NCS Multistage(NCSM) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited financial statements for the period ended June 30, 2022, indicate revenue growth, a net loss, and a decline in total assets primarily due to reduced cash and negative operating cash flow Condensed Consolidated Balance Sheets As of June 30, 2022, total assets decreased to $132.7 million from $142.3 million at year-end 2021, primarily due to a reduction in cash and cash equivalents Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total current assets | $79,740 | $88,493 | | Cash and cash equivalents | $14,930 | $22,168 | | Total assets | $132,697 | $142,325 | | Total current liabilities | $17,064 | $19,818 | | Total liabilities | $28,730 | $31,658 | | Total equity | $103,967 | $110,667 | Condensed Consolidated Statements of Operations For the six months ended June 30, 2022, revenues increased 33% to $66.6 million, yet the company reported a net loss of $7.2 million, a slight improvement over the prior year Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $27,464 | $21,461 | $66,576 | $49,975 | | Loss from operations | $(5,910) | $(5,391) | $(8,113) | $(9,043) | | Net loss | $(5,478) | $(5,544) | $(7,207) | $(9,001) | | Net loss attributable to NCS | $(5,481) | $(5,795) | $(7,016) | $(9,192) | | Diluted loss per share | $(2.25) | $(2.41) | $(2.89) | $(3.85) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2022, net cash used in operating activities was $(5.2) million, a significant decrease from the prior year, leading to a $7.2 million net decrease in cash and cash equivalents Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(5,198) | $1,090 | | Net cash used in investing activities | $(301) | $(316) | | Net cash used in financing activities | $(1,525) | $(2,580) | | Net change in cash and cash equivalents | $(7,238) | $(1,646) | Notes to Condensed Consolidated Financial Statements The notes provide details on accounting policies, geographic revenue breakdown showing strong growth in Canada and the U.S., the new $35.0 million ABL Facility, and share-based compensation awards Revenue by Geographic Region (in thousands) | Region | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | United States | $12,133 | $9,228 | $21,211 | $17,051 | | Canada | $12,848 | $9,194 | $41,377 | $29,429 | | Other Countries | $2,483 | $3,039 | $3,988 | $3,495 | | Total revenues | $27,464 | $21,461 | $66,576 | $49,975 | - On May 3, 2022, the company entered into a new $35.0 million secured asset-based revolving credit facility (ABL Facility), which replaced and terminated its Prior Senior Secured Credit Facility[54][55][56] - During the first six months of 2022, the company granted 66,793 restricted stock units (RSUs), 48,565 cash-settled equivalent stock units (ESUs), and 17,454 performance stock units (PSUs)[69][70][71] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 28% Q2 2022 revenue growth driven by North American activity, offset by competitive pressures, rising costs, and supply chain disruptions, while maintaining liquidity through cash and a new ABL facility Outlook The company anticipates increased drilling and completion activity in North America for 2022, but faces challenges from intense competition, inflationary pressures on costs, and potential economic slowdowns - Management expects U.S. drilling and completion activity to increase by over 20% and over 10% respectively in 2022, while Canadian activity is expected to increase by 15% to 25%[85] - The company is experiencing increased prices for raw materials (steel, chemicals), purchased components, and outsourced services, which began in H2 2021 and continued into 2022[87] - Tight labor conditions have led to increased employee turnover, delays in hiring, and labor cost inflation, impacting both cost of sales and SG&A expenses[87][112] Results of Operations For Q2 2022, revenues increased 28.0% to $27.5 million, but cost of sales grew faster at 33.0% due to inflation, leading to a widened operating loss of $(5.9) million Results of Operations Comparison (in thousands) | Metric | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $27,464 | $21,461 | 28.0% | | Total cost of sales | $18,523 | $13,927 | 33.0% | | SG&A expenses | $13,745 | $11,823 | 16.3% | | Loss from operations | $(5,910) | $(5,391) | (9.6)% | - The increase in cost of sales as a percentage of revenue was driven by lower pricing for certain products, a less favorable revenue mix, and increased costs for raw materials, labor, and outsourced services[117] - The rise in SG&A expenses was primarily due to $1.1 million in higher compensation and benefit costs following the reinstatement of salaries and benefits that were temporarily reduced in prior periods[118] Liquidity and Capital Resources As of June 30, 2022, liquidity was supported by $14.9 million in cash and a new $35.0 million ABL facility, despite negative operating cash flow of $(5.2) million for the first six months Liquidity Position as of June 30, 2022 (in millions) | Item | Amount | | :--- | :--- | | Cash and cash equivalents | $14.9 | | ABL Facility Size | $35.0 | | ABL Borrowing Base | $12.8 | | ABL Outstanding Borrowings | $0.0 | - The decrease in operating cash flow for the first six months of 2022 was primarily driven by the payment of a $3.2 million annual incentive bonus and increases in accounts receivable and inventories[135] - Capital expenditures for 2022 are planned to be between $1.0 million and $2.0 million[132] Quantitative and Qualitative Disclosures About Market Risk The company's market risk profile remains largely unchanged, with primary exposure to interest rate risk from the new ABL Facility, which had no outstanding borrowings as of June 30, 2022 - The company's primary market risk is interest rate risk, now tied to its new ABL Facility entered into on May 3, 2022, with borrowings bearing variable interest rates based on benchmarks including SOFR, CDOR, and prime rates[148][149] - As of June 30, 2022, the company had no outstanding indebtedness under the ABL Facility[149] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that as of June 30, 2022, the company's disclosure controls and procedures were effective[150] - There were no changes to internal control over financial reporting during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[151] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, which management does not expect to have a material adverse effect on its financial condition or operations - The company is involved in various legal proceedings in the ordinary course of business but does not expect the results to have a material adverse effect on its financial condition[66][153] Risk Factors The company highlights new and updated risk factors primarily related to its new ABL Facility, including potential adverse effects on financial condition, restrictive covenants, and limitations on borrowing ability under certain liquidity conditions - The new ABL Facility is secured by substantially all company assets and availability is limited by a borrowing base calculation, which could be constrained by adverse market developments[155] - The ABL Facility contains restrictive covenants that limit the company's ability to, among other things, incur additional debt, grant liens, make certain investments, and pay dividends[159] - A financial covenant requires maintaining a fixed charge coverage ratio of at least 1.0 to 1.0 whenever liquidity is less than 20% of revolving commitments, which could impact the ability to borrow under the facility[160] Exhibits This section lists exhibits filed with the Form 10-Q, including the Credit Agreement for the new ABL Facility, an amended CFO employment agreement, and required CEO and CFO certifications - Key exhibits filed include the Credit Agreement for the new ABL Facility, an amended employment agreement for Ryan Hummer (CFO), and Sarbanes-Oxley Act certifications[164]