Nine Energy Service, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023, included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “Critical Accounting Estimates,” included in our Annual Report on Form 10-K for the year ended December 31, 2022.

This section contains forward-looking statements based on our current expectations, estimates, and projections about our operations and the industry in which we operate. Our actual results may differ materially from those discussed in any forward-looking statement because of various risks and uncertainties, including those described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022.

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 within North America and abroad. We partner with our exploration and production (“E&P”) customers across all major onshore basins in the U.S., as well as within Canada and abroad, to design and deploy downhole solutions and technology to prepare horizontal, multistage wells for production. We focus on providing our customers with cost-effective and comprehensive completion solutions designed to maximize their production levels and operating efficiencies. We believe our success is a product of our culture, which is driven by our intense focus on performance and wellsite execution as well as our commitment to forward-leaning technologies that aid us in the development of smarter, customized applications that drive efficiencies 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 technologies used for completing the toe stage of a horizontal well, liner installations used in refrac operations, casing flotation devices, and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug-and-perf operations, (iii) wireline services, including electric wireline units, 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 the U.S., as well as within Canada and abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically enter into a Master Service Agreement (“MSA”) with each customer that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Each specific job is obtained through competitive bidding or as a result of negotiations with customers. The rate we charge is determined by location, complexity of the job, operating conditions, duration of the contract, and market conditions. In addition to MSAs, we have entered into a select number of longer-term contracts with certain customers relating to our wireline and cementing services, and we may enter into similar contracts from time to time to the extent beneficial to the operation of our business. These longer-term contracts address pricing and other details concerning our services, but each job is performed on a standalone basis.

The principal expenses involved in conducting our business include labor costs, materials and freight, the costs of maintaining our equipment, and fuel costs. Our direct labor costs vary with the amount of equipment deployed and the utilization of that equipment. Another key component of labor costs relates to the ongoing training of our field service employees, which improves safety rates and reduces employee attrition.

How We Evaluate Our Operations

We evaluate our performance based on a number of financial and non-financial measures, including the following:

• Revenue: We compare actual revenue achieved each month to the most recent projection for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the performance of our operations compared to historical revenue drivers or market metrics. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes.
• Adjusted Gross Profit (Loss): Adjusted gross profit (loss) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). Costs of revenues include direct and indirect labor costs, costs of materials, maintenance of equipment, fuel and transportation freight costs, contract services, crew cost, and other miscellaneous expenses. For additional information, see “Non-GAAP Financial Measures” below.
• Adjusted EBITDA: We define Adjusted EBITDA as 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.
• Return on Invested Capital (“ROIC”): We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) 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 the average of the current and prior period-end total capital for use in this analysis. For additional information, see “Non-GAAP Financial Measures” below.
• Safety: We measure safety by tracking the total recordable incident rate (“TRIR”), which is reviewed on a monthly basis. TRIR is a measure of the rate of recordable workplace injuries, defined below, normalized and stated on the basis of 100 workers for an annual period. The factor is derived by multiplying the number of recordable injuries in a calendar year by 200,000 (i.e., the total hours for 100 employees working 2,000 hours per year) and dividing this value by the total hours actually worked in the year. 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, oil and natural gas prices have been extremely volatile. In 2020, oil and natural gas prices as well as E&P capital spending reached historic lows, driving down the pricing for our services and technologies. In the first quarter of 2021, oil and natural gas prices began to rebound and steadily increased throughout 2021 and remained supportive into 2022, with oil prices reaching a 13-year high in March 2022, primarily as a result of the conflict between Russia and Ukraine igniting fears of shortages. In late 2022, due to the rise in interest rates, economic uncertainty and recessionary fears, oil prices began to decline. Commodity prices have continued to be volatile thus far in 2023, with both oil and natural gas prices generally lower than in most of 2022. The Baker Hughes rig count was down by over 150 rigs from the end of the fourth quarter of 2022 to the end of the third quarter of 2023, and U.S. completions in the third quarter of 2023 were down 4% compared to the fourth quarter of 2022 according to the Energy Information Administration.

With the decline in commodity prices and overall activity levels, we received pricing pressure from customers across service lines and basins, impacting both our revenue and margins. The market remains volatile, but we are cautiously optimistic that the rig count is stabilizing, and we could begin to see rigs being added back into the market starting in early 2024. The U.S. rig count and frac crew count are both good market indicators for both our revenue outlook and potential pricing leverage; however, the magnitude and timing of potential price changes will depend on a number of factors, as discussed below.

We also remain cautiously optimistic on the long-term outlook for the energy sector despite the uncertainty and recessionary fears in the global market. OPEC has maintained production cuts, and public U.S. producers remaining committed to capital discipline, rather than increasing drilling, could help lessen the impact of any supply surplus. Additionally, the conflicts between Russia and Ukraine and in the Middle East provide additional uncertainty with global supply.

Significant factors that are likely to affect commodity prices moving forward include actions of the members of OPEC and other oil exporting nations that relate to or impact oil production or supply; 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; 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 Russia, the Middle East, South America and Africa; 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.

Results of Operations

Results for the Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

(in thousands, except percentage change)

Revenues

Revenues decreased $26.8 million, or 16%, to $140.6 million for the third quarter of 2023. The decrease was prevalent across all lines of service and was primarily due to activity decreases, which were driven by a reduction in the U.S. rig count in comparison to the third quarter of 2022. More specifically, cementing revenue (including pump downs) decreased $12.0 million, or 19%, as total cement job count decreased 23% in comparison to the third quarter of 2022. In addition, tools revenue decreased $8.2 million, or 20%, as completion tools stages decreased 24%, coiled tubing revenue decreased $5.6 million, or 17%, as total days worked decreased 14%, and wireline revenue decreased $1.0 million, or 3%, as total completed wireline stages decreased 1%, each in comparison to the third quarter of 2022.

Cost of Revenues (Exclusive of Depreciation and Amortization)

Cost of revenues decreased $5.7 million, or 5%, to $117.7 million for the third quarter of 2023. The decrease in comparison to the third quarter of 2022 was primarily driven by a decrease in activity for all lines of service in comparison to the third quarter of 2022. More specifically, the decrease was the result of a $4.2 million decrease in materials installed and consumed while performing services, a $0.9 million decrease in employee costs, and a $0.6 million decrease in other costs such as vehicle and facility expenses, each in comparison to the third quarter of 2022.

Adjusted Gross Profit (Loss)

Adjusted gross profit decreased $21.1 million to $22.9 million for the third quarter of 2023 due to the factors described above under “Revenues” and “Cost of Revenues.”

General and Administrative Expenses

General and administrative expenses decreased $0.4 million to $13.1 million for the third quarter of 2023. The decrease was attributed to a $1.4 million decrease in employee costs in comparison to the third quarter of 2022. The overall decrease was partially offset by a $1.0 million increase in other general and administrative costs such as marketing and communication costs, as well as professional fees, each in comparison to the third quarter of 2022.

Depreciation

Depreciation expense increased $0.7 million to $7.3 million for the third quarter of 2023. The increase in comparison to the third quarter of 2022 was primarily due to an increase in capital expenditures across certain lines of service over the last twelve months.

Amortization of Intangibles

Amortization of intangibles, which was primarily comprised of technology and customer relationships, was $2.9 million for both the third quarter of 2023 and the third quarter of 2022.

(Gain) Loss on Revaluation of Contingent Liability

We recorded a $0.5 million loss on revaluation of contingent liability for the third quarter of 2023. The increased loss in comparison to the third quarter of 2022 was primarily associated with an increase in the fair value during the period of the earnout associated with our acquisition of Frac Technology AS (“Frac Tech”).

(Gain) Loss on Sale of Property and Equipment

Loss on sale of property and equipment for the third quarter of 2023 decreased $1.2 million in comparison to the third quarter of 2022. The decrease was primarily attributed to certain damaged equipment that was fully disposed of in the third quarter of 2022 that did not recur in the third quarter of 2023.

Non-Operating (Income) Expenses

Non-operating expenses increased $7.2 million to $12.2 million for the third quarter of 2023. The increase in comparison to the third quarter of 2022 was primarily due to an increased interest rate as a result of the issuance of the 2028 Notes (as defined below) in the first quarter of 2023 in connection with the public offering of Units. The increase was also partially due to a $2.8 million gain on the extinguishment of debt related to the repurchase of our 2023 Notes (as defined below) in the third quarter of 2022 that did not recur in the third quarter of 2023.

Provision (Benefit) for Income Taxes

We recorded an income tax provision of $0.2 million for the third quarter of 2023 compared to an income tax provision of $0.5 million for the third quarter of 2022. The difference between the periods was primarily attributed to our income tax position in state and foreign tax jurisdictions.

Adjusted EBITDA

Adjusted EBITDA decreased $21.0 million to $11.6 million for the third quarter of 2023. The Adjusted EBITDA decrease was primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.

Results for the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

(in thousands, except for percentage change)

Revenues

Revenues increased $38.7 million, or 9%, to $465.5 million for the first nine months of 2023; while the average U.S. rig count remained relatively flat in comparison to the first nine months of 2022, the overall increase was prevalent across all lines of service and attributable to a number of factors, including activity and pricing increases, as well as a change in product mix. More specifically, coiled tubing revenue increased $12.2 million, or 15%, due to increased activity, as total days worked increased 13%, and wireline revenue increased $11.9 million, or 15%, due to increased activity, as total completed wireline stages increased 7%. In addition, although completion tools stages decreased 2% in comparison to the first nine months of 2022, tools revenue increased $6.5 million, or 6%, due to a significant international sale made to a customer during the first nine months of 2023 that did not occur during the first nine months of 2022, as well as a change in product mix between periods. Furthermore, although total cement job count decreased 12%, cementing revenue (including pump downs) increased $8.1 million, or 5%, due to pricing increases, in comparison to the first nine months of 2022.

Cost of Revenues (Exclusive of Depreciation and Amortization)

Cost of revenues increased $41.8 million, or 13%, to $372.2 million for the first nine months of 2023. The increase in comparison to the first nine months of 2022 was consistent with the increase in revenue identified above and primarily driven by increased activity in coiled tubing and wireline, coupled with cost inflation over all lines of service associated with both labor and materials as well as headcount increases. More specifically, the increase was due to an $18.3 million increase in employer related costs, a $17.5 million increase in materials installed and consumed while performing services, and a $6.0 million increase in other costs such as repairs and maintenance, travel, and vehicle expenses, in comparison to the first nine months of 2022.

Adjusted Gross Profit (Loss)

Adjusted gross profit decreased $3.0 million to $93.2 million for the first nine months of 2023 due to the factors described above under “Revenues” and “Cost of Revenues.”

General and Administrative Expenses

General and administrative expenses increased $9.2 million to $47.0 million for the first nine months of 2023. The increase was primarily due to $6.4 million in costs associated with the Units offering in the first quarter of 2023 that did not occur in 2022. The increase was also partially attributed to a $1.1 million increase in employee costs, a $0.7 million increase in marketing costs, a $0.6 million increase in communication costs, and a $0.4 million increase in travel costs, each in comparison to the first nine months of 2022.

Depreciation

Depreciation expense increased $2.5 million to $22.1 million for the first nine months of 2023. The increase in comparison to the first nine months of 2022 was primarily due to an increase in capital expenditures over the last twelve months.

Amortization of Intangibles

Amortization of intangibles, which was primarily comprised of technology and customer relationships, decreased $1.9 million to $8.7 million for the first nine months of 2023. The decrease in comparison to the first nine months of 2022 was due to certain intangible assets being fully amortized in 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 first nine months of 2023 compared to a $0.2 million loss on revaluation of contingent liability for the first nine months of 2022. The increased loss in comparison to the first nine months of 2022 was associated with an increase in the fair value during the period of the earnout associated with our acquisition of Frac Tech.

(Gain) Loss on Sale of Property and Equipment

We recorded a gain on sale of property and equipment of $0.4 million for the first nine months of 2023 compared to a loss on sale of property and equipment of $0.8 million for the first nine months of 2022. The $1.2 million change was primarily attributed to certain damaged equipment that was fully disposed of in the first nine months of 2022 that did not recur in the first nine months of 2023.

Non-Operating (Income) Expenses

Non-operating expenses increased $16.1 million to $36.9 million for the first nine months of 2023. The increase in comparison to the first nine months of 2022 was primarily due to an increased interest rate as a result of the issuance of the 2028 Notes in the first quarter of 2023 in connection with the Units offering. The increase was also partially due to a $2.8 million gain on the extinguishment of debt related to the repurchase of our 2023 Notes in the first nine months of 2022 that did not recur in the first nine months of 2023.

Provision (Benefit) for Income Taxes

We recorded an income tax provision of $0.4 million for the first nine months of 2023 compared to an income tax provision of $0.1 million for the first nine months of 2022. The difference between the periods was primarily attributed to our income tax position in state and foreign tax jurisdictions.

Adjusted EBITDA

Adjusted EBITDA decreased $5.4 million to $58.3 million for the first nine months of 2023. The Adjusted EBITDA decrease was primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.

Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a supplemental 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.

Management believes Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above from net income (loss) in arriving at 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, 2023 and 2022:

(in thousands)

(in thousands)

(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.

Return on Invested Capital

ROIC is a supplemental non-GAAP financial measure. We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) 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 the average of the current and prior period-end total capital for use in this analysis.

Management believes ROIC is a meaningful measure because it quantifies how well we generate operating income relative to the capital we have invested in our business and illustrates the profitability of a business or project taking into account the capital invested. Management uses ROIC to assist them in capital resource allocation decisions and in evaluating business performance. Although ROIC is commonly used as a measure of capital efficiency, definitions of ROIC differ, and our computation of ROIC may not be comparable to other similarly titled measures of other companies.

The following table provides an explanation of our calculation of ROIC for the three and nine months ended September 30, 2023 and 2022:

(in thousands)

(in thousands)

(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.

Management uses adjusted gross profit (loss) to evaluate operating performance. We prepare adjusted gross profit (loss) to eliminate the impact of depreciation and amortization because we do not consider depreciation and amortization indicative of our core operating performance. Adjusted gross profit (loss) should not be considered as an alternative to gross profit (loss), operating income (loss), or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted gross profit (loss) may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted gross profit (loss) or similarly titled measures in the same manner as we do.

The following table presents a reconciliation of adjusted gross profit (loss) to GAAP gross profit (loss) for the three and nine months ended September 30, 2023 and 2022:

(in thousands)

(in thousands)

Liquidity and Capital Resources

Sources and Uses of Liquidity

Historically, we have met our liquidity needs principally from cash on hand, cash flow from operations and, if needed, external borrowings and issuances of debt 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. 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.

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.

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.

At September 30, 2023, we had $12.2 million of cash and cash equivalents and $22.7 million of availability under the ABL Credit Facility (as defined and described below), which resulted in a total liquidity position of $34.9 million. Our liquidity position will be impacted by the semi-annual interest payments ($19.5 million based on amounts outstanding as of September 30, 2023) 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 flow 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.

Units Offering and 2028 Notes

On January 30, 2023, we issued 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 (the “Common Stock”). We 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 our 8.750% Senior Notes due 2023 (the “2023 Notes”).

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, which form a part of the Units, 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 Excess Cash Flow Offer Date of November 14, 2023, 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 provision of the 2028 Notes Indenture at September 30, 2023.

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.

2023 Notes

On October 25, 2018, we issued $400.0 million of 2023 Notes under an indenture, dated as of October 25, 2018 (the “2023 Notes Indenture”), by and among us, including certain of our subsidiaries, 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. The 2023 Notes were senior unsecured obligations and were fully and unconditionally guaranteed on a senior unsecured basis by each of our domestic subsidiaries.

On February 1, 2023, all of the outstanding 2023 Notes were redeemed at a redemption price of 100.0% of the principal amount thereof ($307.3 million), plus accrued and unpaid interest ($6.7 million), and the 2023 Notes Indenture was discharged as of January 30, 2023.

For additional information on the 2023 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”). Pursuant to the 2018 ABL Credit Agreement, the ABL Credit Facility was set to mature on October 25, 2023 or, if earlier, on the date that was 180 days before the scheduled maturity date of the 2023 Notes if they had not been redeemed or repurchased by such date.

On January 17, 2023, we entered into the First Amendment to Credit Agreement (the “ABL Facility Amendment”)

with JP Morgan Chase Bank, N.A., as administrative agent, and the lender parties thereto, which amended certain terms of the 2018 ABL Credit Agreement (as amended, the “ABL Credit Agreement”). The ABL Facility Amendment became effective on January 30, 2023.

Pursuant to the ABL Facility Amendment, the maturity date of the ABL Credit Facility was extended from October 25, 2023 to January 29, 2027. In addition, the 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 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) 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 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.

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 under the ABL Credit Agreement as of September 30, 2023.

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.

Both the ABL Credit Facility and the Units collateralization were completed within 30 days after closing of the Units offering in accordance with the terms of the ABL Facility Amendment and the 2028 Notes Indenture.

At September 30, 2023, we had $57.0 million of borrowings under the ABL Credit Facility, and our availability under the ABL Credit Facility was approximately $22.7 million, net of outstanding letters of credit of $1.3 million.

Cash Flows

Cash flows provided by (used in) operations by type of activity were as follows for the nine months ended September 30, 2023 and 2022:

(in thousands)

Operating Activities

Net cash provided by operating activities was $21.2 million in the first nine months of 2023 compared to net cash provided of $8.2 million in the first nine months of 2022. The change was primarily attributed to a $32.7 million increase in cash provided by working capital, including an increase in cash collections in comparison to the first nine months of 2022. The change was partially offset by a $19.7 million decrease in cash flow provided by operations, adjusted for any non-cash items, in comparison to the first nine months of 2022.

Investing Activities

Net cash used in investing activities was $14.7 million during the first nine months of 2023 compared to $6.2 million net cash used in the first nine months of 2022. The increase in net cash used was attributed to a $6.7 million increase in cash purchases of property and equipment, coupled with a $1.8 million decrease in proceeds from the sale of property and equipment (including insurance), in each case, in comparison to the first nine months of 2022.

Financing Activities

Net cash used in financing activities was $11.6 million during the first nine months of 2023 compared to $1.8 million net cash used in the first nine months of 2022. The increase in net cash used was primarily attributed to the $307.3 million redemption of the 2023 Notes and $6.3 million in debt issuance costs associated with the Units offering in the first nine months of 2023 that did not occur in the first nine months of 2022. The increase was also partly attributed to $15.0 million in payments on the ABL Credit Facility during the first nine months of 2023 that did not occur in the first nine months of 2022. The overall increase was largely offset by $279.8 million in proceeds received from the Units offering in the first nine months of 2023 that did not occur in the first nine months of 2022. The overall increase was also partially offset with an increase of $28.0 million in proceeds received in connection with the ABL Credit Facility in comparison to the first nine months of 2022 as well as $10.1 million of purchases of the 2023 Notes and $0.8 million of payments of the Magnum Promissory Notes (as defined in Note 8 – Debt Obligations) in the first nine months of 2022 that did not recur in the first nine months of 2023.

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, 2022. 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.

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.

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 Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in 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, 2023. 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, 2023.

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, 2023 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).

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, 2022. For a detailed discussion of known material factors which could materially affect our business, financial condition, or future results, refer to “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, 2022.