561       55,260       58,894       40,173       13,080       27,093  

Amortization

    6,601       6,794       2,200       2,200       2,201       9,083       8,650       6,389       2,056       4,333  

Provision (benefit) from income taxes

    2,967       (19,017     766       35       2,166       (26,286     (14,323     44,515       16,957       27,558  
 

 

 

   

 

 

 

EBITDA

  $ 23,803     $ (4,922   $ 15,157     $ 7,674     $ 972     $ (18,669   $ 23,990     $ 148,628     $ 61,990     $ 86,638  
 

 

 

   

 

 

 

Adjusted EBITDA reconciliation:

                   

EBITDA

  $ 23,803     $ (4,922   $ 15,157     $ 7,674     $ 972     $ (18,669   $ 23,990     $ 148,628     $ 61,990     $ 86,638  

Impairment of goodwill and other intangible assets

                                  12,207       35,540                    

Transaction expenses

    3,415             50       370       2,995             208       3,911       2,817       1,094  

Loss from discontinued operations(2)

                                        935       28,207       1,963       26,244  

Loss or gains from the revaluation of contingent
liabilities(3)

    421             277       57       87       1,735       (293                  

Loss on equity investment

    255             83       172                                      

Non-cash stock-based compensation expense

    6,380       4,314       2,185       2,659       1,536       5,711       5,473       5,445       1,947       3,498  

Loss or gains on sale of assets

    4,793       2,420       148       4,421       224       3,320       2,004       971       46       925  

Legal fees and settlements(4)

    778       1,521       188       350       240       4,145                          

Inventory write down

    1,024       287             1,024             287       2,772       1,030             1,030  

Restructuring costs

          984                         1,088       3,272                    
 

 

 

   

 

 

 

Adjusted EBITDA

  $ 40,869     $ 4,604     $ 18,088     $ 16,727     $ 6,054     $ 9,824     $ 73,901     $ 188,192     $ 68,763     $ 119,429  

 

   

 

 

 

 

(1)   We closed the acquisitions of Dak-Tana Wireline on April 30, 2014 and Crest Pumping Technologies on June 30, 2014 and Beckman closed the acquisitions of RedZone Coil Tubing on May 2, 2014 and Big Lake Services, LLC on August 29, 2014. As a result, financial results relating to each acquisition for periods prior to the close of each of the aforementioned acquisitions are not reflected in the full year 2014 results. We believe that presenting investors with the selected information for the six months ended December 31, 2014 provides a representative period of the profitability of our business in a high demand environment, including six months of results from the acquisitions of Dak-Tana Wireline, Crest Pumping Technologies and RedZone Coil Tubing and the results of the acquisition of Big Lake Services, LLC from August 29, 2014 through December 31, 2014. For comparative purposes, we have also included such information for the six months ended June 30, 2014.
(2)   For 2014, represents a non-cash impairment charge related to the divestiture of certain assets of a subsidiary whose primary focus was conventional completions. See “Note 14—Discontinued Operations” to the financial statements included in this registration statement for additional detail regarding the Tripoint divestiture.

 

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(3)   Loss or gain related to the revaluation of liability for contingent consideration relating to our acquisition of Scorpion to be paid in shares of Company common stock and in cash, contingent upon quantities of Scorpion Composite Plugs sold during 2016 and gross margin related to the product sales for three years following the acquisition.
(4)   Amount represents fees and legal settlements associated with legal proceedings brought pursuant to the Fair Labor Standards Act and/or similar state laws.

Return on invested capital (ROIC)

ROIC is a supplemental non-GAAP financial measure. We define ROIC as net operating profit less income taxes, divided by average total capital. We define net operating profit as net income (loss) plus interest expense, less taxes on interest. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We then take the average of the current and prior year-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:

 

    

Nine months ended

September 30,

   

Three months ended

   

Year ended December 31,

 
(in thousands)   2017     2016     September 30,
2017
    June 30,
2017
    March 31,
2017
    2016     2015     2014  

Income (loss) from continuing operations (net of tax)

  $ (37,871   $ (45,159   $ (5,052   $ (12,105   $ (20,714   $ (70,911   $ (38,182   $ 76,172  

Add back:

               

Interest expense

    11,780       10,681       4,093       3,929       3,758       14,185       9,886       9,586  

Taxes on interest

    1,001       (3,165     448       283       270       (3,836     (2,697     (3,536
 

 

 

   

 

 

 

After-tax net operating profit

  $ (25,090   $ (37,643   $ (511   $ (7,893   $ (16,686   $ (60,562   $ (30,993   $ 82,222  
 

 

 

   

 

 

 

Total capital as of prior year-end(1):

               

Total stockholders’ equity

  $ 288,186     $ 352,676     $ 288,186     $ 288,186     $ 288,186     $ 352,676     $ 389,644     $ 192,522  

Total debt

    245,888       252,378       245,888       245,888       245,888       252,378       379,658       140,767  

Less: Cash and cash equivalents

    (4,074     (18,877     (4,074     (4,074     (4,074     (18,877     (24,236     (18,505
 

 

 

   

 

 

 

Total capital

  $ 530,000     $ 586,177     $ 530,000     $ 530,000     $ 530,000     $ 586,177     $ 745,066     $ 314,784  
 

 

 

   

 

 

 

Total capital as of year-end:

               

Total stockholders’ equity

  $ 315,987     $ 312,036     $ 315,987     $ 298,883     $ 308,409     $ 288,186     $ 352,676     $ 389,644  

Total debt

    240,840       242,535       240,840       256,072       251,473       245,888       252,378       379,658  

Less: Cash and cash equivalents

    (30,171     (6,542     (30,171     (12,127     (27,039     (4,074     (18,877     (24,236
 

 

 

   

 

 

 

Total capital

  $ 526,656     $ 548,029     $ 526,656     $ 542,828     $ 532,843     $ 530,000     $ 586,177     $ 745,066  
 

 

 

   

 

 

 

Average total capital

  $ 528,328     $ 567,103     $ 528,328     $ 536,414     $ 531,422     $ 558,089     $ 665,622     $ 529,925  
 

 

 

   

 

 

 

ROIC (unaudited)

    (6)%       (9)%       0%       (6)%       (13)%       (11)%       (5)%       16%  

 

   

 

 

 
(1)   For 2014, total capital as of prior year-end is based on Beckman and Nine combined unaudited historical financial information not included in this prospectus.

 

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Adjusted gross profit (excluding depreciation and amortization)

GAAP defines gross profit as revenues less cost of revenues, and includes in costs of revenues depreciation and amortization expenses. We define adjusted gross profit (excluding depreciation and amortization) as revenues less cost of revenues (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit because we do not include the impact of depreciation and amortization, which represent non-cash expenses.

Management uses adjusted gross profit (excluding depreciation and amortization) to evaluate operating performance and to determine resource allocation between segments. We prepare adjusted gross profit (excluding depreciation and amortization) to eliminate the impact of depreciation and amortization because we do not consider depreciation or amortization indicative of our core operating performance. Adjusted gross profit (excluding depreciation and amortization) 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 (excluding depreciation and amortization) may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted gross profit (excluding depreciation and amortization) or similarly titled measures in the same manner as we do.

The following table presents a reconciliation of adjusted gross profit (excluding depreciation and amortization) to GAAP gross profit (loss).

 

     Nine months ended
September 30,
    Three months ended     Year ended December 31,  
(in thousands)   2017     2016     September 30,
2017
    June 30,
2017
    March 31,
2017
    2016     2015     2014(1)  

Calculation of gross profit (loss):

               

Revenues

  $ 389,380     $ 202,368     $ 148,167     $ 135,860     $ 105,353     $ 282,354     $ 478,522     $ 663,191  

Cost of revenue (exclusive of depreciation and amortization)

    322,901       178,676       119,909       111,604       91,388       246,109       373,191       434,064  

Depreciation (related to cost of revenues)

    39,658       41,091       12,927       13,397       13,334       54,344       58,042       39,719  

Amortization

    6,601       6,794       2,200       2,200       2,201       9,083       8,650       6,389  
 

 

 

   

 

 

 

Gross (loss) profit

  $ 20,220     $ (24,193   $ 13,131     $ 8,659     $ (1,570   $ (27,182   $ 38,639     $ 183,019  
 

 

 

   

 

 

 

Adjusted gross profit (excluding depreciation and amortization) reconciliation:

               

Gross (loss) profit

  $ 20,220     $ (24,193   $ 13,131     $ 8,659     $ (1,570   $ (27,182   $ 38,639     $ 183,019  

Depreciation (related to cost of revenues)

    39,658       41,091       12,927       13,397       13,334       54,344       58,042       39,719  

Amortization

    6,601       6,794       2,200       2,200       2,201       9,083       8,650       6,389  
 

 

 

   

 

 

 

Adjusted gross profit (excluding depreciation and amortization) (unaudited)

  $ 66,479     $ 23,692     $ 28,258     $ 24,256     $ 13,965     $ 36,245     $ 105,331     $ 229,127  

 

   

 

 

 

 

(1)   We closed the acquisitions of Dak-Tana Wireline on April 30, 2014 and Crest Pumping Technologies on June 30, 2014 and Beckman closed the acquisitions of RedZone Coil Tubing on May 2, 2014 and Big Lake Services, LLC on August 29, 2014. As a result, financial results relating to each acquisition for periods prior to the close of each of the aforementioned acquisitions are not reflected in the full year 2014 results.

 

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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 “Selected financial data” and our financial statements and related notes appearing elsewhere in this prospectus. This discussion 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 anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in this prospectus under “Cautionary note regarding forward-looking statements” and “Risk factors.” We assume no obligation to update any of these forward-looking statements.

Overview

We are a leading North American onshore completion and production services provider that targets unconventional oil and gas resource development. We partner with our E&P customers across all major onshore basins in both the U.S. and Canada 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.

On February 28, 2017, we completed the Combination, pursuant to which all of the issued and outstanding shares of Beckman common stock were converted into shares of our common stock, other than 1.6% of Beckman shares paid in cash. Prior to the Combination, Beckman, a growth-oriented oilfield services company that provides a wide range of well service and coiled tubing services, was also an SCF Partners portfolio company. As a result, the Combination is accounted for using the reorganization accounting method for entities under common control. Under this method of accounting, the combined financial statements and the discussions herein include the operating results of Nine and Beckman. In this prospectus, unless the context otherwise requires, the terms “Nine,” “we,” “us,” “our” and the “Company” refer to (i) Nine Energy Service, Inc. and its subsidiaries together with Beckman prior to the Combination and (ii) Nine Energy Service, Inc. and its subsidiaries after the Combination. For more information on the Combination, see “Certain relationships and related party transactions—The Combination.”

We operate in two segments:

 

 

Completion Solutions:    Our Completion Solutions segment provides services integral to the completion of unconventional wells through a full range of tools and methodologies. Through our Completion Solutions segment, we provide (i) cementing services, which consist of blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped between the casing and the wellbore of the well, (ii) an innovative portfolio of completion tools, including those that provide pinpoint frac sleeve system technologies, which enable comparable rates per stage while providing more control over fracture initiation, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns to a specified depth, and (iv) coiled tubing services, which perform wellbore intervention operations utilizing a continuous steel pipe that is transported to the wellsite wound on a large spool in lengths of up to 25,000 feet and which provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well.

 

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Production Solutions:    Our Production Solutions segment provides a range of production enhancement and well workover services that are performed with a well servicing rig and ancillary equipment. Our well servicing business encompasses a full range of services performed with a mobile well servicing rig (or workover rig) and ancillary equipment throughout a well’s life cycle from completion to ultimate plug and abandonment. Our rigs and personnel install and remove downhole equipment and eliminate obstructions in the well to facilitate the flow of oil and natural gas, often immediately increasing a well’s production. We believe the production increases generated by our well services substantially enhance our customers’ returns and significantly reduce their payback periods.

For more information on our services and segments, see “Business—Our services.”

How we generate revenue and the costs of conducting our business

We generate our revenues by providing completion and production services to E&P customers across all major onshore basins in both the U.S. and Canada. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically will enter into a Master Service Agreement (“MSA”) with each customer that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Each specific job is obtained through competitive bidding or as a result of negotiations with customers. The rate we charge is determined by location, complexity of the job, operating conditions, duration of the contract and market conditions. In addition to MSAs, we have entered into a select number of longer-term contracts with certain customers relating to our wireline and cementing services, and we may enter into similar contracts from time to time to the extent beneficial to the operation of our business. These longer-term contracts address pricing and other details concerning our services, but each job is performed on a standalone basis.

The principal expenses involved in conducting both our Completion Solutions and Production Solutions segments are 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.

How we evaluate our operations

We manage our operations through two business segments, Completion Solutions and Production Solutions, as described above. We evaluate the performance of these segments 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 each of our segments compared to historical revenue drivers or market metrics applicable to that service. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes.

 

 

Adjusted gross profit (excluding depreciation and amortization) and adjusted gross profit margin:    Adjusted gross profit (excluding depreciation and amortization) is a key metric that we use to evaluate segment operating performance and to determine resource allocation between segments. We define segment adjusted gross profit (excluding depreciation and amortization) as segment revenues less segment 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. Adjusted gross profit margin is calculated by dividing

 

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adjusted gross profit (excluding depreciation and amortization) by revenue. Our management continually evaluates our combined adjusted gross margin percentage and our adjusted gross margin percentage by segment to determine how each segment is performing. This metric aids management in capital resource allocation and pricing decisions.

 

 

Adjusted EBITDA:    Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our combined financial statements, such as industry analysts, investors, lenders and rating agencies. We define Adjusted EBITDA as net income (loss) before interest expense, taxes and depreciation and amortization, further adjusted for (i) impairment of goodwill and other intangible assets, (ii) transaction expenses related to acquisitions or the Combination (iii) loss from discontinued operations, (iv) loss or gains from the revaluation of contingent liabilities, (v) non-cash stock-based compensation expense, (vi) loss or gains on sale of assets, (vii) inventory writedown, and (viii) adjustment for expenses or charges, to exclude certain items which we believe are not reflective of ongoing performance of our business, such as costs related to this offering, legal expenses and settlement costs related to litigation outside the ordinary course of business, and restructuring costs. Our management believes Adjusted EBITDA is useful because it allows 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. See “Prospectus summary—Summary financial data—Non-GAAP financial measures.”

 

 

Safety:    We measure safety by tracking the total recordable incident rate (“TRIR”), which is reviewed on a monthly basis. TRIR is a measure of the rate of recordable workplace injuries, defined below, normalized and stated on the basis of 100 workers for an annual period. The factor is derived by multiplying the number of recordable injuries in a calendar year by 200,000 (i.e., the total hours for 100 employees working 2,000 hours per year) and dividing this value by the total hours actually worked in the year. A recordable injury includes occupational death, nonfatal occupational illness and other occupational injuries that involve loss of consciousness, restriction of work or motion, transfer to another job, or medical treatment other than first aid.

Factors affecting the comparability of our future results of operations to our historical results of operations

Our future results of operations may not be comparable to our historical results of operations for the periods presented, primarily for the reasons described below:

 

 

Public company expenses:    Upon completion of this offering, we expect to incur direct, incremental G&A expenses as a result of being a publicly traded company, including, but not limited to, costs associated with hiring new personnel, annual and quarterly reports to stockholders, quarterly tax provision preparation, independent auditor fees, expenses relating to compliance with the rules and regulations of the SEC, listing standards of the NYSE and the Sarbanes-Oxley Act of 2002, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and independent director compensation. These direct, incremental G&A expenses are not included in our historical combined results of operations.

 

 

The Combination:    The historical combined financial statements included in this prospectus are based on the separate businesses of Nine and Beckman. As a result, the historical financial date may not give you an accurate indication of what our actual results would have been if the Combination, which was completed on February 28, 2017, would have been if it had been completed at the beginning of the periods presented or of what our future results of operations are likely to be. We anticipate the combination will provide potential benefits, including enhancing our ability to serve customers and our growth potential through broader product lines and basin diversification, enabling us to cross-sell our products and compete with larger companies.

 

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Decreased leverage:    As of September 30, 2017, on a pro forma basis giving effect to (i) the entry into our new credit facility and (ii) this offering and the use of a portion of the net proceeds therefrom, together with term loan borrowings under our new credit facility, to fully repay all outstanding borrowings under the Existing Nine Credit Facility and the Existing Beckman Credit Facility, we expect to have $125 million of outstanding total indebtedness, compared to the actual outstanding indebtedness of $240.8 million as of September 30, 2017. For more information on our new credit facility, under which we expect to make term loan borrowings concurrently with, and conditioned upon, the consummation of this offering, see “Management’s discussion and analysis of financial condition and results of operations—Our credit facilities—Our new credit facility.”

General trends and outlook

Our business depends to a significant extent on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. Oil and natural gas prices declined significantly between the third quarter of 2014 and the first quarter of 2016. However, oil and natural gas prices have since gradually increased, a positive trend that was bolstered in the fourth quarter of 2016 when members of the Organization of Petroleum Exporting Countries and certain other oil-producing nations agreed to reduce their oil output. This price recovery has stimulated an increase in onshore North American completions activity, and if the current price environment holds or continues to improve, we expect a further increase in demand for our services. As the demand for our services and complexity of our jobs increase, we expect prices for our services to increase, creating more favorable margins for the services we provide.

The increase in high-intensity, high-efficiency completions of oil and gas wells further enhances the demand for our services. We compete with a limited number of service companies for the most complex and technically demanding wells in which we specialize, which are characterized by extended laterals, increased stage spacing and cluster spacing and high proppant loads. These well characteristics lead to increased operating leverage and returns for us, as we are able to complete more jobs and stages with the same number of units and crews. Service providers for these projects are selected based on their technical expertise and ability to execute safely and efficiently, rather than only price.

See “Business—Our industry—Industry trends” for more information regarding industry trends.

 

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Results of operations

Nine months ended September 30, 2017 compared to nine months ended September 30, 2016

 

      Nine months ended
September 30,
 
(in thousands)    2017     2016  

Revenues

    

Completion Solutions

   $ 331,050     $ 156,768  

Production Solutions

     58,330       45,600  
  

 

 

 
     389,380       202,368  

Cost of revenues(1)

    

Completion Solutions

     275,711       139,920  

Production Solutions

     47,190       38,756  
  

 

 

 
     322,901       178,676  

Adjusted gross profit (excluding depreciation and amortization)

    

Completion Solutions

     55,339       16,848  

Production Solutions

     11,140