Nine Energy Service Inc.
03/04/2026 | Press release | Distributed by Public on 03/04/2026 15:32
Annual Report for Fiscal Year Ending DECEMBER 31, 2025 (Form 10-K)
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 "Financial Statements and Supplementary Data" in Item 8 of Part II of this Annual Report.
This discussion 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 as a result of a variety of risks and uncertainties, including those described under "Risk Factors" in Item 1A of Part I of this Annual Report. We assume no obligation to update any of these forward-looking statements.
Overview
Company Description
We are a leading North American onshore completion services provider that targets unconventional oil and gas resource development. We partner with our 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.
Generally, operators have continued to improve operational efficiencies in completions design, increasing the complexity and difficulty, making oilfield service selection more important. This increase in high-intensity, high-efficiency completions of oil and gas wells further enhances the demand for our services. We compete for the most complex and technically demanding wells in which we specialize, which are characterized by extended laterals, increased stage spacing, multi-well pads, cluster spacing, and high proppant loads. These well characteristics lead to increased operating leverage and returns for us, as we are able to complete more jobs and stages with the same number of units and crews. Service providers for these projects are selected based on their technical expertise and ability to execute safely and efficiently.
We provide (i) cementing services, which consist of blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped between the casing and the wellbore of the well, (ii) an innovative portfolio of completion tools, including those that provide pinpoint frac sleeve system technologies as well as a portfolio of completion technologies used for completing the toe stage of a horizontal well and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug-and-perf operations, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns and 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 in lengths of up to 30,000 feet and which provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well.
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.
Current Bankruptcy Proceedings
On February 1, 2026, the Company Parties filed the Chapter 11 Cases in the Bankruptcy Court to implement the prepackaged Plan to effectuate a financial restructuring of the Company Parties' existing indebtedness. Prior to filing the Chapter 11 Cases, on February 1, 2026, the Company Parties entered into the Restructuring Support Agreement with the Consenting Stakeholders, which includes certain holders of the 2028 Notes and the Prepetition ABL Lenders. Pursuant to the Restructuring Support Agreement, the Consenting Stakeholders agreed, subject to certain terms and conditions, to support the Plan. The material terms of the Plan include, among other things:
•the Prepetition ABL Lenders providing the Company Parties with the DIP ABL Facility, including a roll-up or refinancing of all obligations under the Prepetition ABL Loan and Security Agreement, which will, upon the satisfaction of customary closing conditions, convert into the Exit ABL Facility on the Plan Effective Date or as soon as reasonably practicable thereafter;
•on the Plan Effective Date, the Reorganized Company issuing 100% of a single class of common equity interests to the holders of the 2028 Notes and the 2028 Notes being canceled; and
•on the Plan Effective Date, our currently existing common stock being canceled.
On February 3, 2026, the Bankruptcy Court, on an interim basis, approved the DIP ABL Facility, and the Company Parties entered into the DIP Loan and Security Agreement with the DIP Agent and the DIP Lenders. The DIP ABL Facility is a senior secured super-priority asset-based debtor-in-possession credit facility consisting of up to $125.0 million in aggregate principal amount of revolving credit commitments, including a roll-up or refinancing of all obligations under the Prepetition ABL Loan and Security Agreement. The DIP Loan and Security Agreement includes certain terms and conditions (including the Plan becoming effective) providing for the conversion of the DIP ABL Facility into an exit senior secured asset-based revolving credit facility consisting of up to $135.0 million in aggregate principal amount of revolving commitments on the Plan Effective Date or as soon as reasonably practicable thereafter.
Since the Petition Date, the Company Parties have been operating their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Company Parties have requested and obtained relief from the Bankruptcy Court that enables them to continue their ordinary course operations during the Chapter 11 Cases and uphold their commitments to their stakeholders, including employees, customers, and vendors, during the restructuring process, subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.
Subject to certain exceptions under the Bankruptcy Code, pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed the continuation of most legal proceedings and the filing of other actions against or on behalf of the Company Parties or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Company Parties' bankruptcy estate unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. In particular, although the filing of the Chapter 11 Cases constituted an event of default that accelerated our obligations under the indenture governing the 2028 Notes (the "Indenture") and the Prepetition ABL Loan and Security Agreement (together with the Indenture, the "Debt Instruments") and caused the principal and interest due thereunder to be immediately due and payable, any efforts to enforce such payment obligations are automatically stayed as a result of the Chapter 11 Cases, and the creditors' rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code. Notwithstanding the general application of the automatic stay described above and other protections afforded by the Bankruptcy Code, governmental authorities may determine to continue actions brought under their police and regulatory powers.
On March 4, 2026, the Bankruptcy Court entered the Confirmation Order. The Company Parties anticipate emerging from the Chapter 11 Cases, and the Plan Effective Date occurring, on March 5, 2026; however, consummation of the Restructuring pursuant to the Plan is subject to the satisfaction or waiver of certain conditions set forth in the Plan. Accordingly, no assurance can be given that such transactions will be consummated. See "Risk Factors - Risks Related to the Chapter 11 Cases" in Item 1A of Part I of this Annual Report for a discussion of the risks related to the Chapter 11 Cases.
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 will enter into an 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) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on the extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation and cash award expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business. For additional information, see "Non-GAAP Financial Measures" below.
•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) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on the extinguishment of debt, and (vii) 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. For additional information, see "Non-GAAP Financial Measures" below.
•Safety: We measure safety by tracking the total recordable incident rate ("TRIR"), which is reviewed on a monthly basis. TRIR is a measure of the rate of recordable workplace injuries, defined below, normalized and stated on the basis of 100 workers for an annual period. The factor is derived by multiplying the number of recordable injuries in a calendar year by 200,000 (i.e., the total hours for 100 employees working 2,000 hours per year) and dividing this value by the total hours actually worked in the year. A recordable injury includes occupational death, nonfatal occupational illness, and other occupational injuries that involve loss of consciousness, restriction of work or motion, transfer to another job, or medical treatment other than first aid.
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. During 2024, natural gas prices were extremely depressed, averaging approximately $2.19 per MMBtu for the year. In 2025, natural gas prices improved as compared to 2024, averaging approximately $3.52 per MMBtu. However, despite a more supportive natural gas price environment in 2025, we have yet to see any meaningful activity increases in the natural gas-levered basins like the Haynesville and Northeast. For example, at the end of 2024, the rig count in the Haynesville was 31 rigs and at the end of 2025, the rig count was 42 rigs. In the Marcellus and Utica at the end of 2024, there were a total of 34 rigs, and at the end of 2025, a total of 39 rigs. Nonetheless, the long-term outlook on natural gas demand remains positive due mostly to potential increased demand coming from power generation related to artificial intelligence.
As for oil prices, towards the end of 2024, we began to see WTI oil prices decline, which was exacerbated by the announcement of new tariffs by the Trump Administration in April 2025 and OPEC communicating they would be increasing production. In the second quarter of 2025, WTI price fell below $60 per barrel for the first time in four years. Because of the decline in oil prices, as well as increased costs and market uncertainty, our customers began to decrease activity. According to Baker Hughes, from the end of the first quarter of 2025 through the end of 2025, 46 rigs, most of which were in the Permian Basin, came out of the U.S. market, a decline of approximately 8% compared to the number of rigs at the end of the first quarter of 2025. During the first quarter of 2025, the average WTI price was $71.78 per barrel as compared to $59.62 per barrel in the fourth quarter of 2025, a decline of approximately 17%.
Due to the spot-market nature of our business, our revenue and profitability generally move very similarly to U.S. rig, frac, and stage counts, and starting in the second quarter of 2025, we began to experience activity declines as well as receive pricing pressure across all of our service lines, especially in the oil-levered basins. During the third quarter and continuing into the fourth quarter of 2025, we had full quarter realizations of these activity declines, as well as continued pricing pressure on our services, which negatively impacted both revenue and earnings. In addition to negative market impacts, our completion tools division had market share losses, which were due mostly to customer consolidation and a change in certain of our customers' completion designs, during the quarter that negatively impacted revenue and earnings. Lastly, as anticipated, during the fourth quarter we had typical seasonal slowdowns related to weather, holidays and budget exhaustion, which negatively impacted revenue and earnings.
The macro-outlook is uncertain, especially with recent geopolitical events, but with what we know today, we anticipate that U.S. activity levels will be relatively flat compared to 2025 exit levels. For the first quarter, we have seen operational inefficiencies and downtime due to weather and frac delays. Additionally, during the first quarter, we will incur costs related to our restructuring. Because of this, we anticipate first quarter 2026 revenue and earnings will be down compared to the fourth quarter of 2025.
Significant factors that are likely to affect commodity prices moving forward include geopolitical and economic developments in the U.S. and globally, including conflicts, the pace of economic growth in the U.S. and throughout the world, including the potential for macro weakness; tariffs imposed by the U.S. and other countries or retaliatory trade measures; 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.; changes to energy regulations and policies, including those of the EPA and other governmental bodies; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows. We expect that U.S. activity levels will be impacted by commodity prices and many of the same factors expected to impact commodity prices, including the production of OPEC and other oil exporting nations and governmental policies, such as tariffs. We cannot predict the scope or extent of such impacts. 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
| Year Ended December 31, | |||||||||||||||||||||||
| 2025 | 2024 | Change | Percentage Change | ||||||||||||||||||||
| (in thousands, except percentage change) | |||||||||||||||||||||||
| Revenues | $ | 561,911 | $ | 554,104 | $ | 7,807 | 1 | % | |||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | $ | 467,360 | $ | 456,729 | $ | 10,631 | 2 | % | |||||||||||||||
| General and administrative expenses | 59,747 | 51,298 | 8,449 | 16 | % | ||||||||||||||||||
| Depreciation | 23,205 | 25,594 | (2,389) | (9) | % | ||||||||||||||||||
| Amortization of intangibles | 11,183 | 11,183 | - | - | % | ||||||||||||||||||
| Loss on revaluation of contingent liability | 217 | 104 | 113 | 109 | % | ||||||||||||||||||
| Loss (gain) on sale of property and equipment | (2,149) | 256 | (2,405) | 939 | % | ||||||||||||||||||
| Income from operations | 2,348 | 8,940 | (6,592) | (74) | % | ||||||||||||||||||
| Non-operating expenses | 53,841 | 49,824 | 4,017 | 8 | % | ||||||||||||||||||
| Loss before income taxes | (51,493) | (40,884) | (10,609) | 26 | % | ||||||||||||||||||
| Provision (benefit) for income taxes | (171) | 198 | (369) | 186 | % | ||||||||||||||||||
| Net loss | $ | (51,322) | $ | (41,082) | $ | (10,240) | 25 | % | |||||||||||||||
Revenues
Revenues increased $7.8 million, or 1%, to $561.9 million in 2025. The increase in comparison to 2024 was primarily due to an increase in cementing revenue (including pump downs) of $11.3 million, or 6%, as total cement job count increased
8%. In addition, wireline revenue increased $4.5 million, or 4%, as total completed wireline stages increased 23%, which was partially offset by pricing pressure, in comparison to 2024. The overall increase in revenue was partially offset by a decrease in coiled tubing revenue of $6.3 million, or 6%, as total days worked decreased 6%, in comparison to 2024. The overall increase was also partially offset by a decrease in tools revenue of $1.7 million, or 1% due to a change in product mix in comparison to 2024.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased $10.6 million, or 2%, to $467.4 million in 2025. The increase was primarily related to a $5.3 million increase in materials installed and consumed while performing services, a $2.6 million increase in vehicle costs, a $1.6 million increase in insurance costs, and a $0.8 million increase in repairs and maintenance costs, each in comparison to 2024.
General and Administrative Expenses
General and administrative expenses increased $8.4 million to $59.7 million in 2025. The increase in comparison to 2024 was primarily related to $4.5 million in retention payments and $2.7 million in professional fees recorded in 2025 in connection with the Chapter 11 Cases, which were not incurred in 2024. The overall increase was also partially attributed to a $1.4 million increase in other employee costs in comparison to 2024.
Depreciation
Depreciation expense decreased $2.4 million to $23.2 million in 2025. The decrease in comparison to 2024 was primarily due to an increase in fully depreciated assets and asset disposals across certain lines of service between periods.
Amortization of Intangibles
We recorded approximately $11.2 million in amortization of intangibles expense (comprised of technology and customer relationships) in both 2025 and 2024.
(Gain) Loss on Revaluation of Contingent Liability
We recorded a $0.2 million loss on the revaluation of contingent liability in 2025 compared to a $0.1 million loss in 2024. The losses in both 2025 and 2024 were related to increases in the fair value of the earnout associated with our acquisition Frac Technology AS (the "Frac Tech Earnout"). The remaining amount associated with the Frac Tech Earnout was paid in the first quarter of 2026.
(Gain) Loss on Sale of Property and Equipment
We recorded a gain on sale of property and equipment of $2.1 million in 2025 compared to a $0.3 million loss on sale of equipment in 2024. The $2.4 million change was primarily attributed to gains on the disposal of certain coiled tubing equipment in 2025 that did not occur in 2024.
Non-Operating Expenses (Income)
Non-operating expenses increased $4.0 million to $53.8 million in 2025. The increase was primarily attributed to a $1.9 million increase in the amortization of deferred financing costs associated with certain debt instruments in comparison to 2024. The increase was also partly attributed to the write-off of $1.5 million of deferred financing costs associated with the 2018 ABL Credit Facility (as described and defined in Note 9 - Debt Obligations) in 2025 that did not occur in 2024, as well as an increase of $0.5 million in interest expense associated with revolving credit facilities in comparison to 2024.
Provision (Benefit) for Income Taxes
We recorded an income tax benefit of $0.2 million for 2025 compared to an income tax provision of $0.2 million in 2024. The $0.4 million change was primarily attributed to a $0.5 million discrete income tax benefit in 2025 that did not occur in 2024.
Net Income (Loss) and Adjusted EBITDA
Net loss increased $10.2 million, or 25%, to $51.3 million, and Adjusted EBITDA decreased $3.8 million, or 7%, to $49.4 million for 2025. The changes were primarily due to the fluctuations in revenue 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) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on the extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation and cash award expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business.
Management believes 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 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 years ended December 31, 2025 and 2024:
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Net loss | $ | (51,322) | $ | (41,082) | |||||||
| Interest expense | 55,208 | 51,321 | |||||||||
| Interest income | (683) | (849) | |||||||||
| Provision (benefit) for income taxes | (171) | 198 | |||||||||
| Depreciation | 23,205 | 25,594 | |||||||||
| Amortization of intangibles | 11,183 | 11,183 | |||||||||
| EBITDA | $ | 37,420 | $ | 46,365 | |||||||
| Adjusted EBITDA reconciliation: | |||||||||||
| EBITDA | $ | 37,420 | $ | 46,365 | |||||||
|
Loss on revaluation of contingent liability (1)
|
217 | 104 | |||||||||
| Restructuring charges and other expenses | 7,539 | 701 | |||||||||
| Stock-based compensation expense | 2,211 | 2,946 | |||||||||
| Cash award expense | 4,169 | 2,832 | |||||||||
| Loss (gain) on sale of property and equipment | (2,149) | 256 | |||||||||
| Adjusted EBITDA | $ | 49,407 | $ | 53,204 | |||||||
(1) Amounts relate to the revaluation of contingent liability associated with a 2018 acquisition. The impact is included in our Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). For additional information on contingent liabilities, see Note 12 - Commitments and Contingencies included in Item 8 of Part II of this Annual Report.
(2) For the year ended December 31, 2025, amounts primarily relate to the Chapter 11 Cases, including $4.5 million in employee retention payments approved by the Board and $2.7 million in professional fees and expenses. For the year ended December 31, 2024, amounts primarily relate to professional fees and expenses in connection with procurement and supply chain restructuring and other initiatives.
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) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on the extinguishment of debt, and (vii) 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.
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 years ended December 31, 2025 and 2024. 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 years ended December 31, 2025 and 2024.
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Net loss | $ | (51,322) | $ | (41,082) | |||||||
| Add back: | |||||||||||
| Interest expense | 55,208 | 51,321 | |||||||||
| Interest income | (683) | (849) | |||||||||
|
Restructuring charges and other expenses (1)
|
7,539 | 701 | |||||||||
| Adjusted after-tax net operating income | $ | 10,742 | $ | 10,091 | |||||||
| Total capital as of prior period-end: | |||||||||||
| Total stockholders' deficit | $ | (66,064) | $ | (35,630) | |||||||
| Total debt | 350,580 | 359,859 | |||||||||
| Less cash and cash equivalents | (27,880) | (30,840) | |||||||||
| Total capital as of prior period-end | $ | 256,636 | $ | 293,389 | |||||||
| Total capital as of period-end: | |||||||||||
| Total stockholders' deficit | $ | (114,956) | $ | (66,064) | |||||||
| Total debt | 369,621 | 350,580 | |||||||||
| Less cash and cash equivalents | (18,449) | (27,880) | |||||||||
| Total capital as of period-end | $ | 236,216 | $ | 256,636 | |||||||
| Average total capital | $ | 246,426 | $ | 275,013 | |||||||
| ROIC | (20.8) | % | (14.9) | % | |||||||
| Adjusted ROIC | 4.4 | % | 3.7 | % | |||||||
(1) For the year ended December 31, 2025, amounts primarily relate to the Chapter 11 Cases, including $4.5 million in employee retention payments approved by the Board and $2.7 million in professional fees and expenses. For the year ended December 31, 2024, amounts primarily relate to professional fees and expenses in connection with procurement and supply chain restructuring and other initiatives.
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 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 years ended December 31, 2025 and 2024.
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Calculation of gross profit: | |||||||||||
| Revenues | $ | 561,911 | $ | 554,104 | |||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 467,360 | 456,729 | |||||||||
| Depreciation (related to cost of revenues) | 22,752 | 25,095 | |||||||||
| Amortization of intangibles | 11,183 | 11,183 | |||||||||
| Gross profit | $ | 60,616 | $ | 61,097 | |||||||
| Adjusted gross profit reconciliation: | |||||||||||
| Gross profit | $ | 60,616 | $ | 61,097 | |||||||
| Depreciation (related to cost of revenues) | 22,752 | 25,095 | |||||||||
| Amortization of intangibles | 11,183 | 11,183 | |||||||||
| Adjusted gross profit | $ | 94,551 | $ | 97,375 | |||||||
Financial Condition, Liquidity, and Capital Resources
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 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 adapt as the market dictates. We have also used cash to make open market repurchases of our debt.
The filing of the Chapter 11 Cases constituted events of default that accelerated our obligations related to the 2028 Notes and the Prepetition ABL Facility (as defined and described in Note 9 - Debt Obligations). As a result, the principal and interest due under our outstanding 2028 Notes and Prepetition ABL Facility became immediately due and payable. However, any efforts to enforce such payment obligations are automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors' rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. We do not have sufficient cash on hand or available liquidity to repay such outstanding debt. As of December 31, 2025, we had $18.4 million of cash and cash equivalents and $21.0 million of availability under the Prepetition ABL Facility, which resulted in a total liquidity position of $39.4 million.
Ability to Continue as a Going Concern
As a result of the current bankruptcy proceedings and our financial condition, substantial doubt exists that we will be able to continue as a going concern for one year from the date of this Annual Report. The consolidated financial statements in Part II, Item 8 of this Annual Report were prepared on a going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. Our liquidity requirements and the availability to us of adequate capital resources are difficult to predict at this time. In addition, we have incurred, and continue to incur, material reorganization and administrative expenses in connection with the Chapter 11 Cases and the Plan. Notwithstanding the protections available to us under the Bankruptcy Code, if our future sources of liquidity are insufficient, we will face substantial liquidity constraints and will likely be required to significantly reduce, delay, or eliminate capital expenditures, implement further cost reductions, seek other financing alternatives or cease operations as a going concern and liquidate. We can give no assurance that we will be able to secure additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs. Based on such evaluation and management's current plans, which are subject to change, management believes there is substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is contingent upon our ability to successfully implement the Plan and successfully emerge from Chapter 11, and generate sufficient liquidity to meet our obligations and operating needs, among other factors. The consolidated financial statements in Part II, Item 8 of this Annual Report do not include any adjustments that might be necessary should we be unable to continue as a going concern or as a consequence of the Chapter 11 Cases. Further, any plan of reorganization could materially change the amount of assets and liabilities reported in the accompanying consolidated financial statements. There are substantial risks and uncertainties related to (i) our ability to successfully emerge from the Chapter 11 Cases, and (ii) the effects of disruption from the Chapter 11 Cases making it more difficult to maintain business, financing, and operational relationships. For more information about the risks and uncertainties related to the Chapter 11 Cases, see "Risk Factors - Risks Related to the Chapter 11 Cases" in Item 1A of Part I of this Annual Report.
Capital Resources Prior to and During the Chapter 11 Cases
At December 31, 2025, we had $63.3 million of outstanding borrowings under the Prepetition ABL Facility. We also had $300.0 million aggregate principal amount of 2028 Notes outstanding as of December 31, 2025. For additional information on the Prepetition ABL Facility and the 2028 Notes, see Note 9 - Debt Obligations included in Item 8 of Part II of this Annual Report. As noted above, the filing of the Chapter 11 Cases constituted an event of default that accelerated our obligations related to the 2028 Notes and the Prepetition ABL Facility. As a result, the principal and interest due under our outstanding 2028 Notes and Prepetition ABL Facility became immediately due and payable. However, any efforts to enforce such payment obligations are automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors' rights of enforcement are subject to the applicable provisions of the Bankruptcy Code.
On February 3, 2026, the Bankruptcy Court, on an interim basis, approved the DIP ABL Facility, and the Company Parties entered into the DIP Loan and Security Agreement with the DIP Agent and the DIP Lenders, which provides the Company Parties with a senior secured super-priority asset-based debtor-in-possession credit facility consisting of up to $125.0 million in aggregate principal amount (the "DIP Maximum Revolving Facility Amount") of revolving credit commitments, including a roll-up or refinancing of all obligations under the Prepetition ABL Loan and Security Agreement
(which totaled approximately $67.3 million as of February 3, 2026). A portion of the DIP ABL Facility not in excess of $5.0 million is available for the issuance of standby letters of credit. Our obligations under the DIP ABL Facility are secured by a first-priority security interest in substantially all our tangible and intangible assets and all of our current domestic and Canadian subsidiaries, subject to, among other things, customary bankruptcy-related exceptions including certain carve-outs for administrative and professional fee payments arising in connection with the Chapter 11 Cases.
Borrowings under the DIP ABL Facility are subject to a borrowing base. The outstanding balance of the borrowings under the DIP ABL Facility may not exceed in the aggregate at any time the lesser of (i) the DIP Maximum Revolving Facility Amount reduced by certain customary reserves and (ii) the borrowing base, which is calculated on the basis of eligible accounts and inventory. In particular, the borrowing base is equal to (a) 92.5% of the aggregate amount of eligible U.S. and Canadian billed accounts receivable, plus (b) the lesser of (x) 85% of the aggregate amount of eligible U.S. and Canadian unbilled accounts receivable and (y) $6.0 million, plus (c) the lesser of (x) 50% of the aggregate amount of eligible billed non-U.S. and non-Canadian accounts receivable and (y) $3.0 million, plus (d) the lower of cost or market value of eligible inventory, multiplied by the lessor of (x) 70% and (y) 85% of the appraised net orderly liquidation value divided by the book value in respect of such inventory, and, in the case of inventory consisting raw materials, not to exceed a maximum sublimit of $1.0 million, plus (e) the lesser of (x) $10.0 million and (y) an amount equal to 10% of the borrowing base, minus (f) the aggregate amount of reserves, if any, established by the DIP Agent.
Borrowings under the DIP ABL Facility bear interest at a per annum rate equal to the term-specific Secured Overnight Financing Rate ("SOFR") for an interest period of one month, subject to a 1.50% floor, plus an applicable margin of 4.00%.
The maturity date of the DIP ABL Facility is the earlier of the Plan Effective Date and 120 days after the Petition Date, subject to earlier termination upon the occurrence of certain events specified in the DIP Loan and Security Agreement. The proceeds of the DIP ABL Facility are for (i) working capital and corporate purposes of the Company Parties, (ii) bankruptcy-related costs and expenses in respect of the Chapter 11 Cases, (iii) costs and expenses related to the DIP ABL Facility, and (iv) refinancing of obligations under the Prepetition ABL Loan and Security Agreement.
The DIP Loan and Security Agreement contains certain representations and warranties, events of default, and various affirmative and negative covenants that are customary for debtor-in-possession loan agreements of this type, including limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments and investments (including acquisitions). In addition, the DIP Loan and Security Agreement contains certain financial covenants, including a minimum excess availability of not less than $5.0 million.
ATM Program
On November 6, 2023, we entered into an equity distribution agreement (the "Equity Distribution Agreement") with Piper Sandler & Co. (the "ATM Agent"). Pursuant to the Equity Distribution Agreement, we were able to sell, from time to time, shares of our common stock having an aggregate offering price of up to $30.0 million through the ATM Agent acting as our sales agent (our "ATM program"). The ATM Agent received 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 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 year ended December 31, 2024, 5,380,164 shares were sold under the Equity Distribution Agreement, which generated net proceeds of $8.2 million after deducting commissions of $0.3 million, and during the year ended December 31, 2025, no shares were sold under the Equity Distribution Agreement. No additional shares may be sold under the Equity Distribution Agreement.
Expected Capital Resources and Uses After the Chapter 11 Cases
Under the terms contemplated by the Restructuring Support Agreement and the Plan, upon successful emergence from the Chapter 11 Cases, the 2028 Notes will be canceled (and the holders of the 2028 Notes will receive shares of the Reorganized Company's common stock). On December 31, 2025, we had $300.0 million aggregate principal amount of 2028 Notes outstanding and made $39.0 million of interest payments to the holders of the 2028 Notes during the year then ended.
For 2026, assuming successful emergence from the Chapter 11 Cases, our planned capital expenditure budget, excluding possible acquisitions, is expected to be between $15.0 million to $30.0 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. 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 refinancing, which we may not be able to obtain on terms acceptable to us or at all, particularly after recently emerging from the Chapter 11 cases.
On the Plan Effective Date or as soon as reasonably practicable thereafter, we expect that the DIP ABL Facility will be converted into the Exit ABL Facility, a first priority senior secured asset-based revolving credit facility consisting of up to $135.0 million in aggregate principal amount (the "Exit Maximum Revolving Facility Amount") of revolving commitments. A portion of the Exit ABL Facility not in excess of $5.0 million is expected to be available for the issuance of standby letters of credit. Our obligations under the Exit ABL Facility are expected to be secured by a first-priority security interest in substantially all of our tangible and intangible assets and all of our current domestic and Canadian subsidiaries, including all machinery and equipment.
Borrowings under the Exit ABL Facility will be subject to a borrowing base. The outstanding balance of the borrowings under the Exit ABL Facility may not exceed in the aggregate at any time the lesser of (i) the Exit Maximum Revolving Facility Amount reduced by certain customary reserves and (ii) the borrowing base, which is calculated on the basis of eligible accounts, inventory, machinery and equipment, and, at the Company Parties' election, certain real property assets of the Company Parties. In particular, the borrowing base is equal to (a) 92.5% of the aggregate amount of eligible U.S. and Canadian billed accounts receivable, plus (b) the lesser of (x) 85% of the aggregate amount of eligible U.S. and Canadian unbilled accounts receivable and (y) $6 million, plus (c) the lesser of ("Foreign Accounts Availability") (x) 50% of the aggregate amount of eligible billed non-U.S. and non-Canadian accounts receivable and (y) $3 million, plus (d) the lower of cost or market value of eligible inventory, multiplied by the lesser of (x) 70% and (y) 85% of the appraised net orderly liquidation value divided by the book value in respect of such inventory, and, in the case of inventory constituting raw materials, not to exceed a maximum sublimit of $1 million, plus (e) the lesser of ("SOFA Availability") (x) $10 million and (y) an amount equal to 10% of the borrowing base, plus (f) the lesser of (x) the sum of (1) up to 75% of the net orderly liquidation value of eligible machinery and equipment ("M&E Availability") plus (2) up to 75% of the fair market value of eligible real property owned by certain of the Company Parties ("Real Property Availability") and (y) $30 million (which amount shall be permanently reduced on a yearly basis based on a 5-year straight line amortization), minus (g) the aggregate amount of reserves, if any, established by the agent under the loan and security agreement governing the Exit ABL Facility (the "Exit Loan and Security Agreement"). The Exit ABL Facility will also include a feature allowing the Company Parties, at their election, to provide mortgages in favor of the agent and lenders under the Exit ABL Facility over certain of their eligible real property assets from time to time, thereby obtaining additional borrowing base credit under the Exit ABL Facility.
Borrowings under the Exit ABL Facility are expected to bear interest at a per annum rate equal to the term-specific SOFR for an interest period of one month, subject to a 1.50% floor, plus an applicable margin ranging from 3.50% to 4.00%, depending on our fixed charge coverage ratio, subject to an additional margin of 0.50% with respect to any revolving loans or letters of credit utilizing any of M&E Availability, Real Property Availability, SOFA Availability, and/or Foreign Accounts Availability.
The maturity date of the Exit ABL Facility is expected to be three years after the Plan Effective Date, subject to earlier termination upon the occurrence of certain events specified in the Exit Loan and Security Agreement. The proceeds of the Exit ABL Facility will be used for (i) working capital and general corporate purposes of the Company Parties, (ii) costs and expenses related to the Exit ABL Facility, and (iii) refinancing of all obligations under the DIP ABL Facility.
The Exit Loan and Security Agreement is expected to contain certain representations and warranties, events of default, and various affirmative and negative covenants that are customary for asset-based credit facilities of this type, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, and investments (including acquisitions). In addition, the Exit Loan and Security Agreement is expected to contain certain financial covenants, including a minimum excess availability of not less than $5.0 million and a minimum fixed charge coverage ratio of 1.10 to 1.00 that will be tested when the excess availability under the Exit ABL Facility is less than the lesser of (a) 7.5% of the lesser of (x) the Exit Maximum Revolving Facility Amount minus reserves and (y) the borrowing base and (b) $9.0 million, which minimum fixed charge coverage ratio would apply until the excess availability is greater than or equal to such threshold for a period of 30 consecutive days.
There are substantial risks and uncertainties related to our ability to successfully emerge from Chapter 11 and the effects of disruption from the Chapter 11 Cases which may make it more difficult to maintain business, financing, and operational relationships. Refer to Part I, Item IA "Risk Factors - Risks Related to the Chapter 11 Cases" of this Annual Report.
Cash Flows
Our cash flows for the years ended December 31, 2025, and 2024 are presented below:
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Operating activities | $ | (7,306) | $ | 13,195 | |||||||
| Investing activities | (13,594) | (14,178) | |||||||||
| Financing activities | 12,862 | (1,683) | |||||||||
| Impact of foreign exchange rate on cash | - | (294) | |||||||||
| Net change in cash and cash equivalents | $ | (8,038) | $ | (2,960) | |||||||
Operating Activities
Net cash used in operating activities was $7.3 million in 2025 compared to $13.2 million in net cash provided by operating activities in 2024. The $20.5 million change was primarily attributed to a $12.9 million decrease in cash provided by working capital in comparison to 2024, driven mainly by an increased inventory balance in comparison to 2024 coupled with the fluctuation in the timing of certain prepaid expenses between periods. The overall change was also partly attributed to a $7.6 million decrease in cash flow provided by operations driven mainly by an increased net loss in comparison to 2024.
Investing Activities
Net cash used in investing activities was $13.6 million in 2025 compared to $14.2 million in 2024. The $0.6 million decrease was primarily attributed to $2.2 million in cash proceeds from property and equipment casualty losses in 2025 that did not occur in 2024, partially offset by a $1.2 million increase in cash purchases of property and equipment in comparison to 2024 and a $0.4 million decrease in cash proceeds from the sale of property and equipment between periods.
Financing Activities
Net cash provided by financing activities was $12.9 million in 2025 compared to $1.7 million in net cash used in 2024. The $14.6 million change was primarily attributed to a $62.9 million increase in proceeds received from revolving credit facilities and a $3.8 million increase in proceeds from short-term debt, each in comparison to 2024, partially offset by a $38.0 million increase in payments on revolving credit facilities in comparison to 2024, coupled with $8.2 million in proceeds received from the issuance of common stock under our ATM program in 2024, that did not reoccur in 2025, as well as $4.6 million in debt issuance costs associated with the Prepetition ABL Facility in 2025, that did not occur in 2024, and a $1.8 million increase in payments of 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. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our financial statements.
We consider the significant accounting policies identified below to be "critical accounting estimates" due to the following:
•The policies are dependent on estimates and assumptions made by us about matters that are inherently uncertain.
•The policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used.
For additional information on our significant accounting policies, see Note 2 - Significant Accounting Policies included in Item 8 of Part II of this Annual Report.
Property and Equipment
Property and equipment is stated at cost and depreciated under the straight-line method over the estimated useful life of the asset. Equipment held under finance leases is stated at the present value of its future minimum lease payments and is depreciated under the straight-line method over the shorter of the lease term and the estimated useful life of the asset. Estimated useful lives requires significant judgment, which is influenced by our historical experience in operating property and equipment, technological developments, and expectations of future demand. Should our estimates be too long or too short, we could report a disproportionate amount of losses or gains from sale or retirement.
Valuation of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the assets, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the Level 3 fair value of the asset. The Level 3 fair value is determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows based on expected utilization. Determining fair value requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating profit margins, weighted average costs of capital, terminal growth rates, future market share, the impact of new product development, and future market conditions, among others. We believe that the estimates and assumptions used in impairment assessments are reasonable and appropriate. Impairment losses are reflected in "Income (loss) from operations" in our Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).
In the fourth quarter of 2025, due to liquidity constraints and persistent industry headwinds, we downwardly revised internal forecasts associated with our tools, cementing, wireline, and coiled tubing asset groups. As a result, we evaluated the recoverability of long-lived assets (inclusive of property and equipment and definite-lived intangible assets) associated with these asset groups utilizing undiscounted cash flow projections. These projections were based on historical results and management's estimates of future market conditions, including input costs and sales prices, current and future strategic and operational plans, and future financial performance, projected through the remaining useful life of the primary asset associated with each asset group. Based on these recoverability tests in the fourth quarter of 2025, we determined that the carrying amounts of each asset group was recoverable.
Recognition of Provisions for Contingencies
In the ordinary course of business, we are subject to various claims, suits, and complaints. We, in consultation with internal and external advisors, will provide for a contingent loss in the financial statements if it is probable that a liability has been incurred at the date of the financial statements and the amount can be reasonably estimated. Reasonable estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. If it is determined that the reasonable estimate of the loss is a range and that there is no best estimate within the range, provision will be made for the lower amount of the range. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, there may be a material adverse effect on our future financial results.
Stock-based Compensation and Fair Market Value Determination
We account for awards of stock-based compensation at fair value on the date granted to employees and recognize the compensation expense in the financial statements over the requisite service period. Forfeitures are recorded as they occur. All stock-based compensation expense is recorded using the straight-line method and is included in "General and administrative expenses" in our Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).
Fair value of all the options outstanding was measured using the Black-Scholes model. Determining the appropriate fair value model and calculating the fair value of options requires the input of highly subjective assumptions, including the expected volatility of the price of our stock, the risk-free rate, the expected term of the options, and the expected dividend yield of our common stock. These estimates involve inherent uncertainties and the application of management's judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. The Black-Scholes option pricing model requires estimates of key assumptions based on both historical information and management judgment regarding market factors and trends.
Expected Life- The expected term of stock options represents the period the stock options are expected to remain outstanding and is based on the simplified method, which is the weighted average vesting term plus the original contractual term, divided by two.
Expected Volatility- We develop our expected volatility based upon a weighted average volatility of our peer group.
Risk-free Interest Rate- The risk-free interest rates for options granted are based on the average of five year and seven year constant maturity Treasury bond rates whose term is consistent with the expected term of an option from the date of grant.
Expected Term- The expected term is based on the midpoint between the vesting date and contractual term of an option. The expected term represents the period that our stock-based awards are expected to be outstanding.
Expected Dividend Yield- We do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero.
Fair value of the performance cash awards was measured using a Monte Carlo simulation model.
Recent Accounting Pronouncements
For additional information on recent accounting pronouncements, see Note 2 - Significant Accounting Policies included in Item 8 of Part II of this Annual Report.
Smaller Reporting Company Status
We are a "smaller reporting company" as defined by the SEC. As such, we are eligible to comply with the scaled disclosure requirements in several Regulation S-K and Regulation S-X items. Our disclosures in this Annual Report reflect these scaled requirements.
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