NCS Multistage(NCSM) - 2021 Q4 - Annual Report

Part I Business NCS Multistage provides engineered products and services for oil and gas well completions, focusing on North American unconventional formations - The company's business strategy focuses on disciplined organic growth, developing innovative technologies, maintaining financial strength, and pursuing selective mergers, acquisitions, and joint ventures[24] - Revenue diversification has increased. In 2021, fracturing systems and enhanced recovery accounted for 65% of revenue, Repeat Precision for 15%, and well construction and tracer diagnostics for 10% each, a shift from 2016 when fracturing systems were over 90% of revenue[25][26] Products and Services The company offers fracturing, enhanced recovery, tracer diagnostics, and well construction products to optimize well completions - Fracturing Systems: Enables pinpoint stimulation using casing-installed sliding sleeves (Innovus, Ratek) and downhole frac isolation assemblies, also includes sand jet perforating and the Accelus system[27][28] - Enhanced Recovery: Includes valve systems like Innovus Convertible and the Terrus System to facilitate operations such as waterflood or gas injection[29] - Repeat Precision: A 50%-owned joint venture that markets composite frac plugs (Purple Seal line), setting tools, and perforating guns[32] - Tracer Diagnostics: Provides chemical and radioactive tracers to assess completion performance and optimize field development[32] - Well Construction: Products include the AirLock casing buoyancy system, Vecturon and Vectraset liner hanger systems, and toe initiation sleeves[32] Intellectual Property and Patent Protection NCS protects its proprietary technologies with 50 US and 52 international patents, alongside trade secrets - The company holds 50 U.S. utility patents expiring between 2030 and 2039, and 52 related international utility patents expiring between 2025 and 2037[32] - In addition to patents, the company relies on trade secrets, know-how, and licensed third-party intellectual property to protect its technology[34] Customers NCS serves over 225 oil and gas producers, with the top five customers representing 30% of 2021 revenue - In 2021, the company served over 225 customers, with the five largest customers accounting for approximately 30% of revenue[35] - No single customer represented more than 10% of revenue in 2021, though one customer accounted for 10% of revenue in 2020[35] Competition NCS competes intensely in well completion markets against large multinational corporations, emphasizing technology, service, and price - Major competitors include Baker Hughes, Halliburton, Schlumberger, NOV Inc., and Nine Energy Service, among others[47] - The company believes customers select its products based on technical attributes, service level, and operational know-how, in addition to competitive pricing[48] Government Regulations NCS is subject to extensive environmental, health, and safety regulations, with hydraulic fracturing rules indirectly impacting demand - Operations are subject to regulations under the Clean Air Act, Clean Water Act, and RCRA, governing air emissions, water discharge, and waste management[54][55] - Climate change regulations, such as those limiting GHG emissions, could increase costs for customers and reduce demand for oil and natural gas[53][54] - The use of radioactive tracers requires compliance with licenses from the U.S. Nuclear Regulatory Commission (NRC) or equivalent state agencies[55] - Increased regulation or bans on hydraulic fracturing at federal, state, or local levels could significantly decrease demand for the company's products and services[57][59] Risk Factors The company faces significant risks across its business, industry, indebtedness, and stock ownership, including market volatility and governance issues Risks Related to Our Business and the Oil and Natural Gas Industry Performance depends on the cyclical oil and gas industry, facing COVID-19 impacts, E&P spending volatility, intense competition, and regulatory risks - The business has been and may continue to be adversely affected by the COVID-19 pandemic, which has impacted demand, operations, and the supply chain[70][77] - Business depends on E&P spending, which is highly cyclical and sensitive to volatile oil and natural gas prices[78][82] - Significant customer concentration risk exists, with the five largest customers accounting for 30% of revenue in 2021, where the loss of a significant customer could substantially reduce revenue[87] - The company faces intense competition from large multinational corporations and smaller regional players, which can lead to pricing pressure and loss of market share[83] - Federal and state legislative initiatives relating to hydraulic fracturing and climate change could increase costs for customers and decrease demand for the company's products and services[120][125] Risks Relating to Our Indebtedness The company's Senior Secured Credit Facility poses risks due to restrictive covenants, potential default, and refinancing challenges upon its May 2023 maturity - The Senior Secured Credit Facility contains restrictive covenants that limit the ability to pursue certain business strategies[159] - The facility requires maintaining a minimum liquidity of $7.5 million and a fixed charge coverage ratio of at least 1.0 to 1.0 if availability falls below 20% of the borrowing base[160] - A breach of covenants could result in an event of default, allowing lenders to accelerate all outstanding borrowings[162] Risks Relating to Ownership of Our Common Stock Common stock ownership risks include price volatility and significant control by Advent International, impacting governance and investor appeal - Funds managed by Advent International Corporation control 62.1% of the common stock, giving them effective control over all matters requiring stockholder approval, where their interests may differ from those of public stockholders[169] - The company qualifies as a "controlled company" and is exempt from certain Nasdaq governance rules, including the requirement for a majority-independent board[176] - As an "emerging growth company" and "smaller reporting company," NCS may comply with reduced reporting requirements, which could make its common stock less attractive to investors[180][182] Properties The company operates from its Houston headquarters, one owned property in Calgary, and 19 leased facilities for various operational needs - Corporate headquarters is in Houston, Texas, and the company owns one property in Calgary, Alberta, and leases 19 other properties for its operations[191] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NCSM common stock trades on Nasdaq, with 2.4 million shares outstanding held by 17 record holders, and no current dividend plans - Common stock trades on the Nasdaq Capital Market under the symbol "NCSM"[196] - As of March 4, 2022, there were 2,405,746 shares of common stock outstanding held by approximately 17 record holders[197] - The company does not intend to pay cash dividends in the foreseeable future[198] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2021 revenue growth to $118.5 million, reduced net loss, 2022 activity outlook, and ongoing liquidity management amid market challenges Outlook Management anticipates higher 2022 industry activity, with drilling and completion growth across US, Canada, and international markets, despite competitive pressures - United States: 2022 drilling activity expected to increase by over 20%; completion activity by over 10%[208] - Canada: 2022 drilling and completion activity expected to increase by 10% to 15%[208] - International: 2022 industry activity expected to improve by over 10%[208] COVID-19 Impacts COVID-19 impacted the oil and gas market, prompting NCS to implement cost-saving measures and record significant impairment charges in 2020 - In response to the pandemic's impact, the company undertook significant cost reduction initiatives, including reductions in force, salary cuts, a moratorium on non-essential travel, and deferral of U.S. employer payroll taxes[215] - The company recorded severance expense of $5.7 million in 2020 related to workforce reductions[217] - Due to the market decline, the company recorded impairment charges totaling $50.2 million ($9.7 million for property & equipment, $40.5 million for identifiable intangibles) in the first quarter of 2020[218] Results of Operations (2021 vs 2020) 2021 revenues increased to $118.5 million, with operating loss significantly improving from 2020 due to higher activity and reduced SG&A expenses | Line Item | 2021 (in thousands) | 2020 (in thousands) | Variance (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $118,502 | $106,977 | 10.8% | | Total cost of sales | $70,027 | $62,907 | 11.3% | | SG&A expenses | $49,094 | $59,425 | (17.4)% | | Impairments | $0 | $50,194 | (100.0)% | | Loss from operations | $(5,120) | $(71,440) | 92.8% | | Gain on patent infringement settlement | $0 | $25,678 | (100.0)% | | Net loss attributable to NCS | $(4,734) | $(57,599) | 91.8% | - Revenue increased by $11.5 million, reflecting higher product and service volumes in Canada and increased U.S. services, partially offset by lower U.S. product sales and pricing pressure[245] - SG&A expenses decreased by $10.3 million, primarily due to lower compensation from reduced headcount, lower share-based compensation, reduced professional fees, a $5.6 million decline in severance charges, and a $2.3 million employee retention credit benefit[247] Non-GAAP Financial Measures Adjusted EBITDA significantly increased to $9.1 million in 2021, while Free Cash Flow decreased to $11.1 million, impacted by prior year's patent settlement | Reconciliation to Adjusted EBITDA (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net loss | $(3,779) | $(39,106) | | EBITDA | $1,718 | $(39,202) | | Impairments | — | $50,194 | | Gain on patent infringement settlement | — | $(25,678) | | Share-based compensation | $4,221 | $7,723 | | Severance and other termination benefits | — | $5,661 | | Adjusted EBITDA | $9,094 | $2,184 | | Reconciliation to Free Cash Flow (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,583 | $35,117 | | Purchases of property and equipment | $(495) | $(2,098) | | Purchase and development of software and technology | $(338) | $(55) | | Proceeds from sales of property and equipment | $389 | $1,094 | | Free cash flow | $11,139 | $34,058 | Liquidity and Capital Resources NCS maintains liquidity through cash, operations, and its credit facility, with $22.2 million cash and $15.4 million available, sufficient for 2022 needs - As of December 31, 2021, the company had $22.2 million in cash and cash equivalents[266] - The Senior Secured Credit Facility had an available borrowing base of $15.4 million with no outstanding borrowings at year-end 2021[266] - Planned capital expenditures for 2022 are approximately $2 million to $3 million[267] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks including commodity price volatility, significant foreign currency exposure (62% CAD revenue), interest rate fluctuations, and E&P credit risk - The business is indirectly exposed to commodity price risk through its impact on customer E&P activity[292] - Significant foreign currency risk exists, with 62% of 2021 revenue denominated in Canadian dollars[293] - Credit risk is concentrated within the oil and gas industry, with customers being E&P companies and other oilfield service providers[296] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2019-2021, including balance sheets, income statements, cash flows, and detailed notes Note 10. Commitments and Contingencies Key commitments and contingencies include a 2020 patent settlement gain of $25.7 million and $3.2 million in 2021 Employee Retention Credits - A patent infringement settlement with Diamondback in 2020 resulted in a gain of $25.7 million, which included cash, a patent transfer, and future payments[409] - The company qualified for and claimed $3.2 million in Employee Retention Credits (ERC) for the year ended December 31, 2021[412] Note 18. Segment and Geographic Information NCS operates as a single segment, with Canada as its largest market (62% of 2021 revenue) and most long-lived assets in the US and Canada | Revenue by Geography (in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | United States | $35,155 | $46,179 | $103,291 | | Canada | $73,083 | $48,549 | $86,563 | | Other Countries | $10,264 | $12,249 | $15,631 | | Total Revenues | $118,502 | $106,977 | $205,485 | | Long-Lived Assets by Geography (in thousands) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | United States | $17,835 | $16,616 | | Canada | $9,604 | $10,356 | | Other Countries | $2,078 | $2,633 | | Total | $29,517 | $29,605 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[462] - Management concluded that internal control over financial reporting was effective as of December 31, 2021[464] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - The company has a Code of Business Conduct and Ethics applicable to all employees, officers, and directors[470] - Other required information for this item is incorporated by reference from the 2022 Proxy Statement[471] Executive Compensation Executive compensation information is incorporated by reference from the company's 2022 Proxy Statement - The information required by this item will be included in the 2022 Proxy Statement and is incorporated by reference[472] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans, including 264,831 securities for issuance and 429,602 available for future grants | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 264,831 | $122.14 | 429,602 | - The number of securities remaining available for future issuance includes 86,416 shares under the ESPP, which was suspended as of July 1, 2019[477] Part IV Exhibits, Financial Statement Schedules This section lists Form 10-K exhibits, including financial statements and various certifications, with financial statement schedules omitted - All required financial statement schedules have been omitted because the information is not applicable or is included in the consolidated financial statements and notes[479] - A list of exhibits filed with the report is provided, including the company's credit agreement, equity incentive plans, and various certifications[481][482]