UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



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

FOR THE QUARTERLY PERIOD ENDED ~~JUNE 30, 2020~~March 31, 2021



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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 001-38347

Nine Energy Service, Inc.

(Exact name of registrant as specified in its charter)



Delaware			80-0759121
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

2001 Kirby Drive, Suite 200

Houston,, TX77019

(Address of principal executive offices) (zip code)

(~~281~~) (281) 730-5100

(Registrant’s telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	NINE	New York Stock Exchange

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

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

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

Large accelerated filer

☐

Accelerated filer

☒☐

Non-accelerated filer

☐☒

Smaller reporting company

☒

Emerging growth company

☒

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

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

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding at ~~August~~May 3, ~~2020~~2021 was ~~31,642,601.~~

31,358,497.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, ~~2019 and “Risk Factors” in Item 1A of Part II in the Quarterly Report on Form 10-Q for the quarterly period ended March 31,~~ 2020. These factors, some of which are beyond our control, include the following:

~~the level of~~•Our business is cyclical and depends on capital spending and well completions by the onshore oil and natural gas ~~industry;~~

industry, and the level of such activity is volatile and strongly influenced by current and expected oil and natural gas ~~commodity prices;~~

~~general economic conditions;~~

prices. If the ~~impact~~prices of ~~the coronavirus pandemic and the actions of certain~~ oil and natural gas ~~producing countries~~continue to decline or remain depressed for a lengthy period, our business, financial condition, results of operations, cash flows, and prospects may be materially and adversely affected.

•The recent coronavirus pandemic and related economic repercussions have had, and are expected to continue to have, a significant adverse impact on our business, and depending on the ~~business of our customers, including the effects~~duration of the ~~resulting excess supply~~pandemic and its effect on the oil and gas industry, could have a material adverse effect on our business, liquidity, results of ~~oil;~~operations, and financial condition.

•Our substantial debt obligations could have significant adverse consequences on our business and future prospects, and restrictions in our debt agreements could limit our growth and our ability to ~~employ,~~engage in certain activities.

•We may be unable to maintain existing prices or ~~maintain the employment of, a sufficient number of key employees, technical personnel, and other skilled and qualified workers;~~

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

services, and intense competition in the markets for our dissolvable plug products may lead to pricing pressures, reduced sales, or reduced market ~~share as a result of intense competition in the markets for our composite~~share.

•Our current and ~~dissolvable plug products;~~potential competitors may have longer operating histories, significantly greater financial or technical resources, and greater name recognition than we do.

~~our ability~~•Our operations are subject to ~~accurately predict customer demand;~~

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

•If we are unable to accurately predict customer demand or if customers cancel their orders on short notice, we may hold excess or obsolete inventory, which would reduce gross margins. Conversely, insufficient inventory would result in lost revenue opportunities and potentially in loss of market share and damaged customer relationships.

•We are dependent on customers in a single industry. The loss of one or more significant customers could adversely affect our ~~ability~~financial condition, prospects, and results of operations.

•We may be subject to ~~implement new technologies~~claims for personal injury and ~~services;~~property damage or other litigation, which could materially adversely affect our financial condition, prospects, and results of operations.

~~seasonal~~•We are subject to federal, state, and ~~adverse weather conditions;~~

~~our ability to maintain compliance with the New York Stock Exchange continued listing requirements~~local laws and ~~avoid the delisting of our common stock;~~

~~changes in laws or~~ regulations regarding issues of health, safety, and protection of the ~~environment, including those relating to hydraulic fracturing, greenhouse gases,~~environment. Under these laws and ~~climate change;~~regulations, we may become liable for penalties, damages, or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business.

•Our success may be affected by the use and

protection of our proprietary technology as well as our ability to ~~successfully integrate the assets~~enter into license agreements.

•Our success may be affected by our ability to implement new technologies and services.

•Our future financial condition and results of operations ~~that~~could be adversely impacted by asset impairment charges.

•Increased attention to climate change and conservation measures may reduce oil and natural gas demand, and we ~~acquired~~face various risks associated with increased activism against oil and natural gas exploration and development activities.

•Seasonal and adverse weather conditions adversely affect demand for our ~~acquisition of Magnum Oil Tools International, LTD~~products and ~~its affiliates (the “Magnum Acquisition”) and realize anticipated revenues, cost savings, or other benefits of such acquisition.~~services.

Additional risks or uncertainties that are not currently known to us, that we currently deem to be immaterial, or that could apply to any company could also materially adversely affect our business, financial condition, or future results.

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

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	June 30, 2020			December 31, 2019				March 31, 2021		December 31, 2020
Assets							Assets
Current assets							Current assets
Cash and cash equivalents	$	88,678		$	92,989		Cash and cash equivalents	$	52,982	$	68,864
Accounts receivable, net	39,376			96,889			Accounts receivable, net	48,139		41,235
Income taxes receivable	630			660			Income taxes receivable	1,142		1,392
Inventories, net	59,333			60,945			Inventories, net	38,759		38,402
Prepaid expenses and other current assets	19,291			17,434			Prepaid expenses and other current assets	13,115		16,270
Total current assets	207,308			268,917			Total current assets	154,137		166,163
Property and equipment, net	115,258			128,604			Property and equipment, net	96,530		102,429
Operating lease right of use assets, net							Operating lease right of use assets, net	35,186		36,360
Finance lease right of use assets, net							Finance lease right of use assets, net	1,716		1,816
Intangible assets, net	140,706			148,991			Intangible assets, net	128,432		132,524
Goodwill	—			296,196
Other long-term assets	5,587			8,187			Other long-term assets	3,048		3,308
Total assets	$	468,859		$	850,895		Total assets	$	419,049	$	442,600
Liabilities and Stockholders’ Equity							Liabilities and Stockholders’ Equity
Current liabilities							Current liabilities
Accounts payable	$	11,114		$	35,490		Accounts payable	$	21,385	$	18,140
Accrued expenses	16,056			24,730			Accrued expenses	24,547		17,139
Current portion of long-term debt	563			—			Current portion of long-term debt	844		844
Current portion of capital lease obligations	1,043			995
Current portion of operating lease obligations							Current portion of operating lease obligations	5,897		6,200
Current portion of finance lease obligations							Current portion of finance lease obligations	1,118		1,092
Total current liabilities	28,776			61,215			Total current liabilities	53,791		43,415
Long-term liabilities							Long-term liabilities
Long-term debt	365,632			392,059			Long-term debt	316,910		342,714
Deferred income taxes	—			1,588
Long-term capital lease obligations	1,667			2,201
Long-term operating lease obligations							Long-term operating lease obligations	30,948		32,295
Long-term finance lease obligations							Long-term finance lease obligations	819		1,109
Other long-term liabilities	2,834			3,955			Other long-term liabilities	2,498		2,658
Total liabilities	398,909			461,018			Total liabilities	404,966		422,191
Commitments and contingencies (Note 10)							Commitments and contingencies (Note 10)	0		0
Stockholders’ equity							Stockholders’ equity
Common stock (120,000,000 shares authorized at $.01 par value; 31,652,635 and 30,555,677 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively)	317			306
Common stock (120,000,000 shares authorized at $0.01 par value; 31,517,982 and 31,557,809 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively)							Common stock (120,000,000 shares authorized at $0.01 par value; 31,517,982 and 31,557,809 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively)	315		316
Additional paid-in capital	764,382			758,853			Additional paid-in capital	770,309		768,429
Accumulated other comprehensive loss	(4,863		)	(4,467		)	Accumulated other comprehensive loss	(4,460)		(4,501)
Accumulated deficit	(689,886		)	(364,815		)	Accumulated deficit	(752,081)		(743,835)
Total stockholders’ equity	69,950			389,877			Total stockholders’ equity	14,083		20,409
Total liabilities and stockholders’ equity	$	468,859		$	850,895		Total liabilities and stockholders’ equity	$	419,049	$	442,600

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

NINE ENERGY SERVICE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
	2020			2019			2020			2019				2021		2020
Revenues													Revenues
Service	$	37,673		$	181,450		$	152,074		$	357,440		Service	$	46,617	$	114,401
Product	15,062			56,067			47,285			109,782			Product	20,009		32,223
	52,735			237,517			199,359			467,222				66,626		146,624
Cost and expenses													Cost and expenses
Cost of revenues (exclusive of depreciation and amortization shown separately below)													Cost of revenues (exclusive of depreciation and amortization shown separately below)
Service	41,865			144,875			141,063			285,461			Service	45,229		99,198
Product	14,838			39,680			41,648			77,684			Product	17,054		26,810
General and administrative expenses	11,284			21,818			27,679			41,757			General and administrative expenses	10,224		16,395
Depreciation	8,449			13,846			16,990			27,376			Depreciation	7,789		8,541
Amortization of intangibles	4,116			4,628			8,285			9,316			Amortization of intangibles	4,092		4,169
Impairment of goodwill	—			—			296,196			—			Impairment of goodwill	0		296,196
(Gain) loss on revaluation of contingent liabilities	910			(975		)	484			(14,930		)
Gain on revaluation of contingent liabilities													Gain on revaluation of contingent liabilities	(190)		(426)
Gain on sale of property and equipment	(1,790		)	(310		)	(2,365		)	(333		)	Gain on sale of property and equipment	(273)		(575)
Income (loss) from operations	(26,937		)	13,955			(330,621		)	40,891
Loss from operations													Loss from operations	(17,299)		(303,684)
Interest expense	9,186			10,771			19,014			20,097			Interest expense	8,585		9,828
Interest income	(179		)	(168		)	(550		)	(328		)	Interest income	(13)		(371)
Gain on extinguishment of debt	(11,587		)	—			(21,703		)	—			Gain on extinguishment of debt	(17,618)		(10,116)
Income (loss) before income taxes	(24,357		)	3,352			(327,382		)	21,122
Benefit for income taxes	(186		)	(2,735		)	(2,311		)	(2,275		)
Net income (loss)	$	(24,171	)	$	6,087		$	(325,071	)	$	23,397
Earnings (loss) per share
Other income													Other income	(34)		0
Loss before income taxes													Loss before income taxes	(8,219)		(303,025)
Provision (benefit) for income taxes													Provision (benefit) for income taxes	27		(2,125)
Net loss													Net loss	$	(8,246)	$	(300,900)
Loss per share													Loss per share
Basic	$	(0.81	)	$	0.21		$	(10.97	)	$	0.80		Basic	$	(0.28)	$	(10.22)
Diluted	$	(0.81	)	$	0.21		$	(10.97	)	$	0.80		Diluted	$	(0.28)	$	(10.22)
Weighted average shares outstanding													Weighted average shares outstanding
Basic	29,844,240			29,349,396			29,637,358			29,250,744			Basic	29,878,426		29,430,475
Diluted	29,844,240			29,473,037			29,637,358			29,423,163			Diluted	29,878,426		29,430,475
Other comprehensive income (loss), net of tax													Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of $0 tax in each period	$	207		$	192		$	(396	)	$	440		Foreign currency translation adjustments, net of $0 tax in each period	$	41	$	(603)
Total other comprehensive income (loss), net of tax	207			192			(396		)	440			Total other comprehensive income (loss), net of tax	41		(603)
Total comprehensive income (loss)	$	(23,964	)	$	6,279		$	(325,467	)	$	23,837
Total comprehensive loss													Total comprehensive loss	$	(8,205)	$	(301,503)

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

Common Stock Additional
Paid-in Capital Accumulated
Other
Comprehensive
Income (Loss) Retained
Earnings
(Accumulated Deficit) Total
Stockholders’ Equity
Shares Amounts
Balance, December 31, 2018 30,163,408
$ 302
$ 746,428
$ (4,843 ) $ (147,064 ) $ 594,823
Issuance of common stock under stock compensation plan, net of forfeitures 588,483
6
(6 ) —
—
—
Stock-based compensation expense —
—
7,267
—
—
7,267
Exercise of stock options 674
—
15
—
—
15
Vesting of restricted stock (69,556 ) (1 ) (1,632 ) —
—
(1,633 )
Other comprehensive income —
—
—
440
—
440
Net income —
—
—
—
23,397
23,397
Balance, June 30, 2019 30,683,009
$ 307
$ 752,072
$ (4,403 ) $ (123,667 ) $ 624,309

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

1. Company and Organization

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.

The Company’s chief operating decision maker, which is its Chief Executive Officer, and its board of directors allocate resources and assess performance based on financial information presented at a consolidated level. Accordingly, the Company determined that it operates as 1 reportable segment.

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 the 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. While the Company 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 its business, or the pace or extent of any subsequent recovery, the Company expects the coronavirus pandemic and related effects to continue to have ana material adverse impact on commodity prices and its business generally.

Historically, the Company has met its liquidity needs principally from cash on hand, cash flow from operations and, if needed, external borrowings. In response to the above events, the Company has implemented certain cost-cutting measures across the organization to continue to maintain its current liquidity position. Based on its current forecasts, the Company believes that cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility (as defined in Note 8 – Debt Obligations), should be sufficient to fund its capital requirements for at least the next twelve months from the issuance date of its condensed consolidated financial statements.

2. Basis of Presentation

Condensed Consolidated Financial Information

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,~~the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for ~~the~~a fair statement of ~~the Company’s~~its financial position ~~have been included. These condensed consolidated financial statements include all accounts~~as of March 31, 2021, and its results of operations for the ~~Company.~~

three months ended March 31, 2021, and 2020, and cash flows for the three months ended March 31, 2021, and 2020. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), in a manner consistent with the accounting policies described in the Company’s Annual Report on Form 10-K for ~~interim~~the year ended December 31, 2020, unless otherwise disclosed herein, and should be read in conjunction therewith. The Condensed Consolidated Balance Sheet at December 31, 2020 was derived from audited financial ~~information. Accordingly, they do~~statements, but does not include all ~~of the information and notes~~disclosures 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. Operating results for interim periods are not necessarily indicative of the 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.

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,~~March 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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.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. To support the accounting and disclosure requirements under the new standard, the Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio and developing and implementing appropriate changes to its internal processes and controls. Based on initial evaluation, the Company expects to recognize a lease liability and offsetting right-of-use asset for all of its operating leases with durations greater than twelve months on its Condensed Consolidated Balance Sheets. The Company will provide additional information about the expected financial impact as it progresses through the evaluation and implementation of the standard.

~~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 adoption of this standard does not have a material impact on the Company’s condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for public businesses for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. As an emerging growth company, the Company is ~~currently evaluating~~permitted, and plans, to adopt the ~~impact of~~new standard for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect the standard to have a material impact 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~~Revenues

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 and six months ended June 30, 2019, have not been adjusted and are reported under the previous revenue recognition guidance.

Disaggregated revenue for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~and June 30, 2019~~respectively, was as follows:


												Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
	Three Months Ended June 30, 2020				Three Months Ended June 30, 2019							(in thousands)		(in thousands)
	Completion Solutions		Total		Completion Solutions		Production Solutions⁽²⁾		Total
	(in thousands)				(in thousands)
Coiled tubing	$	7,566	$	7,566	$	38,897	$	—	$	38,897
Cement	20,431		20,431		56,742		—		56,742		Cement	$	22,922	$	48,637
Tools	15,062		15,062		56,067		—		56,067		Tools	20,009		32,223
Wireline	9,676		9,676		64,165		—		64,165		Wireline	12,752		45,033
Well service	—		—		—		21,646		21,646
Coiled tubing											Coiled tubing	10,943		20,731
Total revenues	$	52,735	$	52,735	$	215,871	$	21,646	$	237,517	Total revenues	$	66,626	$	146,624

Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
Completion Solutions Total Completion Solutions
Production Solutions⁽²⁾
Total
(in thousands) (in thousands)
Coiled tubing $ 28,297
$ 28,297
$ 77,540
$ —
$ 77,540
Cement 69,068
69,068
110,000
—
110,000
Tools 47,285
47,285
109,782
—
109,782
Wireline 54,709
54,709
127,681
—
127,681
Well service —
—
—
42,219
42,219
Total revenues $ 199,359
$ 199,359
$ 425,003
$ 42,219
$ 467,222

Production Solutions⁽²⁾

(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 Energy Service LLC (“Brigade”) on August 30, 2019. For additional information on the~~ ~~Production Solutions~~ ~~divestiture, see Note 13 – Segment Information.~~

Performance Obligations

At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the amount of remaining performance obligations ~~were immaterial.~~was not material.

At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, contract assets and contract liabilities were ~~immaterial.~~not material.

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~~$12.6 million and ~~$5.4~~$13.3 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~,2020, respectively.

Inventories, net as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were comprised of the following:

June 30, 2020 December 31,
2019
(in thousands)
Raw materials $ 41,129
$ 38,823
Work in progress 91
—
Finished goods 23,126
27,555
Inventories 64,346
66,378
Reserve for obsolescence (5,013 ) (5,433 )
Inventories, net $ 59,333
$ 60,945

6. ~~Goodwill~~Intangible Assets and Goodwill

Intangible Assets

~~Goodwill~~

The ~~changes in the net~~gross carrying amount and accumulated amortization of ~~the components~~intangible assets as of ~~goodwill~~March 31, 2021 and December 31, 2020 was as follows:


	March 31, 2021
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Amortization Period
	(in thousands, except weighted average amortization period information)
Customer relationships	$	63,270	$	(39,896)	$	23,374	5.4
Non-compete agreements	6,500		(5,466)		1,034		2.6
Technology	125,110		(22,086)		103,024		12.4
In-process research and development	1,000		—		1,000		Indefinite
Total	$	195,880	$	(67,448)	$	128,432


	December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Amortization Period
	(in thousands, except weighted average amortization period information)
Customer relationships	$	63,270	$	(38,084)	$	25,186	5.5
Non-compete agreements	6,500		(5,366)		1,134		2.8
Technology	125,110		(19,906)		105,204		12.7
In-process research and development	1,000		—		1,000		Indefinite
Total	$	195,880	$	(63,356)	$	132,524

Amortization of intangibles expense was $4.1 million and $4.2 million for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~were~~respectively.

Future estimated amortization of intangibles is 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 June 30, 2020 $ 408,732
$ (408,732 ) $ —


Year Ending December 31,	(in thousands)
2021	$	12,024
2022	13,463
2023	11,516
2024	11,183
2025	11,183
2026	11,082
Thereafter	56,981
Total	$	127,432

Q1 2020 Goodwill Impairment

Based on ~~the above~~these 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)~~

As such, 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 in the first quarter of 2020 associated with its

tools, cementing, and wireline reporting units. These charges represented a full write-off of goodwill and were ~~primarily attributed~~due 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).

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 ~~six~~three months ended ~~June 30,~~March 31, 2020.

~~Intangible Assets~~

~~The changes in the net carrying value of the components of intangible assets for the six months ended June 30, 2020 were as follows:~~

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 (3,726 ) (200 ) (4,359 ) —
(8,285 )
Balance as of June 30, 2020 $ 28,810
$ 1,334
$ 109,562
$ 1,000
$ 140,706
Weighted average amortization period 5.7 3.3 13.1 Indefinite

Amortization of intangibles expense was $4.1 million and $8.3 million for the three and six months ended June 30, 2020, respectively. Amortization of intangibles expense was $4.6 million and $9.3 million for the three and six months ended June 30, 2019, respectively.

~~Future estimated amortization of intangibles is as follows:~~

Year Ending December 31, (in thousands)
2020 $ 8,182
2021 16,116
2022 13,463
2023 11,516
2024 11,183
Thereafter 79,246
Total $ 139,706

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 0 impairment to long-lived assets was required.

No events triggered additional impairment tests under ASC 360 through June 30, 2020. However, the occurrence of future events or deteriorating market conditions could result in additional impairment assessments under ASC 360 subsequent to June 30, 2020.

7. Accrued Expenses

Accrued expenses as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 consisted of the following:

June 30, 2020 December 31, 2019
(in thousands)
Accrued compensation and benefits $ 4,340
$ 7,009
Accrued interest 5,655
6,091
Accrued bonus —
5,043
Accrued sales tax 244
820
Contingent liabilities 306
391
Other accrued expenses 5,511
5,376
Accrued expenses $ 16,056
$ 24,730


	March 31, 2021		December 31, 2020
	(in thousands)
Accrued interest	$	11,931	$	5,313
Accrued compensation and benefits	6,798		5,430
Other accrued expenses	5,818		6,396
Accrued expenses	$	24,547	$	17,139

8. Debt Obligations

The Company’s debt obligations as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:

June 30,
2020 December 31,
2019
(in thousands)
Senior Notes $ 370,334
$ 400,000
2018 ABL Credit Facility —
—
Magnum Promissory Notes 2,250
—
Total debt before deferred financing costs $ 372,584
$ 400,000
Deferred financing costs (6,389 ) (7,941 )
Total debt $ 366,195
$ 392,059
Less: Current portion of long-term debt (563 ) —
Long-term debt $ 365,632
$ 392,059


	March 31, 2021		December 31, 2020
	(in thousands)
Senior Notes	$	320,343	$	346,668
Magnum Promissory Notes	1,688		1,969
Total debt before deferred financing costs	$	322,031	$	348,637
Deferred financing costs	(4,277)		(5,079)
Total debt	$	317,754	$	343,558
Less: Current portion of long-term debt	(844)		(844)
Long-term debt	$	316,910	$	342,714

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 ~~June 30, 2020.~~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 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 ~~$6.4~~$4.3 million and ~~$7.9~~$5.1 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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

The Company repurchased approximately ~~$15.9~~$26.3 million and ~~$29.7~~$13.8 million of Senior Notes at a repurchase price of approximately ~~$3.9~~$8.4 million and ~~$7.4~~$3.5 million in cash ~~for~~during the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, respectively. Deferred financing costs associated with these transactions were $0.3 million and ~~$0.5~~$0.2 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, respectively. As a result, for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, the Company recorded a ~~$11.6~~$17.6 million gain and a ~~$21.7~~$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. 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 ~~and six~~ months ended ~~June 30,~~March 31, 2021 and March 31, 2020.

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 ~~June 30, 2020.~~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 ~~June 30, 2020,~~March 31, 2021, the Company’s availability under the 2018 ABL Credit Facility was approximately ~~$44.8~~$45.8 million, net of outstanding letters of credit of $0.5 million. As of March 31, 2021 and December 31, 2020, the Company had 0 outstanding borrowings under its 2018 ABL Credit Facility.

Magnum Promissory Notes

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 (the “Magnum Earnout”).

On June 30, 2020, pursuant to an amendment to the Magnum Purchase Agreement to terminate the remaining Magnum Earnout and all obligations related thereto (the “Magnum Purchase Agreement Amendment”), the Company issued promissory notes with an aggregated principal amount of $2.3 million (the “Magnum Promissory Notes”) to the sellers of

Magnum. The Magnum Promissory Notes bear interest at a rate of 6.0% per annum. The principal amount of the Magnum Promissory Notes ~~will be~~are paid in equal quarterly installments ~~beginning~~which began January 1, 2021. The entire unpaid principal amount will be due and payable on the maturity date, which is the earlier of October 1, 2022 ~~and~~or the business day after the date on which the Company sells, transfers or otherwise disposes of the “E-Set” tools business to an unaffiliated third party, unless such sale, transfer or disposition is made, directly or indirectly, as part of the sale, transfer or disposition of the Dissolvable Plugs Business or due to the occurrence of a Change of Control Event (each as defined in the Magnum Purchase Agreement).

For additional information regarding the termination of the Magnum Earnout, see Note 10 – Commitments and Contingencies.

Fair Value of Debt Instruments

The estimated fair value of the Company’s debt obligations as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was as follows:

June 30, 2020 December 31, 2019
(in thousands)
Senior Notes $ 177,760
$ 324,000
2018 ABL Credit Facility $ —
$ —
Magnum Promissory Notes $ 2,250
$ —


	March 31, 2021		December 31, 2020
	(in thousands)
Senior Notes	$	112,120	$	156,001
Magnum Promissory Notes	$	1,688	$	1,969

The fair value of the Senior Notes, 2018 ABL Credit Facility, and the Magnum Promissory Notes is classified as Level 2 in the fair value hierarchy. The fair value of the Senior Notes is established based on observable inputs in less active markets. The fair value of the ~~2018 ABL Credit Facility and the~~ Magnum Promissory Notes approximates their 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 ~~and $0.4 million~~ for both the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2019,~~ respectively. The Company also purchased ~~$0.4~~$0.2 million and ~~$0.5~~$0.1 million of equipment during the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively, and $0.5 million and $0.6 million of equipment during the three and six months ended June 30, 2019,~~ respectively, 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 and $0.2 million ~~and $0.1 million~~ at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019, respectively.~~2020, respectively.

In addition, the Company leases office space in Corpus Christi and Midland, Texas from an entity affiliated with Warren Lynn Frazier, a beneficial owner of more than 5% of the Company’s stock. In the third quarter of 2020, another entity affiliated with Mr. Frazier began to sub-lease a portion of such space in Corpus Christi, Texas from the Company. Total rental expense associated with this office space, net of sub-leasing income, was ~~$0.4 million and $0.7~~$0.3 million for both the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively,~~respectively.There were net outstanding payables due to this entity of $0.1 million at both March 31, 2021 and ~~$0.3 million and $0.7 million for the three and six months ended June 30, 2019,~~December 31, 2020, respectively. Additionally, on June 30, 2020, the Company issued the Magnum Promissory Notes to the sellers of Magnum, including Mr. Frazier. At ~~June 30,~~March 31, 2021 and December 31, 2020, the outstanding principal balance payable to Mr. Frazier was ~~$2.1 million.~~$1.6 million and $1.9 million, respectively. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.

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 ~~$0.0~~$0.1 millionand $0.4 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively, and $0.5 million and $0.9 million for the three and six months ended June 30, 2019,~~ respectively.There ~~was an~~were outstanding ~~payable~~payables due to ~~the~~this entity of ~~$0.3~~$0.1 million at December 31, ~~2019.~~2020. The Company purchases coiled tubing string from another entity owned by Forum. The Company was billed ~~$0.2~~$1.5 million and ~~$2.1~~$1.9 million for coiled tubing string for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively,and $1.9 million and $4.2 million for the three and six months ended June 30, 2019,~~ respectively. There ~~was an~~were outstanding ~~payable~~payables due to ~~the~~this entity of $1.0 million and $0.9 million at March 31, 2021 and December 31, ~~2019.~~2020, 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 ~~$0.2~~$0.3 million and ~~$0.8~~$0.6 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively, and $0.5 million and $1.1 million for the three and six months ended June 30, 2019,~~ respectively. There ~~was an~~were outstanding ~~payable~~payables due to Select of ~~$0.1~~$0.2 million at both ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020, respectively.

The Company provides products and rentals to National Energy Reunited Corp. (“NESR”), where one of the Company’s directors serves as a director. The Company billed NESR ~~$0.9~~$0.2 million and ~~$1.2~~$0.3 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively, and $0.0 million for both the three and six months ended June 30, 2019.~~respectively. During the fourth quarter of 2019, the Company sold coiled tubing equipment for $5.9

million to NESR with payments due in 24 equal monthly ~~equal~~ installments beginning on January 31, 2020. Total outstanding ~~receivable~~receivables due to the Company from NESR (inclusive of the ~~above sale) was $7.1~~equipment sale above) were $2.6 million and ~~$6.8~~$3.7 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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 Devonof ~~$1.7~~$1.0 million and ~~$3.4~~$1.7 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~respectively, and $4.9 million and $10.4 million for the three and six~~

~~months ended June 30, 2019,~~ respectively. There ~~was an~~were outstanding ~~receivable~~receivables due from Devon of ~~$0.6 million and $1.0~~$0.4 million at ~~June 30, 2020~~both March 31, 2021 and December 31, ~~2019,~~2020, 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 ~~$1.8~~$0.9 million and $1.3 million at ~~both June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020, respectively, and is included under the caption “Accrued expenses” in the Company’s 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~~Company’s contingent liabilities (Level 3) at ~~June 30, 2020:~~March 31, 2021 and 2020 were as follows:


	Frac Tech
	(in thousands)
Balance at December 31, 2020	$	604
Revaluation adjustments	(190)
Payments	(30)
Balance at March 31, 2021	$	384


	Magnum		Frac Tech		Total
	(in thousands)
Balance at December 31, 2019	$	2,609	$	1,359	$	3,968
Revaluation adjustments	141		(567)		(426)
Payments	0		(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 $0.1 million and $0.2 million reported in “Accrued expenses” at March 31, 2021 and December 31, 2020, respectively and $0.3 million and $0.4 million reported in “Other long-term liabilities” at March 31, 2021 and December 31, 2020, respectively, in the Company’s Condensed Consolidated Balance Sheets. Revaluation adjustments resulting in a $0.2 million gain and a $0.4 million gain for the three months ended March 31, 2021 and March 31, 2020, respectively, are included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

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, as amended, includes, among other things, the potential for additional future payments, based on certain Frac Tech revenue metrics through December 31, 2025.

Magnum Earnout

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.

Pursuant to the Magnum Purchase Agreement Amendment, ~~terminating~~which terminated the remaining Magnum Earnout and all obligations related thereto, the Company made a cash payment of $1.1 million and issued the Magnum Promissory Notes with an aggregated principal amount of $2.3 million to the sellers of Magnum. For additional information regarding the Magnum Promissory Notes, see Note 8 – Debt Obligations.

~~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.

~~The changes in the components of contingent liabilities for the six months ended June 30, 2020 were as follows:~~

Magnum Frac Tech Total
(in thousands)
Balance at December 31, 2019 $ 2,609
$ 1,359
$ 3,968
Revaluation adjustments 766
(282 ) 484
Payments —
(206 ) (206 )
Termination (3,375 ) —
(3,375 )
Balance at June 30, 2020 $ —
$ 871
$ 871

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 $0.3 million and $0.4 million reported in “Accrued expenses” at June 30, 2020 and December 31, 2019, respectively, and $0.6 million and $3.6 million reported in “Other long-term liabilities” at June 30, 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~~The Company’s provision (benefit) for income taxes included in ~~the Company’s~~its Condensed Consolidated Statements of Income and Comprehensive Income (Loss) was as follows:


														Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,							2021			2020
	2020			2019			2020			2019				(in thousands, except percentages)
	(in thousands, except percentages)						(in thousands, except percentages)
Income tax benefit	$	(186	)	$	(2,735	)	$	(2,311	)	$	(2,275	)
Provision (benefit) for income taxes													Provision (benefit) for income taxes	$	27		$	(2,125)
Effective tax rate	0.8		%	(81.6		)%	0.7		%	(10.8		)%	Effective tax rate	(0.3)		%	0.7		%

The ~~Company’s~~Company 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 ~~three and six months ended June 30, 2020 was approximately $0.2 million and $2.3 million, respectively.~~first quarter of 2020. The ~~Company’s year-to-date~~difference in tax ~~benefit~~position is primarily a result of the discrete tax ~~benefit recorded in the first quarter of 2020 related to~~impact from the Coronavirus Aid, Relief, and Economic Security Act ~~as well as the release of valuation allowance due to~~and the goodwill impairment ~~which was also~~ recorded induring the first quarter of 2020.

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 June 30, 2020 Three Months Ended June 30, 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 $ (24,171 ) 29,844,240
$ (0.81 ) $ 6,087
29,349,396
$ 0.21
Assumed exercise of stock options —
—
—
—
12
—
Unvested restricted stock and stock units —
—
—
—
123,629
—
Diluted $ (24,171 ) 29,844,240
$ (0.81 ) $ 6,087
29,473,037
$ 0.21

Six Months Ended June 30, 2020 Six Months Ended June 30, 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 $ (325,071 ) 29,637,358
$ (10.97 ) $ 23,397
29,250,744
$ 0.80
Assumed exercise of stock options —
—
—
—
71
—
Unvested restricted stock and stock units —
—
—
—
172,348
—
Diluted $ (325,071 ) 29,637,358
$ (10.97 ) $ 23,397
29,423,163
$ 0.80

~~For the three and six months ended June 30, 2020, the computation of~~The diluted earnings (loss) per share ~~excluded~~calculation excludes all stock options, unvested restricted stock, unvested restricted stock units, and unvested performance stock units for the three months ended March 31, 2021 and 2020 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 (loss) per share for the periods in which the Company experienced a net loss were as follows:

2020 2019
Three months ended June 30, 984,453 —
Six months ended June 30, 568,635 —


	2021	2020
Three months ended March 31,	1,033,743	119,075

~~13. Segment Information~~

~~On August 30, 2019, the Company entered into a Membership Interest Purchase Agreement (the “Production Solutions~~ ~~Purchase Agreement”) with 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 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.~~

~~Prior to August 30, 2019, the Company reported its results in 2 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 June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Revenues

Completion Solutions $ 52,735
$ 215,871
$ 199,359
$ 425,003
Production Solutions —
21,646
—
42,219
$ 52,735
$ 237,517
$ 199,359
$ 467,222
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Completion Solutions $ 56,703
$ 166,022
$ 182,711
$ 327,461
Production Solutions —
18,533
—
35,684
$ 56,703
$ 184,555
$ 182,711
$ 363,145
Adjusted gross profit (loss)
Completion Solutions $ (3,968 ) $ 49,849
$ 16,648
$ 97,542
Production Solutions —
3,113
—
6,535
$ (3,968 ) $ 52,962
$ 16,648
$ 104,077

General and administrative expenses 11,284
21,818
27,679
41,757
Depreciation 8,449
13,846
16,990
27,376
Amortization of intangibles 4,116
4,628
8,285
9,316
Impairment of goodwill —
—
296,196
—
(Gain) loss on revaluation of contingent liabilities 910
(975 ) 484
(14,930 )
Gain on sale of property and equipment (1,790 ) (310 ) (2,365 ) (333 )
Income (loss) from operations $ (26,937 ) $ 13,955
$ (330,621 ) $ 40,891
Non-operating (income) expenses (2,580 ) 10,603
(3,239 ) 19,769
Income (loss) before income taxes (24,357 ) 3,352
(327,382 ) 21,122
Benefit for income taxes (186 ) (2,735 ) (2,311 ) (2,275 )
Net income (loss) $ (24,171 ) $ 6,087
$ (325,071 ) $ 23,397

~~Capital expenditures by segment for the three and six months ended June 30, 2020 and 2019, were as follows:~~

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Completion Solutions $ 3,577
$ 12,719
$ 5,000
$ 35,197
Production Solutions —
1,072
—
1,986
Corporate —
38
—
93
$ 3,577
$ 13,829
$ 5,000
$ 37,276

~~Total assets by segment as of June 30, 2020 and December 31, 2019 were as follows:~~

June 30, 2020 December 31, 2019
(in thousands)
Completion Solutions $ 365,325
$ 739,142
Corporate 103,534
111,753
$ 468,859
$ 850,895

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 ended ~~June 30, 2020,~~March 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 ended December 31, ~~2019.~~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, ~~“Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020,~~ and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

OVERVIEW

Company Description

Nine 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 in ~~both~~ the United States ~~and Canada~~(the “U.S.”), as well as within Canada 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.

~~Business Segments~~

~~The~~ ~~Completion Solutions~~ ~~segment provides services integral to the completion of unconventional wells through a full range of tools and methodologies. Through the~~ ~~Completion Solutions~~ ~~segment, we~~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~~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.

~~On August 30, 2019, we entered into a Membership Interest Purchase Agreement (“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 our wholly owned subsidiary, Beckman Holding Production Services, LLC, we sold our~~ ~~Production Solutions~~ ~~segment to Brigade.~~For additional information on this divestiture, see Note 13 – Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q. Prior to August 30, 2019, we reported our results in two segments, the ~~Completions Solutions~~ ~~segment and the~~ ~~Production Solutions~~ ~~segment.~~

~~The~~ ~~Production Solutions~~ segment provided a range of production enhancement and well workover services that were performed with a well servicing rig and ancillary equipment. Our well servicing business encompassed a full range of services performed with a mobile well servicing rig (or workover rig) and ancillary equipment throughout a well’s life cycle from completion to ultimate plug and abandonment. Our rigs and personnel installed and removed downhole equipment and eliminated obstructions in the well to facilitate the flow of oil and natural gas.

How We Generate Revenue and the Costs of Conducting Our Business

We generate our revenues by providing completion services to E&P customers across all major onshore basins in ~~both~~

the ~~United States and Canada~~U.S., as well as within Canada and abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically ~~will~~ enter into a Master 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.

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 on Invested 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.

•: 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) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) 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, (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 on Invested 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) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss or gain on the sale of subsidiaries, (vi) gain on extinguishment of debt, and (vii) the provision or 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.

~~Factors Affecting the Comparability of Our Results of Operations~~

Our future results of operations may not be comparable to our historical results of operations for the periods presented, and our historical results of operations among the periods presented may not be comparable to each other, primarily due to our divestiture of the ~~Production Solutions~~ ~~segment.~~

~~The historical results of operations for the three and six months ended June 30, 2020 included in this Quarterly Report on Form 10-Q do not include activity related to the~~ ~~Production Solutions~~ ~~segment whereas the historical results of operations for the three and six months ended June 30, 2019 do include activity related to the~~ ~~Production Solutions~~ ~~segment for the entire period.Furthermore, future results of operations after August 30, 2019 will not include activity related to the~~ ~~Production Solutions~~ ~~segment. For additional information on the divestiture of the~~ ~~Production Solutions~~ ~~segment, see Note 13 – Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q.~~

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 ~~the~~

current and expected oil and natural gas prices. ~~The~~In early 2020, 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 incaused an unprecedented decline in demand for ~~oil. In~~oil and the midst of the ongoing pandemic, the Organization of Petroleum Exporting Countries and other oil producing nations, including Russia (“OPEC+”), 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. While OPEC+ agreed in April 2020 to cut production, downward pressure on commodity prices has remained and could continue for the foreseeable future. During the first half of the year, the posted price for West Texas Intermediate ~~(“WTI”) oil decreased from a high of $63~~price averaged approximately $39 per barrel in ~~early January~~ 2020 as compared to ~~a one-day low of $(37)~~$57 per barrel in ~~late April 2020,~~2019. Uncertainty remains around the timing, pace and rate of a ~~level~~global demand recovery, which ~~had not been previously experienced, with physical markets showing signs of distress as spot prices have been negatively impacted by~~is dependent on, among other things, vaccine rollouts and efficacy, government-issued restrictions and the ~~lack of available storage capacity.~~

~~In response to lower oil prices, our customers have generally revised their capital budgets downward~~global economic recovery, and adjusted their operations accordingly, which has caused a significant decline in demand for our products and services. These reductions were most evident in the Permian Basin where total completions have declined by approximately 77% in June from the 2020 high in February. This overall decline in activity, coupled with downward pricing pressure, has led to a significant reduction in our revenue and profitability in the second quarter of 2020. We expect these trends to continue through at least the remainder of the year.

~~While~~ 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, we expect~~recovery.

In addition, the coronavirus pandemic and related effects to continue to have an adverse impact on commodity prices and our business generally. We have experienced inefficiencies and logistical challenges surrounding stay-at-home orders and remote work arrangements, travel restrictions, and an inability to commute to certain facilities and job sites, as we provide services and products to our customers. For additional information regarding risks relating to the coronavirus outbreak, see “Risk Factors” in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.

During the pandemic, we have maintained our commitment to the safety of our employees, customers, vendors, and community at large, and we have taken, and are continuing to take, a proactive approach to navigating the pandemic. To mitigate exposure and risk, we have implemented processes and procedures across our entire organization based on federal, regional, and local guidelines and mandates, and our Health, Safety & Environment and management teams are in frequent communication with our entire employee base to ensure they are receiving updated guidelines, processes, and procedures. In response to the pandemic, we have implemented the following changes, for example: at the field level, we are working closely with our customers and vendors to update standard operating procedures, based on social distancing, hand washing, and other recommended best practices set forthrecent decision by the Centers for Disease Control and Prevention; electronic assessments have been employed to check the health of employees prior to reporting to work, to ensure facilities are being properly cleaned and sanitized, and to check visitor health before arrival to a Nine location; internal case managers have been identified to handle all coronavirus-related cases, and all confirmed and potential cases are tracked through closure; many of our corporate and office employees are working virtually to avoid unnecessary risk and exposure; and we have significantly limited any work-related travel.~~We are actively monitoring updates from regulatory and government bodies and evolving our strategy accordingly in an effort to keep our workforce and communities healthy.~~

~~Other significant factors that are likely to affect commodity prices for the remainder~~Organization of the ~~year include the extent to which members of OPEC+~~Petroleum Exporting Countries and other oil ~~exporting~~producing nations, ~~continue~~including Russia, to ~~reduce~~start gradually boosting oil ~~export~~production, coupled with the new Biden administration’s potential energy restrictions and additional regulations, has created additional headwinds for U.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 ~~increase production; the effect of energy, monetary,~~production growth and ~~trade policies of the United States; the~~our customers have generally revised their capital budgets downward for 2021 versus 2020.

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 ~~economic~~activity increases thus far in 2021 are not able to offset the depressed pricing, leading to relatively anemic revenue growth ~~in the United States~~ and throughout the world, including the potential for macro weakness; geopolitical and economic developments in the United States and globally; the outcome of the United States presidential election and subsequent energy and Environmental Protection Agency policies; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows.profitability. Even with ~~price~~further improvements in oil ~~and natural gas, operator activity~~prices, our business in 2021 may not improve materially ~~increase, as operators remain focused~~or at all depending on ~~operating within their capital~~our customers’ activity plans and ~~uncertainty remains around supply and demand fundamentals.~~

~~In this challenging environment, we will nevertheless 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. These cost-cutting measures include salary reductions for key employees ranging from 10% to 15%, the suspension of the company match (which totaled $4.8 million in 2019) under our Nine Energy Service 401(k) Plan, and headcount reductions of 56% across the entire organization as of July 20, 2020 in comparison to December 31, 2019. In addition, we have revised our capital expenditure budget, excluding possible acquisitions, to between $10.0 million to $15.0 million for 2020 and deferred or eliminated certain capital projects, where necessary. During the first six months of 2020, we incurred approximately $5.0 million of capital expenditures compared to $37.3 million for the first six months of 2019.

Generally, operators have continued to improve operational efficiencies in completions design, increasing the complexity and difficulty, making oilfield service selection more important. This increase in high-intensity, high-efficiency completions of oil and gas wells further enhances the demand for our services. We compete for the most complex and technically demanding wells in which we specialize, which are characterized by extended laterals, increased stage spacing, multi-well pads, cluster spacing, and high proppant loads. These well characteristics lead to increased operating leverage and returns for us, as we are able to complete more jobs and stages with the same number of units and crews. Service providers for these projects are selected based on their technical expertise and ability to ~~execute safely and efficiently, rather than only price.~~implement price increases.

Results of Operations

Results for the Three Months Ended ~~June 30, 2020~~March 31, 2021 Compared to the Three Months Ended ~~June 30, 2019~~

Three Months Ended June 30,
2020 2019 Change
(in thousands)
Revenues

Completion Solutions $ 52,735
$ 215,871
$ (163,136 )
     Production Solutions ⁽¹⁾
—
21,646
(21,646 )
$ 52,735
$ 237,517
$ (184,782 )
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Completion Solutions $ 56,703
$ 166,022
$ (109,319 )
     Production Solutions ⁽¹⁾
—
18,533
(18,533 )
$ 56,703
$ 184,555
$ (127,852 )
Adjusted gross profit (loss)
Completion Solutions $ (3,968 ) $ 49,849
$ (53,817 )
     Production Solutions ⁽¹⁾
—
3,113
(3,113 )
$ (3,968 ) $ 52,962
$ (56,930 )

General and administrative expenses $ 11,284
$ 21,818
$ (10,534 )
Depreciation 8,449
13,846
(5,397 )
Amortization of intangibles 4,116
4,628
(512 )
Impairment of goodwill —
—
—
(Gain) loss on revaluation of contingent liabilities 910
(975 ) 1,885
Gain on sale of property and equipment (1,790 ) (310 ) (1,480 )
Income (loss) from operations (26,937 ) 13,955
(40,892 )
Non-operating (income) expenses (2,580 ) 10,603
(13,183 )
Income (loss) before income taxes (24,357 ) 3,352
(27,709 )
Benefit for income taxes (186 ) (2,735 ) 2,549
Net income (loss) $ (24,171 ) $ 6,087
$ (30,258 )

March 31, 2020

~~(1)We sold the~~ ~~Production Solutions~~ ~~segment to Brigade on August 30, 2019. For additional information on the~~ ~~Production Solutions~~ ~~divestiture, see Note 13 – Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q.~~


	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 ~~$184.8~~$80.0 million, or ~~78%~~55%, to ~~$52.7~~$66.6 million for the ~~second~~first quarter of 2020 which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes, in comparison to the second quarter of 2019. We depend, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America. In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the second quarter of 2020, the average closing price was $27.96 per barrel of WTI, and the average closing price of natural gas was $1.70 per MMBtu. During the second quarter of 2019, the average closing price of WTI was $59.88 per barrel, and the average closing price of natural gas was $2.57 per MMBtu.

~~Additional information with respect to revenues by historical reportable segment is discussed below.~~

~~Completion Solutions: Revenue decreased $163.1 million, or 76%, to $52.7 million for the second quarter of 2020.~~2021. The decrease was prevalent across all lines of service and was ~~a direct reflection of~~primarily related to reduced activity and pricing ~~pressures~~pressure caused by ~~reasons described above.~~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 ~~$54.5~~$32.3 million, or ~~85%~~72%, as total completed wireline stages decreased by ~~81%~~62%, in comparison to the ~~second~~first quarter of ~~2019. Tools~~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 ~~$41.0~~$12.2 million, or ~~73%~~38%, as completion tools stages decreased by ~~70%, and completion tools revenue by stage decreased by 12%~~19% in comparison to the ~~second~~first quarter of ~~2019. Cementing revenue (including pump downs) decreased by $36.3 million, or 64% as our total cement job count decreased 62% in comparison to the second quarter of 2019,~~2020, and coiled tubing revenue decreased by ~~$31.3~~$9.8 million, or ~~81%~~47%, as total days worked decreased by ~~70%~~34% in comparison to the ~~second~~first quarter of ~~2019.~~

~~Production Solutions: Revenue decreased $21.7 million, or 100%, for the second quarter of 2020 as the~~ ~~Production Solutions~~ ~~segment was sold on August 30, 2019.~~2020.

Cost of Revenues (Exclusive of Depreciation and Amortization)

Cost of revenues decreased ~~$127.9~~$63.7 million, or ~~69%~~51%, to ~~$56.7~~$62.3 million for the ~~second~~first quarter of 2020, which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic as well as international pricing and production disputes, in comparison to the second quarter of 2019.

~~Additional information with respect to cost of revenues by historical reportable segment is discussed below.~~

~~Completion Solutions: Cost of revenues decreased $109.3 million, or 66%, to $56.7 million for the second quarter of 2020.~~2021. The decrease ~~in comparison to the second quarter of 2019~~ was prevalent across all lines of service and was primarily related to reduced activity caused by poor market conditions, and, to a ~~direct reflection~~lesser extent, reduced activity caused by weather-related shutdowns, in comparison to the first quarter of ~~reasons described above.~~2020. More specifically, the decreasewas primarily related to a ~~$68.3~~$34.3 million decrease in materials installed and consumed while performing services, a ~~$33.3~~$23.2 million decrease in employee costs, and a ~~$10.8~~$6.2 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses. The overall decrease in cost of revenues was partially offset by a $1.7 million increase in bad debt expense between periods, coupled with a $1.4 million increase in severance and other cost of revenue type restructuring costs mainly associated with headcount reductions and cost cutting measures in response to the challenging market conditions across the industry.

~~Production Solutions: Cost of revenues decreased $18.6 million, or 100%, for the second quarter of 2020 as the~~ ~~Production Solutions~~ ~~segment was sold on August 30, 2019.~~

Adjusted Gross Profit (Loss)

~~Completion Solutions~~: Adjusted gross profit decreased ~~$53.8~~$16.3 million to ~~a $4.0~~$4.3 million ~~loss~~ for the ~~second~~first quarter of ~~2020~~2021 due to the factors described above under “Revenues” and “Cost of Revenues.”

~~Production Solutions: Adjusted gross profit decreased $3.1 million to $0.0 million for the second quarter of 2020 as a result of the factors described above under “Revenues” and “Cost of Revenues.”~~

General and Administrative Expenses

General and administrative expenses decreased ~~$10.5~~$6.2 million to ~~$11.3~~$10.2 million for the ~~second~~first quarter of ~~2020.~~2021. The decrease ~~in comparison to the second quarter of 2019~~ was primarily related to a ~~$6.8~~$4.1 million decrease in employee costs mainly due ~~mainly~~ to headcount and salary reductions ~~across~~in comparison to the ~~organization.~~first quarter of 2020. The overall decrease was also partly attributed to a ~~$2.4 million decrease in transaction and integration costs associated with the Magnum Acquisition and a $2.0~~$1.1 million decrease in other ~~costs~~

~~such as professional fees, marketing, and travel expenses, as well as expenses associated with the recently sold~~ ~~Production Solutions~~ ~~segment. The overall decrease in~~ general and administrative expenses ~~was partially offset by an increase~~such as marketing, travel and vehicle expense and a $1.0 million decrease in severance and other general and ~~administrative type~~administrative-type restructuring costs ~~of $0.7 million mainly associated with headcount reductions and cost cutting measures in response to the challenging market conditions across the industry.~~between periods.

Depreciation

Depreciation expense decreased ~~$5.4~~$0.8 million to ~~$8.4~~$7.8 million for the ~~second~~first quarter of ~~2020.~~2021. The decrease in comparison to the ~~second~~first quarter of ~~2019~~2020 was primarily related to a ~~$2.6 million~~ reduction in depreciation expense associated with our ~~coiled tubing business mainly due to the property~~cement and ~~equipment charge recorded in the fourth quarter of 2019, coupled with a $1.9 million reduction in depreciation expense in the~~ ~~Production Solutions~~ ~~segment, which was sold on August 30, 2019, and a $0.9 million reduction in depreciation expense in other lines of service within our~~ ~~Completion Solutions~~ ~~segment~~wireline businesses due to a decrease in capital expenditures, ~~between~~coupled with certain assets becoming fully depreciated, in recent periods.

Amortization of Intangibles

~~Amortization of intangibles decreased $0.5 million to~~We recorded $4.1 million in intangible amortization for the ~~second~~first quarter of 2021 and $4.2 million in the first quarter of 2020 primarily ~~due~~attributed to ~~a $0.3~~technology and customer relationships. The $0.1 million decrease ~~in amortization associated with~~is related to certain ~~non-compete agreements that were~~intangible assets being fully amortized in ~~2019, coupled with a $0.2~~the first quarter of 2021.

Impairment of Goodwill

In the first quarter of 2020, we recorded goodwill impairment charges of $296.2 million ~~decrease~~ in ~~intangible assets~~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 ~~coiled tubing business mainly due to~~stock price and the ~~intangible asset~~Level 2 fair value of our Senior Notes (as defined and described in “Liquidity and Capital Resources”). These goodwill impairment ~~charge recorded~~charges did not recur in the ~~fourth~~first quarter of ~~2019.~~2021.

(Gain) Loss on Revaluation of Contingent Liabilities

We recorded a ~~$0.9 million loss on the revaluation of contingent liabilities for the second quarter of 2020 compared to a $1.0~~$0.2 million gain on the revaluation of contingent liabilities for the ~~second~~first quarter of ~~2019.~~2021 compared to a $0.4 million gain on the revaluation of contingent liabilities for the first quarter of 2020. The ~~$1.9~~$0.2 million change was primarily related to a ~~$0.6~~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 108 – ~~Commitments and Contingencies~~Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) ~~for~~in the ~~second~~first quarter of 2020 ~~compared to a $1.3 million gain on~~that did not recur in the ~~revaluation of the Magnum Earnout for the second~~first quarter of ~~2019.~~2021. The Magnum Earnout was terminated in the second quarter of 2020.

Non-Operating (Income) Expenses

We recorded ~~$2.6~~$9.1 million in non-operating income for the ~~second~~first quarter of ~~2020~~2021 compared to ~~$10.6~~$0.7 million in non-operating ~~expenses~~income for the ~~second~~first quarter of ~~2019.~~2020. The ~~$13.2~~$8.4 million ~~change~~increase was primarily related to ~~an $11.6~~a $17.6 million gain on the extinguishment of debt related to the repurchase of Senior Notes ~~(as defined in “Liquidity and Capital Resources”)~~ in the ~~second~~first quarter of ~~2020 that did not occur~~2021 compared to a $10.1 million gain in the ~~second~~first quarter of ~~2019.~~2020. The ~~change~~overall increase is also partly attributed to a ~~$1.6~~$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 ~~a $0.2~~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 ~~second~~first quarter of ~~2020 compared to a $2.7 million income~~2020. The difference in tax ~~benefit for the second quarter of 2019. The $2.5 million decrease in the income tax benefit was~~position is primarily a result of the ~~valuation allowance movement~~discrete tax impact from the Coronavirus Aid, Relief, and Economic Security Act and the goodwill impairment charge recorded during the ~~second quarter of 2019 that did not recur during the second~~first quarter of 2020.

Adjusted EBITDA

Adjusted EBITDA decreased ~~$49.1~~$13.6 million to a $3.4 million loss ~~of $11.0 million~~ for the ~~second~~first quarter of ~~2020.~~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.

~~Results for the Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019~~

Six Months Ended June 30,
2020 2019 Change
(in thousands)
Revenues

Completion Solutions $ 199,359
$ 425,003
$ (225,644 )
     Production Solutions ⁽¹⁾
—
42,219
(42,219 )
$ 199,359
$ 467,222
$ (267,863 )
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Completion Solutions $ 182,711
$ 327,461
$ (144,750 )
     Production Solutions ⁽¹⁾
—
35,684
(35,684 )
$ 182,711
$ 363,145
$ (180,434 )
Adjusted gross profit
Completion Solutions $ 16,648
$ 97,542
$ (80,894 )
     Production Solutions ⁽¹⁾
—
6,535
(6,535 )
$ 16,648
$ 104,077
$ (87,429 )

General and administrative expenses $ 27,679
$ 41,757
$ (14,078 )
Depreciation 16,990
27,376
(10,386 )
Amortization of intangibles 8,285
9,316
(1,031 )
Impairment of goodwill 296,196
—
296,196
(Gain) loss on revaluation of contingent liabilities 484
(14,930 ) 15,414
Gain on sale of property and equipment (2,365 ) (333 ) (2,032 )
Income (loss) from operations (330,621 ) 40,891
(371,512 )
Non-operating (income) expenses (3,239 ) 19,769
(23,008 )
Income (loss) before income taxes (327,382 ) 21,122
(348,504 )
Benefit for income taxes (2,311 ) (2,275 ) (36 )
Net income (loss) $ (325,071 ) $ 23,397
$ (348,468 )

~~Revenues~~

Revenues decreased $267.9 million, or 57%, to $199.4 million for the first six months of 2020 which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes, in comparison to the first six months of 2019. We depend, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America. In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the first six months of 2020, the average closing price was $36.58 per barrel of WTI, and the average closing price of natural gas was $1.80 per MMBtu. During the first six months of 2019, the average closing price of WTI was $57.39 per barrel, and the average closing price of natural gas was $2.74 per MMBtu.

~~Additional information with respect to revenues by historical reportable segment is discussed below.~~

~~Completion Solutions: Revenue decreased $225.7 million, or 53%, to $199.4 million for the first six months of 2020.~~The decrease was prevalent across all lines of service and was a direct reflection of pricing pressures caused by reasons described above. More specifically, wireline revenue decreased $73.0 million, or 57%, as total completed wireline stages decreased by 50% in comparison to the first six months of 2019. Tools revenue decreased $62.5 million, or 57%, as completion tools stages decreased by 47%, and completion tools revenue by stage decreased by 21% in comparison to the first six months of 2019. Coiled tubing revenue decreased $49.2 million, or 64%, as total days worked decreased by 53% in comparison to the first six months of 2019, and cementing revenue (including pump downs) decreased by $41.0 million, or 37%, as our total cement job count decreased 35% in comparison to the first six months of 2019.

~~Production Solutions: Revenue decreased $42.2 million, or 100%, for the first six months of 2020 as the~~ ~~Production Solutions~~ ~~segment was sold on August 30, 2019.~~

~~Cost of Revenues (Exclusive of Depreciation and Amortization)~~

~~Cost of revenues decreased $180.4 million, or 50%, to $182.7 million for the first six months of 2020, which is~~primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes, in comparison to the first six months of 2019.

~~Additional information with respect to cost of revenues by historical reportable segment is discussed below~~.

~~Completion Solutions~~: Cost of revenues decreased $144.8 million, or 44%, to $182.7 million for the first six months of 2020. The decrease in comparison to the first six months of 2019 was prevalent across all lines of service and was a direct reflection of reasons described above. More specifically, the decrease was primarily related to an $88.6 million decrease in materials installed and consumed while performing services, a $43.2 million decrease in employee costs, a $14.0 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses, and a $2.7 million decrease in transaction and integration costs associated with the Magnum Acquisition. The overall decrease in cost of revenues was partially offset by a $2.3 million increase in severance and other cost of revenue type restructuring costs mainly associated with headcount reductions and cost cutting measures in response to the challenging market conditions across the industry, coupled with a $1.4 million increase in bad debt expense between periods.

~~Production Solutions: Cost of revenues decreased $35.7 million, or 100%, for the first six months of 2020 as the~~ ~~Production Solutions~~ ~~segment was sold on August 30, 2019.~~

~~Adjusted Gross Profit (Loss)~~

~~Completion Solutions: Adjusted gross profit decreased $80.9 million to $16.6 million for the first six months of 2020 due to the factors described above under “Revenues” and “Cost of Revenues.”~~

~~Production Solutions: Adjusted gross profit decreased $6.5 million to $0.0 million for the first six months of 2020 as a result of the factors described above under “Revenues” and “Cost of Revenues.”~~

~~General and Administrative Expenses~~

~~General and administrative expenses decreased $14.1 million to $27.7 million for the first six months of 2020.~~The decrease in comparison to the first six months of 2019 was primarily related to an $8.8 million decrease in employee costs due mainly to headcount reductions across the organization. The overall decrease was also partly attributed to a $4.6 million

decrease in transaction and integration costs associated with the Magnum Acquisition and a $2.8 million decrease in other costs such as professional fees, marketing, and travel expenses, as well as expenses associated with the recently sold ~~Production Solutions~~ segment. The overall decrease in general and administrative expenses was partially offset by an increase in severance and other general and administrative type restructuring costs of $2.1 million mainly associated with headcount reductions and cost cutting measures in response to the challenging market conditions across the industry.

~~Depreciation~~

~~Depreciation expense decreased $10.4 million to $17.0 million for the first six months of 2020. The decrease in comparison to the first six months of 2019 was primarily related to a~~$4.7 million reduction in depreciation expense associated with our coiled tubing business mainly due to the property and equipment charge recorded in the fourth quarter of 2019, coupled with a $3.8 million reduction in depreciation expense in the ~~Production Solutions~~ ~~segment, which was sold on August 30, 2019 and a $1.9 million reduction in depreciation expense in other lines of service within our~~ ~~Completion Solutions~~ ~~segment due to a decrease in capital expenditures between periods.~~

~~Amortization of Intangibles~~

Amortization of intangibles decreased $1.0 million to $8.3 million for the first six months of 2020, primarily due to a $0.6 million decrease in amortization associated with certain non-compete agreements that were fully amortized in 2019, coupled with a $0.4 million decrease in intangible assets associated with our coiled tubing business mainly due to the intangible asset impairment charge recorded in the fourth quarter of 2019.

~~Impairment of Goodwill~~

We recorded goodwill impairment charges of $296.2 million for the first six months of 2020 in our tools, cementing, and wireline reporting units due to 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. No goodwill impairment charges were recorded for the first six months of 2019.

~~(Gain) Loss on Revaluation of Contingent Liabilities~~

We recorded a $0.5 million loss on the revaluation of contingent liabilities for the first six months of 2020 compared to a $14.9 million gain on the revaluation of contingent liabilities for the first six months of 2019. The $15.4 million change was primarily related to an $0.8 million loss on the revaluation of the Magnum Earnout (as defined in Note 10 – Commitments and Contingencies included in Item 1 of Part I of this Quarterly Report on Form 10-Q) for the first six months of 2020 compared to a $15.4 million gain on the revaluation of the Magnum Earnout for the first six months of 2019. The Magnum Earnout was terminated in the second quarter of 2020. The change was partially offset by a $0.3 million gain on the revaluation of the earnout associated with our acquisition of Frac Technology AS (the “Frac Tech Earnout”) for the first six months of 2020 compared to a $0.5 million loss on the revaluation of the Frac Tech Earnout for the first six months of 2019.

~~Non-Operating (Income) Expenses~~

~~We recorded $3.2 million in non-operating income for the first six months of 2020 compared to $19.8 million in non-operating expenses for the first six months of 2019.~~The $23.0 million change was primarily related to a $21.7 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined in “Liquidity and Capital Resources”) in the first six months of 2020 that did not occur in the first six months of 2019. The change is also partly attributed to a $1.1 million reduction in interest expense between periods.

~~Provision (Benefit) for Income Taxes~~

We recorded a $2.3 million income tax benefit for both the first six months of 2020 and the first six months of 2019. The tax benefit for both periods was primarily driven by our valuation allowance movement.

~~Adjusted EBITDA~~

Adjusted EBITDA decreased $77.9 million to a loss of $0.7 million for the first six months of 2020. 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.

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, ~~amortization of intangibles,~~ and ~~provision (benefit) for income taxes.~~amortization.

We define Adjusted EBITDA as EBITDA further adjusted for (i) goodwill, intangible asset, and/or property and equipment ~~goodwill, and/or intangible asset~~ 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 in the 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 ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
	2020			2019			2020			2019				2021		2020
	(in thousands)						(in thousands)							(in thousands)
EBITDA reconciliation:													EBITDA reconciliation:
Net income (loss)	$	(24,171	)	$	6,087		$	(325,071	)	$	23,397
Net loss													Net loss	$	(8,246)	$	(300,900)
Interest expense	9,186			10,771			19,014			20,097			Interest expense	8,585		9,828
Interest income	(179		)	(168		)	(550		)	(328		)	Interest income	(13)		(371)
Provision (benefit) for income taxes													Provision (benefit) for income taxes	27		(2,125)
Depreciation	8,449			13,846			16,990			27,376			Depreciation	7,789		8,541
Amortization of intangibles	4,116			4,628			8,285			9,316			Amortization of intangibles	4,092		4,169
Benefit for income taxes	(186		)	(2,735		)	(2,311		)	(2,275		)
EBITDA	$	(2,785	)	$	32,429		$	(283,643	)	$	77,583		EBITDA	$	12,234	$	(280,858)

Adjusted EBITDA reconciliation:													Adjusted EBITDA reconciliation:
EBITDA	$	(2,785	)	$	32,429		$	(283,643	)	$	77,583		EBITDA	$	12,234	$	(280,858)
Impairment of goodwill	—			—			296,196			—			Impairment of goodwill	—		296,196
Transaction and integration costs	—			2,684			146			7,446			Transaction and integration costs	—		146
(Gain) loss on revaluation of contingent liabilities ⁽¹⁾	910			(975		)	484			(14,930		)
Gain on revaluation of contingent liabilities (1)													Gain on revaluation of contingent liabilities (1)	(190)		(426)
Gain on extinguishment of debt	(11,587		)	—			(21,703		)	—			Gain on extinguishment of debt	(17,618)		(10,116)
Restructuring charges	2,094			—			4,423			—			Restructuring charges	468		2,329
Stock-based compensation expense	2,105			4,114			5,697			7,267			Stock-based compensation expense	2,010		3,592
Gain on sale of property and equipment	(1,790		)	(310		)	(2,365		)	(333		)	Gain on sale of property and equipment	(273)		(575)
Legal fees and settlements ⁽²⁾	20			75			24			143			Legal fees and settlements (2)	12		4
Adjusted EBITDA	$	(11,033	)	$	38,017		$	(741	)	$	77,176		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 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 ~~goodwill, and/or intangible asset~~ impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss ~~or gain~~(gain) on the sale of subsidiaries, (vi) ~~gain~~loss (gain) on extinguishment of debt, and (vii) the provision ~~or benefit~~(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, 2020~~March 31, 2021 and ~~2019:~~2020:


														Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,							2021		2020
	2020			2019			2020			2019				(in thousands)
	(in thousands)						(in thousands)
Net income (loss)	$	(24,171	)	$	6,087		$	(325,071	)	$	23,397
Net loss													Net loss	$	(8,246)	$	(300,900)
Add back:													Add back:
Impairment of goodwill	—			—			296,196			—			Impairment of goodwill	—		296,196
Transaction and integration costs	—			2,684			146			7,446			Transaction and integration costs	—		146
Interest expense	9,186			10,771			19,014			20,097			Interest expense	8,585		9,828
Interest income	(179		)	(168		)	(550		)	(328		)	Interest income	(13)		(371)
Restructuring charges	2,094			—			4,423			—			Restructuring charges	468		2,329
Gain on extinguishment of debt	(11,587		)	—			(21,703		)	—			Gain on extinguishment of debt	(17,618)		(10,116)
Benefit for deferred income taxes	—			(2,541		)	(1,588		)	(3,019		)	Benefit for deferred income taxes	—		(1,588)
After-tax net operating profit (loss)	$	(24,657	)	$	16,833		$	(29,133	)	$	47,593
After-tax net operating loss													After-tax net operating loss	$	(16,824)	$	(4,476)
Total capital as of prior period-end:													Total capital as of prior period-end:
Total stockholders’ equity	$	91,851		$	615,467		$	389,877		$	594,823		Total stockholders’ equity	$	20,409	$	389,877
Total debt	386,171			415,000			400,000			435,000			Total debt	348,637		400,000
Less cash and cash equivalents	(90,116		)	(31,157		)	(92,989		)	(63,615		)	Less cash and cash equivalents	(68,864)		(92,989)
Total capital as of prior period-end	$	387,906		$	999,310		$	696,888		$	966,208		Total capital as of prior period-end	$	300,182	$	696,888
Total capital as of period-end:													Total capital as of period-end:
Total stockholders’ equity	$	69,950		$	624,309		$	69,950		$	624,309		Total stockholders’ equity	$	14,083	$	91,851
Total debt	372,584			400,000			372,584			400,000			Total debt	322,031		386,171
Less cash and cash equivalents	(88,678		)	(16,886		)	(88,678		)	(16,886		)	Less cash and cash equivalents	(52,982)		(90,116)
Total capital as of period-end	$	353,856		$	1,007,423		$	353,856		$	1,007,423		Total capital as of period-end	$	283,132	$	387,906
Average total capital	$	370,881		$	1,003,367		$	525,372		$	986,816		Average total capital	$	291,657	$	542,397
ROIC	(26.6)%			6.7%			(11.1)%			9.6%			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.

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, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended March 31,
	2021		2020
	(in thousands)
Calculation of gross profit (loss)
Revenues	$	66,626	$	146,624
Cost of revenues (exclusive of depreciation and amortization shown separately below)	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

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Calculation of gross profit (loss)
Revenues $ 52,735
$ 237,517
$ 199,359
$ 467,222
Cost of revenues (exclusive of depreciation and amortization shown separately below) 56,703
184,555
182,711
363,145
Depreciation (related to cost of revenues) 7,858
13,616
15,801
26,922
Amortization of intangibles 4,116
4,628
8,285
9,316
Gross profit (loss) $ (15,942 ) $ 34,718
$ (7,438 ) $ 67,839
Adjusted gross profit (loss) reconciliation:
Gross profit (loss) $ (15,942 ) $ 34,718
$ (7,438 ) $ 67,839
Depreciation (related to cost of revenues) 7,858
13,616
15,801
26,922
Amortization of intangibles 4,116
4,628
8,285
9,316
Adjusted gross profit (loss) $ (3,968 ) $ 52,962
$ 16,648
$ 104,077

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.~~borrowings and issuances of debt securities. Our principal uses of cash are to fund capital expenditures, ~~and acquisitions, to~~ service our outstanding debt, ~~and to~~ fund our working capital ~~requirements. In 2018, we issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”)~~requirements and, historically, fund acquisitions. We have also used cash to together with cash on hand and borrowings under the 2018 ABL Credit Facility (as defined and described below), fund the Magnum Acquisition as well as fully repay and terminate the term loan borrowings and the outstanding revolving credit commitments under our prior credit facility. For additional information regarding the Senior Notes, see “Liquidity and Capital Resources – Senior Notes” below. In the third quarter of 2019, we divested the ~~Production Solutions~~ ~~segment for approximately $17.1 million in cash. We plan to use such proceeds to fund a portion~~make open market repurchases of our ~~2020 capital expenditures~~debt and ~~support working capital requirements.~~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.

~~Although~~ In 2020, in response to rapidly deteriorating market conditions driven in large part by the coronavirus pandemic, we ~~do not budget for acquisitions, pursuing growth through acquisitions may~~implemented certain cost-cutting measures across the organization. We expect to continue to ~~be a significant part~~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 ~~business strategy. Our~~ ability to ~~make significant additional acquisitions for cash will require us~~successfully implement such measures, or whether such measures would be sufficient to ~~obtain additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.~~

~~We may also, from time to time, make open market debt repurchases (including~~mitigate a decline in our Senior Notes) when it is opportunistic to do to manage our debt maturity profile. We repurchased approximately $15.9 million and $29.7 million of Senior Notes at a repurchase price of approximately $3.9 million and $7.4 million in cash for the three and six months ended June 30, 2020, respectively. Deferred financing costs associated with these transactions were $0.3 million and $0.5 million for the three and six months ended June 30, 2020, respectively. As a result, for the three and six months ended June 30, 2020, we recorded a $11.6 million gain and a $21.7 million gain, respectively, on the extinguishment of debt.

financial performance.

At ~~June 30, 2020,~~March 31, 2021, we had ~~$88.7~~$53.0 million of cash and cash equivalents and ~~$44.8~~$45.8 million of availability under the 2018 ABL Credit Facility (as defined below), which resulted in a total liquidity position of ~~$133.5~~$98.8 million. ~~In response~~Although we believe our total liquidity position will continue to ~~rapidly deteriorating market conditions driven~~materially erode, due in large part byto interest payments due on the ~~coronavirus pandemic and international pricing and production disputes,~~Senior Notes, we ~~have implemented certain cost-cutting measures across the organization to continue to maintain our current liquidity position. Based~~believe that, based on our current forecasts, ~~we believe that,~~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. Furthermore, depending~~forecasts, which are materially dependent on our financial performance and the ever-changing market, we may implement additional cost-cutting measures, as necessary, to continue to meet our liquidity and capital resource needs for at least the next twelve months from the issuance date of our condensed consolidated financial statements. 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.market.

On October 25, 2018, we issued ~~the~~$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

activities. We were in compliance with the provisions of the Indenture at ~~June 30, 2020.~~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.

~~Unamortized deferred~~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 ~~the Senior Notes~~these transactions were ~~$6.4~~$0.3 million and ~~$7.9~~$0.2 million ~~at June 30,~~for the three months ended March 31, 2021 and 2020, respectively. As a result, for the three months ended March 31, 2021 and ~~December 31, 2019, respectively. These costs are direct deductions from~~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 ~~are being amortized through interest expense through~~may continue to further consider, transactions to restructure or refinance a portion of the ~~maturity date~~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 ~~using the effective interest method.~~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”), by and among us, 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 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 ~~June 30, 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 ~~June 30, 2020,~~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 ~~$44.8~~$45.8 million, net of an outstanding ~~letter~~letters of credit of $0.5 million.

Cash flows provided by (used in) operations by type of activity were as follows for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:

Operating Activities

Net cash ~~provided by~~used in operating activities was ~~$2.4~~$5.2 million ~~for~~in the first ~~six months~~quarter of ~~2020~~2021 compared to ~~$17.4~~$0.7 million in net cash provided by operating activities ~~for~~in the first ~~six months~~quarter of ~~2019.~~2020. The ~~$15.0~~$5.9 million decrease in net cash provided by operating activities was primarily a result of a ~~$72.3~~$8.4 million decrease in cash flow provided by operations, adjusted for any non-cash items, primarily due to a decrease in revenue ~~for~~in the first ~~six months~~quarter of ~~2020~~2021 compared to the first ~~six months~~quarter of ~~2019.~~2020. The overall decrease in net cash provided by operating activities was partially offset by an increase of ~~$57.3~~$2.5 million ~~in cash collections and other changes~~ in working capital which provided an increased source of cash flow ~~for~~in the first ~~six months~~quarter of ~~2020~~2021 in comparison to the first ~~six months~~quarter of ~~2019.~~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 ~~was $1.8 million for~~in the first ~~six months~~quarter of ~~2020 compared to $27.1 million in net cash used in investing activities for the first six months of 2019.~~2020. The ~~$28.9~~$2.1 million decrease in net cash ~~used in~~provided by investing activities was primarily related to a ~~decrease of $34.5~~$1.6 million increase in cash purchases of property and equipment ~~for~~in the first ~~six months~~quarter of ~~2020~~2021 in comparison to the first ~~six months~~quarter of ~~2019.~~2020. The overall decrease was also partly due to ~~an increase~~a decrease in proceeds from sales of property and equipment (including insurance) of ~~$2.0~~$0.5 million in the first ~~six months~~quarter of ~~2020~~2021 compared to the first six months of 2019. The overall decrease in net cash used in investing activities was partially offset by $7.6 million in proceeds from notes receivable payments which were received in the first six months of 2019 but did not recur in the first six monthsquarter of 2020.

Financing Activities

Net cash used in financing activities was ~~$8.3~~$9.1 million ~~for~~in the first ~~six months~~quarter of ~~2020~~2021 compared to ~~$37.2~~$3.9 million in net cash ~~flow~~ used in financing activities ~~for~~in the first ~~six months~~quarter of ~~2019.~~2020. The ~~$28.9~~$5.2 million ~~decrease~~increase in net cash used in financing activities was primarily related to ~~$45.0~~$4.9 million increase in payments on the 2018 ABL Credit Facility in the first six months of 2019 that did not recur in the first six months of 2020. The overall decrease was also partly due to a decrease of $1.5 million in cash used for the vesting of restricted stock in the first six months of 2020 compared to net cash used in the first six months of 2019. The overall decrease in net cash used in financing activities was partially offset by $10.0 million in proceeds from the 2018 ABL Credit Facility in the first six months of 2019 that did not recur in the first six months of 2020, coupled with $7.4 million of purchases of the Senior Notes and a $0.3 million increase in payments on the Magnum Promissory Notes in the first ~~six months~~quarter of ~~2020 that did not occur~~2021 in comparison to the first ~~six months~~quarter of ~~2019.~~2020.

Contractual Obligations

~~Our contractual obligations at June 30, 2020 did~~As a “smaller reporting company”, as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not ~~change materially, outside the normal course of business, from~~required to provide this information.

those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations” in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2019.

Off-Balance Sheet Arrangements

At ~~June 30, 2020,~~March 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 of ~~June 30, 2020,~~March 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting ~~company,”~~company”, as defined under the ~~Securities~~ Exchange Act, ~~of 1934, as amended (the “Exchange Act”),~~ we are not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Disclosure controls and procedures are controls and other procedures that are designed to ~~provide reasonable assurance~~ensure that information required to be disclosed by usan issuer in the reports ~~we file~~the issuer files or ~~submit~~submits under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time ~~periods~~period specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports filed or submitted under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~June 30, 2020.~~March 31, 2021. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ~~not~~ effective as of ~~June 30, 2020, due to the material weakness in internal control over financial reporting described below.~~March 31, 2021.

~~Material Weakness in Internal Control over Financial Reporting~~. As reported in Item 9A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2019, we did not design and maintain adequate controls to address the segregation of certain accounting duties related to journal entries, account reconciliations, and other accounting functions. Certain accounting personnel had the ability to prepare and post journal entries, as well as reconcile accounts, without an independent review by someone other than the preparer. Specifically, our internal controls were not designed or operating effectively to evidence that journal entries were appropriately recorded or were properly reviewed for validity, accuracy, and completeness. Immaterial misstatements were identified related to the inadequate segregation of accounting duties. This material weakness could result in misstatement of the aforementioned accounts and disclosures that would result in a material misstatement in our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

~~Remediation Efforts to Address the Material Weakness.~~ In response to the material weakness described above, our management has dedicated significant time and effort to improve our internal control over financial reporting and develop a detailed action plan to fully remediate the material weakness, as follows:

~~Previously Completed Remediation Actions~~

~~Actions Completed During the Current Quarter~~

As we continue to evaluate and work to improve our internal control over financial reporting, our management may determine to take additional measures to address the material weakness identified above or determine to modify the remediation steps described above. Until the remediation steps set forth above are fully developed, implemented, and operating for a sufficient amount of time to validate the remediation, the material weakness described above will continue to exist.

Changes in Internal Control over Financial Reporting.~~The actions described above in “Actions Completed During the Current Quarter” represent~~

There were no changes in our internal control over financial reporting during the quarterly period ended March 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting during the quarterly period ended June 30, 2020.~~

ITEM 1. LEGAL PROCEEDINGS

From time to time, we have 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, we believe 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 our business, operating results, or financial condition.

ITEM 1A. RISK FACTORS

~~Except as set forth in “Risk Factors” in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, there~~There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. For a detailed discussion of known material factors which could materially affect our business, financial condition, or future results, refer to “Risk Factors” in Item 1A of Part I ~~included~~ in our Annual Report on Form 10-K for the year ended December 31, ~~2019 and in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31,~~ 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. MINE ~~AND~~ SAFETY DISCLOSURES

ITEM 5. OTHER INFORMATION

The exhibits required to be filed or furnished by Item 601 of Regulation S-K are listed below.

** Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Nine Energy Service, Inc.

Date:

~~August~~May 6, ~~2020~~2021

By:

/s/ Ann G. Fox

Ann G. Fox

President, Chief Executive Officer and Director

(Principal Executive Officer)

Date:

~~August~~May 6, ~~2020~~2021

By:

/s/ Guy Sirkes

Guy Sirkes

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)


	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities
Net loss	$	(8,246)	$	(300,900)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation	7,789		8,541
Amortization of intangibles	4,092		4,169
Amortization of operating leases	2,041		0
Amortization of deferred financing costs	676		745
Provision (benefit) for doubtful accounts	34		(288)
Benefit for deferred income taxes	0		(1,588)
Provision for inventory obsolescence	906		271
Stock-based compensation expense	2,010		3,592
Impairment of goodwill	0		296,196
Gain on extinguishment of debt	(17,618)		(10,116)
Gain on sale of property and equipment	(273)		(575)
Gain on revaluation of contingent liabilities	(190)		(426)
Changes in operating assets and liabilities
Accounts receivable, net	(6,921)		4,458
Inventories, net	(1,247)		(2,651)
Prepaid expenses and other current assets	2,412		2,409
Accounts payable and accrued expenses	11,136		(3,213)
Income taxes receivable/payable	250		(150)
Other assets and liabilities	(2,094)		271
Net cash provided by (used in) operating activities	(5,243)		745
Cash flows from investing activities
Proceeds from sales of property and equipment	843		892
Proceeds from property and equipment casualty losses	0		428
Purchases of property and equipment	(2,428)		(785)
Net cash provided by (used in) investing activities	(1,585)		535
Cash flows from financing activities
Purchases of Senior Notes	(8,355)		(3,455)
Payments on Magnum Promissory Notes	(281)		0
Payments on finance leases	(264)		(240)
Payments of contingent liability	(30)		(98)
Vesting of restricted stock	(131)		(115)
Net cash used in financing activities	(9,061)		(3,908)
Impact of foreign currency exchange on cash	7		(245)
Net decrease in cash and cash equivalents	(15,882)		(2,873)
Cash and cash equivalents
Cash and cash equivalents beginning of period	68,864		92,989
Cash and cash equivalents end of period	$	52,982	$	90,116



	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities
Net income (loss)	$	(325,071	)	$	23,397
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation	16,990			27,376
Amortization of intangibles	8,285			9,316
Amortization of deferred financing costs	1,455			1,492
Provision for doubtful accounts	1,453			48
Benefit for deferred income taxes	(1,588		)	(3,019		)
Provision for inventory obsolescence	512			2,080
Stock-based compensation expense	5,697			7,267
Impairment of goodwill	296,196			—
Gain on extinguishment of debt	(21,703		)	—
Gain on sale of property and equipment	(2,365		)	(333		)
(Gain) loss on revaluation of contingent liabilities	484			(14,930		)
Changes in operating assets and liabilities, net of effects from acquisitions
Accounts receivable, net	56,043			(14,560		)
Inventories, net	959			1,566
Prepaid expenses and other current assets	(1,658		)	(1,952		)
Accounts payable and accrued expenses	(36,156		)	(20,061		)
Income taxes receivable/payable	30			40
Other assets and liabilities	2,796			(319		)
Net cash provided by operating activities	2,359			17,408
Cash flows from investing activities
Proceeds from sales of property and equipment	4,105			1,187
Proceeds from property and equipment casualty losses	555			1,480
Proceeds from notes receivable payments	—			7,626
Purchases of property and equipment	(2,892		)	(37,363		)
Net cash provided by (used in) investing activities	1,768			(27,070		)
Cash flows from financing activities
Purchases of Senior Notes	(7,414		)	—
Proceeds from 2018 ABL Credit Facility	—			10,000
Payments on 2018 ABL Credit Facility	—			(45,000		)
Payments on capital leases	(486		)	(429		)
Payments of contingent liability	(206		)	(138		)
Proceeds from exercise of stock options	—			15
Vesting of restricted stock	(157		)	(1,633		)
Net cash used in financing activities	(8,263		)	(37,185		)
Impact of foreign currency exchange on cash	(175		)	118
Net decrease in cash and cash equivalents	(4,311		)	(46,729		)
Cash and cash equivalents
Cash and cash equivalents beginning of year	92,989			63,615
Cash and cash equivalents end of period	$	88,678		$	16,886
Supplemental disclosures of cash flow information:
Cash paid for interest	$	17,834		$	19,386
Cash paid (refunded) for income taxes	$	(1,061	)	$	694
Capital expenditures in accounts payable and accrued expenses	$	2,118		$	3,079
Property and equipment obtained by capital lease	$	—		$	1,310
Receivable from property and equipment sale (including insurance)	$	4,958		$	—
Termination of contingent liability related to business acquisition	$	3,375		$	—


Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,240	$	748
Cash refunded for income taxes	$	224	$	577
Cash paid for operating leases	$	2,099	$	0
Right of use assets obtained in exchange for operating lease obligations	$	410	$	0
Non-cash investing and financing activities:
Capital expenditures in accounts payable and accrued expenses	$	198	$	648
Receivable from property and equipment sale (including insurance)	$	2,479	$	5,454


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity
	Shares	Amounts
Balance, December 31, 2020	31,557,809	$	316	$	768,429	$	(4,501)	$	(743,835)	$	20,409
Issuance of common stock under stock compensation plan, net of forfeitures	(2,488)	—		—		—		—		0
Stock-based compensation expense	—	—		2,010		—		—		2,010
Vesting of restricted stock	(37,339)	(1)		(130)		—		—		(131)
Other comprehensive income	—	—		—		41		—		41
Net loss	—	—		—		—		(8,246)		(8,246)
Balance, March 31, 2021	31,517,982	$	315	$	770,309	$	(4,460)	$	(752,081)	$	14,083



	Six Months Ended June 30, 2020				Six Months Ended June 30, 2019
	Completion Solutions		Total		Completion Solutions		Production Solutions⁽²⁾		Total
	(in thousands)				(in thousands)
Coiled tubing	$	28,297	$	28,297	$	77,540	$	—	$	77,540
Cement	69,068		69,068		110,000		—		110,000
Tools	47,285		47,285		109,782		—		109,782
Wireline	54,709		54,709		127,681		—		127,681
Well service	—		—		—		42,219		42,219
Total revenues	$	199,359	$	199,359	$	425,003	$	42,219	$	467,222



	June 30, 2020			December 31, 2019
	(in thousands)
Raw materials	$	41,129		$	38,823
Work in progress	91			—
Finished goods	23,126			27,555
Inventories	64,346			66,378
Reserve for obsolescence	(5,013		)	(5,433		)
Inventories, net	$	59,333		$	60,945



	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 June 30, 2020	$	408,732	$	(408,732	)	$	—



	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	(3,726		)	(200		)	(4,359		)	—		(8,285		)
Balance as of June 30, 2020	$	28,810		$	1,334		$	109,562		$	1,000	$	140,706
Weighted average amortization period	5.7			3.3			13.1			Indefinite



	June 30, 2020		December 31, 2019
	(in thousands)
Accrued compensation and benefits	$	4,340	$	7,009
Accrued interest	5,655		6,091
Accrued bonus	—		5,043
Accrued sales tax	244		820
Contingent liabilities	306		391
Other accrued expenses	5,511		5,376
Accrued expenses	$	16,056	$	24,730



Exhibit Number		Description
2.1*3.1		Second Amendment to Securities Purchase Agreement, dated June 30, 2020, by and among Warren Lynn Frazier, Garrett Lynn Frazier 2018 DG Trust, Derrick Chase Frazier 2018 DG Trust, and Frazier Family Foundation, Inc., as sellers, MOTI Holdco, LLC and Nine Energy Canada Inc., as buyers, and Nine Energy Services, Inc.

~~3.1~~	Third Amended and Restated Certificate of Incorporation of Nine Energy Service, Inc., dated January 23, 2018 (Incorporated by reference to Exhibit 3.1 of Nine Energy Service, Inc.’s Current Report on Form 8-K filed on January 23, 2018).

3.2		Fourth Amended and Restated Bylaws of Nine Energy Service, Inc., dated January 23, 2018 (Incorporated by reference to Exhibit 3.2 of Nine Energy Service, Inc.’s Current Report on Form 8-K filed on January 23, 2018).

10.131.1		~~Letter Agreement, effective as of April 1, 2020, between Nine Energy Service, LLC and Ann G. Fox.~~

10.2*	~~Letter Agreement, effective as of April 1, 2020, between Nine Energy Service, LLC and David Crombie.~~

10.3*	~~Letter Agreement, effective as of April 1, 2020, between Nine Energy Service, LLC and Guy Sirkes.~~

10.4*	~~Letter Agreement, effective as of April 1, 2020, between Nine Energy Service, LLC and Edward Bruce Morgan.~~

10.5*	~~Letter Agreement, effective as of April 1, 2020, between Nine Energy Service, LLC and Theodore R. Moore.~~

10.6*	~~Second Amendment to Amended and Restated Employee Agreement, effective May 29, 2020, by and among Nine Energy Service, LLC, Nine Energy Service, Inc., and Edward Bruce Morgan.~~

31.1*	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certifications by Chief Executive Officer pursuant to Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2**		Certifications by Chief Financial Officer pursuant to Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

101*	~~Interactive Data Files~~


**	* Filed herewith. ** Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K.