The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Financial Statements and Supplementary Data" in Item 8 of Part II of this Annual Report.
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 under "Risk Factors" in Item 1A of Part I of this Annual Report. We assume no obligation to update any of these forward-looking statements.
Overview
Company Description
We are a leading North American onshore completion services provider that targets unconventional oil and gas resource development. We partner with our E&P customers across all major onshore basins in both theU.S. andCanada as well as abroad to design and deploy downhole solutions and technology to prepare horizontal, multistage wells for production. We focus on providing our customers with cost-effective and comprehensive completion solutions designed to maximize their production levels and operating efficiencies. Generally, operators have continued to improve operational efficiencies in completions design, increasing the complexity and difficulty, making oilfield service selection more important. This increase in high-intensity, high-efficiency completions of oil and gas wells further enhances the demand for our services. We compete for the most complex and technically demanding wells in which we specialize, which are characterized by extended laterals, increased stage spacing, multi-well pads, 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. We provide (i) cementing services, which consist of blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped between the casing and the wellbore of the well, (ii) an innovative portfolio of completion tools, including those that provide pinpoint frac sleeve system technologies as well as a portfolio of completion technologies used for completing the toe stage of a horizontal well and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug-and-perf operations, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns and isolation tools to a specified depth, and (iv) coiled tubing services, which perform wellbore intervention operations utilizing a continuous steel pipe that is transported to the wellsite wound on a large spool in lengths of up to 30,000 feet and which provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well.
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.
Recent Events
OnJanuary 30, 2023 , we completed our public offering of 300,000 units with an aggregate stated amount of$300.0 million (the "Units"). Each Unit consists of$1,000 principal amount of the 2028 Notes and five shares of our common stock. We received proceeds of$279.8 million from the Units offering, after deducting underwriting discounts and commission, which was deposited with the trustee of the 8.750% Senior Notes due 2023 (the "2023 Notes"), along with$40.0 million of cash received from borrowings under the ABL Credit Facility. OnJanuary 30, 2023 , we instructed the trustee of the 2023 Notes to apply such deposits toward the payment of the 2023 Notes onFebruary 1, 2023 , and we elected to discharge the indenture governing the 2023 Notes, thereby releasing us from our remaining obligations under such indenture as ofJanuary 30, 2023 .
On
For additional information on our Units offering, the ABL Credit Facility, which was amended in connection with such offering, and the redemption of the 2023 Notes, see Note 9 - Debt Obligations included in Item 8 of Part II of this Annual Report. 35 --------------------------------------------------------------------------------
How We Generate Revenue and the Costs of Conducting Our Business
We generate our revenues by providing completion services to E&P customers across all major onshore basins in both theU.S. andCanada as well as abroad. 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 an MSA with each customer that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Each specific job is obtained through competitive bidding or as a result of negotiations with customers. The rate we charge is determined by location, complexity of the job, operating conditions, duration of the contract, and market conditions. In addition to MSAs, we have entered into a select number of longer-term contracts with certain customers relating to our wireline and cementing services, and we may enter into similar contracts from time to time to the extent beneficial to the operation of our business. These longer-term contracts address pricing and other details concerning our services, but each job is performed on a standalone basis. The principal expenses involved in conducting our business include labor costs, materials and freight, the costs of maintaining our equipment, and fuel costs. Our direct labor costs vary with the amount of equipment deployed and the utilization of that equipment. Another key component of labor costs relates to the ongoing training of our field service employees, which improves safety rates and reduces employee attrition.
How We Evaluate Our Operations
We evaluate our performance based on a number of financial and non-financial measures, including the following:
•Revenue: We compare actual revenue achieved each month to the most recent projection for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the performance of our operations compared to historical revenue drivers or market metrics. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes. •Adjusted Gross Profit (Loss): Adjusted gross profit (loss) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). Costs of revenues include direct and indirect labor costs, costs of materials, maintenance of equipment, fuel and transportation freight costs, contract services, crew cost, and other miscellaneous expenses. For additional information, see "Non-GAAP Financial Measures" below. •Adjusted EBITDA: We define Adjusted EBITDA as net income (loss) before interest, taxes, and depreciation and amortization, further adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on the extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation and cash award expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business. For additional information, see "Non-GAAP Financial Measures" below. •Return onInvested Capital ("ROIC"): We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on the extinguishment of debt, and (vii) the provision (benefit) for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis. For additional information, see "Non-GAAP Financial Measures" below. •Safety: We measure safety by tracking the total recordable incident rate ("TRIR"), which is reviewed on a monthly basis. TRIR is a measure of the rate of recordable workplace injuries, defined below, normalized and stated on the basis of 100 workers for an annual period. The factor is derived by multiplying the number of recordable injuries in a calendar year by 200,000 (i.e., the total hours for 100 employees working 2,000 hours per year) and dividing this value by the total hours actually worked in the year. A recordable injury includes occupational death, nonfatal occupational illness, and other occupational injuries that involve loss of consciousness, restriction of work or motion, transfer to another job, or medical treatment other than first aid. 36 --------------------------------------------------------------------------------
Industry Trends and Outlook
Our business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by current and expected oil and natural gas prices. Throughout 2022, oil and natural gas prices were very supportive, with an average WTI price of$94.90 for the year, although prices began to decline during the third quarter of 2022 in response to some indications of slowing economic growth, inflation, and rising interest rates. In addition, over the last several months, we have seen a sharp decline in natural gas prices, which has and will likely continue to affect activity levels in the Northeast and Haynesville. We anticipate these effects will be felt more strongly in the Haynesville in the near-term. Industry dynamics can shift very quickly, however, and we are operating this business for the long-term. Together, the Northeast and Haynesville comprised 30% of our total 2022 revenue, and we believe that these basins are vital to supplying the global markets and are important pieces of our footprint. In 2022, operators increased activity levels with the averageU.S. rig count, according toBaker Hughes , increasing by 51% year over year. TotalU.S. completions in 2022 increased by approximately 22% over 2021 according to theEnergy Information Administration (the "EIA"). Activity levels, specifically rig counts, thus far in the first quarter of 2023 have been down compared to the fourth quarter of 2022, with the rig count declining by 26 rigs since the end of 2022. Nonetheless, we expectU.S. E&P capital expenditure levels to increase in 2023, although not likely at the same rate as 2022. Underinvestment in oil and gas development during the coronavirus pandemic and an increase in overall global demand coming out of the pandemic, production cuts announced byOPEC , international conflict, specifically betweenRussia andUkraine , and publicU.S. producers' commitment to capital discipline rather than increased drilling, are together creating supportive market fundamentals for a longer cycle. TheU.S. average drilled but uncompleted wells inventory in 2022 was down by over 40% from the average 2019 levels, and operators will need to drill more wells to maintain production levels in 2023. In a recent report, the EIA is forecastingU.S. production will increase from 11.90 mb/d in 2022 to 12.49 mb/d in 2023. Throughout 2022, the oilfield services industry faced labor shortages, as well as equipment and supply chain constraints, which limited availability for customers. As a result, in 2022, we implemented price increases across many of our service lines. Potential price increases in 2023 will be dependent on activity increases, as well as a number of other factors, and pricing has remained mostly steady thus far in 2023 across service lines. Any price increases in 2023 could be largely or wholly offset by labor and material cost inflation, and any such price increases could also negatively impact our customers' activity levels due to their own cost inflation. Significant factors that are likely to affect commodity prices moving forward include actions of the members ofOPEC and other oil exporting nations that relate to or impact oil production or supply; the effect of energy, monetary, and trade policies of theU.S. ; the pace of economic growth in theU.S. and throughout the world, including the potential for macro weakness; geopolitical and economic developments in theU.S. and globally, including conflicts, instability, acts of war or terrorism in oil producing countries or regions, particularlyRussia , theMiddle East ,South America andAfrica and including recovery from the coronavirus pandemic and any resurgence thereof; changes to energy regulations and policies, including those of the EPA and other governmental bodies; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows. Furthermore, although as noted above, our customers' activity and spending levels, and thus demand for our services and products, are strongly influenced by current and expected oil and natural gas prices, even with price improvements in oil and natural gas, operator activity may not materially increase, as operators remain focused on operating within their capital plans, and uncertainty remains around supply and demand fundamentals. 37 --------------------------------------------------------------------------------
Results of Operations Year Ended December 31, 2022 2021 Change (in thousands) Revenues$ 593,382 $ 349,419 $ 243,963
Cost of revenues (exclusive of depreciation and amortization shown separately below)
457,093 307,992 149,101 Adjusted gross profit$ 136,289 $ 41,427 $ 94,862 General and administrative expenses$ 51,653 $ 45,301 $ 6,352 Depreciation 26,784 28,905 (2,121) Amortization of intangibles 13,463 16,116 (2,653) Loss on revaluation of contingent liability 454 460 (6) Loss on sale of property and equipment 367 660 (293) Income (loss) from operations 43,568 (50,015) 93,583 Non-operating expenses 28,629 14,585 14,044 Income (loss) before income taxes 14,939 (64,600) 79,539 Provision (benefit) for income taxes 546 (25) 571 Net income (loss)$ 14,393 $ (64,575) $ 78,968 Revenues Revenues increased$244.0 million , or 70%, to$593.4 million in 2022. The increase in comparison to 2021 was prevalent across all lines of service and was due to activity and pricing improvements. As compared to 2021, the averageU.S. rig count increased by 51%, and completions increased by 22%. Cementing revenue (including pump downs) increased by$115.3 million , or 101%, as total cement job count increased by 50%, in comparison to 2021. In addition, coiled tubing revenue increased$56.6 million , or 91%, as total days worked increased by 37%, tools revenue increased$37.2 million , or 37%, as completion tools stages increased by 38%, and wireline revenue increased$34.9 million , or 48%, as total completed wireline stages increased by 26%, in each case, in comparison to 2021.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased$149.1 million , or 48%, to$457.1 million in 2022. The increase in comparison to 2021 was prevalent across all lines of service and was primarily related to increased activity coupled with cost inflation associated with both labor and materials as well as headcount increases. More specifically, the increase was related to a$79.2 million increase in materials installed and consumed while performing services, a$54.4 million increase in employee costs, and a$15.5 million increase in other costs such as repairs and maintenance, travel, and vehicle expenses, in comparison to 2021.
Adjusted Gross Profit (Loss)
Adjusted gross profit increased
General and Administrative Expenses
General and administrative expenses increased$6.4 million to$51.7 million in 2022. The increase in comparison to 2021 was primarily related to an$8.2 million increase in employee costs mainly due to increases in headcount and compensation and a$0.4 million increase in other general and administrative costs such as marketing, travel, and vehicle costs. The overall increase was partially offset by a$2.2 million decrease in professional fees in comparison to 2021. Depreciation
Depreciation expense decreased
38 --------------------------------------------------------------------------------
Amortization of Intangibles
Intangible amortization expense decreased$2.7 million to$13.5 million in 2022 and was primarily attributable to technology and customer relationships. The decrease was related to certain intangible assets being fully amortized in 2022.
(Gain) Loss on Revaluation of Contingent Liability
We recorded a$0.5 million loss on the revaluation of contingent liability in both 2022 and 2021. The losses for both periods were related to increases of the value of the earnout associated with our acquisition Frac Technology AS.
Non-Operating Expenses (Income)
We recorded$28.6 million in non-operating expenses in 2022 compared to$14.6 million in non-operating expenses in 2021. The$14.0 million increase in non-operating expense was primarily related to a$14.8 million decrease in gains on the extinguishment of debt related to the repurchase of 2023 Notes between periods. The overall increase in non-operating expenses was partially offset by a$0.7 million increase in interest and other income between periods.
Provision (Benefit) for Income Taxes
Our effective tax rate was 3.7% for 2022 and 0.01% for 2021. Our tax provision for 2022 is primarily the result of our tax position in state and foreign tax jurisdictions. Adjusted EBITDA
Adjusted EBITDA increased
Non-GAAP Financial Measures Adjusted EBITDA
Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders, and rating agencies.
We define Adjusted EBITDA as EBITDA (which is net income (loss) before interest, taxes, depreciation, and amortization) further adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on the extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation and cash award expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business. Management believes 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. We exclude the items listed above from net income (loss) in arriving at this measure 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. This measure should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with accounting principles generally accepted inthe United States of America ("GAAP") or as an indicator of our operating performance. Certain items excluded from this measure 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 this measure. Our computation of this measure may not be comparable to other similarly titled measures of other companies. 39 --------------------------------------------------------------------------------
The following table presents a reconciliation of the non-GAAP financial measure of Adjusted EBITDA to the GAAP financial measure of net income (loss):
Year Ended December 31, 2022 2021 (in thousands) EBITDA reconciliation: Net income (loss)$ 14,393 $ (64,575) Interest expense 32,486 32,527 Interest income (305) (26) Provision (benefit) for income taxes 546 (25) Depreciation 26,784 28,905 Amortization of intangibles 13,463 16,116 EBITDA$ 87,367 $ 12,922 Adjusted EBITDA reconciliation: EBITDA$ 87,367 $
12,922
Loss on revaluation of contingent liability (1) 454
460
Gain on extinguishment of debt (2,843)
(17,618)
Restructuring charges 3,393
1,588
Stock-based compensation and cash award expense 4,914
5,406
Loss on sale of property and equipment 367
660
Legal fees and settlements (2) 86 1,809 Adjusted EBITDA$ 93,738 $ 5,227 (1) Amounts relate to the revaluation of contingent liability associated with a 2018 acquisition. The impact is included in our Consolidated Statements of Income and Comprehensive Income (Loss). For additional information on contingent liabilities, see Note 12 - Commitments and Contingencies included Item 8 of Part II of this Annual Report.
(2) Amounts represent fees and legal settlements associated with legal proceedings brought pursuant to the FLSA and/or similar state laws.
40 --------------------------------------------------------------------------------
Return on
ROIC is a supplemental non-GAAP financial measure. We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on the extinguishment of debt, and (vii) the provision (benefit) for deferred income taxes. We define total capital as book value of equity (deficit) plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis. Management believes ROIC is a meaningful measure because it quantifies how well we generate operating income relative to the capital we have invested in our business and illustrates the profitability of a business or project taking into account the capital invested. Management uses ROIC to assist them in capital resource allocation decisions and in evaluating business performance. Although ROIC is commonly used as a measure of capital efficiency, definitions of ROIC differ, and our computation of ROIC may not be comparable to other similarly titled measures of other companies.
The following table provides an explanation of our calculation of ROIC for the
years ended
Year Ended December 31, 2022 2021 (in thousands) Net income (loss)$ 14,393 $ (64,575) Add back: Interest expense 32,486 32,527 Interest income (305) (26) Restructuring charges 3,393 1,588 Gain on extinguishment of debt (2,843) (17,618)
After-tax net operating income (loss)
337,436 348,637 Less cash and cash equivalents (21,509) (68,864)
Total capital as of prior period-end
$ (23,507) $ (39,267) Total debt 341,606 337,436 Less cash and cash equivalents (17,445) (21,509) Total capital as of period-end$ 300,654 $ 276,660 Average total capital$ 288,657 $ 288,421 ROIC 16.3 % (16.7) % 41
--------------------------------------------------------------------------------
Adjusted Gross Profit (Loss)
GAAP defines gross profit (loss) as revenues less cost of revenues and includes depreciation and amortization in costs of revenues. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit (loss) because we do not include the impact of depreciation and amortization, which represent non-cash expenses. Management uses adjusted gross profit (loss) to evaluate operating performance. We prepare adjusted gross profit (loss) to eliminate the impact of depreciation and amortization because we do not consider depreciation and amortization indicative of our core operating performance. Adjusted gross profit (loss) should not be considered as an alternative to gross profit (loss), operating income (loss), or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted gross profit (loss) may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted gross profit (loss) or similarly titled measures in the same manner as we do.
The following table presents a reconciliation of adjusted gross profit (loss) to GAAP gross profit (loss).
Year Ended December 31, 2022 2021 (in thousands) Calculation of gross profit (loss) Revenues$ 593,382 $ 349,419
Cost of revenues (exclusive of depreciation and amortization shown separately below)
457,093 307,992 Depreciation (related to cost of revenues) 24,909 26,882 Amortization of intangibles 13,463 16,116 Gross profit (loss)$ 97,917 $ (1,571) Adjusted gross profit reconciliation: Gross profit (loss)$ 97,917 $ (1,571) Depreciation (related to cost of revenues) 24,909 26,882 Amortization of intangibles 13,463 16,116 Adjusted gross profit$ 136,289 $ 41,427 42
--------------------------------------------------------------------------------
Liquidity and Capital Resources
Sources and Uses of Liquidity
Historically, we have met our liquidity needs principally from cash on hand, cash flows from operations and, if needed, external borrowings and issuances of debt securities. Our principal uses of cash are to fund capital expenditures, service our outstanding debt, fund our working capital requirements and fund acquisitions. Due to our high level of variable costs and the asset-light make-up of our business, we have historically been able to quickly implement cost-cutting measures and will continue to adapt as the market dictates. We have also used cash to make open market repurchases of our debt and may, from time to time, continue to make such repurchases (including with respect to the 2028 Notes) when it is opportunistic to do so to manage our debt maturity profile. We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue to access outside sources of capital. Although we do not budget for acquisitions, pursuing growth through acquisitions may continue to be a part of our business strategy. Our ability to make significant additional acquisitions for cash will require us to obtain additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all. In 2023, our planned capital expenditure budget, excluding possible acquisitions, is expected to be between$25.0 million to$35.0 million . The nature of our capital expenditures is comprised of a base level of investment required to support our current operations and amounts related to growth and company initiatives. Capital expenditures for growth and company initiatives are discretionary. 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. AtDecember 31, 2022 , we had$17.4 million of cash and cash equivalents and$66.6 million of availability under the ABL Credit Facility, which resulted in a total liquidity position of$84.0 million . OnJanuary 27, 2023 , we borrowed an additional$40.0 million under the ABL Credit Facility to pay for the redemption price of the 2023 Notes and to pay for fees and expenses related to the Units offering. We believe that, based on our current forecasts, our cash on hand, together with cash flow from operations and borrowings under the ABL Credit Facility, should be sufficient to fund our capital requirements for at least the next twelve months from the issuance date of our consolidated financial statements. However, we can make no assurance regarding our ability to achieve our forecasts, which are materially dependent on our financial performance and the ever-changing market. 2023 Notes OnOctober 25, 2018 , we issued$400.0 million of 2023 Notes under an indenture, dated as ofOctober 25, 2018 (the "2023 Notes Indenture"), by and among us, including certain of our subsidiaries, and Wells Fargo, National Association, as Trustee. The 2023 Notes bore interest at annual rate of 8.750% payable onMay 1 andNovember 1 of each year. The 2023 Notes were senior unsecured obligations and were fully and unconditionally guaranteed on a senior unsecured basis by each of our current domestic subsidiaries and by certain future subsidiaries. The 2023 Notes Indenture contained covenants that limited our ability and the ability of our restricted subsidiaries to engage in certain activities. We were in compliance with the provisions of the 2023 Notes Indenture atDecember 31, 2022 . We repurchased approximately$13.0 million of 2023 Notes at a repurchase price of approximately$10.1 million in cash for the year endedDecember 31, 2022 . We also repurchased approximately$26.3 million of 2023 Notes at a repurchase price of approximately$8.4 million in cash for the year endedDecember 31, 2021 . OnFebruary 1, 2023 , all of the outstanding 2023 Notes were redeemed at a redemption price of 100.0% of the principal amount thereof ($307.3 million ), plus accrued and unpaid interest ($6.7 million ), and the 2023 Notes Indenture was discharged as ofJanuary 30, 2023 .
For additional information on the 2023 Notes, see Note 9 - Debt Obligations included in Item 8 of Part II of this Annual Report.
Units Offering and 2028 Notes
On
43 --------------------------------------------------------------------------------
stock. We received proceeds of
Each Unit will be separated into its constituent securities (the 2028 Notes and the shares of our common stock) automatically onOctober 27, 2023 , or, if earlier, on the date, if any, on which a change of control or event of default (each as defined in the indenture governing the 2028 Notes) occurs.
A holder of Units may elect to separate its Units into its constituent
securities, in whole but not in part, on or after
OnJanuary 30, 2023 , we, and certain of our subsidiaries entered into an indenture, dated as ofJanuary 30, 2023 (the "2028 Notes Indenture"), withU.S. Bank Trust Company, National Association , as the trustee and as notes collateral agent, pursuant to which the 2028 Notes, which form a part of the Units, were issued. The 2028 Notes will mature onFebruary 1, 2028 and bear interest at an annual rate of 13.000% payable in cash semi-annually in arrears on each ofFebruary 1 andAugust 1 , commencingAugust 1, 2023 . The 2028 Notes are our senior secured obligations and are guaranteed on a senior secured basis by each of our current domestic subsidiaries and by certain future subsidiaries, subject to agreed guaranty and security principles and certain exclusions. On eachMay 15 andNovember 14 , commencingNovember 14, 2023 (each, an "Excess Cash Flow Offer Date"), we are required to make an offer (an "Excess Cash Flow Offer") to all holders of the 2028 Notes and, if required by the terms of any Pari Passu Notes Lien Indebtedness (as defined in the 2028 Notes Indenture), to any holders of any Pari Passu Notes Lien Indebtedness to purchase, prepay or redeem, together on a pro-rata basis, the maximum principal amount of the 2028 Notes and any such Pari Passu Notes Lien Indebtedness (plus all accrued interest (including additional interest, if any) on the 2028 Notes and any such Pari Passu Notes Lien Indebtedness and the amount of all fees and expenses, including premiums, incurred in connection therewith) that may be purchased, prepaid or redeemed using an amount of cash equal to the Excess Cash Flow Amount (as defined in the 2028 Notes Indenture and which is 75.0% of Excess Cash Flow (as defined in the 2028 Notes Indenture), as determined immediately prior to the Excess Cash Flow Offer Date), if any, subject to certain exceptions set forth in the 2028 Notes Indenture. The offer price in any such offer will be equal to 100% of the principal amount of the 2028 Notes and any such Pari Passu Notes Lien Indebtedness (or, in respect of any such Pari Passu Notes Lien Indebtedness, such lesser price, if any, as may be provided for by the terms of such Pari Passu Notes Lien Indebtedness), plus accrued and unpaid interest and additional interest, if any, to, but excluding, the date of purchase, prepayment or redemption, subject to the rights of holders of the 2028 Notes or any such Pari Passu Notes Lien Indebtedness on the relevant record date to receive interest due on an interest payment date that is on or prior to the date of purchase, prepayment or redemption, and will be payable in cash. The 2028 Notes Indenture contains covenants that, among other things and subject to certain exceptions and qualifications, limit our ability and the ability of our restricted subsidiaries to engage in certain activities.
For additional information on the Units and the 2028 Notes, see Note 9 - Debt Obligations included in Item 8 of Part II of this Annual Report.
ABL Credit Facility
OnOctober 25, 2018 , we entered into a credit agreement dated as ofOctober 25, 2018 (the "2018 ABL Credit Agreement"), that permitted 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 "ABL Credit Facility"). Pursuant to the 2018 ABL Credit Agreement, the ABL Credit Facility was set to mature onOctober 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the 2023 Notes if they had not been redeemed or repurchased by such date. OnJanuary 17, 2023 , we entered into the First Amendment to Credit Agreement (the "ABL Facility Amendment") withJP Morgan Chase Bank, N.A. , as administrative agent, and the lender parties thereto, which amends certain terms of the 2018 ABL Credit Agreement (as amended the "ABL Credit Agreement"). The ABL Facility Amendment became effective onJanuary 30, 2023 . Pursuant to the ABL Facility Amendment, the maturity date of the ABL Credit Facility was extended fromOctober 25, 2023 toJanuary 29, 2027 . In addition, the ABL Facility Amendment, among other changes, revised the terms of the ABL Credit Facility as follows: (a) decreased the size of the ABL Credit Facility from$200.0 million to$150.0 million , subject to the borrowing base, (b) changed the interest rate benchmark from London Interbank Offered Rate to Term Secured Overnight Financing Rate with a 10 basis point spread adjustment and increased pricing from the existing range of 1.75% to 2.25% to a range of 2.00% to 2.50%, in each case depending on our leverage ratio, (c) modified the financial covenant, enhanced reporting 44 -------------------------------------------------------------------------------- and cash dominion triggers in the ABL Credit Facility from the existing minimum availability threshold of the greater of$18.75 million and 12.5% of the loan limit to a minimum availability threshold of (i)$12.5 million fromJanuary 30, 2023 untilMay 31, 2023 and (ii) the greater of$17.5 million and 12.5% of the loan limit thereafter, (d) decreased the Canadian tranche sub-limit from$25.0 million to$5.0 million , (e) decreased the letter of credit sub-limit from$50.0 million to$10.0 million and (f) made satisfaction of the Payment Conditions (as defined in the ABL Facility Amendment) a condition to an Excess Cash Flow Offer in addition to a condition to voluntary payments of the 2028 Notes. The Payment Conditions in summary are (A) no default or event of default on a pro forma basis and (B) immediately after and at all times and at all times during the 30 days prior, on a pro forma basis, (1) (x) availability under the ABL Credit Facility shall not be less than the greater of 15% of the loan limit and$22.5 million and (y) the fixed charge coverage ratio shall be at least 1.00 to 1.00 or (2) availability under the ABL Credit Facility shall not be less than the greater of 20% of the loan limit and$30.0 million . The 2018 ABL Credit Agreement contained, and the ABL Credit Agreement contains, various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions) and transactions with affiliates. We were in compliance with all covenants under the 2018 ABL Credit Agreement as ofDecember 31, 2022 . Pursuant to the 2018 ABL Credit Agreement, all of the obligations under the ABL Credit Facility were, and pursuant to the ABL Credit Agreement, all obligations under the ABL Credit Facility are, secured by security interests (subject to permitted liens) in substantially all of the personal property of our domestic subsidiaries, excluding certain assets. The obligations under the Canadian tranche were and are further secured by security interests (subject to permitted liens) in substantially all of the personal property ofNine Energy Canada, Inc. , a corporation organized under the laws ofAlberta, Canada , and its restricted subsidiaries, excluding certain assets.
Both the ABL Credit Facility and the Units collateralization were completed within 30 days after closing in accordance with the terms of the ABL Facility Amendment and the Units offering.
AtDecember 31, 2022 , we had$32.0 million of borrowings under the ABL Credit Facility, and our availability under the ABL Credit Facility was approximately$66.6 million , net of outstanding letters of credit of$1.3 million . OnJanuary 27, 2023 , we borrowed an additional$40.0 million under the ABL Credit Facility to pay for the redemption price of the 2023 Notes and to pay for fees and expenses related to the Units offering.
Cash Flows
Our cash flows for the years endedDecember 31, 2022 , and 2021 are presented below: Year Ended December 31, 2022 2021 (in thousands) Operating activities$ 16,672 $ (40,416) Investing activities (25,417) (11,921) Financing activities 4,849 5,048 Impact of foreign exchange rate on cash (168)
(66)
Net change in cash and cash equivalents$ (4,064) $ (47,355) Operating Activities Net cash provided by operating activities was$16.7 million in 2022 compared to$40.4 million in net cash used in operating activities in 2021. The$57.1 million increase in net cash provided by operating activities was primarily a result of an$85.5 million increase in cash flow provided by operations, adjusted for any non-cash items, and primarily driven by an increase in revenue and income in comparison to 2021. The increase in net cash provided by operating activities was offset by a$28.4 million decrease in cash provided by working capital, including an increase in accounts receivable from increased product and service sales, which has the effect of lagging cash collections, in each case, in comparison to 2021. Investing Activities Net cash used in investing activities was$25.4 million in 2022 compared to$11.9 million in net cash used in investing activities in 2021. The$13.5 million increase was primarily due to a$13.1 million increase in cash purchases of property and equipment, coupled with$0.4 million decrease in proceeds from the sale of property and equipment (including insurance), in each case, in comparison to 2021. 45 --------------------------------------------------------------------------------
Financing Activities
Net cash provided by financing activities was$4.8 million in 2022 compared to$5.0 million in net cash provided by financing activities in 2021. The$0.2 million decrease was primarily related to a$7.0 million payment on the ABL Credit Facility in 2022 that did not occur in 2021 as well as a$2.2 million increase in payments on short-term debt in comparison to 2021. The decrease was partially offset by a$9.0 million increase in proceeds from the ABL Credit Facility in 2022 in comparison to 2021.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our financial statements.
We consider the significant accounting policies identified below to be "critical accounting estimates" due to the following:
•The policies are dependent on estimates and assumptions made by us about matters that are inherently uncertain.
•The policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. For additional information on our significant accounting policies, see Note 2 - Significant Accounting Policies included in Item 8 of Part II of this Annual Report. Property and Equipment Property and equipment is stated at cost and depreciated under the straight-line method over the estimated useful life of the asset. Equipment held under finance leases is stated at the present value of its future minimum lease payments and is depreciated under the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Estimated useful lives requires significant judgment which is influenced by our historical experience in operating property and equipment, technological developments, and expectations of future demand. Should our estimates be too long or too short, we could report a disproportionate amount of losses or gains from sale or retirement.
Valuation of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the assets, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the Level 3 fair value of the asset. The Level 3 fair value is determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows based on expected utilization. Determining fair value requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating profit margins, weighted average costs of capital, terminal growth rates, future market share, the impact of new product development, and future market conditions, among others. We believe that the estimates and assumptions used in impairment assessments are reasonable and appropriate. Impairment losses are reflected in "Income (loss) from operations" in our Consolidated Statements of Income and Comprehensive Income (Loss).
Recognition of Provisions for Contingencies
In the ordinary course of business, we are subject to various claims, suits, and complaints. We, in consultation with internal and external advisors, will provide for a contingent loss in the financial statements if it is probable that a liability has been incurred at the date of the financial statements and the amount can be reasonably estimated. Reasonable estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. If it is determined that the reasonable estimate of the loss is a range and that there is no best estimate within the 46 --------------------------------------------------------------------------------
range, provision will be made for the lower amount of the range. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, there may be a material adverse effect on our future financial results.
Stock-based Compensation and Fair Market Value Determination
We account for awards of stock-based compensation at fair value on the date granted to employees and recognize the compensation expense in the financial statements over the requisite service period. Forfeitures are recorded as they occur. All stock-based compensation expense is recorded using the straight-line method and is included in "General and administrative expenses" in our Consolidated Statements of Income and Comprehensive Income (Loss). Fair value of all the options outstanding was measured using the Black-Scholes model. Determining the appropriate fair value model and calculating the fair value of options requires the input of highly subjective assumptions, including the expected volatility of the price of our stock, the risk-free rate, the expected term of the options, and the expected dividend yield of our common stock. These estimates involve inherent uncertainties and the application of management's judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. The Black-Scholes option pricing model requires estimates of key assumptions based on both historical information and management judgment regarding market factors and trends. Expected Life - The expected term of stock options represents the period the stock options are expected to remain outstanding and is based on the simplified method, which is the weighted average vesting term plus the original contractual term, divided by two.
Expected Volatility - We develop our expected volatility based upon a weighted average volatility of our peer group.
Risk-free Interest Rate - The risk-free interest rates for options granted are based on the average of five year and seven year constant maturityTreasury bond rates whose term is consistent with the expected term of an option from the date of grant. Expected Term - The expected term is based on the midpoint between the vesting date and contractual term of an option. The expected term represents the period that our stock-based awards are expected to be outstanding.
Expected Dividend Yield - We do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero.
Fair value of the stock-based compensation for all of the performance share units as well as performance cash awards outstanding was measured using a Monte Carlo simulation model.
Recent Accounting Pronouncements
For additional information on recent accounting pronouncements, see Note 2 - Significant Accounting Policies included in Item 8 of Part II of this Annual Report.
Emerging Growth Company Status
We are an "emerging growth company" as defined in the JOBS Act. Under Section 107 of the JOBS Act, as an emerging growth company, we are taking advantage of an extended transition period for the adoption of new or revised financial accounting standards, including the reduced reporting requirements and exemptions, and the longer phase-in periods for the adoption of new or revised financial accounting standards, until we are no longer an emerging growth company. Our election to use the longer 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. 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.
Smaller Reporting Company Status
We are a "smaller reporting company" as defined by the
47 --------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a "smaller reporting company," as defined under the Exchange Act, we are not required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) F- 1 Consolidated Balance Sheets as ofDecember 31, 2022 and 2021 F- 2
Consolidated Statements of Income and Comprehensive Income (Loss) for the
Years Ended
F- 3
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended
F- 4
Consolidated Statements of Cash Flows for the Years Ended
F- 5 Notes to Consolidated Financial Statements F- 7 48
-------------------------------------------------------------------------------- Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets ofNine Energy Service, Inc. and its subsidiaries (the "Company") as ofDecember 31, 2022 and 2021, and the related consolidated statements of income and comprehensive income (loss), consolidated statements of stockholders' equity (deficit), and consolidated statements of cash flows for the years then ended, including the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted inthe United States of America .
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/PricewaterhouseCoopers LLP Houston, TX March 7, 2023
We have served as the Company's auditor since 2011.
F-1 -------------------------------------------------------------------------------- NINE ENERGY SERVICE, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 31, 2022 2021 Assets Current assets Cash and cash equivalents$ 17,445 $ 21,509 Accounts receivable, net 105,277 64,025 Income taxes receivable 741 1,393 Inventories, net 62,045 42,180 Prepaid expenses and other current assets 11,217 10,195 Total current assets 196,725 139,302 Property and equipment, net 89,717 86,958 Operating lease right of use assets, net 36,336 35,117 Finance lease right of use assets, net 547 1,445 Intangible assets, net 101,945 116,408 Other long-term assets 1,564 2,383 Total assets$ 426,834 $ 381,613 Liabilities and Stockholders' Equity (Deficit) Current liabilities Accounts payable$ 42,211 $ 28,680 Accrued expenses 28,391 18,519 Current portion of long-term debt 2,267 2,093 Current portion of operating lease obligations 7,956 6,091 Current portion of finance lease obligations 178 1,070 Total current liabilities 81,003 56,453 Long-term liabilities Long-term debt 338,031 332,314 Long-term operating lease obligations 29,370 30,435 Long-term finance lease obligations - 65 Other long-term liabilities 1,937 1,613 Total liabilities 450,341 420,880 Commitments and contingencies (Note 12) Stockholders' equity (deficit) Common stock (120,000,000 shares authorized at$0.01 par value; 33,221,266 and 32,826,325 shares issued and outstanding at December 31, 2022 and 2021 respectively) 332 328 Additional paid-in capital 775,006 773,350 Accumulated other comprehensive loss (4,828) (4,535) Accumulated deficit (794,017) (808,410) Total stockholders' equity (deficit) (23,507) (39,267) Total liabilities and stockholders' equity (deficit) $
426,834
The accompanying notes are an integral part of these consolidated financial
statements. F-2 -------------------------------------------------------------------------------- NINE ENERGY SERVICE, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (In thousands, except share and per share amounts) Year Ended December 31, 2022 2021 Revenues Service$ 455,364 $ 248,618 Product 138,018 100,801 593,382 349,419 Cost and expenses Cost of revenues (exclusive of depreciation and amortization shown separately below) Service 350,733 228,290 Product 106,360 79,702 General and administrative expenses 51,653 45,301 Depreciation 26,784 28,905 Amortization of intangibles 13,463 16,116 Loss on revaluation of contingent liability 454 460 Loss on sale of property and equipment 367 660 Income (loss) from operations 43,568 (50,015) Interest expense 32,486 32,527 Interest income (305) (26) Gain on extinguishment of debt (2,843) (17,618) Other income (709) (298) Income (loss) before income taxes 14,939 (64,600) Provision (benefit) for income taxes 546 (25) Net income (loss)$ 14,393 $ (64,575) Earnings (loss) per share Basic$ 0.47 $ (2.13) Diluted$ 0.45 $ (2.13) Weighted average shares outstanding Basic 30,930,890 30,302,925 Diluted 32,251,398 30,302,925 Other comprehensive loss, net of tax Foreign currency translation adjustments, net of$0 tax in each period$ (293) $ (34) Total other comprehensive loss, net of tax (293) (34) Total comprehensive income (loss)$ 14,100 $ (64,609)
The accompanying notes are an integral part of these consolidated financial
statements. F-3 --------------------------------------------------------------------------------
NINE ENERGY SERVICE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands, except share amounts) Accumulated Retained Total Additional Other Earnings Stockholders' Common Stock Paid-in Comprehensive (Accumulated Equity Shares Amounts Capital Income (Loss) Deficit) (Deficit) Stockholders' equity (deficit) as of December 31, 2020 31,557,809$ 316 $ 768,429 $ (4,501) $ (743,835) $ 20,409 Issuance of common stock under stock compensation plan, net of forfeitures 1,457,626 14 (14) - - - Stock-based compensation expense - - 5,406 - -
5,406
Vesting of restricted stock and stock units (189,110) (2) (471) - - (473) Other comprehensive loss - - - (34) - (34) Net loss - - - - (64,575) (64,575) Stockholders' equity (deficit) as of December 31, 2021 32,826,325$ 328 $ 773,350 $ (4,535) $ (808,410) $ (39,267) Issuance of common stock under stock compensation plan, net of forfeitures 623,328 7 (7) - - - Stock-based compensation expense - - 2,440 - -
2,440
Vesting of restricted stock and stock units (228,387) (3) (777) - - (780) Other comprehensive loss - - - (293) - (293) Net income - - - - 14,393 14,393 Stockholders' equity (deficit) as of December 31, 2022 33,221,266$ 332 $ 775,006 $ (4,828) $ (794,017) $ (23,507) The accompanying notes are an integral part of these consolidated financial statements. F-4
--------------------------------------------------------------------------------
NINE ENERGY SERVICE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 2021 Cash flows from operating activities Net income (loss)$ 14,393 $ (64,575) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation 26,784 28,905 Amortization of intangibles 13,463 16,116 Amortization of operating leases 8,670 8,020 Amortization of deferred financing costs 2,545 2,602 Recovery for doubtful accounts (166) (229) Provision for inventory obsolescence 2,966 4,831 Stock-based compensation expense 2,440 5,406 Gain on extinguishment of debt (2,843) (17,618) Loss on sale of property and equipment 367 660 Loss on revaluation of contingent liability 454 460 Abandonment of in-process research and development 1,000 - Changes in operating assets and liabilities Accounts receivable, net (41,114) (22,540) Inventories, net (22,968) (8,608) Prepaid expenses and other current assets (818) 3,350 Accounts payable and accrued expenses 19,476 12,447 Income taxes receivable/payable 655 - Other assets and liabilities (8,632) (9,643) Net cash provided by (used in) operating activities 16,672 (40,416) Cash flows from investing activities Proceeds from sales of property and equipment 2,959 3,492 Proceeds from property and equipment casualty losses 175 - Purchases of property and equipment (28,551) (15,413) Net cash used in investing activities (25,417) (11,921) Cash flows from financing activities Proceeds from ABL Credit Facility 24,000 15,000 Payments on ABL Credit Facility (7,000) - Purchases of 2023 Notes (10,081) (8,355) Payments on Magnum Promissory Notes (1,125) (844) Proceeds from short-term debt 4,086 1,513 Payments of short-term debt (2,787) (545) Payments on finance leases (1,269) (1,094) Payments of contingent liability (195) (154) Vesting of restricted stock and stock units (780) (473) Net cash provided by financing activities 4,849 5,048 Impact of foreign currency exchange on cash (168) (66) Net decrease in cash and cash equivalents (4,064) (47,355) Cash and cash equivalents Cash and cash equivalents at beginning of period 21,509 68,864 F-5 --------------------------------------------------------------------------------
Year Ended
2022 2021 Cash and cash equivalents at end of period $
17,445
Supplemental disclosures of cash flow information: Cash paid for interest
$ 29,708 $ 30,085 Cash refunded for income taxes $ 116$ 24 Supplemental schedule of non-cash activities: Capital expenditures in accounts payable and accrued expenses$ 3,443 $ 63 Receivable from property and equipment sale (including insurance) $
701
The accompanying notes are an integral part of these consolidated financial statements. F-6
--------------------------------------------------------------------------------NINE ENERGY SERVICE, INC. NOTES TO THE FINANCIAL STATEMENTS
1. Company and Organization
Company Description
Nine Energy Service, Inc. (the "Company" or "Nine"), aDelaware corporation, is an oilfield services business that provides services integral to the completion of unconventional wells through a full range of tools and methodologies. The Company is headquartered inHouston, Texas . The Company's chief operating decision maker, which is its Chief Executive Officer, and its board of directors allocate resources and assess performance based on financial information presented at a consolidated level. Accordingly, the Company determined that it operates as one reportable segment, known as Completion Solutions.
Risks and Uncertainties
The Company's business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. Following an extreme decline in activity levels and pricing in 2020, the Company has been focused on strategically implementing price increases and gaining market share. In 2022, oil and natural gas prices improved, and activity levels increased compared to 2021, resulting in higher demand for the Company's products and services. Due to a heightened competition for qualified labor, an under-supply of equipment, and other supply chain-related constraints, the Company implemented price increases in most service lines. Finding and retaining qualified labor continues to be a challenge resulting in wage inflation, offsetting some of the price increases. Going forward, the Company's earnings will be affected by its customers' activity plans (which are strongly influenced by commodity prices), the Company's ability to implement further price increases, the impact of wage and labor inflation, and labor shortage and supply chain constraints. Additionally, activity levels could be affected as oilfield service providers continue to raise prices and customers are impacted by cost inflation to drill, complete, and produce oil and natural gas wells.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). Principles of Consolidation The consolidated financial statements as ofDecember 31, 2022 and 2021, and for the years endedDecember 31, 2022 and 2021, include the accounts of Nine and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in the 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 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 analyzing long-lived assets for possible impairment, useful lives used in depreciation and amortization expense, recognition of provisions for contingencies, and stock-based compensation fair value. It is at least reasonably possible that the estimates used will change within the next year. Revenue Recognition The Company recognizes revenue under Accounting Standards Codification Topic 606 ("ASC 606") when products are received by a customer's domestic common carrier at the Company's facility or when the product is received by the customer's international carrier. The Company believes this recognition policy reflects the point at which the customer obtains control of the product as required by ASC 606. F-7 --------------------------------------------------------------------------------
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company excludes sales taxes, value added taxes, and other taxes it collects concurrent with revenue-producing activities from revenue. The Company's revenue is derived from the sale of products and services which are sold directly to customers or are consumed by customers on their well sites. For domestic product sales, the Company typically recognizes revenue when it meets its performance obligation upon the shipment of the products from its facilities to its customer. For international product sales, the Company typically recognizes revenue when it meets its performance obligation upon receipt of the products by the customer's international carrier. The Company recognizes service revenue over the time the service is performed as the customer consumes and benefits from the use of the Company's products and services for well service. Service revenues represent revenue recognized over time, as the Company's customer arrangements typically provide agreed upon hourly or daily fixed-rates, and the Company recognizes service revenue based upon the number of hours or days services have been performed. Contracts for the Company's products and services are negotiated on a per-job basis at a regional level. Contracts vary in nature but typically have a duration of less than a month and have a single performance obligation either for a job, a series of distinct jobs, or a period the Company stands ready to provide its services to its client as needed. The Company's payment terms vary by the type and location of its customers and type of product and service offered. The Company receives cash equal to the invoice amount for most services and product sales, and payment terms typically range from 30 to 60 days from the date the Company invoices a customer. Since the period between the delivery of the Company's products and services and the Company's receipt of customer payment for these products and services is not expected to exceed one year, the Company has elected not to calculate or disclose a financing component for its customer contracts.
Contract Estimates
The Company receives reimbursements from its customers for the purchase of supplies, equipment, personnel services, and other services provided at a customer's request. Reimbursable revenues are subject to uncertainty as the timing of the receipt of these amounts is dependent on factors outside of the Company's influence. Accordingly, these revenues are not recognized until the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of the customer. The Company is considered a principal in these transactions and records the associated revenues at the gross amount billed to the customer. Changes and modifications to contracts are routine in the performance of the Company's contracts due to the dynamic nature of well operations and the services the Company provides for its customers. The Company considers contract modifications to exist when the modification either creates a new contract or changes the existing enforceable rights and obligations of a contract. Most of the Company's contract modifications are for services or goods that are not distinct from existing contracts due to the significant integration provided or significant interdependencies in the context of the contract and are accounted for as if they were part of the original contract.
Contract Balances
Any contract assets are included in "Accounts receivable, net" in the Company's Consolidated Balance Sheets. Contract assets arise when recorded revenues for a contract exceed the amounts billed under the terms of the contracts. The Company classifies contract liabilities as unearned income which is included in "Accrued expenses" in the Company's Consolidated Balance Sheets. Such deferred revenue typically results from advance payments received on well service orders prior to performance of the service.
For information regarding the Company's revenue, see Note 3 - Revenues.
Leases
The Company determines if an arrangement is a lease at inception. To the extent an arrangement represents a lease, the Company classifies that lease as an operating lease or a finance lease under Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) and its related ASUs ("ASC 842"). The Company capitalizes operating leases on its Consolidated Balance Sheets through a Right of Use ("ROU") asset and a corresponding lease liability. ROU assets represent the Company's right to use an underlying asset for the lease term, and F-8 -------------------------------------------------------------------------------- lease liabilities represent the Company's obligation to make lease payments arising from the operating lease. Operating lease ROU assets and obligations are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term utilizing an interest rate that the Company would have incurred to borrow over a similar term the funds necessary to purchase the leased asset. Operating leases are included in "Operating lease right of use assets, net," "Current portion of operating lease obligations," and "Long-term operating lease obligations" in the Company's Consolidated Balance Sheets as ofDecember 31, 2022 and 2021. Lease expense for operating leases is recognized on a straight-line basis over the lease term for 2022 and 2021. Finance leases are included in the line items "Finance lease right of use assets, net," "Current portion of finance lease obligations," and "Long-term finance lease obligations" in the Company's Consolidated Balance Sheets as ofDecember 31, 2022 and 2021.
For additional information regarding the Company's leases, see Note 6 - Leases.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. Throughout the year, the Company maintained cash balances that were in excess of their federally insured limits. The Company has not experienced any losses in such accounts.
Cash flows from the Company's Canadian subsidiary are calculated based on its functional currency. As a result, amounts related to changes in assets and liabilities reported in the Company's Consolidated Statements of Cash Flows will not necessarily agree to changes in the corresponding balances in the Company's Consolidated Balance Sheets. Foreign Currency The Company's functional currency is the United States Dollar ("USD"). The financial position and results of operations of the Company's Canadian subsidiary are measured using the local currency as the functional currency. Revenues and expenses of the subsidiary have been translated into USD at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the date of the Company's Consolidated Balance Sheets. The resulting translation gain and loss adjustments have been recorded as a separate component of other comprehensive income (loss) in the Company's Consolidated Statements of Income and Comprehensive Income (Loss) and its Consolidated Statements of Stockholders' Equity (Deficit).
Accounts Receivable
The Company extends credit to customers in the normal course of business. Accounts receivable are carried at their estimated collectible amount. Trade credit is generally extended on a short-term basis; thus, receivables do not bear interest, although a finance charge may be applied to amounts past due. The Company maintains an allowance for doubtful accounts for estimated losses that may result from the inability of its customers to make required payments. Such allowances are based upon several factors including, but not limited to, credit approval practices, industry and customer historical experience, as well as the current and projected financial condition of the specific customer. Accounts receivable outstanding longer than contractual terms are considered past due. The Company writes off accounts receivable to the allowance for doubtful accounts when they become uncollectible. Any payments subsequently received on receivables previously written off are credited to bad debt expense. The Company had$105.3 million and$64.0 million of "Accounts receivable, net" atDecember 31, 2022 and 2021, respectively. The Company maintains an allowance for doubtful accounts based on the expected collectability of accounts receivable, which is included in "Accounts receivable, net" on the Company's Consolidated Balance Sheets. The Company had an allowance for doubtful accounts of$0.2 million and$2.8 million atDecember 31, 2022 and 2021, respectively. Bad debt expense recovery was$0.2 million for both the years endedDecember 31, 2022 and 2021.
Concentration of Credit Risk
The Company derives a significant portion of its revenues from companies in the exploration and production ("E&P") industry, and its customer base includes a broad range of integrated and independent domestic E&P companies and international E&P companies operating in the markets that the Company serves. While current energy prices are important contributors to positive cash flow for the customers, expectations about future prices and price volatility are generally more important for determining future spending levels. Any prolonged increase or decrease in oil and natural gas prices affects the levels of exploration, development, and production activity as well as the entire health of the oil and natural gas industry and F-9 -------------------------------------------------------------------------------- can therefore negatively impact spending by the Company's customers. No customer accounted for more than 10% of the revenues for the years endedDecember 31, 2022 and 2021.
Concentration of Supplier Risk
Purchases during the years ended
Property and Equipment Property and equipment is stated at cost and depreciated under the straight-line method over the estimated useful lives of the assets. Equipment held under capital leases is stated at the present value of its future minimum lease payments and is depreciated under the straight-line method over the shorter of the lease term or the estimated useful life of the asset. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized within operating expenses. Normal repair and maintenance costs are charged to operating expense as incurred. Significant renewals and betterments are capitalized.
Valuation of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the assets, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the Level 3 fair value of the asset. The Level 3 fair value is determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows based on expected utilization. Determining fair value requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating profit margins, weighted average costs of capital, terminal growth rates, future market share, the impact of new product development, and future market conditions, among others. The Company believes that the estimates and assumptions used in impairment assessments are reasonable and appropriate. Impairment losses are reflected in "Income (loss) from operations" in the Company's Consolidated Statements of Income and Comprehensive Income (Loss).
Valuation of Intangible Assets
Intangible assets with definite lives include technology, customer relationships, and non-compete agreements. The Level 3 fair value of technology and the Level 3 fair value of customer relationships are estimated using the income approach, specifically the multi-period excess earnings method. The multi-period excess earnings method consists of isolating the cash flows attributed to the intangible asset, which are then discounted to present value to calculate the Level 3 fair value of the intangible asset. The Level 3 fair value of non-compete agreements is estimated using a with and without scenario where cash flows are projected through the term of the non-compete agreement assuming the non-compete agreement is in place and compared to cash flows assuming the non-compete agreement is not in place.
Intangible assets with definite lives are amortized based on the estimated consumption of the economic benefit over their estimated useful lives. Intangible assets with definite lives are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
Intangible assets with indefinite useful lives are not subject to amortization. For intangible assets with indefinite useful lives, an assessment for impairment is performed annually onDecember 31 or when there is an indication an impairment may have occurred. Intangible assets with indefinite useful lives are reviewed for impairment by comparing the carrying value of the intangible asset to the Level 3 fair value of the intangible asset. The Level 3 fair value of intangible assets with indefinite useful lives is estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset. Determining fair value requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating profit margins, royalty rates, weighted average costs of capital, terminal growth rates, future market share, the impact of new product development, and future market conditions, among others. The Company believe that the estimates and assumptions used in impairment assessments are reasonable and appropriate. The Company recognizes an indefinite-lived intangible asset impairment charge of the amount by which the carrying value of the intangible asset exceeds the Level 3 fair value of the intangible asset. Impairment losses are reflected in "Income (loss) from operations" in the Company's Consolidated Statements of Income and Comprehensive Income (Loss). F-10 --------------------------------------------------------------------------------
Stock-based Compensation
The Company has stock-based compensation plans for certain of its employees. The Company measures employee stock-based compensation awards at fair value on the date they are granted to employees and recognizes compensation cost in its financial statements over the requisite service period. As a result of the adoption of ASU No. 2016-09, the Company elected to account for stock-based compensation forfeitures as they occur.
Restricted Stock and Restricted Stock Units
Compensation expense is recorded for restricted stock and restricted stock units over the applicable vesting period based on the Company's closing stock price as of the grant date.
Performance Stock Units and Performance Cash Awards
Performance stock units and performance cash awards are recorded at their fair value and expensed over their performance period. Fair value for performance stock units and performance cash awards is measured using a Monte Carlo simulation model.
Options
Options are issued with an exercise price equal to the fair value of the stock on the date of grant. Compensation expense is recorded for the fair value of the stock options and is recognized over the period of the underlying security's vesting schedule. Consideration paid on the exercise of stock options is credited to share capital and additional paid-in capital. For options, fair value of the stock-based compensation is measured by use of the Black-Scholes pricing model. The following discusses the assumptions used related to the Black-Scholes pricing model. •The expected term of stock options represents the period the stock options are expected to remain outstanding and is based on the simplified method, which is the weighted average vesting term plus the original contractual term, divided by two.
•Expected volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period. The Company developed its expected volatility based upon a weighted average volatility of its peer group.
•At the time of the issuance of the options, the Company did not plan to pay cash dividends in the foreseeable future. Therefore, a zero expected dividend yield was used in the valuation model.
•The risk-free interest rate is based on
Income Taxes
The Company accounts for income taxes under Accounting Standards Codification 740, Income Taxes ("ASC 740"). Under this method, deferred income tax assets and liabilities are determined based upon temporary differences between the carrying amounts and tax bases of the Company's assets and liabilities at the balance sheet date and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period in which the change occurs. The Company records a valuation reserve in each reporting period when management believes that it is more likely than not that any deferred tax asset created will not be realized. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. If a tax position meets the "more likely than not" recognition criteria, the tax position is measured at the largest amount of benefit greater than 50% likely of being realized upon ultimate settlement. F-11 --------------------------------------------------------------------------------
Fair Value of Financial Instruments
The carrying amounts for financial instruments classified as current assets and current liabilities approximate fair value, due to the short maturity of such instruments. For financial assets and liabilities disclosed at fair value, fair value is determined as the exit price, or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The established fair value hierarchy divides fair value measurement into three levels: •Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
•Level 2 - inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly or indirectly; and
•Level 3 - inputs are unobservable for the asset or liability, which reflect the best judgment of management.
Financial assets and liabilities that are disclosed at fair value are categorized in one of the above three levels based on the lowest level input that is significant to the fair value measurement in its entirety. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
The fair value of the Company's debt obligations is classified as Level 2 in the fair value hierarchy and is established based on observable inputs in less active markets. For additional information on the fair value of the Company's debt obligations, see Note 9 - Debt Obligations. The fair value of the Company's contingent consideration is classified as Level 3 in the fair value hierarchy and is established on unobservable markets which reflect the best judgment of management. For additional information on the fair value of the Company's contingent consideration, see Note 12 - Commitments and Contingencies. Earnings (Loss) Per Share Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period, taking into effect, if any, the exercise of potentially dilutive stock options assumed to be purchased from the proceeds using the average market price of the Company's stock for each of the periods presented as well as potentially dilutive restricted stock, restricted stock units, and performance stock units. There was no dilutive effect for the year endedDecember 31, 2021 as the Company was in a net loss position. For additional information on earnings (loss) per share, see Note 14 - Earnings (Loss) Per Share.
Accounting Pronouncements Recently Adopted
InDecember 2019 , theFinancial Accounting Standards Board (the "FASB") issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for public businesses for fiscal years beginning afterDecember 15, 2020 and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and adopted, the new standard for fiscal years beginning afterDecember 15, 2021 and interim periods within fiscal years beginning afterDecember 15, 2022 . The adoption of this standard did not have a material impact on the Company's consolidated financial statements included in this Annual Report.
Accounting Pronouncements Not Yet Adopted
InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in ASU 2016-13 replace the current incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. ASU 2016-13 is effective forSecurities and Exchange Commission filers, excluding smaller reporting companies, for fiscal years beginning afterDecember 15, 2019 , including interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for the fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years. The Company does not expect the standard to have a material impact on its financial position, results of operations, or F-12 --------------------------------------------------------------------------------
liquidity. 3. Revenues Disaggregation of Revenues Disaggregated revenue for the years endedDecember 31, 2022 and 2021 was as follows: Year Ended December 31, 2022 2021 (in thousands) Cement$ 229,409 $ 114,181 Tools 138,018 100,801 Wireline 107,352 72,436 Coiled tubing 118,603 62,001 Total revenues$ 593,382 $ 349,419
The Company recognizes revenues from the sales of products at a point in time and revenues from the sales of services over time.
Performance Obligations
At
Contract Balances
At
4. Inventories
Inventories, consisting primarily of finished goods and raw materials, are stated at the lower of cost or net realizable value. Cost is determined on an average cost basis. The Company reviews its inventory balances and writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The reserve for obsolescence was$6.7 million and$9.0 million atDecember 31, 2022 and 2021, respectively. Inventories, net as ofDecember 31, 2022 and 2021 were comprised of the following: December 31, 2022 2021 (in thousands) Raw materials$ 39,249 $ 31,153 Work in progress 161 675 Finished goods 29,345 19,323 Inventories 68,755 51,151 Reserve for obsolescence (6,710) (8,971) Inventories, net$ 62,045 $ 42,180 F-13
--------------------------------------------------------------------------------
5. Property and Equipment
Property and equipment amounts as ofDecember 31, 2022 and 2021 were as follows: December 31, Estimated Useful Lives 2022 2021 (in thousands) Operating equipment 1 to 12 years$ 321,315 $ 299,602 Autos and trucks 1 to 7 years 4,140 4,168 Furniture, fixtures, and equipment 2 to 12 years 3,843 4,059 Shop equipment 3 to 15 years 14,552 14,555 Buildings 7 to 39 years 4,599 8,994 Leasehold improvements 3 to 11 years 2,017 1,443 Land indefinite 1,348 828 351,814 333,649 Less: Accumulated depreciation (262,097) (246,691) Property and equipment, net$ 89,717 $ 86,958
Depreciation expense was
6. Leases
Under ASC 842, the Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded in the Company's Consolidated Balance Sheets. Lease with an initial term greater than 12 months are recognized in the Company's Consolidated Balance Sheets based on lease classification as either operating or financing. Some of the Company's lease agreements include lease and non-lease components for which the Company has elected to not separate for all classes of underlying assets. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company may sublease its real estate to third parties, subject to certain provision of the lease, when it has no future use for the property. Operating Leases As a lessee, the Company's operating lease portfolio primarily consists of operating leases for equipment, vehicles, office space, yard facilities, and employee housing. Operating lease ROU assets and operating lease obligations are recognized based on the present value of the future minimum lease payments at commencement date. As most of the Company's leases do not provide an implicit borrowing rate, the Company uses its incremental borrowing rate based on the lease information available at the commencement date in determining the present value of future payments. The incremental borrowing rate utilized is based upon the interest rate associated with the Company's ABL Credit Facility (as defined and described in Note 9 - Debt Obligations) which is utilized to fund its working capital needs and planned capital expenditures. The Company's leases have remaining terms of one to ten years and may include options to extend or terminate the lease. The operating lease ROU assets also include any upfront lease payments made and exclude lease incentives and initial direct costs incurred. The Company leases most of these properties under long-term (greater than one year) non-cancelable term leases many of which contain renewal options that can extend the lease term from one to five years and some of which contain escalation clauses. The Company may also enter into short-term or month-to-month operating leases. Options to renew these leases are generally not considered reasonably certain to be exercised due to the nature of the Company's operations and the markets it serves. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease. The Company also leases supplemental equipment, typically under cancellable short-term contracts which are less than 30 days. This equipment is typically required for a specific project and for a short duration. Due to the nature of the Company's operations, any option to renew these short-term leases is generally not considered reasonably certain to be exercised. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease, and the lease payments during these periods are similarly excluded from the calculation of operating lease asset and lease obligation balances. F-14 -------------------------------------------------------------------------------- Operating lease expense consists of rent expense related to leases that were included in ROU assets under ASC 842. The Company recognizes operating lease expense on a straight-line basis, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable operating lease payments typically include charges for property taxes and insurance, and some leases contain variable payments related to non-lease components, including common area maintenance and usage of facilities or office equipment (for example, copiers). The Company does not have variable expenses. Additional Information The following table summarizes the components of the Company's lease expense recognized for the years endedDecember 31, 2022 and 2021, excluding variable lease and prepaid rent costs: Year Ended December 31, 2022 2021 (in thousands) Operating lease expense Operating lease right of use assets$ 8,670 $
8,020
Operating lease non right of use assets 7,697 6,201 Total operating lease expense$ 16,367 $ 14,221 Finance lease expense Depreciation of right of use assets $ 385$ 399 Interest on lease obligations 199 162 Total finance lease expense $ 584$ 561 Operating lease expense is included in the line items "Cost of revenues" and "General and administrative expenses" in the Company's Consolidated Statements of Income and Comprehensive Income (Loss) for the years endedDecember 31, 2022 and 2021. Supplemental information related to leases was as follows as ofDecember 31, 2022 and 2021: December 31, 2022 2021 Operating leases Weighted average remaining lease term 5.3 6.4 Weighted average discount rate 5.0% 5.0% Finance leases Weighted average remaining lease term 0.4 1.0 Weighted average discount rate 21.7% 9.8% F-15 -------------------------------------------------------------------------------- Supplemental balance sheet information related to leases was as follows as ofDecember 31, 2022 and 2021: December 31, 2022 2021 (in thousands)
Operating lease right of use assets
Operating lease right of use assets, gross
(16,611) (10,736)
Operating lease right of use assets, net
Operating lease obligations
Current portion of operating lease obligations
29,370 30,435 Total operating lease obligations$ 37,326 $ 36,526
Finance lease right of use assets
Finance lease right of use assets, gross
(510) (1,535) Finance lease right of use assets, net$ 547 $ 1,445
Finance lease obligations
Current portion of finance lease obligations
- 65 Total finance lease obligations$ 178 $ 1,135 Future annual minimum lease payments as ofDecember 31, 2022 were as follows: Operating Lease Right of Use Obligations Finance Leases Total (in thousands) 2023 $ 9,599 $ 219$ 9,818 2024 7,994 - 7,994 2025 7,047 - 7,047 2026 6,474 - 6,474 2027 5,130 - 5,130 Thereafter 6,243 - 6,243 Total lease payments$ 42,487 $ 219$ 42,706 Less: present value discount (5,161) (41) (5,202) Present value of lease obligations$ 37,326 $
178
F-16 --------------------------------------------------------------------------------
Supplemental cash flow information related to leases for the years ended
Year EndedDecember 31, 2022 2021 (in thousands)
Cash paid for amounts included in the measurement of lease obligations: Operating cash flows from operating leases
$ 8,698 $ 8,124 Operating cash flows from finance leases $ 385 $ 399 Financing cash flows from finance leases $ 1,269
$ 1,094
Right of use assets obtained in exchange for lease obligations: Operating leases $ 8,356 $ 5,059 Finance leases $ 336 $ 28 7. Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets as
of
Gross Carrying Accumulated Net Carrying Weighted Average Amount Amortization Amount Amortization Period (in thousands,
except weighted average amortization period information) Customer relationships
$ 63,270 $ (49,845) $ 13,425 4.8 Non-compete agreements 6,500 (6,166) 334 0.8 Technology 125,110 (36,924) 88,186 10.7 Total$ 194,880 $ (92,935) $ 101,945 December 31, 2021 Gross Carrying Accumulated Net Carrying Weighted Average Amount Amortization Amount Amortization Period (in thousands, except weighted average amortization period information) Customer relationships$ 63,270 $ (45,187) $ 18,083 5.3 Non-compete agreements 6,500 (5,766) 734 2.0 Technology 125,110 (28,519) 96,591 11.7 In-process research and development 1,000 - 1,000 Indefinite Total$ 195,880 $ (79,472) $ 116,408
The Company abandoned its "E-Set" tools business and related
Amortization of Intangibles
Amortization of intangibles was
F-17 --------------------------------------------------------------------------------
Future estimated amortization of intangibles is as follows:
Year Ending December 31, (in thousands) 2023$ 11,516 2024 11,183 2025 11,183 2026 11,082 2027 10,315 Thereafter 46,666$ 101,945 8. Accrued Expenses Accrued expenses as ofDecember 31, 2022 and 2021 consisted of the following: December 31, 2022 2021 (in thousands) Accrued interest 5,012 4,980
Accrued compensation and benefits 10,283 6,897 Accrued bonus
3,979 1,125 Accrued legal fees and settlements 145 1,076 Other accrued expenses 8,972 4,441 Accrued expenses$ 28,391 $ 18,519 9. Debt Obligations The Company's debt obligations as ofDecember 31, 2022 and 2021 were as follows: December 31, 2022 2021 (in thousands) 2023 Notes (1)$ 307,339 $ 320,343 ABL Credit Facility (1) 32,000 15,000 Magnum Promissory Notes (2) - 1,125 Other short-term debt (2) 2,267 968
Total debt before deferred financing costs
(1,308) (3,029) Total debt$ 340,298 $ 334,407
Less: Current portion of long-term debt (2,267) (2,093) Long-term debt
$ 338,031 $ 332,314 (1) Subsequent toDecember 31, 2022 , the Company redeemed all of the outstanding 2023 Notes and extended the maturity date of the ABL Credit Facility fromOctober 25, 2023 toJanuary 29, 2027 . As such, these obligations are classified as long-term on the Company's Consolidated Balance Sheet atDecember 31, 2022 . Refer to further disclosure within this footnote for additional information.
(2) The weighted average interest rate of short-term debt outstanding at
2023 Notes
OnOctober 25, 2018 , the Company issued$400.0 million principal amount of 8.750% Senior Notes due 2023 (the "2023 Notes"). The 2023 Notes were issued under an indenture, dated as ofOctober 25, 2018 (the "2023 Notes Indenture"), by and among the Company, certain subsidiaries of the Company and Wells Fargo, National Association, as Trustee. The 2023 F-18 -------------------------------------------------------------------------------- Notes bore interest at an annual rate of 8.750% payable onMay 1 andNovember 1 of each year, commencingMay 1, 2019 . The 2023 Notes were senior unsecured obligations of the Company and were fully and unconditionally guaranteed on a senior unsecured basis by each of the Company's current domestic subsidiaries and by certain future subsidiaries. The 2023 Notes Indenture contained covenants that limited the Company's ability and the ability of its restricted subsidiaries to engage in certain activities. The Company was in compliance with the provisions of the 2023 Notes Indenture atDecember 31, 2022 . Pursuant to the 2023 Notes Indenture, upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding 2023 Notes may declare the 2023 Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to the Company, any significant subsidiary or any group of subsidiaries that, taken together, would constitute a significant subsidiary, would automatically cause all outstanding 2023 Notes to become due and payable. Unamortized deferred financing costs associated with the 2023 Notes were$1.3 million and$3.0 million atDecember 31, 2022 and 2021, respectively. These costs were direct deductions from the carrying amount of the 2023 Notes and were amortized through interest expense through the maturity date of the 2023 Notes using the effective interest method.
Extinguishment of Debt
The Company repurchased approximately$13.0 million of 2023 Notes at a repurchase price of approximately$10.1 million in cash for the year endedDecember 31, 2022 . Deferred financing costs associated with these transactions were$0.1 million for the year endedDecember 31, 2022 . As a result, for the year endedDecember 31, 2022 , the Company recorded a$2.8 million gain on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the 2023 Notes partially offset by the deferred financing costs. The Company repurchased approximately$26.3 million of 2023 Notes at a repurchase price of approximately$8.4 million in cash for the year endedDecember 31, 2021 . Deferred financing costs associated with these transactions were$0.3 million for the year endedDecember 31, 2021 . As a result, for the year endedDecember 31, 2021 , the Company recorded a$17.6 million gain on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the 2023 Notes partially offset by the deferred financing costs. The gain on extinguishment of debt is included as a separate line item in the Company's Consolidated Statements of Income and Comprehensive Income (Loss) for the years endedDecember 31, 2022 and 2021.
Redemption
OnFebruary 1, 2023 , with proceeds received from its public offering of Units (as defined and described below) and borrowings under its ABL Credit Facility (as defined and described below), the Company redeemed all of the outstanding 2023 Notes at a redemption price of 100.0% of outstanding principal amount thereof ($307.3 million ), plus accrued and unpaid interest ($6.7 million ). The Company also wrote off the unamortized deferred financing costs associated with the 2023 Notes in conjunction with the redemption.
Units Offering and 2028 Notes
Units
OnJanuary 30, 2023 , the Company completed its public offering of 300,000 units with an aggregate stated amount of$300.0 million (the "Units"). Each Unit consists of$1,000 principal amount of the Company's 13.000% Senior Secured Notes due 2028 (collectively, the "2028 Notes") and five shares of common stock of the Company. The Company received proceeds of$279.8 million from the Units offering, after deducting underwriting discounts and commission, which was used to fund a portion of the redemption price of the 2023 Notes. Each Unit will be separated into its constituent securities (the 2028 Notes and shares of the Company's common stock) automatically onOctober 27, 2023 , or, if earlier, on the date, if any, on which a change of control or event of default (each as defined in the indenture governing the 2028 Notes) occurs. A holder of Units may elect to separate its Units into its constituent securities, in whole but not in part, on or afterMarch 31, 2023 . Prior to such date, the Units may not be separated at the option of the holder. Once a Unit has been separated into its constituent securities at the option of a holder, it cannot be recreated. F-19 -------------------------------------------------------------------------------- Prior to separating the Units into its constituent securities, a holder thereof will not be able to participate in any redemption or repurchase of the 2028 Notes, and holders of the 2028 Notes must have separated their Units prior to the date of any redemption of any offer to repurchase commencement date in order to participate in such redemption or repurchase.
Holders of Units are entitled to the rights of a holder of the Company's common stock, including, without limitation, the right to vote and consent to or receive notice as a stockholder.
2028 Notes
OnJanuary 30, 2023 , the Company and certain of its subsidiaries entered into an indenture, dated as ofJanuary 30, 2023 (the "2028 Notes Indenture"), withU.S. Bank Trust Company, National Association , as the trustee and as notes collateral agent, pursuant to which the 2028 Notes, which form a part of the Units, were issued. The 2028 Notes will mature onFebruary 1, 2028 and bear interest at an annual rate of 13.000% payable in cash semi-annually in arrears on each ofFebruary 1 andAugust 1 , commencingAugust 1, 2023 . The 2028 Notes are senior secured obligations of the Company and are guaranteed on a senior secured basis by each of the Company's current domestic subsidiaries and by certain future subsidiaries, subject to agreed guaranty and security principles and certain exclusions. Prior toFebruary 1, 2026 , the Company may, on any one or more occasions, redeem all or a part of the 2028 Notes at a redemption price equal to 100.0% of the principal amount of the 2028 Notes redeemed, plus a "make-whole" premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, prior toFebruary 1, 2026 , the Company may, from time to time, redeem up to 35.0% of the aggregate principal amount of the 2028 Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings at a redemption price equal to 113.0% of the principal amount of the 2028 Notes redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, provided that at least 65.0% of the aggregate principal amount of the 2028 Notes issued under the 2028 Notes Indenture remains outstanding immediately after such redemption and the redemption occurs within 180 days of the closing date of such equity offering. Also, prior toFebruary 1, 2026 , the Company may redeem during each 12-month period beginning onJanuary 30, 2023 , up to 10% of the principal amount of the 2028 Notes on a redemption price equal to 103.0% of the aggregate principal amount of the 2028 Notes being redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. On and afterFebruary 1, 2026 , the Company may redeem the 2028 Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount of the 2028 Notes to be redeemed) set forth below, plus accrued and unpaid interest, if any, to, but excluding the date of redemption, if redeemed during the periods indicated: Redemption PriceFebruary 1, 2026 toJanuary 31, 2027 106.500 %February 1, 2027 toOctober 31, 2027 103.250 %November 1, 2027 and thereafter 100.000 % On eachMay 15 andNovember 14 , commencingNovember 14, 2023 (each, an "Excess Cash Flow Offer Date"), the Company is required to make an offer (an "Excess Cash Flow Offer") to all holders of the 2028 Notes and, if required by the terms of any Pari Passu Notes Lien Indebtedness (as defined in the 2028 Notes Indenture), to any holders of any Pari Passu Notes Lien Indebtedness to purchase, prepay or redeem, together on a pro-rata basis, the maximum principal amount of the 2028 Notes and any such Pari Passu Notes Lien Indebtedness (plus all accrued interest (including additional interest, if any) on the 2028 Notes and any such Pari Passu Notes Lien Indebtedness and the amount of all fees and expenses, including premiums, incurred in connection therewith) that may be purchased, prepaid or redeemed using an amount of cash equal to the Excess Cash Flow Amount (as defined in the 2028 Notes Indenture and which is 75.0% of Excess Cash Flow (as defined in the 2028 Notes Indenture), as determined immediately prior to the Excess Cash Flow Offer Date), if any, subject to certain exceptions set forth in the 2028 Notes Indenture. The offer price in any such offer will be equal to 100% of the principal amount of the 2028 Notes and any such Pari Passu Notes Lien Indebtedness (or, in respect of any such Pari Passu Notes Lien Indebtedness, such lesser price, if any, as may be provided for by the terms of such Pari Passu Notes Lien Indebtedness), plus accrued and unpaid interest and additional interest, if any, to, but excluding, the date of purchase, prepayment or redemption, subject to the rights of holders of the 2028 Notes or any such Pari Passu Notes Lien Indebtedness on the relevant record date to receive interest due on an interest payment date that is on or prior to the date of purchase, prepayment or redemption, and will be payable in cash. If the Company experiences certain changes of control, each holder of 2028 Notes may require the Company to repurchase all or a portion of its 2028 Notes for cash at a price equal to 101.0% of the principal amount of such 2028 Notes, plus any accrued but unpaid interest, if any, to, but excluding, the date of repurchase. F-20 -------------------------------------------------------------------------------- The 2028 Notes Indenture contains covenants that, among other things and subject to certain exceptions and qualifications, limit the Company's ability and the ability of its restricted subsidiaries to (i) incur additional indebtedness and guarantee indebtedness; (ii) pay dividends or make other distributions of capital stock; (iii) prepay, redeem or repurchase certain debt; (iv) issue certain preferred stock or similar equity securities, (v) make loans and investments; (vi) sell assets; (vii) incur liens; (viii) enter into transactions with affiliates; (ix) enter into agreements restricting its subsidiaries' ability to pay dividends; or (x) consolidate, merge, or sell all or substantially all of its assets. Upon an event of default, the trustee of the 2028 Notes or the holders of at least 25% in aggregate principal amount of then outstanding 2028 Notes may declare the 2028 Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to the Company, any significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding 2028 Notes to become due and payable.
ABL Credit Facility
Background
OnOctober 25, 2018 , the Company entered into a credit agreement dated as ofOctober 25, 2018 (the "2018 ABL Credit Agreement"), by and among the Company,Nine Energy Canada, Inc. ,JP Morgan Chase Bank, N.A. as administrative agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permitted 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 "ABL Credit Facility"). Pursuant to the 2018 ABL Credit Agreement, the ABL Credit Facility was set to mature onOctober 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the 2023 Notes if they had not been redeemed or repurchased by such date. Pursuant to the 2018 ABL Credit Agreement, loans to the Company and its domestic related subsidiaries (the "U.S. Credit Parties") under the ABL Credit Facility were base rate loans or London Interbank Offered Rate ("LIBOR") loans; and loans toNine Energy Canada Inc. , a corporation organized under the laws ofAlberta, Canada , and its restricted subsidiaries (the "Canadian Credit Parties") under the Canadian tranche may be Canadian Dollar Offered Rate ("CDOR") loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans varied from 0.75% to 1.25% and the applicable margin for LIBOR loans or CDOR loans varied from 1.75% to 2.25%, in each depending on the Company's leverage ratio. In addition, a commitment fee of 0.50% per annum was charged on the average daily unused portion of the revolving commitments. OnJanuary 17, 2023 , the Company entered into the First Amendment to Credit Agreement (the "ABL Facility Amendment") withJP Morgan Chase Bank, N.A. , as administrative agent, and the lender parties thereto, which amends certain terms of the 2018 ABL Credit Agreement (as amended the "ABL Credit Agreement"). The ABL Facility Amendment became effective onJanuary 30, 2023 . Pursuant to the ABL Facility Amendment, the maturity date of the ABL Credit Facility was extended fromOctober 25, 2023 toJanuary 29, 2027 . In addition, the ABL Facility Amendment, among other changes, revised the terms of the ABL Credit Facility as follows: (a) decreased the size of the ABL Credit Facility from$200.0 million to$150.0 million , subject to the borrowing base, (b) changed the interest rate benchmark from LIBOR to Term Secured Overnight Financing Rate with a 10 basis point spread adjustment and increased pricing from the existing range of 1.75% to 2.25% to a range of 2.00% to 2.50%, in each case depending on the Company's leverage ratio, (c) modified the financial covenant, enhanced reporting and cash dominion triggers in the ABL Credit Facility from the existing minimum availability threshold of the greater of$18.75 million and 12.5% of the loan limit to a minimum availability threshold of (i)$12.5 million fromJanuary 30, 2023 untilMay 31, 2023 and (ii) the greater of$17.5 million and 12.5% of the loan limit thereafter, (d) decreased the Canadian tranche sub-limit from$25.0 million to$5.0 million , (e) decreased the letter of credit sub-limit from$50.0 million to$10.0 million and (f) made satisfaction of the Payment Conditions (as defined in the ABL Facility Amendment) a condition to an Excess Cash Flow Offer in addition to a condition to voluntary payments of the 2028 Notes. The Payment Conditions in summary are (A) no default or event of default on a pro forma basis and (B) immediately after and at all times and at all times during the 30 days prior, on a pro forma basis, (1) (x) availability under the ABL Credit Facility shall not be less than the greater of 15% of the loan limit and$22.5 million and (y) the fixed charge coverage ratio shall be at least 1.00 to 1.00 or (2) availability under the ABL Credit Facility shall not be less than the greater of 20% of the loan limit and$30.0 million . The 2018 ABL Credit Agreement contained and the ABL Credit Agreement contains, various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and F-21 -------------------------------------------------------------------------------- transactions with affiliates. In addition, the 2018 ABL Credit Agreement contained a minimum fixed charge ratio covenant of 1.00 to 1.00 that was tested quarterly when the availability under the ABL Credit Facility dropped below$18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. The Company was in compliance with all covenants under the 2018 ABL Credit Agreement as ofDecember 31, 2022 . Pursuant to the 2018 ABL Credit Agreement, all of the obligations under the ABL Credit Facility were, and pursuant to the ABL Credit Agreement, all of the obligations under the ABL Credit Facility are secured by security interests (subject to permitted liens) in substantially all of the personal property ofU.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties, excluding certain assets. AtDecember 31, 2022 , the Company had$32.0 million outstanding borrowings under the ABL Credit Facility, and its availability under the ABL Credit Facility was approximately$66.6 million , net of outstanding letters of credit of$1.3 million . OnJanuary 27, 2023 , the Company borrowed an additional$40.0 million under the ABL Credit Facility to pay for the redemption price of the 2023 Notes and to pay for fees and expenses related to the Units offering.
Both the ABL Credit Facility and the Units collateralization were completed within 30 days after closing in accordance with the terms of the ABL Facility Amendment and the Units offering.
Magnum Promissory Notes
OnOctober 25, 2018 , pursuant to the terms of a Securities Purchase Agreement, datedOctober 15, 2018 (as amended onJune 7, 2019 , the "Magnum Purchase Agreement"), the Company acquired all of the equity interests ofMagnum Oil Tools International, LTD ,Magnum Oil Tools GP, LLC , andMagnum Oil Tools Canada Ltd. (such entities collectively, "Magnum"). The Magnum Purchase Agreement included the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the "E-Set" tools business in 2019 through 2026 and (ii) up to$25.0 million based on sales of certain dissolvable plug products in 2019 (the "Magnum Earnout"). OnJune 30, 2020 , pursuant to an amendment to the Magnum Purchase Agreement to terminate the remaining Magnum Earnout and all obligations related thereto, the Company issued promissory notes with an aggregated principal amount of$2.3 million (the "Magnum Promissory Notes") to the sellers of Magnum. The Magnum Promissory Notes bear interest at a rate of 6.0% per annum. The principal amount of the Magnum Promissory Notes was paid in equal quarterly installments which beganJanuary 1, 2021 . The remaining outstanding balance was paid onOctober 1, 2022 .
Other Short-Term Debt
In the fourth quarter of 2022, the Company renewed certain insurance policies, and it financed the premium for its excess policy in the amount of$4.1 million . AtDecember 31, 2022 , the outstanding balance on this premium was$2.3 million .
Fair Value of Debt Instruments
The estimated fair value of the Company's debt obligations as of
December 31, 2022 2021 (in thousands) 2023 Notes$ 300,700 $ 153,765 ABL Credit Facility$ 32,000 $ 15,000 Magnum Promissory Notes $ -$ 1,125 Other short-term debt$ 2,267 $ 968 The fair value of the 2023 Notes, ABL Credit Facility, the Magnum Promissory Notes, and other short-term debt is classified as Level 2 in the fair value hierarchy. The fair value of the 2023 Notes is established based on observable inputs in less active markets. The fair value of the ABL Credit Facility, the Magnum Promissory Notes, and other short-term debt approximates their carrying value. F-22 --------------------------------------------------------------------------------
10. Defined Contribution Plans
Background
The Company sponsors a defined contribution plan, theNine Energy Service 401(k) Plan (the "Nine Plan"), under Section 401(k) of the Internal Revenue Code of 1986, as amended, for all qualified employees.
Contributions
For the years ended
11. Stock-based Compensation
Stock Options
Information about stock option activity during the years ended
Number of Remaining Shares in Weighted Weighted Average Underlying Average Contractual Life 2022 Activity Options Exercise Price in Years Intrinsic Value (in thousands) Beginning balance 610,410$ 33.52 3.9 $ - Granted - - - - Exercised - - - - Forfeited - - - - Expired (22,904) 26.28 - - Total outstanding 587,506$ 33.80 3.0 $ - Options exercisable 587,506$ 33.80 3.0 $ - Number of Remaining Shares in Weighted Weighted Average Underlying Average Contractual Life 2021 Activity Options Exercise Price in Years Intrinsic Value (in thousands) Beginning balance 702,542$ 32.63 4.5 $ - Granted - - - - Exercised - - - - Forfeited - - - - Expired (92,132) 26.71 - - Total outstanding 610,410$ 33.52 3.9 $ - Options exercisable 610,410$ 33.52 3.9 $ - The intrinsic value atDecember 31, 2022 and 2021 is the amount by which the fair value of the underlying share exceeds the exercise price of an option as ofDecember 31, 2022 and 2021, respectively.
The Company granted no options in 2022 and 2021.
There was no compensation expense recorded for the years endedDecember 31, 2022 and 2021. As ofDecember 31, 2022 , there is no remaining compensation expense related to options for the Company to expense. Future stock option grants will result in additional compensation expense. F-23 --------------------------------------------------------------------------------
Restricted Stock and Restricted Stock Units
Information about restricted stock and restricted stock unit activity during the
years ended
Weighted Average Number of Shares and Grant Date Fair 2022 Activity Units Value
Nonvested at January 1, 2022 2,379,320 $ 2.83 Granted 651,250 2.80 Vested (1,068,092) 4.13 Forfeited (27,922) 2.02 Nonvested at December 31, 2022 1,934,556 $ 2.12 Weighted Average Number of Shares and Grant Date Fair 2021 Activity Units Value
Nonvested at January 1, 2021 1,714,398 $ 6.69 Granted 1,509,000 2.15 Vested (792,704) 9.77 Forfeited (51,374) 4.33 Nonvested at December 31, 2021 2,379,320 $ 2.83 The total amount of compensation expense related to the restricted stock and restricted stock units recorded was approximately$2.4 million and$4.9 million for the years endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , the Company expects to record compensation expense related to restricted stock and restricted stock units of approximately$3.0 million over the remaining term of approximately 1.9 years. Future restricted stock and restricted stock unit grants would result in additional compensation expense.
Performance Stock Units
The Company granted performance stock units ("PSUs") in 2019. The number of PSUs that vested in the first quarter of 2022 was contingent upon the Company's achievement of certain specified targets. These awards had market conditions and were valued using a Monte Carlo simulation model. The volatility of 49.7% was developed based upon the historical volatility of the Company as well as the volatilities of a group of peer companies, as the Company's trading history needed to be supplemented with additional data as it went public in 2018. The risk-free rate, which was derived using theU.S. Treasury security rates at the grant date, was 2.44%. 2022 2021 Nonvested at January 1, 61,900 61,900 Granted (1) - - Vested (42,714) - Forfeited (19,186) - Nonvested at December 31, - 61,900 (1) The Company granted PSUs in 2019 that vested in the first quarter of 2022 contingent upon the Company's achievement of certain specified targets based on a three-year performance period endingDecember 31, 2021 . The nonvested PSU balance atJanuary 1, 2021 is shown at target level.
The Company did not grant PSUs in 2022 or 2021.
There was no compensation expense related to PSUs for the year ended
F-24 --------------------------------------------------------------------------------December 31, 2021 , the total amount of compensation expense related to PSUs was approximately$0.5 million . As ofDecember 31, 2022 , the Company has no further compensation expense related to PSUs to record. Future PSU grants will result in additional compensation expense.
Performance Cash Awards
InMay 2022 , the Company granted performance cash awards (the "PCAs") that vest based upon the Company's achievement of certain criteria related to its relative total shareholder return ("TSR") in comparison to TSR of members of its peer group (the "Peer Group "), as defined by the PCA grant. These awards, which the Company granted at a target achievement amount, are subject to three individual year-long performance periods (the "Performance Periods"), and payment related to each Performance Period can range from 0% to 200% of the target amount for that Performance Period. The PCAs were valued on the date of grant based on the estimated fair value, which was based on numerous assumptions including the likelihood of the Company's stock price performance achieving targeted thresholds, using a Monte Carlo simulation model. The assumptions used to value the awards included the historical volatility of the Company as well as the volatility of itsPeer Group and the risk-free rate, which was derived using theU.S. Treasury security rates. Under the relevant liability accounting, the fair values for each tranche of the PCAs are remeasured at the end of each reporting period. AtDecember 31, 2022 , the volatility for remeasurement was 123.82%, and the risk-free rate was 4.30%. Compensation expense related to PCAs for the year endedDecember 31, 2022 was approximately$1.8 million . As ofDecember 31, 2022 , based upon the valuation of the PCAs at year end, the Company had remaining compensation expense to recognize of$1.6 million . Future PCA grants will result in additional compensation expense.
12. Commitments and Contingencies
Litigation
The Company records accruals related to litigation and other legal proceedings when they are either known or considered probable and can be reasonably estimated. Legal proceedings are inherently unpredictable and subject to significant uncertainties, and significant judgment is required to determine both probability and the estimated amount. Some of these uncertainties include the stage of litigation, available facts, uncertainty as to the outcome of any legal proceedings or settlement discussions, and any novel legal issues presented. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending litigation. As ofDecember 31, 2022 and 2021, the Company recorded a$0.1 million and a$1.1 million accrual, respectively, for liabilities related to legal matters, which is included under the caption "Accrued expenses" in its Consolidated Balance Sheets. From time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers' compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.
Self-insurance
The Company uses a combination of third-party insurance and self-insurance for health insurance claims. The self-insured liability represents an estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. The estimate is based on an analysis of trailing months of incurred medical claims to project the amount of incurred but not reported claims liability. The estimated liability for self-insured medical claims was$1.2 million and$1.0 million atDecember 31, 2022 and 2021, respectively, and is included under the caption "Accrued expenses" on the Company's Consolidated Balance Sheets. Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, the self-insurance liability could be affected if future claims experience differs significantly from historical trends and actuarial assumptions. Contingent Liabilities
On
F-25 -------------------------------------------------------------------------------- focused on the development of downhole technology, including a casing flotation tool and a number of patented downhole completion tools. The Frac Tech Purchase Agreement, as amended, includes, among other things, the potential for additional future payments, based on certain Frac Tech revenue metrics throughDecember 31, 2025 . The Company's contingent liability (Level 3) for the years endedDecember 31, 2022 and 2021 was as follows: Frac Tech (in thousands) Balance at December 31, 2020 $ 604 Payments (154) Revaluation adjustments 460 Balance at December 31, 2021 $ 910 Payments (195) Revaluation adjustments 454 Balance at December 31, 2022 $ 1,169 All contingent liabilities that relate to contingent consideration are reported at fair value, based on a Monte Carlo simulation model. Significant inputs used in the fair value measurement include estimated gross margin related to forecasted sales of the plugs, term of the agreement, and a risk adjusted discount factor. Contingent liabilities include$0.4 million and$0.1 million reported in "Accrued expenses" atDecember 31, 2022 and 2021, respectively, and$0.8 million reported in "Other long-term liabilities" at bothDecember 31, 2022 and 2021 in the Company's Consolidated Balance Sheets. The impact of the revaluation adjustments is included in the Company's Consolidated Statements of Income and Comprehensive Income (Loss). F-26 --------------------------------------------------------------------------------
13. Taxes
The components of the provision (benefit) for income taxes for the years ended
Year Ended December 31, 2022 2021 (in thousands) Current U.S. federal $ - $ - U.S. state 510 (56) Foreign 36 31 Total current provision (benefit) $ 546$ (25) Deferred U.S. federal $ - $ - U.S. state - - Foreign - - Total deferred provision (benefit) -
-
Total provision (benefit) for income taxes $ 546
The provision (benefit) for income taxes for the years endedDecember 31, 2022 and 2021 differed from the provision (benefit) calculated using the applicable statutory federal income tax rate as follows: Year EndedDecember 31, 2022 2021 (in thousands)
Tax provision (benefit) at statutory rate$ 3,137 $
(13,570)
Foreign rate differential (16) (41) State income taxes, net of federal benefit 403 (44) Nondeductible expenses 912 413 Valuation allowance (5,823)
11,350
Non-cash compensation 1,879
1,893
Other 54 (26) Total provision (benefit) for income taxes$ 546 $ (25) F-27
-------------------------------------------------------------------------------- The tax effects of the cumulative temporary differences resulting in the net deferred tax asset (liabilities) atDecember 31, 2022 and 2021 were as follows: December 31, 2022 2021 (in thousands) Deferred income tax assets: Inventories$ 2,298 $ 2,533 Goodwill and intangible assets 75,617 83,318 Deferred tax benefit from net losses 79,914 79,690 Stock-based compensation and cash award expense 2,524 4,194 Tax credit carryforwards 655 695 Accrued expenses 678 1,632 Interest carryover 13,860 6,824 Lease liability 8,441 8,162 Other 163 164 Total deferred income tax assets 184,150 187,212 Less: Valuation allowance (162,888) (170,747) Net deferred income tax assets$ 21,262 $ 16,465 Deferred income tax liabilities: Property and equipment$ (12,974) $ (8,387) ROU asset (8,288) (8,078) Total deferred income tax liabilities (21,262) (16,465)
Net deferred income tax asset (liability) $ - $ -
As ofDecember 31, 2022 , the Company had federal and state net operating loss carryforwards ("NOLs") of approximately$442.2 million . The federal NOLs related to tax years 2017 and prior can be used for a 20-year period and, if unused, will begin to expire in 2034. The state NOLs can be used from 7 to 20 years and vary by state. A small portion of state NOLs expired in 2022. The Company evaluates its deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. The Company assesses whether a valuation allowance should be established based on its determination of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and prior to the expiration of its NOL and tax credit carryforwards. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Due to recent operating results, the Company continues to be in a three-year cumulative loss position for the year endedDecember 31, 2022 . According to ASC 740, cumulative losses in recent years represent significant negative evidence in considering whether deferred tax assets are realizable. As a result, the Company continues to record a valuation allowance against itsU.S. domestic and Canadian deferred tax assets. The 2022 results include a decrease in the Company's valuation allowance of approximately$7.9 million . If the Company is able to generate sufficient taxable income in the future, and it becomes more likely than not that the Company will be able to fully utilize the net deferred tax assets on which a valuation allowance was recorded, the allowance will be released resulting in a tax benefit. The Company is subject toU.S. federal income tax as well as income tax in multiple state jurisdictions. The earliest period the Company is subject to examination of federal income tax returns by the Internal Revenue Service is 2019. The state income tax returns and other state tax filings of the Company are subject to examination by the state taxing authorities for various periods, generally up to four years after they are filed. F-28 -------------------------------------------------------------------------------- The Company accounts for uncertain tax positions in accordance with guidance in ASC 740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. A reconciliation of the beginning and ending amount of uncertain tax positions is as follows: 2022 (in thousands) Balance at January 1, $ 779
Additional based on tax positions related to prior years - Additional based on tax positions related to current year - Reduction based on tax positions related to prior years - Lapse of statute of limitations - Balance at December 31, $ 779 The total amount of unrecognized tax benefits atDecember 31, 2022 was$0.8 million . The total balance of unrecognized tax benefit would impact the Company's future effective income tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions within the provision for income taxes in its Consolidated Statements of Income and Comprehensive Income (Loss). As ofDecember 31, 2022 , no interest and penalties have been accrued.
14. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of shares outstanding during each period and the exercise of potentially dilutive stock options assumed to be purchased from the proceeds using the average market price of the Company's stock for each of the periods presented as well as the potentially dilutive restricted stock, restricted stock units, and performance stock units.
Basic and diluted earnings (loss) per common share was computed as follows:
Year Ended December 31, 2022 Net Income Average Shares Outstanding Earnings Per Share (in thousands, except for share and per share amounts) Basic $ 14,393 30,930,890 $ 0.47 Unvested restricted stock and stock units - 1,320,508 - Diluted $ 14,393 32,251,398 $ 0.45 Year Ended December 31, 2021 Net Loss Average Shares Outstanding Loss Per Share (in thousands, except for share and per share amounts) Basic$ (64,575) 30,302,925$ (2.13) Unvested restricted stock and stock units - - - Diluted$ (64,575) 30,302,925$ (2.13) The diluted earnings (loss) per share calculation excludes all stock options, unvested restricted stock, unvested restricted stock units, and unvested performance stock units for 2021 because there is a net loss for the period, and their inclusion would be anti-dilutive. The average number of securities that were excluded from diluted earnings (loss) per share that would potentially dilute earnings (loss) per share for the period in which the Company experienced a net loss was as follows: 2022 2021 Year ended December 31, - 729,514 F-29
--------------------------------------------------------------------------------
15. Related Party Transactions
The Company leases office space, yard facilities, and equipment and purchases building maintenance and repair services from entities owned byDavid Crombie , an executive officer of the Company. Total lease expense and building maintenance and repair expense associated with these entities was$1.3 million and$0.9 million for the years endedDecember 31, 2022 and 2021, respectively. The Company also purchased$2.6 million of products and services for both the years endedDecember 31, 2022 and 2021 from an entity in whichMr. Crombie is a limited partner. There were outstanding payables due to this entity relating to equipment purchases of$0.1 million and$0.7 million atDecember 31, 2022 and 2021, respectively. In addition, the Company currently leases office space inCorpus Christi, Texas and previously leased office space inMidland, Texas from an entity affiliated withWarren Lynn Frazier , a beneficial owner of more than 5% of the Company's stock. In the third quarter of 2020, another entity affiliated withMr. Frazier began to sub-lease a portion of such space inCorpus Christi, Texas from the Company. Total rental expense associated with these office spaces, net of sub-leasing income, was$1.6 million and$1.4 million for the years endedDecember 31, 2022 and 2021, respectively. There were net outstanding payables due to these entities of$0.1 million atDecember 31, 2022 . Additionally, onJune 30, 2020 , the Company issued the Magnum Promissory Notes to the sellers of Magnum, includingMr. Frazier . AtDecember 31, 2022 , there was no outstanding principal balance payable toMr. Frazier , and the balance payable toMr. Frazier was$1.1 million atDecember 31, 2021 . For additional information regarding the Magnum Promissory Notes, see Note 9 - Debt Obligations. The Company purchases chemical additives used in cementing from Select Energy Services, Inc. ("Select"). One of the Company's directors also served as a director of Select fromNovember 2017 toNovember 2022 . The Company was billed$1.5 million and$1.1 million for the years endedDecember 31, 2022 and 2021, respectively. There were outstanding payables due to Select of$0.1 million at bothDecember 31, 2022 and 2021. The Company provides products and rentals toNational Energy Reunited Corp. ("NESR"), where one of the Company's directors serves as a director. The Company billed NESR$0.8 million and$1.3 million for the years endedDecember 31, 2022 and 2021, respectively. During the fourth quarter of 2019, the Company sold coiled tubing equipment for$5.9 million to NESR with payments due in 24 monthly equal installments beginning onJanuary 31, 2020 . Total outstanding receivables due to the Company from NESR (inclusive of the equipment sale above) were$0.2 million and$0.5 million atDecember 31, 2022 and 2021, respectively.Ann G. Fox , President and Chief Executive Officer and a director of the Company, is a director of Devon Energy Corporation ("Devon"). The Company generated revenue from Devon of$2.2 million and$3.2 million for the years endedDecember 31, 2022 and 2021, respectively. There were outstanding receivables due from Devon of$0.5 million and$0.4 million atDecember 31, 2022 and 2021, respectively.
16. Supplemental Information
Capital expenditures for years endedDecember 31, 2022 and 2021 were as follows: Year Ended December 31, 2022 2021 (in thousands) Completion Solutions$ 32,162 $ 14,742 Corporate 105 15$ 32,267 $ 14,757
Total assets by segment as of
December 31, 2022 2021 (in thousands) Completion Solutions$ 399,546 $ 349,429 Corporate 27,288 32,184$ 426,834 $ 381,613 F-30
-------------------------------------------------------------------------------- Revenue by country for the years endedDecember 31, 2022 and 2021 were as follows: Year Ended December 31, 2022 Year Ended December 31, 2021 Amount Percentage Amount Percentage (in thousands) (in thousands) United States$ 591,614 99.7 %$ 347,445 99.4 % Canada 1,768 0.3 % 1,974 0.6 %$ 593,382 100.0 %$ 349,419 100.0 % Long-lived assets (defined as property and equipment and definite-lived intangible assets) by country as ofDecember 31, 2022 and 2021 were as follows: December 31, 2022 2021 (in thousands) United States$ 189,962 $ 200,227 Canada and other 1,700 2,139$ 191,662 $ 202,366 F-31
--------------------------------------------------------------------------------
© Edgar Online, source