0001564590-18-029128.txt : 20181113 0001564590-18-029128.hdr.sgml : 20181113 20181113074248 ACCESSION NUMBER: 0001564590-18-029128 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 63 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181113 DATE AS OF CHANGE: 20181113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Nine Energy Service, Inc. CENTRAL INDEX KEY: 0001532286 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 800759121 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38347 FILM NUMBER: 181175158 BUSINESS ADDRESS: STREET 1: 2001 KIRBY DRIVE STREET 2: SUITE 200 CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: (713) 227-7888 MAIL ADDRESS: STREET 1: 2001 KIRBY DRIVE STREET 2: SUITE 200 CITY: HOUSTON STATE: TX ZIP: 77019 FORMER COMPANY: FORMER CONFORMED NAME: NSC-Tripoint, Inc. DATE OF NAME CHANGE: 20111007 10-Q 1 nine-10q_20180930.htm 10-Q nine-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM          TO            

Commission File Number: 001-38347

 

Nine Energy Service, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

80-0759121

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2001 Kirby Drive, Suite 200

Houston, TX 77019

(Address of principal executive offices) (zip code)

(281) 730-5100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  

 

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding at November 9, 2018, was 30,169,216.

 

 

 


TABLE OF CONTENTS

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

1

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

1

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017

 

2

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the period from December 31, 2017 to September 30, 2018

 

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

 

4

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

5

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

Item 4.

 

Controls and Procedures

 

28

PART II

 

OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

 

29

 

 

Item 1A.

 

Risk Factors

 

29

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

 

 

Item 3.

 

Defaults Upon Senior Securities

 

32

 

 

Item 4.

 

Mine Safety Disclosures

 

32

 

 

Item 5.

 

Other Information

 

32

 

 

Item 6.

 

Exhibits

 

33

 

 

 

 

Signatures

 

34

 

 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.

All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q; we disclaim any obligation to update these statements unless required by law, and we caution you not to place undue reliance on them. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved.

We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” in Item 1A of Part II in this Quarterly Report on Form 10-Q, “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, 2017, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I in this Quarterly Report on Form 10-Q, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2017.

Important factors, some of which are beyond our control, that could cause actual results to differ materially from our historical results or those expressed or implied by these forward-looking statements include the following:

 

the level of capital spending and well completions by the onshore oil and natural gas industry in North America;

 

oil and natural gas commodity prices;

 

general economic conditions;

 

our ability to employ, or maintain the employment of, a sufficient number of key employees, technical personnel and other skilled and qualified workers;

 

our ability to implement price increases or maintain existing prices on our services;

 

conditions inherent in the oilfield services industry, such as equipment defects, liabilities arising from accidents or damage involving our fleet of trucks or other equipment, explosions and uncontrollable flows of gas or well fluids, and loss of well control;

 

our ability to implement new technologies and services;

 

seasonal and adverse weather conditions;

 

changes in laws or regulations regarding issues of health, safety, and protection of the environment, including those relating to hydraulic fracturing, greenhouse gases, and climate change; and

 

our ability to successfully integrate the assets and operations that we acquired with our acquisition of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. and realize anticipated revenues, cost savings, or other benefits of such acquisition.

These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

 

 


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

86,534

 

 

$

17,513

 

Accounts receivable, net

 

 

162,437

 

 

 

99,565

 

Income taxes receivable

 

 

84

 

 

 

 

Inventories, net

 

 

29,571

 

 

 

22,230

 

Prepaid expenses and other current assets

 

 

7,035

 

 

 

7,929

 

Notes receivable from shareholders (Note 8)

 

 

10,551

 

 

 

 

Total current assets

 

 

296,212

 

 

 

147,237

 

Property and equipment, net

 

 

257,447

 

 

 

259,039

 

Goodwill

 

 

93,756

 

 

 

93,756

 

Intangible assets, net

 

 

57,892

 

 

 

63,545

 

Other long-term assets

 

 

1,144

 

 

 

4,806

 

Notes receivable from shareholders (Note 8)

 

 

 

 

 

10,476

 

Total assets

 

$

706,451

 

 

$

578,859

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

 

$

241,509

 

Accounts payable

 

 

49,497

 

 

 

29,643

 

Accrued expenses

 

 

44,600

 

 

 

14,687

 

Current portion of capital lease obligations

 

 

372

 

 

 

 

Income taxes payable

 

 

 

 

 

581

 

Total current liabilities

 

 

94,469

 

 

 

286,420

 

Long-term liabilities

 

 

 

 

 

 

 

 

Long-term debt

 

 

114,048

 

 

 

 

Deferred income taxes

 

 

5,983

 

 

 

5,017

 

Long-term lease obligations

 

 

1,266

 

 

 

 

Other long-term liabilities

 

 

55

 

 

 

64

 

Total liabilities

 

 

215,821

 

 

 

291,501

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock (120,000,000 shares authorized at $.01 par value; 25,114,597 and 15,810,540 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)

 

 

251

 

 

 

158

 

Additional paid-in capital

 

 

564,229

 

 

 

384,965

 

Accumulated other comprehensive loss

 

 

(4,121

)

 

 

(3,684

)

Accumulated deficit

 

 

(69,729

)

 

 

(94,081

)

Total stockholders’ equity

 

 

490,630

 

 

 

287,358

 

Total liabilities and stockholders’ equity

 

$

706,451

 

 

$

578,859

 

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

1


NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

$

218,427

 

 

$

148,167

 

 

$

597,726

 

 

$

389,380

 

Cost and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

165,882

 

 

 

119,909

 

 

 

467,700

 

 

 

322,901

 

General and administrative expenses

 

 

21,784

 

 

 

12,870

 

 

 

53,282

 

 

 

37,628

 

Depreciation

 

 

13,661

 

 

 

13,150

 

 

 

39,982

 

 

 

40,326

 

Amortization of intangibles

 

 

1,857

 

 

 

2,200

 

 

 

5,653

 

 

 

6,601

 

Loss on equity method investment

 

 

77

 

 

 

83

 

 

 

270

 

 

 

255

 

(Gain) loss on sale of property and equipment

 

 

(1,190

)

 

 

148

 

 

 

(1,701

)

 

 

4,793

 

Income (loss) from operations

 

 

16,356

 

 

 

(193

)

 

 

32,540

 

 

 

(23,124

)

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

1,568

 

 

 

4,093

 

 

 

6,313

 

 

 

11,780

 

Total other expense

 

 

1,568

 

 

 

4,093

 

 

 

6,313

 

 

 

11,780

 

Income (loss) before income taxes

 

 

14,788

 

 

 

(4,286

)

 

 

26,227

 

 

 

(34,904

)

Provision for income taxes

 

 

1,130

 

 

 

766

 

 

 

1,875

 

 

 

2,967

 

Net income (loss)

 

$

13,658

 

 

$

(5,052

)

 

$

24,352

 

 

$

(37,871

)

Net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

$

0.57

 

 

$

(0.34

)

 

$

1.05

 

 

$

(2.61

)

   Diluted

 

$

0.56

 

 

$

(0.34

)

 

$

1.03

 

 

$

(2.61

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

23,971,032

 

 

 

14,992,431

 

 

 

23,264,014

 

 

 

14,492,757

 

   Diluted

 

 

24,389,295

 

 

 

14,992,431

 

 

 

23,603,922

 

 

 

14,492,757

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of $0 tax in each period

 

$

207

 

 

$

(105

)

 

$

(437

)

 

$

(192

)

Total other comprehensive income (loss), net of tax

 

 

207

 

 

 

(105

)

 

 

(437

)

 

 

(192

)

Total comprehensive income (loss)

 

$

13,865

 

 

$

(5,157

)

 

$

23,915

 

 

$

(38,063

)

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

2


NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Retained

Earnings

(Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Income (Loss)

 

 

Deficit)

 

 

Equity

 

Stockholders’ equity as of December 31, 2017

 

 

15,810,540

 

 

$

158

 

 

$

384,965

 

 

$

(3,684

)

 

$

(94,081

)

 

$

287,358

 

Issuance of common stock in IPO, net of offering costs

 

 

8,050,000

 

 

 

81

 

 

 

168,180

 

 

 

 

 

 

 

 

 

168,261

 

Issuance of common stock under stock-based compensation plan

 

 

1,171,008

 

 

 

11

 

 

 

(11

)

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

9,719

 

 

 

 

 

 

 

 

 

9,719

 

Exercise of stock options

 

 

96,367

 

 

 

1

 

 

 

1,866

 

 

 

 

 

 

 

 

 

1,867

 

Vesting of restricted stock

 

 

(26,361

)

 

 

 

 

 

(790

)

 

 

 

 

 

 

 

 

(790

)

Other issuances of common stock

 

 

13,043

 

 

 

 

 

 

300

 

 

 

 

 

 

 

 

 

300

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(437

)

 

 

 

 

 

(437

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,352

 

 

 

24,352

 

Stockholders’ equity as of September 30, 2018

 

 

25,114,597

 

 

$

251

 

 

$

564,229

 

 

$

(4,121

)

 

$

(69,729

)

 

$

490,630

 

 

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

3


NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

24,352

 

 

$

(37,871

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities

 

 

 

 

 

 

 

 

Depreciation

 

 

39,982

 

 

 

40,326

 

Amortization of intangibles

 

 

5,653

 

 

 

6,601

 

Amortization of deferred financing costs

 

 

1,191

 

 

 

1,212

 

Recovery of doubtful accounts

 

 

(319

)

 

 

(7

)

Provision for deferred income taxes

 

 

965

 

 

 

2,624

 

Provision for inventory obsolescence

 

 

278

 

 

 

1,023

 

Stock-based compensation expense

 

 

9,719

 

 

 

6,380

 

(Gain) loss on sale of property and equipment

 

 

(1,701

)

 

 

4,793

 

Loss on revaluation of contingent liabilities (Note 9)

 

 

1,715

 

 

 

421

 

Loss on equity method investment

 

 

270

 

 

 

255

 

Changes in operating assets and liabilities, net of effects from acquisitions

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(62,702

)

 

 

(46,940

)

Inventories, net

 

 

(7,705

)

 

 

(6,560

)

Prepaid expenses and other current assets

 

 

1,760

 

 

 

(289

)

Accounts payable and accrued expenses

 

 

38,117

 

 

 

19,051

 

Income taxes receivable/payable

 

 

(666

)

 

 

14,577

 

Other assets and liabilities

 

 

(153

)

 

 

(1,821

)

Net cash provided by operating activities

 

 

50,756

 

 

 

3,775

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales of property and equipment

 

 

1,791

 

 

 

1,078

 

Proceeds from property and equipment casualty losses

 

 

1,743

 

 

 

97

 

Purchases of property and equipment

 

 

(29,545

)

 

 

(29,991

)

Equity method investment

 

 

 

 

 

(1,000

)

Net cash used in investing activities

 

 

(26,011

)

 

 

(29,816

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from revolving credit facilities

 

 

 

 

 

53,500

 

Payments on revolving credit facilities

 

 

(96,182

)

 

 

(37,500

)

Proceeds from term loan

 

 

125,000

 

 

 

 

Payments on term loans

 

 

(155,701

)

 

 

(21,725

)

Payments on notes payable—insurance premium financing

 

 

 

 

 

(272

)

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

 

 

171,450

 

 

 

 

Proceeds from other issuances of common stock

 

 

300

 

 

 

61,374

 

Proceeds from exercise of stock options

 

 

1,867

 

 

 

 

Vesting of restricted stock

 

 

(790

)

 

 

 

Distribution to shareholders

 

 

 

 

 

(2,438

)

Cost of debt issuance

 

 

(1,385

)

 

 

(716

)

Net cash provided by financing activities

 

 

44,559

 

 

 

52,223

 

Impact of foreign currency exchange on cash

 

 

(283

)

 

 

(85

)

Net increase in cash and cash equivalents

 

 

69,021

 

 

 

26,097

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of year

 

 

17,513

 

 

 

4,074

 

End of period

 

$

86,534

 

 

$

30,171

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,363

 

 

$

10,492

 

Cash paid (refunded) for income taxes

 

$

1,582

 

 

$

(14,311

)

Capital expenditures included in accounts payable and accrued expenses

 

$

11,946

 

 

$

8,566

 

 

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

4


NINE ENERGY SERVICE, INC.

NOTES TO THE FINANCIAL STATEMENTS

(unaudited)

1. Company and Organization

Company Description

Nine Energy Service, Inc. (the “Company” or “Nine”), a Delaware corporation, is an oilfield services business that provides services integral to the completion of unconventional wells through a full range of tools and methodologies and provides a range of production enhancement and well workover services. The Company is headquartered in Houston, Texas.

Magnum Acquisition

On October 25, 2018, pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (the “Magnum Purchase Agreement”), the Company acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum” and such acquisition, the “Magnum Acquisition”) for approximately $334.5 million in upfront cash consideration, subject to customary adjustments, and 5.0 million shares of the Company’s common stock, which were issued to the sellers of Magnum in a private placement. The Magnum Purchase Agreement also includes the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes and certain gains or losses) for the “E-Set” tools business in 2019 through 2025 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019. Due to the timing of the closing of the acquisition, the Company has not completed the detailed valuation work necessary to determine the required estimates of the fair value of the acquired assets and liabilities assumed and the related allocation of purchase price. The Company’s preliminary allocation of purchase price to the assets acquired will be included in the Company’s future filings.

Initial Public Offering

In January 2018, the Company completed its initial public offering (“IPO”) of 8,050,000 shares of common stock (including 1,050,000 shares pursuant to an over-allotment option) at a price to the public of $23.00 per share pursuant to a registration statement on Form S-1 (File 333-217601), as amended and declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on January 18, 2018. For additional information, see Note 10 – Stockholders’ Equity.

Beckman Combination

On February 28, 2017, pursuant to the terms and conditions of a combination agreement dated February 3, 2017, the Company merged with Beckman Production Services, Inc. (“Beckman”), and all of the issued and outstanding shares of Beckman common stock were converted into shares of common stock of Nine Energy Service, Inc. (the “Combination”). Prior to the Combination, SCF-VII, L.P. had controlled a majority of the voting interests of Nine and Beckman since February 28, 2011 and July 31, 2012, respectively. The merger of the entities into the combined company was accounted for using reorganization accounting (i.e., “as if” pooling of interest) for entities under common control. For additional information, see Note 4 – Acquisitions and Combinations.

2. Basis of Presentation

Condensed Consolidated Financial Information

The accompanying Condensed Consolidated Financial Statements have not been audited by the Company’s independent registered public accounting firm, except that the Condensed Consolidated Balance Sheet at December 31, 2017 and the Condensed Consolidated Statement of Stockholders' Equity as of December 31, 2017, are derived from audited Consolidated Financial Statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for the fair statement of the Company’s financial position, have been included. These Condensed Consolidated Financial Statements include all accounts of the Company.

These Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the SEC for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Therefore, these Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2017, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

5


Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of Nine and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Such estimates include fair value assumptions used in purchase accounting and in analyzing goodwill, other intangibles and long-lived assets for possible impairment, useful lives used in depreciation and amortization expense, stock-based compensation fair value, estimated realizable value on excess and obsolete inventories, deferred taxes and income tax contingencies, and losses on accounts receivable. It is at least reasonably possible that the estimates used will change within the next year.

3. New Accounting Standards

In May 2014, the Financial Accounting Standards Board (the ‘‘FASB’’) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the current revenue recognition guidance. The standard is based on the principle that revenue is recognized to depict the transfer of goods and services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and asset recognized from costs incurred to obtain or fulfill a contract. As part of its ongoing evaluation of the impact of the standard, the Company is analyzing its portfolio contracts and reviewing its current accounting policies and practices to identify potential differences that would result from applying the new standard to its existing contracts. Although the standard was generally effective for fiscal years beginning after December 15, 2017, the Company plans to adopt for the fiscal year beginning after December 15, 2018, as an emerging growth company, using the modified retrospective approach.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard, which requires the use of a modified retrospective transition approach, includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued a new, optional transition method that will give companies the option to use the effective date as the date of initial application on transition. Based on initial evaluation, the Company expects to include operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. The Company will provide additional information about the expected financial impact as it progresses through the evaluation and implementation of the standard. Although the standard will be generally effective for fiscal years beginning after December 15, 2018, the Company plans to adopt for the fiscal year beginning after December 15, 2019, as an emerging growth company.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230)-Classification of Certain Cash Receipts and Cash Payments. This new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice, including: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. As an emerging growth company, the Company plans to adopt the new standard for the fiscal year beginning after December 15, 2018. The Company is currently evaluating the impact of the new standard on its Condensed Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this standard provide a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the integrated set of assets and activities is not a business. The Company is currently evaluating the impact of the new standard on its Condensed Consolidated Financial Statements. Although the standard is generally effective for fiscal years beginning after December 15, 2017, the Company plans to adopt for the fiscal year beginning after December 15, 2018, as an emerging growth company. Entities will be required to apply the guidance prospectively when adopted.

6


In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350)-Simplifying the Test for Goodwill Impairment which simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the new standard, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of an operating unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the operating unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that operating unit. An entity still has the option to perform the qualitative assessment for an operating unit to determine if the quantitative impairment test is necessary. The new standard should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. As an emerging growth company, the Company plans to adopt the new standard for the fiscal year beginning after December 15, 2021. The Company is currently evaluating the impact of the new standard on its Condensed Consolidated Financial Statements.

4. Acquisitions and Combinations

On February 28, 2017, pursuant to the terms and conditions of a combination agreement dated February 3, 2017, the Company merged with Beckman and substantially all of the issued and outstanding shares of Beckman common stock were converted into shares of common stock of Nine Energy Service, Inc. at a ratio of 0.567154 Nine shares per Beckman share, other than 1.6% of Beckman shares paid in cash. Prior to the Combination, SCF-VII, L.P. had controlled a majority of the voting interests of Nine and Beckman since February 28, 2011 and July 31, 2012, respectively. The merger of the entities into the combined company was accounted for using reorganization accounting (i.e., “as if” pooling of interest) for entities under common control.

In conjunction with the Combination, in addition to the conversion of Beckman shares into Nine shares, other events occurred, including:

 

The conversion of Beckman shares owned by non-accredited shareholders of Beckman at the time of the Combination into cash at a price of $17.69 per Beckman share;

 

Payment of cash for Beckman shares that converted into fractional Nine shares at a price of $31.18 per Nine share;

 

The conversion of options to purchase Beckman common stock into options to purchase Nine common stock;

 

The conversion of Beckman restricted shares into Nine restricted shares;

 

The conversion of warrants to purchase Beckman common stock into warrants to purchase Nine common stock;

 

The issuance of options to purchase Nine common stock;

 

The issuance, on a pro-rata basis, to the Company’s shareholders, of Nine common stock based on a subscription amount equal to the number of common shares issued at a price of $31.18. The subscription was offered to all shareholders of record at the time of the Combination. Any unsubscribed shares were reallocated among the other shareholders; and

 

The issuance to the Company’s shareholders of Nine warrants equal to one half of the amount of shares issued related to the subscription described above.

5. Inventories

Inventories, classified as finished goods, are stated at the lower of cost or net realizable value. Cost is determined on an average cost basis. The Company reviews its inventory balances and writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The reserve for obsolescence was $1.7 million and $2.9 million at September 30, 2018 and December 31, 2017, respectively.

7


Inventories, net as of September 30, 2018 and December 31, 2017 were comprised of the following:

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(in thousands)

 

Raw materials

 

$

2,796

 

 

$

939

 

Finished goods

 

 

28,518

 

 

 

24,197

 

Inventories

 

 

31,314

 

 

 

25,136

 

Reserve for obsolescence

 

 

(1,743

)

 

 

(2,906

)

Inventories, net

 

$

29,571

 

 

$

22,230

 

 

6. Goodwill and Intangible Assets

The changes in the net carrying amount of the components of goodwill for the year ended December 31, 2017 and the nine months ended September 30, 2018 were as follows:

 

 

 

Goodwill

 

 

 

Gross Value

 

 

Accumulated

Impairment Loss

 

 

Net

 

 

(in thousands)

 

Balance as of December 31, 2016

 

$

173,033

 

 

$

(47,747

)

 

$

125,286

 

Impairment

 

 

 

 

 

(31,530

)

 

 

(31,530

)

Balance as of December 31, 2017

 

$

173,033

 

 

$

(79,277

)

 

$

93,756

 

Impairment

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2018

 

$

173,033

 

 

$

(79,277

)

 

$

93,756

 

 

At December 31, 2017, the Company performed its annual impairment test on each of its operating units and concluded that there was impairment at one operating unit in its Completion Solutions segment because its carrying value exceeded its estimated fair value, which resulted from declining profitability and deteriorating market conditions. As such, the Company recognized a goodwill impairment loss of $31.5 million in the fourth quarter of 2017.

The December 31, 2017 impairment test for the Production Solutions segment indicated that the estimated fair value calculation provided only 11% of cushion in relation to carrying value. As a result, this segment’s goodwill, which totals $13.0 million, is susceptible to impairment risk from adverse economic conditions in the future.

During the nine months ended September 30, 2018, there were no indications that impairment of goodwill had occurred. Goodwill by segment was unchanged from December 31, 2017.

The changes in the net carrying value of the components of intangible assets for the year ended December 31, 2017 and the nine months ended September 30, 2018 were as follows:

 

 

 

Intangible assets

 

 

 

Gross Value

 

 

Accumulated

Amortization

 

 

Net

 

 

(in thousands)

 

Balance as of December 31, 2016

 

$

105,464

 

 

$

(29,320

)

 

$

76,144

 

Amortization expense

 

 

 

 

 

(8,799

)

 

 

(8,799

)

Impairment

 

 

(12,000

)

 

 

8,200

 

 

 

(3,800

)

Balance as of December 31, 2017

 

$

93,464

 

 

$

(29,919

)

 

$

63,545

 

Amortization expense

 

 

 

 

 

(5,653

)

 

 

(5,653

)

Impairment

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2018

 

$

93,464

 

 

$

(35,572

)

 

$

57,892

 

 

Amortization expense of $1.9 million and $5.7 million for the three and nine months ended September 30, 2018, and $2.2 million and $6.6 million for the three and nine months ended September 30, 2017, respectively, are related to cost of revenues, but reported separately as “Amortization of intangibles” in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

During the nine months ended September 30, 2018, there were no indications that impairment of intangible assets had occurred.

 

8


7. Debt Obligations

The Company’s debt obligations as of September 30, 2018 and December 31, 2017 were as follows:

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(in thousands)

 

2018 IPO Term Loan Credit Facility

 

$

115,274

 

 

$

 

Legacy Term Loans

 

 

 

 

 

145,975

 

Legacy Revolving Credit Facilities

 

 

 

 

 

96,260

 

Total debt before deferred financing costs

 

$

115,274

 

 

$

242,235

 

Deferred financing costs

 

 

(1,226

)

 

 

(726

)

Total debt

 

$

114,048

 

 

$

241,509

 

Less: Current portion of long-term debt

 

 

 

 

 

(241,509

)

Long-term debt

 

$

114,048

 

 

$

 

 

2018 IPO Credit Agreement

On September 14, 2017, the Company entered into a new credit agreement (as amended on November 20, 2017, the “2018 IPO Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JP Morgan”) as administrative agent and certain other financial institutions that became effective upon the consummation of the IPO in January 2018 (the “Effective Date”). Pursuant to the terms of the 2018 IPO Credit Agreement, the Company and its domestic restricted subsidiaries were entitled to borrow $125.0 million of term loans (the “2018 IPO Term Loan Credit Facility”), which the Company drew in full on the Effective Date. In January 2018, the Company also made a mandatory prepayment of $9.7 million against the 2018 IPO Term Loan Credit Facility, which approximated 50.0% of the estimated net proceeds from the IPO in excess of $150.0 million, as prescribed under the 2018 IPO Credit Agreement.

 

In addition, under the 2018 IPO Credit Agreement, the Company and its domestic restricted subsidiaries were entitled to borrow up to $50.0 million (including letters of credit) as revolving credit loans under the revolving commitments (the “2018 IPO Revolving Credit Facility”). At September 30, 2018, the 2018 IPO Revolving Credit Facility had an undrawn capacity of $49.5 million, which was net of a $0.5 million outstanding letter of credit.

Concurrent with the effectiveness of the 2018 IPO Credit Agreement, using proceeds received from the IPO and borrowings under the 2018 IPO Term Loan Credit Facility, the Company repaid all indebtedness under its prior term loan and the Beckman term loan (together, the “Legacy Term Loans”) and under its prior revolving credit facility and the Beckman revolving credit facility (together, the “Legacy Revolving Credit Facilities”) in the first quarter of 2018, which approximated $242.2 million. In addition, in the first quarter of 2018, the Company wrote off approximately $0.7 million in deferred financing costs associated with the Legacy Term Loans and the Legacy Revolving Credit Facilities.

All of the obligations under the 2018 IPO Credit Agreement were secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of the Company and its domestic restricted subsidiaries, excluding certain assets.

Loans to the Company and its domestic restricted subsidiaries under the 2018 IPO Credit Agreement were either base rate loans or LIBOR loans. The applicable margin for base rate loans varied from 1.50% to 2.75%, and the applicable margin for LIBOR loans varied from 2.50% to 3.75%, in each case depending on the Company’s leverage ratio. Interest rates averaged 5.5% during the nine months ended September 30, 2018. The Company was permitted to repay any amounts borrowed prior to the maturity date without any premium or penalty other than customary LIBOR breakage costs. In addition, a commitment fee of 0.50% per annum was charged on the average daily unused portion of the revolving commitments. Such commitment fee was payable quarterly in arrears.

9


The 2018 IPO Credit Agreement contained various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and transactions with affiliates. Financial covenants under the 2018 IPO Credit Agreement included a maximum total leverage ratio, an asset coverage ratio and a fixed charge coverage ratio, each of which was calculated on a quarterly basis. The Company was in compliance with all debt covenants under the 2018 IPO Credit Agreement as of September 30, 2018.

 

The fair value of the Company’s debt obligations under the 2018 IPO Credit Agreement was classified within Level 2 of the fair value hierarchy. Fair value approximated carrying value, as the interest rates are variable and based on market rates.

 

On October 25, 2018, the Company fully repaid and terminated the 2018 IPO Credit Agreement as more fully described below.

 

Unamortized deferred financing costs associated with the Company’s 2018 IPO Term Loan Credit Facility were $1.2 million at September 30, 2018. These costs were being amortized through the maturity date of the 2018 IPO Term Loan Credit Facility using the effective interest method. The Company wrote off these deferred financing costs on October 25, 2018 in conjunction with the termination of the 2018 IPO Credit Agreement.

Senior Notes

 

On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The Senior Notes will bear interest at an annual rate of 8.750% payable on May 1 and November 1 of each year with the first interest payment being due on May 1, 2019. The proceeds from the Senior Notes, together with cash on hand and borrowings under the 2018 ABL Credit Facility (as defined below), were used to (i) fund a portion of the upfront cash purchase price of the Magnum Acquisition, (ii) repay all indebtedness under the 2018 IPO Credit Agreement and (iii) pay fees and expenses associated with the issuance of the Senior Notes, the Magnum Acquisition and the 2018 ABL Credit Facility. For additional information regarding the Magnum Acquisition, see Note 1 – Company and Organization.

2018 ABL Credit Facility

 

On October 25, 2018, the Company entered into a five-year asset based senior secured revolving credit facility with JP Morgan serving as administrative agent for the lenders thereunder (the “2018 ABL Credit Facility”). The 2018 ABL Credit Facility permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit. The borrowing base is initially $146.5 million. Concurrent with the effectiveness of the 2018 ABL Credit Facility, the Company borrowed approximately $35.0 million to fund a portion of the upfront cash purchase price of the Magnum Acquisition. The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.

 

8. Related Party Transactions

During 2014, in conjunction with an exercise of warrants to provide a capital infusion, the Company issued promissory notes totaling $2.5 million to both a former executive officer of the Company and a current manager of the Company. The principal is due on June 30, 2019 (the “Maturity Date”). Interest of 4% per annum is due and payable on the Maturity Date. At each of September 30, 2018 and December 31, 2017, the outstanding balance of the notes, including principal and unpaid interest, totaled $3.0 million and $2.9 million, respectively. Unpaid interest at each of September 30, 2018 and December 31, 2017 totaled $0.4 million.

As part of the acquisition of Crest Pumping Technologies, LLC (“Crest”) in 2014, the Company issued promissory notes totaling $9.4 million to former owners of Crest, including David Crombie, who is an executive officer of the Company. The principal is due on June 30, 2019. The interest rate is based on the prime rate, the federal funds rate or LIBOR, plus a margin to be determined in connection with the Company’s credit agreement and is due quarterly. Mr. Crombie paid $1.8 million during 2016 to pay his promissory note in full. At each of September 30, 2018 and December 31, 2017, the outstanding principal balance of the remaining promissory notes held by other former owners of Crest totaled $7.6 million. Unpaid interest, included in “Prepaid expenses and other current assets” in the Condensed Consolidated Balance Sheets, totaled $0.1 million and $8,000 at September 30, 2018 and December 31, 2017, respectively.

The Company leases office space, yard facilities, and equipment and purchases building maintenance services from entities owned by Mr. Crombie. Total lease expense and building maintenance expense was $0.6 million for each of the nine months ended September 30, 2018 and 2017. There were no payables to these entities at September 30, 2018 and $13,000 of payables to these entities at December 31, 2017.

10


The Company provides services to Citation Oil & Gas Corp., an entity owned by Curtis F. Harrell, a director of the Company. The Company billed $0.5 million and $0.4 million for services provided to this entity during the nine months ended September 30, 2018 and 2017, respectively. There was an outstanding receivable due from such entity of $0.1 million and $0.2 million as of September 30, 2018 and December 31, 2017, respectively.

The Company provides services in the ordinary course of business to EOG Resources, Inc. Gary L. Thomas, a director of the Company, acts as the President of EOG Resources, Inc. The Company generated revenue from EOG Resources, Inc. of $31.8 million and $26.1 million for the nine months ended September 30, 2018 and 2017, respectively.

 

9. Commitments and Contingencies

Litigation

From time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these and the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.

The Company has been named in the following proceeding:

Christina Sparks, et al v. Pioneer Natural Resources, et al., Filed in the District Court, 142nd Judicial District, Midland County, Texas. On August 31, 2017, an accident occurred while a five-employee crew of Big Lake Services, LLC, a subsidiary of Nine (“Big Lake Services”), was performing workover services at an oil and gas wellsite near Midland, Texas, operated by Pioneer Natural Resources USA, Inc. (“Pioneer Natural Resources”), resulting in the death of a Big Lake Services employee, Juan De La Rosa. On December 7, 2017, a lawsuit was filed on behalf of Mr. De La Rosa’s minor children in the Midland County District Court against Pioneer Natural Resources, Big Lake Services, and Phillip Hamilton related to this accident. The petition alleges, among other things, that the defendants acted negligently, resulting in the death of Mr. De La Rosa. On March 14, 2018, a plea in intervention was filed on behalf of Mr. De La Rosa’s parents, alleging similar claims. The plaintiffs and intervenors are seeking money damages, including punitive damages. Discovery proceedings are underway in this matter, and trial is scheduled for mid-2019.

The Company maintains insurance coverage against liability for, among other things, personal injury (including death), which coverage is subject to certain exclusions and deductibles. The Company tendered this matter to its insurance company for defense and indemnification of Big Lake Services and the other defendants. While the Company maintains such insurance policies with insurers in amounts and with coverage and deductibles that it, with the advice of its insurance advisors and brokers, believes are reasonable and prudent, the Company cannot ensure that this insurance will be adequate to protect it from all material expenses related to current or potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices.

Self-insurance

The Company uses a combination of third-party insurance and self-insurance for health insurance clams. The self-insured liability represents an estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. The estimate is based on an analysis of trailing months of incurred medical claims to project the amount of incurred but not reported claims liability. The estimated liability for self-insured medical claims was $1.5 million and $1.3 million at September 30, 2018 and December 31, 2017, respectively, and is included under the caption “Accrued expenses” on the Condensed Consolidated Balance Sheets.

Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, the self-insurance liability could be affected if future claims experience differs significantly from historical trends and actuarial assumptions.

Scorpion Contingent Liability

In connection with the acquisition of Pat Greenlee Builders, LLC (“Scorpion”) in 2015, the Company recorded a liability for contingent consideration to be paid in shares of Company common stock and in cash, contingent upon quantities of Scorpion Composite PlugsTM sold during 2016 and gross margin related to the product sales for three years following the acquisition.

The contingent consideration related to the Scorpion acquisition is reported at fair value, based on discounted cash flows. Significant inputs used in the fair value measurement include estimated gross margin related to forecasted sales of the plugs, term of the agreement, and a risk adjusted discount factor.

The revaluation gains and losses are included in “General and administrative expenses” in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss). The following is a reconciliation of the beginning and ending amounts of

11


contingent consideration obligation (level 3) related to the Scorpion acquisition for the nine months ended September 30, 2018 and the year ended December 31, 2017:

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(in thousands)

 

Balance at beginning of year

 

$

1,730

 

 

$

3,187

 

Common stock issuance

 

 

 

 

 

(547

)

Payment

 

 

 

 

 

(1,325

)

Revaluation adjustment

 

 

1,715

 

 

 

415

 

Balance at end of the period

 

$

3,445

 

 

$

1,730

 

 

Contingent liabilities related to the Scorpion acquisition include $3.4 million and $1.7 million and are reported in “Accrued expenses” in the Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017, respectively. The contingent liabilities related to Scorpion are expected to be paid by December 31, 2018.

 

10. Stockholders’ Equity

 

In January 2018, the Company completed its IPO of 8,050,000 shares of common stock (including 1,050,000 shares pursuant to an over-allotment option) at a price to the public of $23.00 per share pursuant to a registration statement on Form S‑1 (File 333‑217601), as amended and declared effective by the SEC on January 18, 2018.

After subtracting approximately $16.9 million of underwriting discounts, commissions, and offering expenses, the Company received net proceeds of approximately $168.3 million from its IPO. The Company used these proceeds, together with borrowings under the 2018 IPO Term Loan Credit Facility, to repay all indebtedness under its Legacy Term Loans and Legacy Revolving Credit Facilities, to prepay $9.7 million of the borrowings under the 2018 IPO Term Loan Credit Facility, as well as for general corporate purposes. For additional information, see Note 7 – Debt Obligations. No payments, fees or expenses have been paid, directly or indirectly, to any of the Company’s officers, directors or associates, holders of 10% or more of any class of its equity securities or other affiliates.

11. Taxes

The Company’s effective tax rate fluctuates based on, among other factors, changes in statutory tax rates, changes in pre-tax income and nondeductible items, and changes in valuation allowances.

The Company’s effective tax rate for the three and nine months ended September 30, 2018 was 7.6% and 7.1%, respectively, compared to (17.9%) and (8.5%) for the three and nine months ended September 30, 2017, respectively. The change in effective tax rate for the three and nine months ended September 30, 2018 was primarily attributable to changes in pre-tax book income and valuation allowance positions as well as tax liabilities in states where income is expected to exceed available net operating losses. 

The Company recognized the income tax effects of the Tax Cuts and Jobs Act (the “Tax Reform”) in its audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period during which the Tax Reform was signed into law. The guidance also provides for a measurement period of up to one year from the enactment date of the Tax Reform for the Company to complete its accounting for the U.S. tax law changes. As such, the Company’s 2017 financial results reflected the provisional estimate of the income tax effects of the Tax Reform. No subsequent adjustments have been made to the amounts recorded as of December 31, 2017, which continue to represent a provisional estimate of the impact of the Tax Reform. The estimate of the impact of the Tax Reform was based on certain assumptions and the Company’s current interpretation of the Tax Reform. Any adjustments to the 2017 estimate due to additional clarification and implementation guidance will be reported as a component of income tax expense in the reporting period in which any such adjustments are identified, which will be no later than the fourth quarter of 2018.

12


12. Income (Loss) Per Share

Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is based on the weighted average number of shares outstanding during each period and the assumed exercise of potentially dilutive stock options and restricted stock.

Basic and diluted income (loss) per common share was computed as follows (in thousands, except share and per share amounts):

 

 

 

2018

 

 

2017

 

Three Months Ended September 30,

 

Net Income

 

 

Average Shares Outstanding

 

 

Income Per Share

 

 

Net Loss

 

 

Average Shares Outstanding

 

 

Loss Per Share

 

Basic

 

$

13,658

 

 

 

23,971,032

 

 

$

0.57

 

 

$

(5,052

)

 

 

14,992,431

 

 

$

(0.34

)

Assumed exercise of stock options

 

 

 

 

 

41,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested restricted stock

 

 

 

 

 

376,922

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

13,658

 

 

 

24,389,295

 

 

$

0.56

 

 

$

(5,052

)

 

 

14,992,431

 

 

$

(0.34

)

 

 

 

 

2018

 

 

2017

 

Nine Months Ended September 30,

 

Net Income

 

 

Average Shares Outstanding

 

 

Income Per Share

 

 

Net Loss

 

 

Average Shares Outstanding

 

 

Loss Per Share

 

Basic

 

$

24,352

 

 

 

23,264,014

 

 

$

1.05

 

 

$

(37,871

)

 

 

14,492,757

 

 

$

(2.61

)

Assumed exercise of stock options

 

 

 

 

 

31,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested restricted stock

 

 

 

 

 

308,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

24,352

 

 

 

23,603,922

 

 

$

1.03

 

 

$

(37,871

)

 

 

14,492,757

 

 

$

(2.61

)

 

 

For the three and nine months ended September 30, 2017, the computation of diluted income (loss) per share excluded outstanding stock options and unvested restricted stock because their inclusion would be anti-dilutive given the Company was in a net loss position. The average number of securities that were excluded from diluted income (loss) per share that would potentially dilute earnings per share for the periods in which the Company experienced a net loss were as follows:

 

 

 

2018

 

 

2017

 

Three months ended September 30,

 

 

 

 

 

212,181

 

Nine months ended September 30,

 

 

 

 

 

205,324

 

 

13. Segment Information

The Company has two reportable segments, Completion Solutions and Production Solutions. The Completion Solutions segment consists primarily of cementing, completion tools, wireline and coiled tubing services, while the Production Solutions consists of rig-based well maintenance and workover services.

The Company’s reportable segments are strategic units that offer distinct products and services. They are managed separately since each business segment requires different marketing strategies. Operating segments have not been aggregated as part of a reportable segment. The Company evaluates the performance of its reportable segments based on adjusted gross profit. This segmentation is representative of the manner in which its Chief Operating Decision Maker (“CODM”) and its Board of Directors view the business. The Company considers the CODM to be its Chief Executive Officer.

13


Summary financial data by segment is as follows. The amounts labeled “Corporate” relate to assets not allocated to the reportable segments.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Completion Solutions

 

$

196,608