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 months endedMarch 31, 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. 16 -------------------------------------------------------------------------------- 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 strongly influenced by current and expected oil and natural gas prices. In early 2020, the worldwide coronavirus outbreak caused an unprecedented decline in demand for oil and the West Texas Intermediate price averaged approximately$39 per barrel in 2020 as compared to$57 per barrel in 2019. Uncertainty remains around the timing, pace and rate of a global demand recovery, which is dependent on, among other things, vaccine rollouts and efficacy, government-issued restrictions and the global economic recovery, and we cannot predict the length of time that market disruptions resulting from the coronavirus pandemic and efforts to mitigate its effects will continue, the ultimate impact on our business, or the pace or extent of any subsequent recovery. In addition, the recent decision by theOrganization of the Petroleum Exporting Countries and other oil producing nations, includingRussia , to start gradually boosting oil production, coupled with the new Biden administration's potential energy restrictions and additional regulations, has created additional headwinds forU.S. oil and gas land activity. Thus, even with the recent improvement in oil prices, we have seen our customers remain committed to capital discipline over activity and production growth and our customers have generally revised their capital budgets downward for 2021 versus 2020. 17 -------------------------------------------------------------------------------- Accordingly, demand for our products and services remains depressed, and there is little to no pricing leverage for oil field service companies. The extreme activity declines, as well as an over-saturated competitive landscape in 2020 accelerated pricing declines, especially within our completion tools and wireline business. The pace of activity increases thus far in 2021 are not able to offset the depressed pricing, leading to relatively anemic revenue growth and profitability. Even with further improvements in oil prices, our business in 2021 may not improve materially or at all depending on our customers' activity plans and our ability to implement price increases. Results of Operations Results for the Three Months EndedMarch 31, 2021 Compared to the Three Months EndedMarch 31, 2020 Three Months Ended March 31, 2021 2020 Change (in thousands) Revenues$ 66,626 $ 146,624 $ (79,998) Cost of revenues (exclusive of depreciation and amortization shown separately below) 62,283 126,008 (63,725) Adjusted gross profit$ 4,343 $ 20,616 $ (16,273) General and administrative expenses$ 10,224 $ 16,395 $ (6,171) Depreciation 7,789 8,541 (752) Amortization of intangibles 4,092 4,169 (77) Impairment of goodwill - 296,196 (296,196) Gain on revaluation of contingent liabilities (190) (426) 236 Gain on sale of property and equipment (273) (575) 302 Loss from operations (17,299) (303,684) 286,385 Non-operating income (9,080) (659) (8,421) Loss before income taxes (8,219) (303,025) 294,806 Provision (benefit) for income taxes 27 (2,125) 2,152 Net loss$ (8,246) $ (300,900) $ 292,654 Revenues Revenues decreased$80.0 million , or 55%, to$66.6 million for the first quarter of 2021. The decrease was prevalent across all lines of service and was primarily related to reduced activity and pricing pressure caused by poor market conditions, and, to a lesser extent, reduced activity caused by weather-related shutdowns, in comparison to the first quarter of 2020. More specifically, wireline revenue decreased$32.3 million , or 72%, as total completed wireline stages decreased by 62%, in comparison to the first quarter of 2020. In addition, cementing revenue (including pump downs) decreased by$25.7 million , or 53%, as total cement job count decreased 41% in comparison to the first quarter of 2020, tools revenue decreased$12.2 million , or 38%, as completion tools stages decreased by 19% in comparison to the first quarter of 2020, and coiled tubing revenue decreased by$9.8 million , or 47%, as total days worked decreased by 34% in comparison to the first quarter of 2020. Cost of Revenues (Exclusive of Depreciation and Amortization) Cost of revenues decreased$63.7 million , or 51%, to$62.3 million for the first quarter 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 quarter of 2020. More specifically, the decrease was primarily related to a$34.3 million decrease in materials installed and consumed while performing services, a$23.2 million decrease in employee costs, and a$6.2 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses. 18 -------------------------------------------------------------------------------- Adjusted Gross Profit (Loss) Adjusted gross profit decreased$16.3 million to$4.3 million for the first quarter of 2021 due to the factors described above under "Revenues" and "Cost of Revenues." General and Administrative Expenses General and administrative expenses decreased$6.2 million to$10.2 million for the first quarter of 2021. The decrease was primarily related to a$4.1 million decrease in employee costs mainly due to headcount and salary reductions in comparison to the first quarter of 2020. The overall decrease was also partly attributed to a$1.1 million decrease in other general and administrative expenses such as marketing, travel and vehicle expense and a$1.0 million decrease in severance and other general and administrative-type restructuring costs between periods. Depreciation Depreciation expense decreased$0.8 million to$7.8 million for the first quarter of 2021. The decrease in comparison to the first quarter of 2020 was primarily related to a reduction in depreciation expense associated with our cement and wireline businesses due to a decrease in capital expenditures, coupled with certain assets becoming fully depreciated, in recent periods. Amortization of Intangibles We recorded$4.1 million in intangible amortization for the first quarter of 2021 and$4.2 million in the first quarter 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 quarter of 2021. Impairment ofGoodwill In the first quarter 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 (as defined and described in "Liquidity and Capital Resources"). These goodwill impairment charges did not recur in the first quarter of 2021. (Gain) Loss on Revaluation of Contingent Liabilities We recorded a$0.2 million gain on the revaluation of contingent liabilities for the first quarter of 2021 compared to a$0.4 million gain on the revaluation of contingent liabilities for the first quarter of 2020. The$0.2 million change was primarily related to a reduced$0.4 million gain on the revaluation of the earnout associated with our acquisition of Frac Technology AS partially offset by a$0.2 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 quarter of 2020 that did not recur in the first quarter of 2021. The Magnum Earnout was terminated in the second quarter of 2020. Non-Operating (Income) Expenses We recorded$9.1 million in non-operating income for the first quarter of 2021 compared to$0.7 million in non-operating income for the first quarter of 2020. The$8.4 million increase was primarily related to a$17.6 million gain on the extinguishment of debt related to the repurchase of Senior Notes in the first quarter of 2021 compared to a$10.1 million gain in the first quarter of 2020. The overall increase is also partly attributed to a$1.2 million reduction in interest expense mainly due to a reduced debt balance attributed to repurchases of Senior Notes in recent periods. The overall increase is partially offset by a$0.3 million decrease in interest income between periods. Provision (Benefit) for Income Taxes We recorded an income tax provision of less than$0.1 million for the first quarter of 2021 compared to an income tax benefit of$2.1 million for the first quarter 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$13.6 million to a$3.4 million loss for the first quarter of 2021. The Adjusted EBITDA 19 -------------------------------------------------------------------------------- decrease was primarily due to the changes in revenues and expenses discussed above. See "Non-GAAP Financial Measures" below for further explanation. 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. 20 -------------------------------------------------------------------------------- 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 months endedMarch 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 (in thousands) EBITDA reconciliation: Net loss$ (8,246) $ (300,900) Interest expense 8,585 9,828 Interest income (13) (371) Provision (benefit) for income taxes 27 (2,125) Depreciation 7,789 8,541 Amortization of intangibles 4,092 4,169 EBITDA$ 12,234 $ (280,858) Adjusted EBITDA reconciliation: EBITDA$ 12,234 $ (280,858) Impairment of goodwill - 296,196 Transaction and integration costs - 146 Gain on revaluation of contingent liabilities (1) (190) (426) Gain on extinguishment of debt (17,618) (10,116) Restructuring charges 468 2,329 Stock-based compensation expense 2,010 3,592 Gain on sale of property and equipment (273) (575) Legal fees and settlements (2) 12 4 Adjusted EBITDA$ (3,357) $ 10,292 (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 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 and legal settlements associated with legal proceedings brought pursuant to the Fair Labor Standards Act and/or similar state laws. Return onInvested 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. 21 --------------------------------------------------------------------------------
The following table provides an explanation of our calculation of ROIC for the
three months ended
Three Months Ended March 31,
2021 2020
(in thousands)
Net loss $ (8,246) $ (300,900)
Add back:
Impairment of goodwill - 296,196
Transaction and integration costs - 146
Interest expense 8,585 9,828
Interest income (13) (371)
Restructuring charges 468 2,329
Gain on extinguishment of debt (17,618) (10,116)
Benefit for deferred income taxes -
(1,588)
After-tax net operating loss$ (16,824) $
(4,476)
Total capital as of prior period-end: Total stockholders' equity$ 20,409 $
389,877
Total debt 348,637
400,000
Less cash and cash equivalents (68,864)
(92,989)
Total capital as of prior period-end$ 300,182 $
696,888
Total capital as of period-end: Total stockholders' equity$ 14,083 $
91,851
Total debt 322,031
386,171
Less cash and cash equivalents (52,982)
(90,116)
Total capital as of period-end$ 283,132 $ 387,906 Average total capital$ 291,657 $ 542,397 ROIC (23.1)% (3.3)% 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. 22 -------------------------------------------------------------------------------- The following table presents a reconciliation of adjusted gross profit (loss) to GAAP gross profit (loss) for the three months endedMarch 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 (in thousands) Calculation of gross profit (loss) Revenues $
66,626
62,283 126,008
Depreciation (related to cost of revenues) 7,244 7,943
Amortization of intangibles 4,092 4,169
Gross profit (loss) $ (6,993) $ 8,504
Adjusted gross profit (loss) reconciliation:
Gross profit (loss) $ (6,993) $ 8,504
Depreciation (related to cost of revenues) 7,244 7,943
Amortization of intangibles 4,092 4,169
Adjusted gross profit $ 4,343 $ 20,616
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. 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 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. In 2020,
in response to rapidly deteriorating market conditions driven in large part by
the coronavirus pandemic, we implemented certain cost-cutting measures across
the organization. We expect to continue to maintain many of these measures,
including those relating to employee compensation, and may implement additional
cost-cutting measures, as necessary. We can make no assurance regarding our
ability to successfully implement such measures, or whether such measures would
be sufficient to mitigate a decline in our financial performance.
At March 31, 2021 , we had $53.0 million of cash and cash equivalents and $45.8
million of availability under the 2018 ABL Credit Facility (as defined below),
which resulted in a total liquidity position of $98.8 million . Although we
believe our total liquidity position will continue to materially erode, due in
large part to interest payments due on the Senior Notes, we believe that, based
on our current forecasts, our cash on hand, together with cash flow from
operations, and borrowings under the 2018 ABL Credit Facility, should be
sufficient to fund our capital requirements for at least the next twelve months
from the issuance date of our condensed consolidated financial statements.
However, we can make no assurance regarding our ability to achieve our
forecasts, which are materially dependent on our financial performance and the
ever-changing market.
Senior Notes
On October 25, 2018 , we issued $400.0 million of 8.750% Senior Notes due 2023
(the "Senior Notes") under an indenture, dated as of October 25, 2018 (the
"Indenture"), by and among us, including certain of our subsidiaries, and Wells
Fargo, National Association, as Trustee. The Senior Notes bear interest at an
annual rate of 8.750% payable on May 1 and November 1 of each year, and the
first interest payment was due on May 1, 2019 . Based on current amounts
outstanding as of April 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
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activities. We were in compliance with the provisions of the Indenture at
March 31, 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.
We repurchased approximately $26.3 million and $13.8 million of Senior Notes at
a repurchase price of approximately $8.4 million and $3.5 million in cash during
the three months ended March 31, 2021 and 2020, respectively. Deferred financing
costs associated with these transactions were $0.3 million and $0.2 million for
the three months ended March 31, 2021 and 2020, respectively. As a result, for
the three months ended March 31, 2021 and 2020, we recorded a $17.6 million gain
and a $10.1 million gain, respectively, 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. In
addition to repurchases, from time to time, we have explored, and may continue
to further consider, transactions to restructure or refinance a portion of the
Senior Notes. Any such transactions may involve the issuance of additional
equity or convertible debt securities that could result in material dilution to
our stockholders, and these or other securities issued in any such transactions
could have rights superior to holders of our common stock or holders of the
Senior Notes and could contain covenants that will restrict our operations.
2018 ABL Credit Facility
On October 25, 2018 , we entered into a credit agreement dated as of October 25,
2018 (the "2018 ABL Credit Agreement") that permits aggregate borrowings of up
to $200.0 million , subject to a borrowing base, including a Canadian tranche
with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for
letters of credit (the "2018 ABL Credit Facility"). The 2018 ABL Credit Facility
will mature on October 25, 2023 or, if earlier, on the date that is 180 days
before the scheduled maturity date of the Senior Notes if they have not been
redeemed or repurchased by such date.
Loans to us and our domestic related subsidiaries (the "U.S. Credit Parties")
under the 2018 ABL Credit Facility may be base rate loans or London Interbank
Offered Rate ("LIBOR") loans; and loans to Nine Energy Canada Inc. , a
corporation organized under the laws of Alberta, Canada , and its restricted
subsidiaries (the "Canadian Credit Parties") under the Canadian tranche may be
Canadian Dollar Offered Rate ("CDOR") loans or Canadian prime rate loans. The
applicable margin for base rate loans and Canadian prime rate loans vary from
0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary
from 1.75% to 2.25%, in each case depending on our leverage ratio. In addition,
a commitment fee of 0.50% per annum will be charged on the average daily unused
portion of the revolving commitments.
The 2018 ABL Credit Agreement contains various affirmative and negative
covenants, including financial reporting requirements and limitations on
indebtedness, liens, mergers, consolidations, liquidations and dissolutions,
sales of assets, dividends and other restricted payments, investments (including
acquisitions) and transactions with affiliates. In addition, the 2018 ABL Credit
Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is
tested quarterly when the availability under the 2018 ABL Credit Facility drops
below $18.75 million or a default has occurred until the availability exceeds
such threshold for 30 consecutive days and such default is no longer
outstanding. We were in compliance with all covenants under the 2018 ABL Credit
Agreement at March 31, 2021 .
All of the obligations under the 2018 ABL Credit Facility are secured by first
priority perfected security interests (subject to permitted liens) in
substantially all of the personal property of U.S. Credit Parties, excluding
certain assets. The obligations under the Canadian tranche are further secured
by first priority perfected security interests (subject to permitted liens) in
substantially all of the personal property of Canadian Credit Parties excluding
certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit
Parties, and the Canadian tranche is further guaranteed by the Canadian Credit
Parties and the U.S. Credit Parties.
At March 31, 2021 , we had no borrowings outstanding under the 2018 ABL Credit
Facility, and our availability under the 2018 ABL Credit Facility was
approximately $45.8 million , net of outstanding letters of credit of $0.5
million .
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Cash Flows
Cash flows provided by (used in) operations by type of activity were as follows
for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
2021 2020
(in thousands)
Operating activities $ (5,243) $ 745
Investing activities (1,585) 535
Financing activities (9,061) (3,908)
Impact of foreign exchange rate on cash 7 (245)
Net change in cash and cash equivalents$ (15,882)
Operating Activities Net cash used in operating activities was$5.2 million in the first quarter of 2021 compared to$0.7 million in net cash provided by operating activities in the first quarter of 2020. The$5.9 million decrease in net cash provided by operating activities was primarily a result of a$8.4 million decrease in cash flow provided by operations, adjusted for any non-cash items, primarily due to a decrease in revenue in the first quarter of 2021 compared to the first quarter of 2020. The overall decrease in net cash provided by operating activities was partially offset by an increase of$2.5 million in working capital which provided an increased source of cash flow in the first quarter of 2021 in comparison to the first quarter of 2020. Investing Activities Net cash used in investing activities was$1.6 million in the first quarter of 2021 compared to$0.5 million in net cash provided by investing activities in the first quarter of 2020. The$2.1 million decrease in net cash provided by investing activities was primarily related to a$1.6 million increase in cash purchases of property and equipment in the first quarter of 2021 in comparison to the first quarter of 2020. The overall decrease was also partly due to a decrease in proceeds from sales of property and equipment (including insurance) of$0.5 million in the first quarter of 2021 compared to the first quarter of 2020. Financing Activities Net cash used in financing activities was$9.1 million in the first quarter of 2021 compared to$3.9 million in net cash used in financing activities in the first quarter of 2020. The$5.2 million increase in net cash used in financing activities was primarily related to$4.9 million increase in purchases of the Senior Notes and a$0.3 million increase in payments on the Magnum Promissory Notes in the first quarter of 2021 in comparison to the first quarter of 2020. 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 AtMarch 31, 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 ofMarch 31, 2021 , no liability has been recognized in our Condensed Consolidated Balance Sheets for the letters of credit. Recent Accounting Pronouncements See Note 3 - New Accounting Standards included in Item 1 of Part I of this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.
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