NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Company and Organization
Background
Nine Energy Service, Inc. (the “Company” or “Nine”), a Delaware corporation, is an oilfield services business that provides services integral to the completion of unconventional wells through a full range of tools and methodologies. The Company is headquartered in Houston, Texas.
On August 30, 2019, the Company entered into a Membership Interest Purchase Agreement (the “Production Solutions Purchase Agreement”) with Brigade Energy Services LLC (“Brigade”). Pursuant to the Production Solutions Purchase Agreement, on such date, through the sale of all of the limited liability interests of its wholly owned subsidiary, Beckman Holding Production Services, LLC, the Company sold its Production Solutions segment to Brigade. The Production Solutions Purchase Agreement contained customary representations and warranties, covenants, and indemnification provisions. This divestiture did not qualify as discontinued operations in accordance with Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity as it did not represent a strategic shift that had a major effect on the Company’s operations and financial results.
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. The worldwide coronavirus outbreak in early 2020, which was declared a pandemic by the World Health Organization in March 2020, the uncertainty regarding its impact, and various governmental actions taken to mitigate its impact have resulted in an unprecedented decline in demand for oil. In the midst of the ongoing pandemic, the Organization of Petroleum Exporting Countries and other oil producing nations, including Russia, were initially unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. The convergence of these events created the unprecedented dual impact of a massive decline in the demand for oil, coupled with the risk of a substantial increase in supply, which has directly affected the Company.
2. Basis of Presentation
Condensed Consolidated Financial Information
The accompanying condensed consolidated financial statements have not been audited by the Company’s independent registered public accounting firm, except that the Condensed Consolidated Balance Sheet at December 31, 2019 and the Condensed Consolidated Statement of Stockholders’ Equity as of December 31, 2019 and 2018 are derived from audited consolidated financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for the fair statement of the Company’s financial position have been included. These condensed consolidated financial statements include all accounts of the Company.
These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Nine and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Such estimates include fair value assumptions used in purchase accounting and in analyzing goodwill, definite and indefinite-lived intangible assets, and property and equipment for possible impairment, useful lives used in depreciation and amortization expense, stock-based compensation fair value, estimated realizable value on excess and obsolete inventories, deferred taxes and income tax contingencies, and losses on accounts receivable. It is at least reasonably possible that the estimates used will change within the next year.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications primarily relate to presenting “Revenues” and “Cost of revenues” by product and service and by presenting “Interest income” as a separate line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
3. New Accounting Standards
Accounting Pronouncements Recently Adopted
In August 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The standard is required to be applied retrospectively, except the new Level 3 disclosure requirements are applied prospectively. The Company adopted ASU 2018-13 in the first quarter of 2020, and it had an immaterial impact on the Company’s condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard, which requires the use of a modified retrospective transition approach, includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued a new, optional transition method that will give companies the option to use the effective date as the date of initial application on transition. Based on initial evaluation, the Company expects to include operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. The Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio under the new standard. The Company will provide additional information about the expected financial impact as it progresses through the evaluation and implementation of the standard. For emerging growth entities, the standard is effective for the fiscal years beginning after December 15, 2020 and interim periods within the fiscal years beginning after December 15, 2021. Early adoption is allowed, and the Company, as an emerging growth company, plans to early adopt the standard for the fiscal years beginning after December 15, 2019 and interim periods within the fiscal years beginning after December 15, 2020.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a
cloud computing arrangement that is a service contract. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for public businesses for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. As an emerging growth company, the Company is permitted, and plans, to adopt the new standard for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
In June 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 for SEC filers, excluding smaller reporting companies, for fiscal years beginning after December 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 after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the standard on its condensed consolidated financial statements.
4. Revenue
Disaggregation of Revenue
The Company adopted Accounting Standards Codification 606 (“ASC 606”) on December 31, 2019, effective January 1, 2019, using the modified retrospective method. Accordingly, results for the year ended December 31, 2019 and periods thereafter are presented in accordance with ASC 606 while prior period results, including those presented below for the three months ended March 31, 2019, have not been adjusted and are reported under the previous revenue recognition guidance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
|
Completion Solutions
|
|
Total
|
|
Completion Solutions
|
|
Production Solutions(2)
|
|
Total
|
|
(in thousands)
|
|
(in thousands)
|
Coiled tubing
|
$
|
20,731
|
|
|
$
|
20,731
|
|
|
$
|
38,643
|
|
|
$
|
—
|
|
|
$
|
38,643
|
|
Cement
|
48,637
|
|
|
48,637
|
|
|
53,258
|
|
|
—
|
|
|
53,258
|
|
Tools
|
32,223
|
|
|
32,223
|
|
|
53,715
|
|
|
—
|
|
|
53,715
|
|
Wireline
|
45,033
|
|
|
45,033
|
|
|
63,516
|
|
|
—
|
|
|
63,516
|
|
Well service
|
—
|
|
|
—
|
|
|
—
|
|
|
20,573
|
|
|
20,573
|
|
Total revenues
|
$
|
146,624
|
|
|
$
|
146,624
|
|
|
$
|
209,132
|
|
|
$
|
20,573
|
|
|
$
|
229,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
|
Completion Solutions
|
|
Total
|
|
Completion Solutions
|
|
Production Solutions(2)
|
|
Total
|
|
(in thousands)
|
|
(in thousands)
|
Products(1)
|
$
|
32,223
|
|
|
$
|
32,223
|
|
|
$
|
53,715
|
|
|
$
|
—
|
|
|
$
|
53,715
|
|
Services(1)
|
114,401
|
|
|
114,401
|
|
|
155,417
|
|
|
20,573
|
|
|
175,990
|
|
Total revenues
|
$
|
146,624
|
|
|
$
|
146,624
|
|
|
$
|
209,132
|
|
|
$
|
20,573
|
|
|
$
|
229,705
|
|
(1) The Company recognizes revenues from the sales of products at a point in time and revenues from the sales of services over time.
(2) The Production Solutions segment was sold to Brigade on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 1 – Company and Organization.
Performance Obligations
At March 31, 2020 and December 31, 2019, the amount of remaining performance obligations were immaterial.
Contract Balances
At March 31, 2020 and December 31, 2019, contract assets and contract liabilities were immaterial.
5. 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 $5.0 million and $5.4 million at March 31, 2020 and December 31, 2019, respectively.
Inventories, net as of March 31, 2020 and December 31, 2019 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31,
2019
|
|
(in thousands)
|
Raw materials
|
$
|
41,761
|
|
|
$
|
38,823
|
|
Work in progress
|
434
|
|
|
—
|
|
Finished goods
|
25,932
|
|
|
27,555
|
|
Inventories
|
68,127
|
|
|
66,378
|
|
Reserve for obsolescence
|
(5,014
|
)
|
|
(5,433
|
)
|
Inventories, net
|
$
|
63,113
|
|
|
$
|
60,945
|
|
6. Goodwill and Intangible Assets
Goodwill
The changes in the net carrying amount of the components of goodwill for the three months ended March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Gross Value
|
|
Accumulated
Impairment Loss
|
|
Net
|
|
(in thousands)
|
Balance as of December 31, 2019
|
$
|
408,732
|
|
|
$
|
(112,536
|
)
|
|
$
|
296,196
|
|
Impairment
|
—
|
|
|
(296,196
|
)
|
|
(296,196
|
)
|
Balance as of March 31, 2020
|
$
|
408,732
|
|
|
$
|
(408,732
|
)
|
|
$
|
—
|
|
Q1 2020 Goodwill Impairment
With a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes, the outlook for expected future cash flows associated with the Company’s reporting units decreased dramatically in the first quarter of 2020.
Based on the above events, an indication of impairment associated with the Company’s reporting units occurred, triggering an interim goodwill impairment test of the Level 3 fair value of each reporting unit under Accounting Standards Codification 350, Intangibles - Goodwill and Other (“ASC 350”) at March 31, 2020. The Level 3 fair value of each reporting unit was determined by using the income approach (discounted cash flows of forecasted income) based on the Company’s best internal projections and the likelihood of various outcomes.
Determining fair value requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating profit margins, weighted average cost 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 the interim goodwill impairment test are reasonable and appropriate.
Based on its Level 3 fair value determination in connection with the interim goodwill impairment test under ASC 350, the Company recorded goodwill impairment charges of $296.2 million associated with its tools, cementing, and wireline reporting units. These charges represent a full write-off of goodwill and are primarily attributed to the events described above, coupled with an increased weighted average cost of capital driven by a reduction in the Company’s stock price and the Level 2 fair value of its Senior Notes (as defined in Note 8 – Debt Obligations) at March 31, 2020.
These charges are included in the line item “Impairment of goodwill” in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended March 31, 2020.
Intangible Assets
The changes in the net carrying value of the components of intangible assets for the three months ended March 31, 2020 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
Non- Compete Agreements
|
|
Technology
|
|
In-process R&D
|
|
Total
|
|
(in thousands, except weighted average amortization period information)
|
Balance as of December 31, 2019
|
$
|
32,536
|
|
|
$
|
1,534
|
|
|
$
|
113,921
|
|
|
$
|
1,000
|
|
|
$
|
148,991
|
|
Amortization expense
|
(1,890
|
)
|
|
(100
|
)
|
|
(2,179
|
)
|
|
—
|
|
|
(4,169
|
)
|
Balance as of March 31, 2020
|
$
|
30,646
|
|
|
$
|
1,434
|
|
|
$
|
111,742
|
|
|
$
|
1,000
|
|
|
$
|
144,822
|
|
Weighted average amortization period
|
5.9
|
|
3.6
|
|
13.4
|
|
Indefinite
|
|
|
Amortization of intangibles expense was $4.2 million and $4.7 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
Future estimated amortization of intangibles is as follows:
|
|
|
|
|
Year Ending December 31,
|
(in thousands)
|
2020
|
$
|
12,298
|
|
2021
|
16,116
|
|
2022
|
13,463
|
|
2023
|
11,516
|
|
2024
|
11,183
|
|
Thereafter
|
79,246
|
|
Total
|
$
|
143,822
|
|
With a significant reduction in exploration and production capital budgets and activity, primarily driven by sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes, the carrying amount of long-lived assets (inclusive of definite-lived intangible assets and property and equipment) associated with the Company’s asset groups may not be recoverable. As such, the Company performed an impairment assessment of long-lived assets in its asset groups under Accounting Standards Codification 360, Property, Plant and Equipment (“ASC 360”) at March 31, 2020, based on its best internal projections and the likelihood of various outcomes.
Based on its assessment, the Company determined that the estimated future undiscounted cash flows derived from long-lived assets associated with its asset groups exceeded the carrying amount of long-lived assets associated with its asset groups, and no impairment to long-lived assets was required.
However, the occurrence of future events or deteriorating market conditions could result in additional impairment assessments under ASC 360 subsequent to March 31, 2020.
7. Accrued Expenses
Accrued expenses as of March 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(in thousands)
|
Accrued compensation and benefits
|
$
|
9,346
|
|
|
$
|
7,009
|
|
Accrued interest
|
14,333
|
|
|
6,091
|
|
Accrued bonus
|
—
|
|
|
5,043
|
|
Accrued sales tax
|
606
|
|
|
820
|
|
Contingent liabilities
|
206
|
|
|
391
|
|
Other accrued expenses
|
4,607
|
|
|
5,376
|
|
Accrued expenses
|
$
|
29,098
|
|
|
$
|
24,730
|
|
8. Debt Obligations
The Company’s debt obligations as of March 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
(in thousands)
|
Senior Notes
|
$
|
386,171
|
|
|
$
|
400,000
|
|
2018 ABL Credit Facility
|
—
|
|
|
—
|
|
Total debt before deferred financing costs
|
$
|
386,171
|
|
|
$
|
400,000
|
|
Deferred financing costs
|
(7,164
|
)
|
|
(7,941
|
)
|
Total debt
|
$
|
379,007
|
|
|
$
|
392,059
|
|
Less: Current portion of long-term debt
|
—
|
|
|
—
|
|
Long-term debt
|
$
|
379,007
|
|
|
$
|
392,059
|
|
Senior Notes
Background
On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The Senior Notes were issued under an indenture, dated as of October 25, 2018 (the “Indenture”), by and among the Company, certain subsidiaries of the Company 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. The Senior Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s current domestic subsidiaries and by certain future subsidiaries.
The Indenture contains covenants that limit 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 Indenture at March 31, 2020.
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 the Company, any restricted subsidiary of the Company that is 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.
Unamortized deferred financing costs associated with the Senior Notes were $7.2 million and $7.9 million at March 31, 2020 and December 31, 2019, respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method.
Extinguishment of Debt
In the first quarter of 2020, the Company repurchased approximately $13.8 million of the Senior Notes for a repurchase price of approximately $3.5 million in cash. As a result, the Company recorded a $10.1 million gain on extinguishment of debt which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by $0.2 million in deferred financing costs. The gain on extinguishment of debt is included as a separate line item in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended March 31, 2020.
Subsequent to March 31, 2020, the Company repurchased an additional $15.9 million of the Senior Notes for a repurchase price of approximately $3.9 million in cash.
2018 ABL Credit Facility
On October 25, 2018, the Company entered into a credit agreement dated as of October 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 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 the Company and its domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or 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 the Company’s 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. The Company was in compliance with all covenants under the 2018 ABL Credit Agreement at March 31, 2020.
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, 2020, the Company’s availability under the 2018 ABL Credit Facility was approximately $93.5 million, net of an outstanding letter of credit of $0.2 million.
Fair Value of Debt Instruments
The estimated fair value of the Company’s debt obligations as of March 31, 2020 and December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(in thousands)
|
Senior Notes
|
$
|
96,581
|
|
|
$
|
324,000
|
|
2018 ABL Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
The fair value of the Senior Notes is classified as Level 2 in the fair value hierarchy and is established based on
observable inputs in less active markets. The 2018 ABL Credit Facility is also classified within Level 2 of the fair value hierarchy. The fair value of the 2018 ABL Credit Facility approximates its carrying value.
9. Related Party Transactions
The Company leases office space, yard facilities, and equipment and purchases building maintenance services from entities owned by David Crombie, an executive officer of the Company. Total lease expense and building maintenance expense associated with these entities was $0.2 million for both the three months ended March 31, 2020 and March 31, 2019. The Company also purchased $0.1 million of equipment during both the three months ended March 31, 2020 and March 31, 2019, from an entity in which Mr. Crombie is a limited partner. There were outstanding payables due to this entity relating to equipment purchases of $0.1 million at both March 31, 2020 and December 31, 2019.
In addition, the Company leases office space in Corpus Christi and Midland, Texas from an entity affiliated with Lynn Frazier, a beneficial owner of more than 5% of the Company’s stock. Total rental expense associated with this office space was $0.3 million and $0.4 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
The Company purchases cable for its wireline trucks from an entity owned by Forum Energy Technologies (“Forum”). Two of the Company’s directors serve as directors of Forum. The Company was billed $0.4 million for both the three months ended March 31, 2020 and March 31, 2019. There was an outstanding payable due to the entity of $0.2 million and $0.3 million at March 31, 2020 and December 31, 2019, respectively. The Company purchases coiled tubing string from another entity owned by Forum. The Company was billed $1.9 million and $2.3 million for coiled tubing string during the three months ended March 31, 2020 and March 31, 2019, respectively. There was an outstanding payable due to the entity of $1.0 million and $0.9 million at March 31, 2020 and December 31, 2019, respectively.
The Company purchases chemical additives used in cementing from Select Energy Services, Inc. (“Select”). One of the Company’s directors also serves as a director of Select. The Company was billed $0.6 million both for the three months ended March 31, 2020 and March 31, 2019. There was an outstanding payable due to Select of $0.2 million and $0.1 million at March 31, 2020 and December 31, 2019, respectively.
The Company provides products and rentals to National Energy Services, Inc. (“NESR”). One of the Company’s directors serves as a director of NESR. The Company billed $0.3 million and $0.0 million for the three months ended March 31, 2020 and March 31, 2019, respectively. There was an outstanding receivable due to the Company from NESR of $6.7 million and $6.8 million at March 31, 2020 and December 31, 2019, respectively.
On June 5, 2019, Ann G. Fox, President and Chief Executive Officer and a director of the Company, was elected as a director of Devon Energy Corporation (“Devon”). The Company generated revenue from Devon of $1.7 million and $5.5 million for the three months ended March 31, 2020 and March 31, 2019, respectively. There was an outstanding receivable due from Devon of $0.9 million and $1.0 million at March 31, 2020 and December 31, 2019, respectively.
10. Commitments and Contingencies
Litigation
From time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these 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 $1.7 million and $1.8 million at March 31, 2020 and December 31, 2019, respectively, and is included under the caption “Accrued expenses” on the Condensed Consolidated Balance Sheets.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, the self-insurance liability could be affected if future claims experience differs significantly from historical trends and actuarial
assumptions.
Contingent Liabilities
The Company has recorded the following contingent liabilities at March 31, 2020:
Magnum Earnout
On October 25, 2018, pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), the Company acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum”).
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. In 2019, the Company did not meet the sales requirement of certain dissolvable plug products during the year.
Frac Tech Earnout
On October 1, 2018, pursuant to the terms and conditions of a Securities Purchase Agreement (the “Frac Tech Purchase Agreement”), the Company acquired Frac Technology AS, a Norwegian private limited company (“Frac Tech”) 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 includes, among other things, the potential for additional future payments, based on certain Frac Tech sales volume metrics through December 31, 2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magnum
|
|
Frac Tech
|
|
Total
|
|
(in thousands)
|
Balance at December 31, 2019
|
$
|
2,609
|
|
|
$
|
1,359
|
|
|
$
|
3,968
|
|
Revaluation adjustments
|
141
|
|
|
(567
|
)
|
|
(426
|
)
|
Payments
|
—
|
|
|
(98
|
)
|
|
(98
|
)
|
Balance at March 31, 2020
|
$
|
2,750
|
|
|
$
|
694
|
|
|
$
|
3,444
|
|
The contingent consideration related to the contingent liabilities is 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 $0.2 million and $0.4 million reported in “Accrued expenses” at March 31, 2020 and December 31, 2019, respectively, and $3.2 million and $3.6 million reported in “Other long-term liabilities” at March 31, 2020 and December 31, 2019, respectively, in the Company’s Condensed Consolidated Balance Sheets. The impact of the revaluation adjustments is included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
11. Taxes
Income tax expense (benefit) included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss) was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(in thousands, except percentages)
|
Income tax expense (benefit)
|
$
|
(2,125
|
)
|
|
$
|
460
|
|
Effective tax rate
|
0.7
|
%
|
|
2.6
|
%
|
The Company’s tax provision prior to the discrete tax impact discussed below was approximately $0.3 million, primarily attributable to state and non-U.S. income taxes.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act was signed into law which, among other provisions, provides a five-year carryback of certain net operating losses. As a result, during the three months ended March 31, 2020, the Company recorded the tax benefit from the ability to carryback some of its net operating losses. In addition, the goodwill impairment recorded during the three months ended March 31, 2020 resulted in the release of some of the Company’s
valuation allowance previously recorded. The total discrete impact for the three months ended March 31, 2020 was an income tax benefit of approximately $2.4 million.
12. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
|
Net Loss
|
|
Average Shares Outstanding
|
|
Loss Per Share
|
|
Net Income
|
|
Average Shares Outstanding
|
|
Earnings Per Share
|
|
(in thousands, except share and per share amounts)
|
Basic
|
$
|
(300,900
|
)
|
|
29,430,475
|
|
|
$
|
(10.22
|
)
|
|
$
|
17,310
|
|
|
29,150,996
|
|
|
$
|
0.59
|
|
Assumed exercise of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,709
|
|
|
—
|
|
Unvested restricted stock and stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
318,048
|
|
|
—
|
|
Diluted
|
$
|
(300,900
|
)
|
|
29,430,475
|
|
|
$
|
(10.22
|
)
|
|
$
|
17,310
|
|
|
29,471,753
|
|
|
$
|
0.59
|
|
For the three months ended March 31, 2020, the computation of diluted earnings (loss) per share excluded all stock options, unvested restricted stock, unvested restricted stock units, and unvested performance stock units because their inclusion would be anti-dilutive given the Company was in a net loss position. The average number of securities that were excluded from diluted earnings (loss) per share that would potentially dilute earnings per share for the periods in which the Company experienced a net loss were as follows:
|
|
|
|
|
|
2020
|
|
2019
|
Three months ended March 31,
|
119,075
|
|
—
|
13. Segment Information
On August 30, 2019, the Company sold its Production Solutions segment to Brigade. For additional information on the Production Solutions divestiture, see Note 1 – Company and Organization. Prior to August 30, 2019, the Company reported its results in two segments, the Completions Solutions segment and the Production Solutions segment. As a result of the Company’s sale of its Production Solutions segment, the Company considers the Completion Solutions segment to be its operating and reporting segment. This segmentation is representative of the manner in which the Chief Operating Decision Maker (“CODM”) and its Board of Directors view the business in allocating resources and measuring financial performance. The Company considers the CODM to be its Chief Executive Officer.
The amounts labeled “Corporate” relate to assets not allocated to either the Completion Solutions segment or the Production Solutions segment.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(in thousands)
|
Revenues
|
|
|
|
|
|
Completion Solutions
|
$
|
146,624
|
|
|
$
|
209,132
|
|
Production Solutions
|
—
|
|
|
20,573
|
|
|
$
|
146,624
|
|
|
$
|
229,705
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
|
|
|
Completion Solutions
|
$
|
126,008
|
|
|
$
|
161,439
|
|
Production Solutions
|
—
|
|
|
17,151
|
|
|
$
|
126,008
|
|
|
$
|
178,590
|
|
Adjusted gross profit
|
|
|
|
Completion Solutions
|
$
|
20,616
|
|
|
$
|
47,693
|
|
Production Solutions
|
—
|
|
|
3,422
|
|
|
$
|
20,616
|
|
|
$
|
51,115
|
|
|
|
|
|
General and administrative expenses
|
16,395
|
|
|
19,939
|
|
Depreciation
|
8,541
|
|
|
13,530
|
|
Amortization of intangibles
|
4,169
|
|
|
4,688
|
|
Impairment of goodwill
|
296,196
|
|
|
—
|
|
Gain on revaluation of contingent liabilities
|
(426
|
)
|
|
(13,955
|
)
|
Gain on sale of property and equipment
|
(575
|
)
|
|
(23
|
)
|
Income (loss) from operations
|
$
|
(303,684
|
)
|
|
$
|
26,936
|
|
Non-operating (income) expenses
|
(659
|
)
|
|
9,166
|
|
Income (loss) before income taxes
|
(303,025
|
)
|
|
17,770
|
|
Provision (benefit) for income taxes
|
(2,125
|
)
|
|
460
|
|
Net income (loss)
|
$
|
(300,900
|
)
|
|
$
|
17,310
|
|
Capital expenditures by segment for the three months ended March 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(in thousands)
|
Completion Solutions
|
$
|
1,423
|
|
|
$
|
22,478
|
|
Production Solutions
|
—
|
|
|
914
|
|
Corporate
|
—
|
|
|
55
|
|
|
$
|
1,423
|
|
|
$
|
23,447
|
|
Total assets by segment as of March 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(in thousands)
|
Completion Solutions
|
$
|
435,827
|
|
|
$
|
739,142
|
|
Corporate
|
99,181
|
|
|
111,753
|
|
|
$
|
535,008
|
|
|
$
|
850,895
|
|