NINE ENERGY SERVICE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements for the three and six months endedJune 30, 2021 , included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," including "Critical Accounting Policies," included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . This section contains forward-looking statements based on our current expectations, estimates, and projections about our operations and the industry in which we operate. Our actual results may differ materially from those discussed in any forward-looking statement because of various risks and uncertainties, including those described in the sections titled "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q, and "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . OVERVIEW Company DescriptionNine Energy Service, Inc. (either individually or together with its subsidiaries, as the context requires, the "Company," "Nine" "we," "us," and "our") is a leading North American onshore completion services provider that targets unconventional oil and gas resource development. We partner with our exploration and production ("E&P") customers across all major onshore basins inthe United States (the "U.S."), as well as withinCanada and abroad to design and deploy downhole solutions and technology to prepare horizontal, multistage wells for production. We focus on providing our customers with cost-effective and comprehensive completion solutions designed to maximize their production levels and operating efficiencies. We believe our success is a product of our culture, which is driven by our intense focus on performance and wellsite execution as well as our commitment to forward-leaning technologies that aid us in the development of smarter, customized applications that drive efficiencies. We provide (i) cementing services, which consist of blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped between the casing and the wellbore of the well, (ii) an innovative portfolio of completion tools, including those that provide pinpoint frac sleeve system technologies as well as a portfolio of completion technologies used for completing the toe stage of a horizontal well and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug-and-perf operations, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns and isolating tools to a specified depth, and (iv) coiled tubing services, which perform wellbore intervention operations utilizing a continuous steel pipe that is transported to the wellsite wound on a large spool in lengths of up to 30,000 feet and which provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well. How We Generate Revenue and the Costs of Conducting Our Business We generate our revenues by providing completion services to E&P customers across all major onshore basins in theU.S. , as well as withinCanada and abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically enter into aMaster Service Agreement ("MSA") with each customer that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Each specific job is obtained through competitive bidding or as a result of negotiations with customers. The rate we charge is determined by location, complexity of the job, operating conditions, duration of the contract, and market conditions. In addition to MSAs, we have entered into a select number of longer-term contracts with certain customers relating to our wireline and cementing services, and we may enter into similar contracts from time to time to the extent beneficial to the operation of our business. These longer-term contracts address pricing and other details concerning our services, but each job is performed on a standalone basis. The principal expenses involved in conducting our business include labor costs, materials and freight, the costs of maintaining our equipment, and fuel costs. Our direct labor costs vary with the amount of equipment deployed and the utilization of that equipment. Another key component of labor costs relates to the ongoing training of our field service employees, which improves safety rates and reduces employee attrition. 18 -------------------------------------------------------------------------------- How We Evaluate Our Operations We evaluate our performance based on a number of financial and non-financial measures, including the following: •Revenue: We compare actual revenue achieved each month to the most recent projection for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the performance of our operations compared to historical revenue drivers or market metrics. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes. •Adjusted Gross Profit (Loss): Adjusted gross profit (loss) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). Costs of revenues include direct and indirect labor costs, costs of materials, maintenance of equipment, fuel and transportation freight costs, contract services, crew cost, and other miscellaneous expenses. For additional information, see "Non-GAAP Financial Measures" below. •Adjusted EBITDA: We define Adjusted EBITDA as net income (loss) before interest, taxes, and depreciation and amortization, further adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business. For additional information, see "Non-GAAP Financial Measures" below. •Return 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 extinguishment of debt, and (vii) the provision (benefit) for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis. For additional information, see "Non-GAAP Financial Measures" below. •Safety: We measure safety by tracking the total recordable incident rate ("TRIR"), which is reviewed on a monthly basis. TRIR is a measure of the rate of recordable workplace injuries, defined below, normalized and stated on the basis of 100 workers for an annual period. The factor is derived by multiplying the number of recordable injuries in a calendar year by 200,000 (i.e., the total hours for 100 employees working 2,000 hours per year) and dividing this value by the total hours actually worked in the year. A recordable injury includes occupational death, nonfatal occupational illness, and other occupational injuries that involve loss of consciousness, restriction of work or motion, transfer to another job, or medical treatment other than first aid. Recent Events, Industry Trends, and Outlook Our business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are typically strongly influenced by the current and expected oil and natural gas prices. During 2020, due the coronavirus pandemic, North American activity levels decreased by nearly 50% versus 2019, which led to extreme pricing declines across all of our service offerings, but especially within our completion tools and wireline business. Even with increased commodity prices thus far in 2021, we have only seen moderate activity increases inNorth America , as our customers remain committed to capital discipline. For example, for the first half of 2021, the average West Texas Intermediate crude price has averaged$62 , an increase of approximately 8% over the average for the first half of 2019. However, the rig count for the first half of 2021 has averaged 423, a decrease of approximately 58% over the average for the first half of 2019. Because of sustained lower activity in 2021, we expect pricing will remain depressed for the near to medium term, offsetting much of the anticipated revenue increase. We did, however, begin to implement modest net price increases within our cementing and coiled tubing service lines during the second quarter of 2021, andJune 2021 was one of our strongest months from a revenue perspective since the first quarter of 2020. For the remainder of 2021, we anticipate only moderate activity increases, with revenues in the third quarter of 2021 expected to be higher than in the second quarter of 2021. We continue to navigate cost inflation, with finding and retaining 19 -------------------------------------------------------------------------------- qualified labor currently being our largest challenge as we continue to rebuild the oilfield services sector and compete with other industries for labor. Thus, even with further improvements in commodity prices, our business in the near or medium term may not improve materially or at all depending on, among other things, our customers' activity plans, our ability to implement price increases, and our ability to find and retain qualified personnel. Other significant factors that are likely to affect commodity prices moving forward include the extent to which members ofOrganization of the Petroleum Exporting Countries and other oil producing nations, includingRussia , continue to reduce oil export prices and increase production; the effect of energy, monetary, and trade policies ofthe United States ; the pace of economic growth inthe United States and throughout the world, including the potential for macro weakness; geopolitical and economic developments inthe United States and globally; new energy policies put in place by the new administration and theEnvironmental Protection Agency ; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows. Even with price improvements in oil and natural gas, operator activity may not materially increase, as operators remain focused on operating within their capital plans, and uncertainty remains around supply and demand fundamentals. We will continue to focus on generating returns and cash flow. Due to our high level of variable costs and the asset-light make-up of our business, we have been able to quickly implement cost-cutting measures and will continue to adapt as the market dictates. Results of Operations Results for the Three Months EndedJune 30, 2021 Compared to the Three Months EndedJune 30, 2020 Three Months Ended June 30, 2021 2020 Change (in thousands) Revenues$ 84,832
76,638 56,703 19,935
Adjusted gross profit (loss) $ 8,194 General and administrative expenses$ 12,167 $ 11,284 $ 883 Depreciation 7,438 8,449 (1,011) Amortization of intangibles 4,091 4,116 (25) Loss on revaluation of contingent liabilities 45 910 (865) (Gain) loss on sale of property and equipment 950 (1,790) 2,740 Loss from operations (16,497) (26,937) 10,440 Non-operating (income) expense 7,938 (2,580) 10,518 Loss before income taxes (24,435) (24,357) (78) Provision (benefit) for income taxes 95 (186) 281 Net loss$ (24,530) $ (24,171) $ (359) Revenues Revenues increased$32.1 million , or 61%, to$84.8 million for the second quarter of 2021. The increase in comparison to the second quarter of 2020 was prevalent across all lines of service and in line with a 15% increase in rig count, a 128% increase in active frac crews, and the re-opening of field offices, in comparison to the second quarter of 2020. More specifically, tools revenue increased$9.4 million , or 62%, as completion tools stages increased by 120% in comparison to the second quarter of 2020. In addition, wireline revenue increased$9.0 million , or 93%, as total completed wireline stages increased by 108%, in comparison to the second quarter of 2020, coiled tubing revenue increased by$6.9 million , or 91%, as total days worked increased by 78% in comparison to the second quarter of 2020 and cementing revenue (including pump downs) increased by$6.8 million , or 34%, as total cement job count increased 45% in comparison to the second quarter of 2020. 20 -------------------------------------------------------------------------------- Cost of Revenues (Exclusive of Depreciation and Amortization) Cost of revenues increased$19.9 million , or 35%, to$76.6 million for the second quarter of 2021. The increase in comparison to the second quarter of 2020 was prevalent across all lines of service and was primarily related to increased activity despite continued pricing pressure within the market. More specifically, the increase was primarily related to a$17.5 million increase in materials installed and consumed while performing services and a$4.2 million increase in employee costs in comparison to the second quarter of 2020. The overall increase was partially offset by a$1.8 million decrease in bad debt expense between periods. Adjusted Gross Profit (Loss) Adjusted gross profit increased$12.2 million to$8.2 million for the second quarter of 2021 due to the factors described above under "Revenues" and "Cost of Revenues." General and Administrative Expenses General and administrative expenses increased$0.9 million to$12.2 million for the second quarter of 2021. The increase was primarily related to a$2.2 million increase in professional fees in comparison to the second quarter of 2020. The overall increase was partially offset by a$1.3 million decrease in employee costs mainly due to headcount and salary reductions in comparison to the second quarter of 2020. Depreciation Depreciation expense decreased$1.0 million to$7.4 million for the second quarter of 2021. The decrease in comparison to the second quarter of 2020 was associated with all lines of service and was primarily due to certain assets becoming fully depreciated in recent periods.. Amortization of Intangibles We recorded$4.1 million in intangible amortization for both the second quarter of 2021 and the second quarter of 2020 primarily attributed to technology and customer relationships. (Gain) Loss on Revaluation of Contingent Liabilities We recorded a less than$0.1 million loss on the revaluation of contingent liabilities for the second quarter of 2021 compared to a$0.9 million loss on the revaluation of contingent liabilities for the second quarter of 2020. The decreased loss between periods was primarily related to a$0.6 million loss on the revaluation of contingent liabilities associated with the Magnum Earnout (as defined in Note 8 - Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) in the second quarter of 2020 that did not recur in the second quarter of 2021. The Magnum Earnout was terminated in the second quarter of 2020. The overall decrease was also partly attributed to a$0.2 million reduction on the loss on the revaluation of the earnout associated with our acquisition of Frac Technology AS between periods. Non-Operating (Income) Expenses We recorded$7.9 million in non-operating expenses for the second quarter of 2021 compared to$2.6 million in non-operating income for the second quarter of 2020. The$10.5 million decrease in non-operating income was primarily related to a$11.6 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined and described in "Liquidity and Capital Resources") in the second quarter of 2020 that did not recur in the second quarter of 2021, coupled with a$0.1 million reduction in interest and other income between periods. The overall decrease in non-operating income is partially offset by a$1.2 million reduction in interest expense mainly due to a reduced debt balance attributed to repurchases of Senior Notes in recent periods. Provision (Benefit) for Income Taxes We recorded an income tax provision of less than$0.1 million for the second quarter of 2021 compared to an income tax benefit of$0.2 million for the second quarter of 2020. The difference in tax position is primarily a result of discrete tax items recorded in the second quarter of 2020 related to our state tax position. Adjusted EBITDA Adjusted EBITDA increased$10.6 million to a$0.4 million loss for the second quarter of 2021. The Adjusted 21 -------------------------------------------------------------------------------- EBITDA increase was primarily due to the changes in revenues and expenses discussed above. See "Non-GAAP Financial Measures" below for further explanation. Results for the Six Months EndedJune 30, 2021 Compared to the Six Months EndedJune 30, 2020 Six Months Ended June 30, 2021 2020 Change (in thousands) Revenues$ 151,458 $ 199,359 $ (47,901) Cost of revenues (exclusive of depreciation and amortization shown separately below) 138,921 182,711 (43,790) Adjusted gross profit$ 12,537 $ 16,648 $ (4,111) General and administrative expenses$ 22,391 $ 27,679 $ (5,288) Depreciation 15,227 16,990 (1,763) Amortization of intangibles 8,183 8,285 (102) Impairment of goodwill - 296,196 (296,196) (Gain) loss on revaluation of contingent liabilities (145) 484 (629) (Gain) loss on sale of property and equipment 677 (2,365) 3,042 Loss from operations (33,796) (330,621) 296,825 Non-operating income (1,142) (3,239) 2,097 Loss before income taxes (32,654) (327,382) 294,728 Provision (benefit) for income taxes 122 (2,311) 2,433 Net loss$ (32,776) $ (325,071) $ 292,295 Revenues Revenues decreased$47.9 million , or 24%, to$151.5 million for the first six months of 2021. The decrease was prevalent across all lines of service and was primarily related to reduced activity and pricing pressure that began in the second quarter of 2020 and was caused by poor market conditions as a result of the coronavirus pandemic. To a lesser extent, the decrease was also a result of reduced activity caused by weather-related shutdowns in the first quarter of 2021. More specifically, wireline revenue decreased$23.3 million , or 43%, as total completed wireline stages decreased by 29%, in comparison to the first six months of 2020 and cementing revenue (including pump downs) decreased by$18.9 million , or 27%, as total cement job count decreased 15% in comparison to the first six months of 2020. In addition, coiled tubing revenue decreased by$2.9 million , or 10%, although total days worked increased by 2% in comparison to the first six months of 2020 and tools revenue decreased$2.8 million , or 6%, as completion tools stages increased by 25% in comparison to the first six months of 2020. Cost of Revenues (Exclusive of Depreciation and Amortization) Cost of revenues decreased$43.8 million , or 24%, to$138.9 million for the first six months of 2021. The decrease was prevalent across all lines of service and was primarily related to reduced activity caused by poor market conditions, and, to a lesser extent, reduced activity caused by weather-related shutdowns, in comparison to the first six months of 2020. More specifically, the decrease was primarily related to a$19.0 million decrease in employee costs, a$16.8 million decrease in materials installed and consumed while performing services, and a$8.0 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses. Adjusted Gross Profit (Loss) Adjusted gross profit decreased$4.1 million to$12.5 million for the first six months of 2021 due to the factors described above under "Revenues" and "Cost of Revenues." General and Administrative Expenses General and administrative expenses decreased$5.3 million to$22.4 million for the first six months of 2021. The decrease was primarily related to a$5.4 million decrease in employee costs mainly due to headcount and salary reductions in 22 -------------------------------------------------------------------------------- comparison to the first six months of 2020 as well as a$1.8 million decrease in other general and administrative expenses such as restructuring, travel, vehicle and marketing expenses in comparison to the first six months of 2020. The overall decrease was partially offset by a$1.9 million increase in professional fees between periods. Depreciation Depreciation expense decreased$1.8 million to$15.2 million for the first six months of 2021. The decrease in comparison to the first six months of 2020 was associated with all lines of service and was primarily due to certain assets becoming fully depreciated in recent periods. Amortization of Intangibles We recorded$8.2 million in intangible amortization for the first six months of 2021 and$8.3 million in the first six months of 2020 primarily attributed to technology and customer relationships. The$0.1 million decrease is related to certain intangible assets being fully amortized in the first six months of 2021. Impairment ofGoodwill In the first six months of 2020, we recorded goodwill impairment charges of$296.2 million in our tools, cementing, and wireline reporting units due to sharp declines in global crude oil demand, an economic recession associated with the coronavirus pandemic, sharp declines in oil and natural gas prices, and an increased weighted average cost of capital driven by a reduction in our stock price and the Level 2 fair value of our Senior Notes. These goodwill impairment charges did not recur in the first six months of 2021. (Gain) Loss on Revaluation of Contingent Liabilities We recorded a$0.1 million gain on the revaluation of contingent liabilities for the first six months of 2021 compared to a$0.5 million loss on the revaluation of contingent liabilities for the first six months of 2020. The$0.6 million change was primarily related to a$0.8 million loss on the revaluation of contingent liabilities associated with the Magnum Earnout (as defined in Note 8 - Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) in the first six months of 2020 that did not recur in the first six months of 2021. The Magnum Earnout was terminated in the second quarter of 2020. The overall change was partially offset by a reduced gain of$0.2 million on the revaluation of the earnout associated with our acquisition of Frac Technology AS between periods. Non-Operating (Income) Expenses We recorded$1.1 million in non-operating income for the first six months of 2021 compared to$3.2 million in non-operating income for the first six months of 2020. The$2.1 million decrease was primarily related to a$4.1 million reduction in gains on the extinguishment of debt attributed to the repurchase of Senior Notes in the first six months of 2021 compared to the first six months of 2020, coupled with a$0.5 million reduction in interest income between periods. The overall decrease in non-operating income is partially offset by a$2.4 million reduction in interest expense mainly due to a reduced debt balance attributed to repurchases of Senior Notes in recent periods and a$0.1 million reduction in other income between periods. Provision (Benefit) for Income Taxes We recorded an income tax provision of$0.1 million for the first six months of 2021 compared to an income tax benefit of$2.3 million for the first six months of 2020. The difference in tax position is primarily a result of the discrete tax impact from the Coronavirus Aid, Relief, and Economic Security Act and the goodwill impairment charge recorded during the first quarter of 2020. Adjusted EBITDA Adjusted EBITDA decreased$3.0 million to a$3.8 million loss for the first six months of 2021. The Adjusted EBITDA decrease was primarily due to the changes in revenues and expenses discussed above. See "Non-GAAP Financial Measures" below for further explanation. 23 -------------------------------------------------------------------------------- Non-GAAP Financial Measures EBITDA and Adjusted EBITDA EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures that are used by management and external users of our financial statements, such as industry analysts, investors, lenders, and rating agencies. We define EBITDA as net income (loss) before interest, taxes, depreciation, and amortization. We define Adjusted EBITDA as EBITDA further adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business. Management believes EBITDA and Adjusted EBITDA are useful because they allow us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above from net income (loss) in arriving at these measures because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, and the method by which the assets were acquired. These measures should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with accounting principles generally accepted inthe United States of America ("GAAP") or as an indicator of our operating performance. Certain items excluded from these measures are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of these measures. Our computations of these measures may not be comparable to other similarly titled measures of other companies. We believe that these are widely followed measures of operating performance. The following table presents a reconciliation of the non-GAAP financial measures of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) for the three and six months endedJune 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) (in thousands) EBITDA reconciliation: Net loss$ (24,530) $ (24,171) $ (32,776) $ (325,071) Interest expense 7,981 9,186 16,566 19,014 Interest income (8) (179) (21) (550) Provision (benefit) for income taxes 95 (186) 122 (2,311) Depreciation 7,438 8,449 15,227 16,990 Amortization of intangibles 4,091 4,116 8,183 8,285 EBITDA$ (4,933) $ (2,785) $ 7,301 $ (283,643) Adjusted EBITDA reconciliation: EBITDA$ (4,933) $ (2,785) $ 7,301 $ (283,643) Impairment of goodwill - - - 296,196 Transaction and integration costs - - - 146 Loss (gain) on revaluation of contingent liabilities (1) 45 910 (145) 484 Gain on extinguishment of debt - (11,587) (17,618) (21,703) Restructuring charges 745 2,094 1,213 4,423 Stock-based compensation expense 1,028 2,105 3,038 5,697 (Gain) loss on sale of property and equipment 950 (1,790) 677 (2,365) Legal fees and settlements (2) 1,735 20 1,747 24 Adjusted EBITDA $ (430)$ (11,033) $ (3,787) $ (741)
(1)Amounts relate to the revaluation of contingent liabilities associated with our 2018 acquisitions. The impact is included in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss). For additional information
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on contingent liabilities, see Note 10 - Commitments and Contingencies included
in Item 1 of Part I of this Quarterly Report on Form 10-Q.
(2)Amounts represent fees, legal settlements and/or accruals associated with
legal proceedings brought pursuant to the Fair Labor Standards Act and/or
similar state laws.
Return on Invested Capital
ROIC is a supplemental non-GAAP financial measure. We define ROIC as after-tax
net operating profit (loss), divided by average total capital. We define
after-tax net operating profit (loss) as net income (loss) plus (i) goodwill,
intangible asset, and/or property and equipment impairment charges, (ii)
transaction and integration costs related to acquisitions, (iii) interest
expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of
subsidiaries, (vi) loss (gain) on extinguishment of debt, and (vii) the
provision (benefit) for deferred income taxes. We define total capital as book
value of equity plus the book value of debt less balance sheet cash and cash
equivalents. We compute the average of the current and prior period-end total
capital for use in this analysis.
Management believes ROIC is a meaningful measure because it quantifies how well
we generate operating income relative to the capital we have invested in our
business and illustrates the profitability of a business or project taking into
account the capital invested. Management uses ROIC to assist them in capital
resource allocation decisions and in evaluating business performance. Although
ROIC is commonly used as a measure of capital efficiency, definitions of ROIC
differ, and our computation of ROIC may not be comparable to other similarly
titled measures of other companies.
The following table provides an explanation of our calculation of ROIC for the
three and six months ended June 30, 2021 and 2020:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Net loss $ (24,530) $ (24,171) $ (32,776) $ (325,071)
Add back:
Impairment of goodwill - - - 296,196
Transaction and integration costs - - - 146
Interest expense 7,981 9,186 16,566 19,014
Interest income (8) (179) (21) (550)
Restructuring charges 745 2,094 1,213 4,423
Gain on extinguishment of debt - (11,587) (17,618) (21,703)
Benefit for deferred income taxes - - - (1,588)
After-tax net operating loss $ (15,812) $ (24,657) $ (32,636) $ (29,133)
Total capital as of prior period-end:
Total stockholders' equity $ 14,083 $ 91,851 $ 20,409 $ 389,877
Total debt 322,031 386,171 348,637 400,000
Less cash and cash equivalents (52,982) (90,116) (68,864) (92,989)
Total capital as of prior period-end $ 283,132 $ 387,906 $ 300,182 $ 696,888
Total capital as of period-end:
Total stockholders' equity $ (9,731) $ 69,950 $ (9,731) $ 69,950
Total debt 322,031 372,584 322,031 372,584
Less cash and cash equivalents (33,128) (88,678) (33,128) (88,678)
Total capital as of period-end $ 279,172 $ 353,856 $ 279,172 $ 353,856
Average total capital $ 281,152 $ 370,881 $ 289,677 $ 525,372
ROIC (22.5)% (26.6)% (22.5)% (11.1)%
Adjusted Gross Profit (Loss)
GAAP defines gross profit (loss) as revenues less cost of revenues and includes
depreciation and amortization in costs of revenues. We define adjusted gross
profit (loss) as revenues less direct and indirect costs of revenues (excluding
depreciation and amortization). This measure differs from the GAAP definition of
gross profit (loss) because we do not include the impact of depreciation and
amortization, which represent non-cash expenses.
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Management uses adjusted gross profit (loss) to evaluate operating performance.
We prepare adjusted gross profit (loss) to eliminate the impact of depreciation
and amortization because we do not consider depreciation and amortization
indicative of our core operating performance. Adjusted gross profit (loss)
should not be considered as an alternative to gross profit (loss), operating
income (loss), or any other measure of financial performance calculated and
presented in accordance with GAAP. Adjusted gross profit (loss) may not be
comparable to similarly titled measures of other companies because other
companies may not calculate adjusted gross profit (loss) or similarly titled
measures in the same manner as we do.
The following table presents a reconciliation of adjusted gross profit (loss) to
GAAP gross profit (loss) for the three and six months ended June 30, 2021 and
2020:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Calculation of gross profit (loss)
Revenues $ 84,832 $ 52,735 $ 151,458 $ 199,359
Cost of revenues (exclusive of depreciation
and amortization shown separately below) 76,638 56,703 138,921 182,711
Depreciation (related to cost of revenues) 6,917 7,858 14,161 15,801
Amortization of intangibles 4,091 4,116 8,183 8,285
Gross loss $ (2,814) $
(15,942)
$ (2,814) $
(15,942)
6,917 7,858 14,161 15,801
Amortization of intangibles 4,091 4,116 8,183 8,285
Adjusted gross profit (loss) $ 8,194 $
(3,968)
Liquidity and Capital Resources Sources and Uses of Liquidity Historically, we have met our liquidity needs principally from cash on hand, cash flows from operating activities and, if needed, external borrowings and issuances of debt securities. Our principal uses of cash are to fund capital expenditures, service our outstanding debt, fund our working capital requirements and, historically, fund acquisitions. Due to our high level of variable costs and the asset-light make-up of our business, we have historically been able to quickly implement cost-cutting measures and will continue to adapt as the market dictates. We have also used cash to make open market repurchases of our debt and may, from time to time, continue to make such repurchases (including with respect to our Senior Notes when it is opportunistic to do so to manage our debt maturity profile. We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue to access outside sources of capital. In addition, our ability to satisfy our liquidity requirements depends on our future operating performance, which is affected by prevailing economic conditions, the level of drilling, completion and production activity for North American onshore oil and natural gas resources, and financial and business and other factors, many of which are beyond our control. AtJune 30, 2021 , we had$33.1 million of cash and cash equivalents and$52.3 million of availability under the 2018 ABL Credit Facility (as defined below), which resulted in a total liquidity position of$85.4 million . Although we believe our total liquidity position will continue to materially erode, due in large part to interest payments due on the Senior Notes, we believe that, based on our current forecasts, our cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility, should be sufficient to fund our capital requirements for at least the next twelve months from the issuance date of our condensed consolidated financial statements. However, we can make no assurance regarding our ability to achieve our forecasts, which are materially dependent on our financial performance and the ever-changing market. Senior Notes OnOctober 25, 2018 , we issued$400.0 million of 8.750% Senior Notes due 2023 (the "Senior Notes") under an indenture, dated as ofOctober 25, 2018 (the "Indenture"), by and among us, including certain of our subsidiaries, and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable onMay 1 and 26 --------------------------------------------------------------------------------November 1 of each year, and the first interest payment was due onMay 1, 2019 . Based on current amounts outstanding as ofJune 30, 2021 , the semi-annual interest payments are$14.0 million each. The Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed on a senior unsecured basis by each of our current domestic subsidiaries and by certain future subsidiaries. The Indenture contains covenants that limit our ability and the ability of our restricted subsidiaries to engage in certain activities. We were in compliance with the provisions of the Indenture atJune 30, 2021 . Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to us, any of our restricted subsidiaries that are a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable. During the six months endedJune 30, 2021 , we repurchased approximately$26.3 million of Senior Notes at a repurchase price of approximately$8.4 million in cash. Deferred financing costs associated with these repurchases were$0.3 million . As a result, for the six months endedJune 30, 2021 , we recorded a$17.6 million gain on the extinguishment of debt, which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by the deferred financing costs. We also repurchased approximately$53.3 million of Senior Notes at a repurchase price of approximately$14.6 million in cash during the year endedDecember 31, 2020 . As ofJune 30, 2021 , there were approximately$320.3 million aggregate principal amount of Senior Notes outstanding. In addition to repurchases, from time to time, we have explored, and may continue to further consider, transactions to restructure or refinance a portion of the Senior Notes. Any such transactions may involve the issuance of additional equity or convertible debt securities that could result in material dilution to our stockholders, and these or other securities issued in any such transactions could have rights superior to holders of our common stock or holders of the Senior Notes and could contain covenants that will restrict our operations. 2018 ABL Credit Facility OnOctober 25, 2018 , we entered into a credit agreement dated as ofOctober 25, 2018 (the "2018 ABL Credit Agreement") that permits aggregate borrowings of up to$200.0 million , subject to a borrowing base, including a Canadian tranche with a sub-limit of up to$25.0 million and a sub-limit of$50.0 million for letters of credit (the "2018 ABL Credit Facility"). The 2018 ABL Credit Facility will mature onOctober 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date. Loans to us and our domestic related subsidiaries (the "U.S. Credit Parties") under the 2018 ABL Credit Facility may be base rate loans or London Interbank Offered Rate ("LIBOR") loans; and loans 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 vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on our leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments. The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions) and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below$18.75 million or a default has occurred, until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. We were in compliance with all covenants under the 2018 ABL Credit Agreement atJune 30, 2021 . All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property ofU.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties excluding certain assets. The 2018 ABL Credit Facility is guaranteed by theU.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and theU.S. Credit Parties. 27 -------------------------------------------------------------------------------- AtJune 30, 2021 , we had no borrowings outstanding under the 2018 ABL Credit Facility, and our availability under the 2018 ABL Credit Facility was approximately$52.3 million , net of outstanding letters of credit of$0.5 million . Cash Flows Cash flows provided by (used in) operations by type of activity were as follows for the six months endedJune 30, 2021 and 2020: Six Months Ended June 30, 2021 2020 (in thousands) Operating activities$ (24,869) $ 2,359 Investing activities (1,137) 1,768 Financing activities (9,706) (8,263) Impact of foreign exchange rate on cash (24)
(175)
Net change in cash and cash equivalents$ (35,736) $
(4,311)
Operating Activities Net cash used in operating activities was$24.9 million during the first six months of 2021 compared to$2.4 million in net cash provided by operating activities in the first six months of 2020. The$27.3 million decrease in net cash provided by operating activities was primarily a result of an$32.1 million decrease in working capital, including a reduction in cash collections, in comparison to the first six months of 2020. The overall decrease in net cash provided by operating activities was partially offset by an increase of$4.8 million in cash flow provided by operations, adjusted for any non-cash items, in comparison to the first six months of 2020. Investing Activities Net cash used in investing activities was$1.1 million in the first six months of 2021 compared to$1.8 million in net cash provided by investing activities in the first six months of 2020. The$2.9 million decrease in net cash provided by investing activities was primarily related to a$2.7 million decrease in proceeds from the sale of property and equipment (including insurance) in comparison to the first six months of 2020, coupled with a$0.2 million increase in cash purchases of property and equipment between periods. Financing Activities Net cash used in financing activities was$9.7 million in the first six months of 2021 compared to$8.3 million in net cash used in financing activities in the first six months of 2020. The$1.4 million increase in net cash used in financing activities was primarily related to$0.9 million increase in purchases of the Senior Notes, a$0.3 million increase in payments on the Magnum Promissory Notes (as defined in Note 8 - Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) and a$0.3 million increase in cash used for the vesting of restricted stock during the first six months of 2021 in comparison to the first six months of 2020. The overall increase in net cash used for financing activities was partially offset by a$0.1 million reduction in payments of contingent liabilities between periods. Contractual Obligations As a "smaller reporting company", as defined under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we are not required to provide this information. Off-Balance Sheet Arrangements AtJune 30, 2021 , we had letters of credit of$0.5 million , which represented off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. As ofJune 30, 2021 , no liability has been recognized in our Condensed Consolidated Balance Sheets for the letters of credit. Recent Accounting Pronouncements See Note 3 - New Accounting Standards included in Item 1 of Part I of this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements. 28
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