Supplemental disclosures of cash flow information:
Cash paid for interest
$
42,681
$
30,188
Cash paid for income taxes
$
487
$
560
Cash paid for operating leases
$
9,813
$
8,934
Right of use assets obtained in exchange for operating lease obligations
$
3,199
$
14,364
Supplemental schedule of non-cash investing and financing activities:
Right of use assets obtained in exchange for finance lease obligations
$
26
$
56
Capital expenditures in accounts payable and accrued expenses
$
1,229
$
3,507
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NINE ENERGY SERVICE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Company and Organization
Background
Nine Energy Service, Inc. (the “Company” or “Nine”), a Delaware corporation, is an oilfield services business that provides services integral to the completion of unconventional wells through a full range of tools and methodologies. The Company is headquartered in Houston, Texas.
The Company’s chief operating decision maker (the “CODM”), which is its Chief Executive Officer, and its board of directors allocate resources and assess performance based on financial information presented at a consolidated level. Accordingly, the Company determined that it operates as one reportable segment, known as Completion Solutions.
Risks and Uncertainties
As Nine is a spot-market business, the Company’s business and its pricing depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by current and expected oil and natural gas prices, which have been extremely volatile historically and in recent years. In addition, the Company’s earnings are affected by its ability to maintain current pricing levels, the impact of wage and labor inflation, labor shortages, and supply chain constraints. Due to the spot-market nature of its business, the Company’s revenue and profitability generally moves very similarly to rig, frac, and stage counts in U.S. rig count.
2. Basis of Presentation
Condensed Consolidated Financial Information
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2024, and its results of operations for the three and nine months ended September 30, 2024 and 2023, and cash flows for the nine months ended September 30, 2024 and 2023. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, in a manner consistent with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, unless otherwise disclosed herein, and should be read in conjunction therewith. The Condensed Consolidated Balance Sheet at December 31, 2023 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Operating results for interim periods are not necessarily indicative of the results that may be expected 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 the consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 analyzing long-lived assets for possible impairment, useful lives used in depreciation and amortization expense, recognition of provisions for contingencies, and stock-based compensation fair value. It is at least reasonably possible that the estimates used will change within the next year.
6
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications relate to presenting “Operating lease obligations” as a separate line item in the Company’s Condensed Consolidated Statements of Cash Flows.
3. New Accounting Standards
In December 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments require disclosure of specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold and further disaggregation of income taxes paid for individually significant jurisdictions. The ASU is effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact that this guidance will have on the disclosures within its condensed consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The new guidance requires disclosures of significant segment expenses provided to the CODM and included in reported measures of segment profit and loss. The guidance also requires interim and annual disclosures about a reportable segment’s profit or loss and assets. Additionally, the guidance requires disclosure of other segment items by reportable segment including a description of its composition. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, on a retrospective basis. The Company is currently evaluating the impact that this guidance will have on the disclosures within its condensed consolidated financial statements.
4. Revenues
Disaggregation of Revenues
Disaggregated revenues for the three and nine months ended September 30, 2024 and 2023 were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Cement
$
51,185
$
51,867
$
145,262
$
172,449
Coiled tubing
27,654
27,867
84,603
94,888
Wireline
27,905
28,324
83,743
88,917
Service revenues
$
106,744
$
108,058
$
313,608
$
356,254
Tools
$
31,413
$
32,559
$
99,070
$
109,199
Product revenues
$
31,413
$
32,559
$
99,070
$
109,199
Total revenues
$
138,157
$
140,617
$
412,678
$
465,453
The Company recognizes revenues from the sales of products at a point in time and revenues from the sales of services over time.
5. Inventories
Inventories, consisting primarily of finished goods and raw materials, are stated at the lower of cost or net realizable value. Cost is determined on an average cost basis. The Company reviews its inventory balances and writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The reserve for obsolescence was $5.4 million and $6.2 million at September 30, 2024 and December 31, 2023, respectively.
7
Inventories, net as of September 30, 2024 and December 31, 2023 were comprised of the following:
September 30, 2024
December 31, 2023
(in thousands)
Raw materials
$
32,098
$
31,235
Work in progress
757
542
Finished goods
28,334
28,867
Inventories
61,189
60,644
Reserve for obsolescence
(5,356)
(6,158)
Inventories, net
$
55,833
$
54,486
6. Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets as of September 30, 2024 and December 31, 2023 was as follows:
September 30, 2024
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Weighted Average Amortization Period
(in thousands, except weighted average amortization period information)
Customer relationships
$
63,270
$
(54,705)
$
8,565
3.1
Technology
125,110
(51,634)
73,476
9.0
Total
$
188,380
$
(106,339)
$
82,041
December 31, 2023
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Weighted Average Amortization Period
(in thousands, except weighted average amortization period information)
Customer relationships
$
63,270
$
(52,622)
$
10,648
3.8
Non-compete agreements
6,500
(6,500)
—
0.0
Technology
125,110
(45,329)
79,781
9.7
Total
$
194,880
$
(104,451)
$
90,429
Amortization of intangibles expense was $2.8 million and $8.4 million for the three and nine months ended September 30, 2024, respectively. Amortization of intangibles expense was $2.9 million and $8.7 million for the three and nine months ended September 30, 2023, respectively.
Future estimated amortization of intangibles (in thousands) is as follows:
Year Ending December 31,
Remainder of 2024
$
2,795
2025
11,183
2026
11,082
2027
10,315
2028
8,000
2029
8,000
Thereafter
30,666
Total
$
82,041
8
7. Accrued Expenses
Accrued expenses as of September 30, 2024 and December 31, 2023 consisted of the following:
September 30, 2024
December 31, 2023
(in thousands)
Accrued interest
$
7,366
$
17,216
Accrued compensation and benefits
7,693
9,784
Accrued bonus
1,036
1,169
Accrued legal fees and settlements
110
68
Other accrued expenses
6,865
7,934
Accrued expenses
$
23,070
$
36,171
8. Debt Obligations
The Company’s debt obligations as of September 30, 2024 and December 31, 2023 were as follows:
September 30, 2024
December 31, 2023
(in thousands)
2028 Notes
$
300,000
$
300,000
ABL Credit Facility
50,000
57,000
Short-term debt (1)
—
2,859
Total debt before deferred financing costs
$
350,000
$
359,859
Deferred financing costs
(31,531)
(36,480)
Total debt
$
318,469
$
323,379
Less: Current portion of long-term debt
—
(2,859)
Long-term debt
$
318,469
$
320,520
(1)The weighted average interest rate of short-term debt outstanding was 8.2% at December 31, 2023.
Units Offering and 2028 Notes
Units
On January 30, 2023, the Company completed its public offering of 300,000 units with an aggregate stated amount of $300.0 million (the “Units”). Each Unit consisted of $1,000 principal amount of the Company’s 13.000% Senior Secured Notes due 2028 (collectively, the “2028 Notes”) and five shares of common stock of the Company. The Company received proceeds of $279.8 million from the Units offering, after deducting underwriting discounts and commission, which was used to fund a portion of the redemption price of the 2023 Notes (as defined and described below). These proceeds were allocated to the 2028 Notes and the common stock based on their relative fair value at the time of issuance.
Each Unit separated into its constituent securities (the 2028 Notes and shares of common stock) automatically on October 27, 2023. A holder of Units could have elected to separate its Units into its constituent securities, in whole but not in part, on or after March 31, 2023. Prior to such date, the Units could not be separated at the option of the holder.
In the first quarter of 2023, the Company recorded approximately $41.7 million of deferred financing costs in connection with the Units offering. These costs are direct deductions from the carrying amount of the 2028 Notes and are being amortized through interest expense through the maturity date of the 2028 Notes using the effective interest method. The unamortized portion of these deferred financing costs was $31.5 million at September 30, 2024.
2028 Notes
On January 30, 2023, the Company and certain of its subsidiaries entered into an indenture, dated as of January 30, 2023 (the “2028 Notes Indenture”), with U.S. Bank Trust Company, National Association, as the trustee and as notes collateral agent, pursuant to which the 2028 Notes were issued. The 2028 Notes will mature on February 1, 2028 and bear interest at an annual rate of 13.000% payable in cash semi-annually in arrears on each of February 1 and August 1, commencing August 1, 2023. The 2028 Notes are senior secured obligations of the Company and are guaranteed on a senior secured basis by each of
9
the Company’s current domestic subsidiaries and will be so guaranteed by certain future subsidiaries, in each case, subject to agreed guaranty and security principles and certain exclusions.
Prior to February 1, 2026, the Company may, on any one or more occasions, redeem all or a part of the 2028 Notes at a redemption price equal to 100.0% of the principal amount of the 2028 Notes redeemed, plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, prior to February 1, 2026, the Company may, from time to time, redeem up to 35.0% of the aggregate principal amount of the 2028 Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings at a redemption price equal to 113.0% of the principal amount of the 2028 Notes redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, provided that at least 65.0% of the aggregate principal amount of the 2028 Notes originally issued under the 2028 Notes Indenture on January 30, 2023 remains outstanding immediately after such redemption and the redemption occurs within 180 days of the closing date of such equity offering. Also, prior to February 1, 2026, the Company may redeem during each 12-month period beginning on January 30, 2023, up to 10% of the aggregate principal amount of the 2028 Notes outstanding at a redemption price equal to 103.0% of the aggregate principal amount of the 2028 Notes being redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.
On and after February 1, 2026, the Company may redeem the 2028 Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount of the 2028 Notes to be redeemed) set forth below, plus accrued and unpaid interest, if any, to, but excluding the date of redemption, if redeemed during the periods indicated:
Redemption Price
February 1, 2026 to January 31, 2027
106.500
%
February 1, 2027 to October 31, 2027
103.250
%
November 1, 2027 and thereafter
100.000
%
On each May 15 and November 14, commencing November 14, 2023 (each, an “Excess Cash Flow Offer Date”), the Company is required to make an offer (an “Excess Cash Flow Offer”) to all holders of the 2028 Notes and, if required by the terms of any Pari Passu Notes Lien Indebtedness (as defined in the 2028 Notes Indenture), to any holders of any Pari Passu Notes Lien Indebtedness to purchase, prepay or redeem, together on a pro-rata basis, the maximum principal amount of the 2028 Notes and any such Pari Passu Notes Lien Indebtedness (plus all accrued interest (including additional interest, if any) on the 2028 Notes and any such Pari Passu Notes Lien Indebtedness and the amount of all fees and expenses, including premiums, incurred in connection therewith) that may be purchased, prepaid or redeemed using an amount of cash equal to the Excess Cash Flow Amount (as defined in the 2028 Notes Indenture and which is 75.0% of Excess Cash Flow (as defined in the 2028 Notes Indenture), as determined immediately prior to the Excess Cash Flow Offer Date), if any, subject to certain exceptions set forth in the 2028 Notes Indenture. The offer price in any such offer will be equal to 100% of the principal amount of the 2028 Notes and any such Pari Passu Notes Lien Indebtedness (or, in respect of any such Pari Passu Notes Lien Indebtedness, such lesser price, if any, as may be provided for by the terms of such Pari Passu Notes Lien Indebtedness), plus accrued and unpaid interest and additional interest, if any, to, but excluding, the date of purchase, prepayment or redemption, subject to the rights of holders of the 2028 Notes or any such Pari Passu Notes Lien Indebtedness on the relevant record date to receive interest due on an interest payment date that is on or prior to the date of purchase, prepayment or redemption, and will be payable in cash.
If the Company experiences certain changes of control, each holder of 2028 Notes may require the Company to repurchase all or a portion of its 2028 Notes for cash at a price equal to 101.0% of the principal amount of such 2028 Notes, plus any accrued but unpaid interest, if any, to, but excluding, the date of repurchase.
The 2028 Notes Indenture contains covenants that, among other things and subject to certain exceptions and qualifications, limit the Company’s ability and the ability of its restricted subsidiaries to (i) incur additional indebtedness and guarantee indebtedness; (ii) pay dividends or make other distributions of capital stock; (iii) prepay, redeem or repurchase certain debt; (iv) issue certain preferred stock or similar equity securities, (v) make loans and investments; (vi) sell assets; (vii) incur liens; (viii) enter into transactions with affiliates; (ix) enter into agreements restricting its subsidiaries’ ability to pay dividends; or (x) consolidate, merge, or sell all or substantially all of its assets. The Company was in compliance with all covenants contained in the 2028 Notes Indenture at September 30, 2024.
Upon an event of default, the trustee of the 2028 Notes or the holders of at least 25% in aggregate principal amount of then outstanding 2028 Notes may declare the 2028 Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to the Company, any significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding 2028 Notes to become due and payable.
10
2023 Notes
On October 25, 2018, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “2023 Notes”). The 2023 Notes were issued under an indenture, dated as of October 25, 2018, by and among the Company, certain subsidiaries of the Company and Wells Fargo, National Association, as trustee. The 2023 Notes bore interest at an annual rate of 8.750% payable on May 1 and November 1 of each year, commencing May 1, 2019. The 2023 Notes were senior unsecured obligations of the Company and were fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s domestic subsidiaries.
On February 1, 2023, with proceeds received from its public offering of Units and borrowings under its ABL Credit Facility (as defined and described below), the Company redeemed all of the outstanding 2023 Notes at a redemption price of 100.0% of outstanding principal amount thereof ($307.3 million), plus accrued and unpaid interest ($6.7 million). The Company also wrote off unamortized deferred financing costs in the amount of $1.2 million associated with the 2023 Notes in conjunction with the redemption.
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 permitted aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “ABL Credit Facility”). Pursuant to the 2018 ABL Credit Agreement, loans to the Company and its domestic related subsidiaries (the “U.S. Credit Parties”) under the ABL Credit Facility were base rate loans or London Interbank Offered Rate (“LIBOR”) loans; and loans 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 were Canadian Dollar Offered Rate (“CDOR”) loans or Canadian prime rate loans.
On January 17, 2023, the Company entered into the First Amendment to Credit Agreement (the “First ABL Facility Amendment”) with JP Morgan Chase Bank, N.A., as administrative agent, and the lender parties thereto, which became effective on January 30, 2023. Pursuant to the First ABL Facility Amendment, the maturity date of the ABL Credit Facility was extended from October 25, 2023 to January 29, 2027. In addition, the First ABL Facility Amendment, among other changes, revised the terms of the ABL Credit Facility as follows: (a) decreased the size of the ABL Credit Facility from $200.0 million to $150.0 million, subject to the borrowing base (the “Loan Limit”), (b) changed the interest rate benchmark from LIBOR to Term Secured Overnight Financing Rate with a 10 basis point spread adjustment and increased pricing from the existing range of 1.75% to 2.25% to a range of 2.00% to 2.50%, in each case depending on the Company’s leverage ratio, (c) modified the financial covenant, enhanced reporting and cash dominion triggers in the ABL Credit Facility from the existing minimum availability threshold of the greater of $18.75 million and 12.5% of the Loan Limit to a minimum availability threshold of (i) $12.5 million from January 30, 2023 until May 31, 2023 and (ii) the greater of $17.5 million and 12.5% of the Loan Limit thereafter, (d) decreased the Canadian tranche sub-limit from $25.0 million to $5.0 million, (e) decreased the letter of credit sub-limit from $50.0 million to $10.0 million and (f) made satisfaction of the Payment Conditions (as defined in the First ABL Facility Amendment) a condition to an Excess Cash Flow Offer in addition to a condition to voluntary payments of the 2028 Notes. The Payment Conditions in summary are (A) no default or event of default on a pro forma basis and (B) immediately after and at all times during the 30 days prior, on a pro forma basis, (1) (x) availability under the ABL Credit Facility shall not be less than the greater of 15% of the Loan Limit and $22.5 million and (y) the fixed charge coverage ratio shall be at least 1.00 to 1.00 or (2) availability under the ABL Credit Facility shall not be less than the greater of 20% of the Loan Limit and $30.0 million.
On June 7, 2024, the Company entered into the Second Amendment to Credit Agreement (together with the First ABL Facility Amendment, the “ABL Facility Amendments”) with JP Morgan Chase Bank, N.A., as administrative agent, and the lender parties thereto, to change the interest rate benchmark for borrowings denominated in Canadian dollars from CDOR to a rate based on the Canadian Overnight Repo Rate Average (CORRA), effective as of June 14, 2024.
The 2018 ABL Credit Agreement, as amended by the ABL Facility Amendments (the “ABL Credit Agreement”), contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions), and transactions with affiliates. In addition, the ABL Credit Agreement contains a financial covenant requiring a minimum fixed charge ratio of 1.00 to 1.00 that is tested quarterly when (a) the availability under the ABL Credit Facility drops below (i) at any time on or before May 31, 2023, $12.5 million and (ii) at any time thereafter, the greater of $17.5 million and 12.5% of the Loan Limit or (b) a default has occurred. This financial covenant applies until the
11
availability exceeds the applicable threshold for 30 consecutive days and no default is ongoing. The Company was in compliance with all covenants contained in the ABL Credit Agreement at September 30, 2024.
Pursuant to the ABL Credit Agreement, all of the obligations under the ABL Credit Facility are secured by security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties, excluding certain assets.
At September 30, 2024, the Company had $50.0 million outstanding borrowings under the ABL Credit Facility, and its availability under the ABL Credit Facility was approximately $27.6 million, net of outstanding letters of credit of $2.2 million. On October 10, 2024, the Company repaid $3.0 million of outstanding borrowings under the ABL Credit Facility.
Short-Term Debt
In the fourth quarter of 2023, the Company renewed certain insurance policies, and it financed the premium for its excess policy for $4.7 million. At September 30, 2024, there was no outstanding balance on this premium.
Fair Value of Debt Instruments
The estimated fair value of the Company’s debt obligations as of September 30, 2024 and December 31, 2023 was as follows:
September 30, 2024
December 31, 2023
(in thousands)
2028 Notes
$
238,500
$
264,750
ABL Credit Facility
$
50,000
$
57,000
Short-term debt
$
—
$
2,859
The fair value of the 2028 Notes, ABL Credit Facility, and short-term debt is classified as Level 2 in the fair value hierarchy. The fair value of the 2028 Notes is established based on observable inputs in less active markets. The fair value of the ABL Credit Facility and short-term debt approximates their carrying value.
9. Related Party Transactions
The Company leases office space, yard facilities, and equipment and purchases building maintenance and repair services from entities owned by David Crombie, an executive officer of the Company. Total lease expense and building maintenance and repair expense associated with these entities was $0.2 million and $0.8 million for the three and nine months ended September 30, 2024, respectively, and $0.3 million and $1.1 million for the three and nine months ended September 30, 2023, respectively. The Company also purchased $1.1 million and $2.6 million of products and services during the three and nine months ended September 30, 2024, respectively, and $0.8 million and $2.7 million for the three and nine months ended September 30, 2023, respectively, from an entity in which Mr. Crombie is a limited partner. There were outstanding payables due to entities associated with Mr. Crombie of $0.5 million and $0.2 million at September 30, 2024 and December 31, 2023, 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 $0.2 million and $1.1 million for the three and nine months ended September 30, 2024, respectively, and $0.5 million and $1.1 million for the three and nine months ended September 30, 2023, respectively.Total outstanding receivables due to the Company from NESR were $0.2 million and $0.4 million at September 30, 2024 and December 31, 2023, respectively.
Ann G. Fox, President and Chief Executive Officer and a director of the Company, is a director of Devon Energy Corporation (“Devon”). The Company generated revenue from Devon of $1.2 million and $4.2 million for the three and nine months ended September 30, 2024, respectively, and $1.0 million and $1.9 million for the three and nine months ended September 30, 2023, respectively. There were outstanding receivables due from Devon of $0.3 million and $0.7 million at September 30, 2024 and December 31, 2023, respectively.
12
10. Commitments and Contingencies
Litigation
The Company records accruals related to litigation and other legal proceedings when they are either known or considered probable and can be reasonably estimated. Legal proceedings are inherently unpredictable and subject to significant uncertainties, and significant judgment is required to determine both probability and the estimated amount. Some of these uncertainties include the stage of litigation, available facts, uncertainty as to the outcome of any legal proceedings or settlement discussions, and any novel legal issues presented. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending litigation. The estimated liability for legal matters was $0.1 million at both September 30, 2024 and December 31, 2023, and is included under the caption “Accrued expenses” in its Condensed Consolidated Balance Sheets.
From time to time, the Company has various claims, lawsuits, and administrative proceedings that are pending or threatened with respect to personal injury, workers’ compensation, contractual matters, and other matters. Although no assurance can be given with respect to the outcome of these claims, lawsuits, or proceedings or the effect such outcomes may have, the Company believes any ultimate liability resulting from the outcome of such claims, lawsuits, or administrative proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its business, operating results, or financial condition.
On April 18, 2020, the Company was named as a defendant in a patent infringement lawsuit regarding its Breakthru Casing Flotation Device. On January 18, 2022, the Company received an adverse judgment in this matter. The Company has posted a $1.9 million letter of credit representing the judgment amount and accrued royalties from the judgment date through September 30, 2024. While the Company believes it is probable that it will prevail on appeal resulting in no liability, in the event the Company does not prevail on appeal, the Company will be liable for the aggregate letter of credit posted through the date of appeal plus any future royalties awarded.
However, due to the inherent uncertainties of litigation, the Company is unable to determine the exact amount of any potential loss at this time, and thus, no accrual has been made for this matter in the Company’s condensed consolidated financial statements. The Company will continue to monitor the progress of this litigation and will adjust its accrual as necessary if and when additional information becomes available.
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 $1.6 million at both September 30, 2024 and December 31, 2023 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
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 (“Frac Tech”), a Norwegian private limited company 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 (the “Frac Tech Earnout”).
13
The Company’s contingent liability (Level 3) associated with the Frac Tech Earnout (in thousands) at September 30, 2024 and 2023 was as follows:
Balance at December 31, 2023
$
1,219
Revaluation adjustments
191
Payments
(466)
Balance at September 30, 2024
$
944
Balance at December 31, 2022
$
1,169
Revaluation adjustments
412
Payments
(251)
Balance at September 30, 2023
$
1,330
All contingent liabilities that relate to contingent consideration are reported at fair value, based on a Monte Carlo simulation model. Significant inputs used in the fair value measurement include forecasted sales of the plugs, terms of the agreement, a risk-adjusted discount factor (ranging from 4.2% to 5.0%), and a credit-adjusted rate (ranging from 10.3% to 10.4%). Contingent liabilities include $0.7 million and $0.8 million reported in “Accrued expenses” at September 30, 2024 and December 31, 2023, respectively, and $0.2 million and $0.4 million reported in “Other long-term liabilities” at September 30, 2024 and December 31, 2023, 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
The Company’s provision (benefit) for income taxes included in its Condensed Consolidated Statements of Income and Comprehensive Income (Loss) was as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands, except percentages)
Provision for income taxes
$
73
$
215
$
366
$
414
Effective tax rate
(0.7)
%
(1.6)
%
(1.1)
%
(1.9)
%
The Company’s provision for income taxes for the three and nine months ended September 30, 2024 was primarily attributed to state and non-U.S. income taxes. At September 30, 2024, the Company continued to record a full valuation allowance against its net deferred tax asset positions in the U.S. and Canada.
12. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of shares outstanding for the period, including the dilutive effect of equity awards.
Basic and diluted earnings (loss) per share of common stock was computed as follows:
Three Months Ended September 30, 2024
Three Months Ended September 30, 2023
Net Loss
Average Shares Outstanding
Loss Per Share
Net Loss
Average Shares Outstanding
Loss Per Share
(in thousands, except share and per share amounts)
Basic
$
(10,143)
39,209,798
$
(0.26)
$
(13,262)
33,659,386
$
(0.39)
Unvested restricted stock and stock units
—
—
—
—
—
—
Assumed exercise of stock options
—
—
—
—
—
—
Diluted
$
(10,143)
39,209,798
$
(0.26)
$
(13,262)
33,659,386
$
(0.39)
14
Nine Months Ended September 30, 2024
Nine Months Ended September 30, 2023
Net Loss
Average Shares Outstanding
Loss Per Share
Net Loss
Average Shares Outstanding
Loss Per Share
(in thousands, except share and per share amounts)
Basic
$
(32,239)
36,188,175
$
(0.89)
$
(21,908)
33,090,792
$
(0.66)
Unvested restricted stock and stock units
—
—
—
—
—
—
Assumed exercise of stock options
—
—
—
—
—
—
Diluted
$
(32,239)
36,188,175
$
(0.89)
$
(21,908)
33,090,792
$
(0.66)
The diluted earnings (loss) per share calculation excludes all stock options, unvested restricted stock, and unvested restricted stock units for the three and nine months ended September 30, 2024 and 2023 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:
2024
2023
Three months ended September 30,
151,898
806,722
Nine months ended September 30,
333,128
1,267,609
15
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 included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the consolidated financial statements and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “Critical Accounting Estimates,” included in our Annual Report on Form 10-K for the year ended December 31, 2023.
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 anticipated in these forward-looking statements because of various risks and uncertainties, including those described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2023.
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 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 U.S. and Canada as well as abroad to design and deploy downhole solutions and technology to prepare horizontal, multistage wells for production. We focus on providing our customers with cost-effective and comprehensive completion solutions designed to maximize their production levels and operating efficiencies. 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 and reduce emissions.
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 technologies used for completing the toe stage of a horizontal well and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug-and-perf operations, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns and isolation tools to a specified depth, and (iv) coiled tubing services, which perform wellbore intervention operations utilizing a continuous steel pipe that is transported to the wellsite wound on a large spool, providing a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well.
How We Generate Revenue and the Costs of Conducting Our Business
We generate our revenues by providing completion services to E&P customers across all major onshore basins in both the U.S. and Canada as well as abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically 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
16
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 EBITDA (which is 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) fees and expenses relating to our Units (as defined and described below) offering and other refinancing activities, (iv) loss or gain on revaluation of contingent liabilities, (v) loss or gain on extinguishment of debt, (vi) loss or gain on the sale of subsidiaries, (vii) restructuring charges, (viii) stock-based compensation and cash award expense, (ix) loss or gain on sale of property and equipment, and (x) 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.
•Adjusted Return on Invested Capital (“Adjusted ROIC”): We define Adjusted ROIC as adjusted after-tax net operating profit (loss), divided by average total capital. We define adjusted 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) fees and expenses relating to our Units offering and other refinancing activities, (iv) interest expense (income), (v) restructuring charges, (vi) loss (gain) on the sale of subsidiaries, (vii) loss (gain) on extinguishment of debt, and (viii) the provision (benefit) for deferred income taxes. We define total capital as book value of equity (deficit) plus the book value of debt less balance sheet cash and cash equivalents. We compute and use the average of the current and prior period-end total capital in determining Adjusted ROIC. Previously, in our filings with the Securities and Exchange Commission (the “SEC”), press releases, and other investor materials issued prior to December 31, 2023, we referred to (a) Adjusted ROIC as ROIC and (b) adjusted after-tax net operating profit (loss) as after-tax net operating profit (loss). We have made no changes to the manner in which these measures are calculated and have only revised the titles of these measures to more clearly identify them as non-GAAP measures. 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.TRIRis 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. Recordable workplace injuries include 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.
Industry Trends and Outlook
Our business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by current and expected oil and natural gas prices. In recent years, commodity prices have been extremely volatile and unpredictable, and this has continued in 2024 thus far. Natural gas prices have continued to be extremely depressed, with average natural gas prices of $2.11 for the first nine months of 2024, which is 17% lower than average prices in 2023, which had already declined by over 60% as compared to 2022. This sustained lower natural gas price environment has resulted in, and is expected to continue to result in, decreased activity and lower rig counts, especially in natural gas-levered basins like the Haynesville, where the rig count as of the end of the third quarter of 2024 has declined by approximately 54% since the end of 2022. It has also led to, and is expected to continue to lead to, pricing pressure from customers, impacting both revenue and margins. Towards the end of the third quarter of 2024, West Texas Intermediate oil prices began to decline, reaching as low as $66.73 on September 10, 2024, a decline of approximately 24% as compared to the highest price thus far in 2024 of $87.69 on April 5, 2024, due to OPEC and other oil exporting nations potentially bringing production back. The ongoing conflict in the
17
Middle East and demand from China, if weaker than expected, could have an impact on oil prices moving forward as well. Nonetheless, as discussed below, activity levels have remained relatively stable in oil-levered basins.
Due to the spot-market nature of our business, our revenue and profitability generally moves very similarly to rig, frac, and stage counts in U.S. rig count. Since the end of 2023, the U.S. rig count has declined by around 35 rigs, or approximately 6%. This is following a rig count decline of over 150 rigs from the end of 2022 to the end of 2023, creating an already depressed oil and gas market. For the full year 2024, most public operators with acreage in oil-levered basins, like the Permian, appear to be keeping activity and capital expenditure levels relatively flat year-over-year. However, we anticipate both private and public operators with acreage in gas-levered basins, like the Haynesville and in the Northeast, will maintain low activity levels until natural gas prices start to improve. In the third quarter of 2024, despite a declining rig count as compared to the second quarter of 2024, we outperformed market drivers, and our revenue and profitability for the third quarter of 2024 was improved as compared to the second quarter of 2024 due in large part to market share gains achieved by our cementing division, which we believe has been able to differentiate itself in the market with its advanced cementing slurries and excellent wellsite execution. Due to typical budget exhaustion, weather, and holiday slow-downs, as well as an expected decrease in international tool sales, we anticipate fourth quarter revenue and profitability to be lower as compared to the third quarter of 2024.
We remain cautiously optimistic on the outlook for the energy sector, and we believe there is potential upside for North American activity levels, especially if natural gas prices begin to recover. We believe that there could be a moderate increase in activity in 2025 over current levels if commodity prices are supportive and customer budgets are reset and believe that we are well-positioned to capitalize on an improving market, should it materialize.
Significant factors that are likely to affect commodity prices moving forward include geopolitical and economic developments in the U.S. and globally, including conflicts, instability, acts of war or terrorism in oil producing countries or regions, particularly the Middle East, Russia, South America and Africa; actions of the members of OPEC and other oil exporting nations that relate to or impact oil production or supply; weather conditions; the effect of energy, monetary, and trade policies of the U.S.; the pace of economic growth in the U.S. and throughout the world, including the potential for macro weakness; changes to energy regulations and policies, including those of the U.S. Environmental Protection Agency and other governmental bodies; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows. Furthermore, although as noted above, our customers’ activity and spending levels, and thus demand for our services and products, are strongly influenced by current and expected oil and natural gas prices, even with price improvements in oil and natural gas, operator activity may not materially increase, as operators remain focused on operating within their capital plans and uncertainty remains around supply and demand fundamentals.
18
Results of Operations
Results for the Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023
Three Months Ended September 30,
2024
2023
Change
Percentage Change
(in thousands, except percentage change)
Revenues
$
138,157
$
140,617
$
(2,460)
(2)
%
Cost of revenues (exclusive of depreciation and amortization shown separately below)
113,451
117,676
(4,225)
(4)
%
Adjusted gross profit
$
24,706
$
22,941
$
1,765
8
%
General and administrative expenses
$
12,366
$
13,060
$
(694)
(5)
%
Depreciation
6,226
7,285
(1,059)
(15)
%
Amortization of intangibles
2,796
2,895
(99)
(3)
%
Loss on revaluation of contingent liability
383
493
(110)
(22)
%
Loss on sale of property and equipment
484
21
463
2205
%
Income (loss) from operations
2,451
(813)
3,264
(401)
%
Non-operating expense
12,521
12,234
287
2
%
Loss before income taxes
(10,070)
(13,047)
2,977
(23)
%
Provision for income taxes
73
215
(142)
(66)
%
Net loss
$
(10,143)
$
(13,262)
$
3,119
(24)
%
Revenues
Revenues decreased $2.5 million, or 2%, to $138.2 million for the third quarter of 2024. The decrease in comparison to the third quarter of 2023 was prevalent across all lines of service and was primarily due to pricing decreases and current market conditions, as the average U.S. rig count for the third quarter of 2024 decreased 10%, in comparison to the third quarter of 2023. More specifically, tools revenue decreased $1.2 million, or 4%, driven by a decrease in completion tools stages of 5%, in comparison to the third quarter of 2023. In addition, although job count increased 15% in comparison to the third quarter of 2023, cementing revenue (including pump downs) decreased $0.7 million, or 1%, primarily due to pricing decreases related to changes in mix of services between periods. Further, coiled tubing revenue decreased $0.2 million, or 1%, due largely to pricing decreases, and wireline revenue decreased $0.4 million, or 2%, due largely to changes in mix of services, each in comparison to the third quarter of 2023.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues decreased $4.2 million, or 4%, to $113.5 million for the third quarter of 2024. The decrease in comparison to the third quarter of 2023 was primarily driven by a reduction in activity for certain lines of service in comparison to the third quarter of 2023 as described above under “Revenues.” More specifically, the decrease was primarily attributed to a $1.9 million decrease in materials installed and consumed while performing services, a $0.9 million decrease in employee-related costs, a $0.5 million decrease in travel, meals, and entertainment expenses, a $0.3 million decrease in repairs and maintenance expenses, and a $0.3 million decrease in cost of revenue type restructuring costs, each in comparison to the third quarter of 2023.
Adjusted Gross Profit (Loss)
Adjusted gross profit increased approximately $1.8 million to $24.7 million for the third quarter of 2024 due to the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses decreased $0.7 million to $12.4 million for the third quarter of 2024. The decrease was primarily related to a $0.4 million decrease in marketing expenses and a $0.3 million decrease in professional fees between periods.
19
Depreciation
Depreciation expense decreased $1.1 million to $6.2 million for the third quarter of 2024. The decrease in comparison to the third quarter of 2023 was primarily due to a decrease in capital expenditures across certain lines of service over the last twelve months.
Amortization of Intangibles
Amortization of intangibles, which is comprised of technology and customer relationships, decreased $0.1 million to $2.8 million for the third quarter of 2024. The decrease in comparison to the third quarter of 2023 was related to certain intangible assets being fully amortized over the last twelve months.
(Gain) Loss on Revaluation of Contingent Liability
We recorded a $0.4 million loss on revaluation of contingent liability for the third quarter of 2024 compared to a $0.5 million loss on revaluation of contingent liability for the third quarter of 2023. The losses for both periods were related to increases in the fair value of the earnout associated with our acquisition of Frac Technology AS.
(Gain) Loss on Sale of Property and Equipment
Loss on sale of property and equipment increased $0.5 million in comparison to the third quarter of 2023. The increase is primarily related to losses on equipment sales in the third quarter of 2024 that did not occur in the third quarter of 2023.
Non-Operating (Income) Expenses
Non-operating expenses increased $0.3 million to $12.5 million for the third quarter of 2024. The increase in comparison to the third quarter of 2023 was attributed to a decrease in interest income earned on cash in the third quarter of 2024, as our average cash for the period decreased in comparison to the third quarter of 2023.
Provision (Benefit) for Income Taxes
We recorded an income tax provision of $0.1 million for the third quarter of 2024 compared to an income tax provision of $0.2 million for the third quarter of 2023. The difference between the periods was primarily attributed to our income tax position in state and foreign tax jurisdictions.
Net Income (Loss) and Adjusted EBITDA
Net loss decreased $3.1 million, or 24%, to $10.1 million for the third quarter of 2024, and Adjusted EBITDA increased $2.7 million, or 23%, to $14.3 million for the third quarter of 2024. The changes were primarily due to the fluctuations in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further information regarding Adjusted EBITDA.
20
Results for the Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023
Nine Months Ended September 30,
2024
2023
Change
Percentage Change
(in thousands, except percentage change)
Revenues
$
412,678
$
465,453
$
(52,775)
(11)
%
Cost of revenues (exclusive of depreciation and amortization shown separately below)
341,505
372,236
(30,731)
(8)
%
Adjusted gross profit
$
71,173
$
93,217
$
(22,044)
(24)
%
General and administrative expenses
$
37,113
$
47,007
$
(9,894)
(21)
%
Depreciation
19,562
22,138
(2,576)
(12)
%
Amortization of intangibles
8,388
8,687
(299)
(3)
%
Loss on revaluation of contingent liability
191
412
(221)
(54)
%
(Gain) loss on sale of property and equipment
485
(407)
892
(219)
%
Income from operations
5,434
15,380
(9,946)
(65)
%
Non-operating expense
37,307
36,874
433
1
%
Loss before income taxes
(31,873)
(21,494)
(10,379)
48
%
Provision for income taxes
366
414
(48)
(12)
%
Net loss
$
(32,239)
$
(21,908)
$
(10,331)
47
%
Revenues
Revenues decreased $52.8 million, or 11%, to $412.7 million for the first nine months of 2024. The decrease in comparison to the first nine months of 2023 was prevalent across all lines of service and was primarily due to pricing decreases and current market conditions, as the average U.S. rig count for the first nine months of 2024 decreased 15%, in comparison to the first nine months of 2023.More specifically, cementing revenue (including pump downs) decreased $27.2 million, or 16%, primarily due to pricing decreases coupled with a job count decrease of 1%, each in comparison to the first nine months of 2023.Coiled tubing revenue also decreased $10.3 million, or 11%, primarily due to pricing decreases as well as lower utilization as total days worked decreased 1%, each in comparison to the first nine months of 2023. In addition, tools revenue decreased $10.1 million, or 9%, driven by a decrease in completion tools stages of 13%, in comparison to the first nine months of 2023. Further, although total wireline stages increased 11%, in comparison to the first nine months of 2023, wireline revenue also decreased $5.2 million, or 6%, due largely to pricing decreases between periods.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues decreased $30.7 million, or 8%, to $341.5 million for the first nine months of 2024. The decrease in comparison to the first nine months of 2023 was primarily driven by a reduction in activity for certain lines of service in comparison to the first nine months of 2023 as described above under “Revenues.” More specifically, the decrease was attributed to a $15.6 million decrease in materials installed and consumed while performing services, a $9.4 million decrease in employee costs, a $1.6 million decrease in vehicle expense, a $1.3 million decrease in travel, meals, and entertainment expenses, a $1.1 million decrease in repairs and maintenance expenses, a $1.0 million decrease in general and administrative type restructuring costs, and a $0.7 million decrease in other costs, each in comparison to the first nine months of 2023.
Adjusted Gross Profit (Loss)
Adjusted gross profit decreased $22.0 million to $71.2 million for the first nine months of 2024 due to the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses decreased $9.9 million to $37.1 million for the first nine months of 2024. The decrease in comparison to the first nine months of 2023 was primarily related to $6.4 million in costs associated with the Units offering in the first nine months of 2023 that did not reoccur in the first nine months of 2024. The decrease is also partially attributed to a $2.4 million decrease in employee costs, a $0.6 million decrease in marketing expenses, and a $0.5 million
21
decrease in professional fees, each in comparison to the first nine months of 2023.
Depreciation
Depreciation expense decreased $2.6 million to $19.6 million for the first nine months of 2024. The decrease in comparison to the first nine months of 2023 was primarily due to a decrease in capital expenditures across certain lines of service over the last twelve months.
Amortization of Intangibles
Amortization of intangibles, which is comprised of technology and customer relationships, decreased $0.3 million to $8.4 million for the first nine months of 2024. The decrease in comparison to the first nine months of 2023 was related to certain intangible assets being fully amortized over the last twelve months.
(Gain) Loss on Revaluation of Contingent Liability
We recorded a $0.2 million loss on revaluation of contingent liability for the first nine months of 2024 and a $0.4 million loss on revaluation of contingent liability for the first nine months of 2023. The losses for both periods were related to increases in the fair value of the earnout associated with our acquisition of Frac Technology AS.
(Gain) Loss on Sale of Property and Equipment
We recorded a $0.5 million loss on sale of property and equipment for the first nine months of 2024 and a $0.4 million gain on sale of property and equipment for the first nine months of 2023. The change was primarily attributed to gains on equipment sales in the first nine months of 2023 that did not reoccur in the first nine months in 2024, as well as losses on equipment sales in the first nine months of 2024 that did not occur in the first nine months of 2023.
Non-Operating (Income) Expenses
Non-operating expenses increased $0.4 million to $37.3 million for the first nine months of 2024. The increase in comparison to the first nine months of 2023 was primarily attributed to a $0.3 million decrease in interest income earned on cash in the first nine months of 2024, as our average cash for the period decreased in comparison to the first nine months of 2023. The increase was also partially attributed to an increase in interest expense on the 2028 Notes (as defined and described below) in the first nine months of 2024 compared to interest expense on the 2023 Notes (as defined and described below) and the 2028 Notes in the first nine months of 2023.
Provision (Benefit) for Income Taxes
We recorded an income tax provision of $0.4 million for both the first nine months of 2024 and the first nine months of 2023. The provision for both periods was primarily attributed to our income tax position in state and foreign tax jurisdictions.
Net Income (Loss) and Adjusted EBITDA
Net loss increased $10.3 million, or 47%, to $32.2 million for the first nine months of 2024, and Adjusted EBITDA decreased $19.3 million, or 33%, to $39.1 million for the first nine months of 2024. The changes were primarily due to the fluctuations in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further information regarding Adjusted EBITDA.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders, and rating agencies. We define Adjusted EBITDA as EBITDA (which is net income (loss) before interest, taxes, depreciation, and amortization) further adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) fees and expenses relating to our Units offering and other refinancing activities, (iv) loss or gain on revaluation of contingent liabilities, (v) loss or gain on extinguishment of debt, (vi) loss or gain on the sale of subsidiaries, (vii) restructuring charges, (viii) stock-based compensation and cash award expense, (ix) loss or gain on sale of property and equipment, and (x) 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.
22
Management believes Adjusted EBITDA provides useful information to us and our investors regarding our financial condition and results of operations because it allows us and them 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 and helps identify underlying trends in our operations that could otherwise be distorted by the effect of impairments, acquisitions and dispositions, and costs that are not reflective of the ongoing performance of our business. We exclude the items listed above from net income (loss) in arriving at this measure because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, and the method by which the assets were acquired.
Adjusted EBITDA 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 Adjusted EBITDA 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 Adjusted EBITDA. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
The following table presents a reconciliation of the non-GAAP financial measure of Adjusted EBITDA to the GAAP financial measure of net income (loss) for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Net loss
$
(10,143)
$
(13,262)
$
(32,239)
$
(21,908)
Interest expense
12,879
12,858
38,453
38,306
Interest income
(196)
(462)
(660)
(946)
Provision for income taxes
73
215
366
414
Depreciation
6,226
7,285
19,562
22,138
Amortization of intangibles
2,796
2,895
8,388
8,687
EBITDA
$
11,635
$
9,529
$
33,870
$
46,691
Loss on revaluation of contingent liability (1)
383
493
191
412
Certain refinancing costs (2)
—
—
—
6,396
Restructuring charges
177
315
519
1,204
Stock-based compensation expense
837
580
2,225
1,591
Cash award expense
770
628
1,765
2,378
(Gain) loss on sale of property and equipment
484
21
485
(407)
Legal fees and settlements (3)
—
29
—
53
Adjusted EBITDA
$
14,286
$
11,595
$
39,055
$
58,318
(1)Amounts relate to the revaluation of a contingent liability associated with a 2018 acquisition. 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 expenses relating to our Units offering and other refinancing activities, including cash incentive compensation to employees following the successful completion of the Units offering, that were not capitalized.
(3)Amounts represent fees, legal settlements, and/or accruals associated with legal proceedings brought pursuant to the Fair Labor Standards Act and/or similar state laws.
Adjusted Return on Invested Capital
Adjusted ROIC is a non-GAAP financial measure. We define Adjusted ROIC as adjusted after-tax net operating profit (loss), divided by average total capital. We define adjusted after-tax net operating profit (loss), which is a non-GAAP financial measure, 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) fees and expenses relating to our Units offering and other refinancing activities, (iv) interest expense (income), (v) restructuring charges, (vi) loss (gain) on the sale of subsidiaries, (vii) loss (gain) on extinguishment of debt, and (viii) the provision (benefit) for deferred income taxes. We define total capital as
23
book value of equity (deficit) plus the book value of debt less balance sheet cash and cash equivalents. We compute and use the average of the current and prior period-end total capital in determining Adjusted ROIC. Previously, in our SEC filings, press releases, and other investor materials issued prior to December 31, 2023, we referred to (a) Adjusted ROIC as ROIC and (b) adjusted after-tax net operating profit (loss) as after-tax net operating profit (loss). We have made no changes to the manner in which these measures are calculated and have only revised the titles of these measures to more clearly identify them as non-GAAP measures.
Management believes Adjusted ROIC provides useful information to us and our investors regarding our financial condition and results of operations 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 Adjusted ROIC to assist them in capital resource allocation decisions and in evaluating business performance. Although Adjusted ROIC is commonly used as a measure of capital efficiency, definitions of Adjusted ROIC differ, and our computation of Adjusted ROIC may not be comparable to other similarly titled measures of other companies.
The following table provides our calculation of Adjusted ROIC for the three and nine months ended September 30, 2024 and 2023. The following table also presents ROIC (defined as net income (loss), divided by average total capital) and a reconciliation of the non-GAAP financial measure of adjusted after-tax net operating profit (loss) to the most directly comparable GAAP measure of net income (loss), in each case for the three and nine months ended September 30, 2024 and 2023.
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Net loss
$
(10,143)
$
(13,262)
$
(32,239)
$
(21,908)
Add back:
Interest expense
12,879
12,858
38,453
38,306
Interest income
(196)
(462)
(660)
(946)
Certain refinancing costs (1)
—
—
—
6,396
Restructuring charges
177
315
519
1,204
Adjusted after-tax net operating income (loss)
$
2,717
$
(551)
$
6,073
$
23,052
Total capital as of prior period-end:
Total stockholders’ deficit
$
(49,715)
$
(13,412)
$
(35,630)
$
(23,507)
Total debt
352,730
372,329
359,859
341,606
Less cash and cash equivalents
(26,027)
(41,122)
(30,840)
(17,445)
Total capital as of prior period-end
$
276,988
$
317,795
$
293,389
$
300,654
Total capital as of period-end:
Total stockholders’ deficit
$
(57,561)
$
(26,116)
$
(57,561)
$
(26,116)
Total debt
350,000
357,000
350,000
357,000
Less cash and cash equivalents
(15,652)
(12,159)
(15,652)
(12,159)
Total capital as of period-end
$
276,787
$
318,725
$
276,787
$
318,725
Average total capital
$
276,888
$
318,260
$
285,088
$
309,690
ROIC
(14.7)%
(16.7)%
(15.1)%
(9.4)%
Adjusted ROIC
3.9%
(0.7)%
2.8%
9.9%
(1) Amounts represent fees and expenses relating to our Units offering and other refinancing activities, including cash incentive compensation to employees following the successful completion of the Units offering, that were not capitalized.
Adjusted Gross Profit (Loss)
GAAP defines gross profit (loss) as revenues less cost of revenues and includes depreciation and amortization in costs of revenues. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit (loss) because we do not include the impact of depreciation and amortization, which represent non-cash expenses.
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Management believes adjusted gross profit (loss) provides useful information to us and our investors regarding our financial condition and results of operation and helps management evaluate our operating performance by eliminating the impact of depreciation and amortization, which we do not consider 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 nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Calculation of gross profit:
Revenues
$
138,157
$
140,617
$
412,678
$
465,453
Cost of revenues (exclusive of depreciation and amortization shown separately below)
113,451
117,676
341,505
372,236
Depreciation (related to cost of revenues)
5,791
6,775
18,193
20,588
Amortization of intangibles
2,796
2,895
8,388
8,687
Gross profit
$
16,119
$
13,271
$
44,592
$
63,942
Adjusted gross profit reconciliation:
Gross profit
$
16,119
$
13,271
$
44,592
$
63,942
Depreciation (related to cost of revenues)
5,791
6,775
18,193
20,588
Amortization of intangibles
2,796
2,895
8,388
8,687
Adjusted gross profit
$
24,706
$
22,941
$
71,173
$
93,217
Liquidity and Capital Resources
Sources and Uses of Liquidity
Historically, we have met our liquidity needs principally from cash on hand, cash flows from operations and, if needed, external borrowings and issuances of debt and equity securities. Our principal uses of cash are to fund capital expenditures, service our outstanding debt, and fund our working capital requirements. Due to our high level of variable costs and the asset-light make-up of our business, we have historically been able to quickly implement cost-cutting measures and will continue to adapt as the market dictates. For example, earlier this year, we implemented certain cost reduction and supply chain initiatives. These ongoing initiatives have helped reduce some of our largest material costs, and starting at the end of the second quarter of 2024, we began to see positive impacts on our profitability as a result of such efforts. We have also used cash to make open market repurchases of our debt and may, from time to time, continue to make such repurchases when it is opportunistic to do so to manage our debt maturity profile.
For 2024, our planned capital expenditure budget, excluding possible acquisitions, is expected to be between $10.0 million and $15.0 million. The nature of our capital expenditures is comprised of a base level of investment required to support our current operations and amounts related to growth and company initiatives. Capital expenditures for growth and company initiatives are discretionary. We continually evaluate our capital expenditures, and the amount we ultimately spend will depend on a number of factors, including expected industry activity levels and company initiatives. For example, our planned capital expenditure budget, excluding possible acquisitions, for 2024 was initially expected to be between $15.0 million and $25.0 million and was subsequently reduced to be between $10.0 million and $15.0 million in conjunction with market declines and to preserve liquidity until the market returns to more normalized levels. Although we do not budget for acquisitions, pursuing growth through acquisitions may continue to be a part of our business strategy. Our ability to make significant additional acquisitions for cash will require us to obtain additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.
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, which we cannot guarantee.
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At September 30, 2024, we had $15.7 million of cash and cash equivalents and $27.6 million of availability under the ABL Credit Facility (as defined and described below), which resulted in a total liquidity position of $43.3 million. Our liquidity position will continue to be impacted by the semi-annual interest payments ($19.5 million based on amounts outstanding as of September 30, 2024) to the holders of the 2028 Notes, which began on August 1, 2023. We believe that, based on our current forecasts, our cash on hand, together with cash flows from operations and borrowings under the ABL Credit Facility, should be sufficient to fund our capital requirements for at least the next twelve months from the issuance date of our condensed consolidated financial statements. However, we can make no assurance regarding our ability to achieve our forecasts, which are materially dependent on our financial performance and the ever-changing market.
ATM Program
On November 6, 2023, we entered into an equity distribution agreement (the “Equity Distribution Agreement”) with Piper Sandler & Co. (the “Agent”), pursuant to which we may, from time to time, sell shares of our common stock having an aggregate offering price of up to $30.0 million through the Agent acting as our sales agent. The Agent will receive a commission equal to 3.0% of the gross sale price of any shares sold under the Equity Distribution Agreement.
Under the Equity Distribution Agreement, we will set the parameters for the sale of the shares thereunder, including the number of shares to be sold, the time period during which sales are requested to be made and any price below which sales may not be made. During the three months ended September 30, 2024, 1,181,090 shares were sold under the Equity Distribution Agreement, which generated net proceeds to us of $1.4 million after deducting commissions of $0.1 million. During the nine months ended September 30, 2024, 5,380,164 shares were sold under the Equity Distribution Agreement, which generated net proceeds to us of $8.2 million after deducting commissions of $0.3 million.
Units Offering and 2028 Notes
On January 30, 2023, we completed our public offering of 300,000 units with an aggregate stated amount of $300.0 million (the “Units”). Each Unit consisted of $1,000 principal amount of our 13.000% Senior Secured Notes due 2028 (collectively, the “2028 Notes”) and five shares of our common stock. We received proceeds of $279.8 million from the Units offering, after deducting underwriting discounts and commission, which, together with borrowings under the ABL Credit Facility, was used to fund the redemption of our 8.750% Senior Notes due 2023 (the “2023 Notes”). On February 1, 2023, we redeemed all of the 2023 Notes at a redemption price of 100.0% of outstanding principal amount thereof ($307.3 million), plus accrued and unpaid interest ($6.7 million).
Each Unit separated into its constituent securities (the 2028 Notes and the shares of our common stock) automatically on October 27, 2023. A holder of Units could have elected to separate its Units into its constituent securities, in whole but not in part, on or after March 31, 2023. Prior to such date, the Units could not be separated at the option of the holder.
On January 30, 2023, we, and certain of our subsidiaries entered into an indenture, dated as of January 30, 2023 (the “2028 Notes Indenture”), with U.S. Bank Trust Company, National Association, as the trustee and as notes collateral agent, pursuant to which the 2028 Notes were issued. The 2028 Notes will mature on February 1, 2028 and bear interest at an annual rate of 13.000% payable in cash semi-annually in arrears on each of February 1 and August 1, commencing August 1, 2023. The 2028 Notes are our senior secured obligations and are guaranteed on a senior secured basis by each of our current domestic subsidiaries and will be so guaranteed by certain future subsidiaries, in each case, subject to agreed guaranty and security principles and certain exclusions.
On each May 15 and November 14, commencing November 14, 2023 (each, an “Excess Cash Flow Offer Date”), we are required to make an offer (an “Excess Cash Flow Offer”) to all holders of the 2028 Notes and, if required by the terms of any Pari Passu Notes Lien Indebtedness (as defined in the 2028 Notes Indenture), to any holders of any Pari Passu Notes Lien Indebtedness to purchase, prepay or redeem, together on a pro-rata basis, the maximum principal amount of the 2028 Notes and any such Pari Passu Notes Lien Indebtedness (plus all accrued interest (including additional interest, if any) on the 2028 Notes and any such Pari Passu Notes Lien Indebtedness and the amount of all fees and expenses, including premiums, incurred in connection therewith) that may be purchased, prepaid or redeemed using an amount of cash equal to the Excess Cash Flow Amount (as defined in the 2028 Notes Indenture and which is 75.0% of Excess Cash Flow (as defined in the 2028 Notes Indenture), as determined immediately prior to the Excess Cash Flow Offer Date), if any, subject to certain exceptions set forth in the 2028 Notes Indenture. The offer price in any such offer will be equal to 100% of the principal amount of the 2028 Notes and any such Pari Passu Notes Lien Indebtedness (or, in respect of any such Pari Passu Notes Lien Indebtedness, such lesser price, if any, as may be provided for by the terms of such Pari Passu Notes Lien Indebtedness), plus accrued and unpaid interest and additional interest, if any, to, but excluding, the date of purchase, prepayment or redemption, subject to the rights of holders of the 2028 Notes or any such Pari Passu Notes Lien Indebtedness on the relevant record date to receive interest due on an interest payment date that is on or prior to the date of purchase, prepayment or redemption, and will be payable in cash. For the
26
Excess Cash Flow Offer Date of November 14, 2024, the Excess Cash Flow Amount will be $0, and as such, no Excess Cash Flow Offer will be made.
The 2028 Notes Indenture contains covenants that, among other things and subject to certain exceptions and qualifications, limit our ability and the ability of our restricted subsidiaries to engage in certain activities. We were in compliance with the covenants contained in the 2028 Notes Indenture at September 30, 2024.
For additional information on the Units and the 2028 Notes, see Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
ABL Credit Facility
On October 25, 2018, we entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”) that permitted aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “ABL Credit Facility”).
On January 17, 2023, we entered into the First Amendment to Credit Agreement (the “First ABL Facility Amendment”) with JP Morgan Chase Bank, N.A., as administrative agent, and the lender parties thereto, which became effective on January 30, 2023. Pursuant to the First ABL Facility Amendment, the maturity date of the ABL Credit Facility was extended from October 25, 2023 to January 29, 2027. In addition, the First ABL Facility Amendment, among other changes, revised the terms of the ABL Credit Facility as follows: (a) decreased the size of the ABL Credit Facility from $200.0 million to $150.0 million, subject to the borrowing base, (b) changed the interest rate benchmark from London Interbank Offered Rate to Term Secured Overnight Financing Rate with a 10 basis point spread adjustment and increased pricing from the existing range of 1.75% to 2.25% to a range of 2.00% to 2.50%, in each case depending on our leverage ratio, (c) decreased the Canadian tranche sub-limit from $25.0 million to $5.0 million, and (d) decreased the letter of credit sub-limit from $50.0 million to $10.0 million. Certain other changes to the terms of the ABL Credit Facility as a result of the First ABL Facility Amendment are summarized in Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
On June 7, 2024, we entered into the Second Amendment to Credit Agreement (together with the First ABL Facility Amendment, the “ABL Facility Amendments”) with JP Morgan Chase Bank, N.A., as administrative agent, and the lender parties thereto, to change the interest rate benchmark for borrowings denominated in Canadian dollars from Canadian Dollar Offered Rate (CDOR) to a rate based on the Canadian Overnight Repo Rate Average (CORRA), effective as of June 14, 2024.
The 2018 ABL Credit Agreement, as amended by the ABL Facility Amendments (the “ABL Credit Agreement”), contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions) and transactions with affiliates. We were in compliance with all covenants contained in the ABL Credit Agreement as of September 30, 2024.
Pursuant to the ABL Credit Agreement, all obligations under the ABL Credit Facility are secured by security interests (subject to permitted liens) in substantially all of the personal property of our domestic subsidiaries, excluding certain assets. The obligations under the Canadian tranche are further secured by security interests (subject to permitted liens) in substantially all of the personal property of Nine Energy Canada, Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries, excluding certain assets.
At September 30, 2024, we had $50.0 million of borrowings under the ABL Credit Facility, and our availability under the ABL Credit Facility was approximately $27.6 million, net of outstanding letters of credit of $2.2 million. On October 10, 2024, the Company repaid $3.0 million of outstanding borrowings on the ABL Credit Facility.
For additional information on the ABL Credit Facility and the ABL Facility Amendments, see Note 8 – Debt Obligations included in Item 1 of Part I of this Quarter Report on Form 10-Q.
27
Cash Flows
Cash flows provided by (used in) operations by type of activity were as follows for the nine months ended September 30, 2024 and 2023:
Nine Months Ended September 30,
2024
2023
(in thousands)
Operating activities
$
(1,793)
$
21,185
Investing activities
(11,176)
(14,715)
Financing activities
(2,116)
(11,596)
Impact of foreign exchange rate on cash
(103)
(160)
Net change in cash and cash equivalents
$
(15,188)
$
(5,286)
Operating Activities
Net cash used in operating activities was $1.8 million in the first nine months of 2024 compared to $21.2 million in net cash provided in the first nine months of 2023. The change was primarily attributed to a $12.0 million decrease in cash provided by operations driven mainly by an increased net loss in comparison to the first nine months of 2023. The change was also partially attributed to a $11.0 million decrease in cash provided by working capital, driven mainly by a $11.6 million decrease in cash provided by accounts receivable collections in comparison to the first nine months of 2023.
Investing Activities
Net cash used in investing activities was $11.2 million during the first nine months of 2024 compared to $14.7 million in net cash used in the first nine months of 2023. The decrease was attributed to a $4.5 million decrease in cash purchases of property and equipment, partially offset by a $1.0 million decrease in proceeds from the sale of property and equipment (including insurance), each in comparison to the first nine months of 2023.
Financing Activities
Net cash used in financing activities was $2.1 million during the first nine months of 2024 compared to $11.6 million in net cash used in the first nine months of 2023. The decrease was primarily attributed to the $307.3 million redemption of the 2023 Notes as well as $6.3 million in debt issuance costs associated with the Units offering in the first nine months of 2023, neither of which reoccurred in the first nine months of 2024. The decrease in net cash used was also partially due to $8.2 million in proceeds received from the issuance of common stock under our ATM program in the first nine months of 2024 that did not occur in the first nine months of 2023. Additionally, the decrease was partly attributed to a $5.0 million reduction in payments on the ABL Credit Facility between periods. The overall decrease in net cash used was largely offset by $279.8 million in proceeds received from the Units offering in the first nine months of 2023, that did not reoccur in the first nine months of 2024. The decrease was also offset by a $37.0 million reduction in proceeds from the ABL Credit Facility between periods, as well as a $0.6 million increase in payments on short term debt between periods.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our critical accounting estimates, which are estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations, are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to our critical accounting estimates as described therein.
Recent Accounting Pronouncements
See Note 3 – New Accounting Standards included in Item 1 of Part I of this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company,” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide 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 of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits 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 September 30, 2024. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2024.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarterly period ended September 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).
29
PART II – OTHER INFORMATION
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 below, 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, 2023.
We are currently out of compliance with the NYSE minimum market capitalization requirement and are at risk of the NYSE delisting our common stock; such a delistingcould negatively impact us as it would likely reduce the liquidity and market price of our common stock, which in turn would, among other things, negatively impact our ability to raise equity financing.
On October 21, 2024, we received written notification (the “Notice”) from the NYSE that we no longer satisfy the continued listing compliance standards set forth under Section 802.01B of the NYSE Listed Company Manual (the “NYSE Manual”) because our average global market capitalization was less than $50,000,000 over a consecutive 30 trading-day period that ended on October 18, 2024 and, at the same time, our last reported stockholders’ equity was less than $50,000,000.
In accordance with NYSE procedures, we have 45 days from receipt of the Notice to submit a plan to the NYSE demonstrating how we intend to regain compliance with the NYSE’s continued listing standards within 18 months of our receipt of the Notice. We intend to develop and submit a plan to bring the Company into compliance with the listing standards within the required timeframe (the “Plan”), which would be reviewed by the Listings Operations Committee of the NYSE (the “Listings Committee”). If the Listings Committee does not accept the Plan, the NYSE will commence suspension and delisting procedures. If the Listings Committee accepts the Plan, our common stock would continue to be listed on the NYSE during the 18-month cure period, subject to our compliance with other continued listing requirements, and we will be subject to quarterly review for compliance with the Plan.If we fail to meet material aspects of the Plan or any quarterly milestones contained in the Plan, the NYSE may commence suspension and delisting procedures. If we fail to regain compliance with Section 802.01B of the NYSE Manual at the end of the cure period, the NYSE will commence suspension and delisting procedures. The NYSE may also commence suspension and delisting procedures if the average closing price of our common stock falls below $1.00 per share over a period of 30 consecutive trading days (the “minimum share price condition”) or our common stock trades at an “abnormally low” price. In April 2020, we received written notification from the NYSE that we did not satisfy the minimum share price condition; although we regained compliance with this condition in June 2020, there is no assurance that we will be able to continue to do so.
A delisting of our common stock from the NYSE could negatively impact us as it would likely reduce the liquidity and market price of our common stock and thus (i) reduce the number of investors willing to hold or acquire our common stock, which would negatively impact our ability to access equity markets and obtain financing and (ii) impair our ability to provide equity incentives to our employees.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
30
ITEM 6. EXHIBITS
The exhibits required to be filed or furnished by Item 601 of Regulation S-K are listed below.
Interactive Data Files (Formatted as inline XBRL).
104*
Cover Page Interactive Data File (Formatted as inline XBRL and contained in Exhibit 101).
* Filed herewith.
** Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K.
31
SIGNATURES
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.