NCS Multistage(NCSM) - 2022 Q4 - Annual Report

General Information This section provides foundational disclosures including forward-looking statement caveats, intellectual property ownership, and access to public filings Cautionary Note Regarding Forward-Looking Statements This section highlights that the Form 10-K contains forward-looking statements, which are subject to inherent uncertainties, risks, and changes in circumstances that could cause actual results to differ materially from expectations - Forward-looking statements are based on current expectations and assumptions, but actual results may differ materially due to inherent uncertainties, risks, and changes in circumstances[9] - Key risks include: declines in oil and natural gas E&P activity, oil and natural gas price fluctuations, significant competition, inability to develop new technologies, inability to increase sales in U.S. and international markets, loss of significant customers, supply chain disruptions, and regulatory changes[9] - Other risks: attracting and retaining qualified employees, currency exchange rate fluctuations, impact of severe weather, changes in legislation governing the oil and natural gas industry, and cybersecurity breaches[10] Trademarks and Trade Names NCS Multistage Holdings, Inc. owns or has rights to various trademarks, service marks, and trade names, including AirLock, MultiCycle, Innovus, and NCS - The company owns or has rights to various trademarks, service marks, and trade names, such as AirLock, MultiCycle, Innovus, Terrus, Ratek, Vecturon, Vectraset, PurpleSeal, PurpleFire, Repeat Precision, and NCS[12] Available Information The company's SEC filings, including 10-K, 10-Q, and 8-K reports, are available for download free of charge on its website and the SEC's website - SEC filings (10-K, 10-Q, 8-K) are available on the company's website (www.ncsmultistage.com) and the SEC's website (www.sec.gov)[13](index=13&type=chunk) - Investor information, presentations, and press releases are also posted on http://ir.ncsmultistage.com to comply with disclosure obligations[13] PART I Item 1. Business NCS Multistage Holdings, Inc. is a leading provider of engineered products and support services for oil and natural gas well construction, completions, and field development, primarily serving E&P companies in North America and select international markets - NCS Multistage Holdings, Inc. is a leading provider of highly engineered products and support services for oil and natural gas well construction, completions, and field development strategies[14] - The company serves over 245 customers, including large independent and major oil companies, primarily in North America and international markets like Argentina, China, the Middle East, and the North Sea[14] Revenue and Net Loss (2021-2022) | Metric | 2022 (Millions) | 2021 (Millions) | | :----- | :-------------- | :-------------- | | Revenue | $155.6 | $118.5 | | Net Loss | $(1.1) | $(4.7) | - Business Strategy: Increase adoption of products/services, innovate technology, maintain financial strength, and pursue complementary M&A/JVs[20] - Revenue Diversification (2022): 65% from fracturing systems and enhanced oil recovery, 15% from Repeat Precision, 10% from well construction, and 10% from tracer diagnostics, representing a more balanced portfolio compared to 2016 (over 90% from fracturing systems)[20][21] Overview NCS Multistage Holdings, Inc. provides engineered products and support services for oil and natural gas well construction, completions, and field development, primarily to E&P companies in North America and selected international markets - NCS is a leading provider of highly engineered products and support services for oil and natural gas well construction, completions, and field development strategies[14] - Primary offering: Fracturing systems products and services for efficient pinpoint stimulation in horizontal wells, predominantly in unconventional and conventional oil and natural gas formations[14][15] - Other offerings include enhanced recovery systems, a 50% controlling interest in Repeat Precision (composite frac plugs, perforating guns, machining), tracer diagnostics services, and well construction products (casing buoyancy, liner hanger, toe initiation sleeves)[16][17][18] Business Strategy The company's strategy focuses on increasing market adoption of its products and services globally, continuous technological innovation, maintaining financial strength, and pursuing strategic mergers, acquisitions, and joint ventures - Increase market share through disciplined organic growth in the U.S., Canada, and select international markets[20] - Develop and introduce innovative technologies aligned with customer needs[20] - Maintain financial strength and flexibility[20] - Selectively pursue complementary mergers, acquisitions, and joint ventures[20] - Revenue diversification achieved through investments like Repeat Precision and the acquisition of Spectrum Tracer Services, LLC in 2017[21] Revenue Mix by Product/Service (2022 vs. 2016) | Product/Service Category | 2022 Revenue Share | 2016 Revenue Share | | :----------------------- | :----------------- | :----------------- | | Fracturing Systems & Enhanced Oil Recovery | ~65% | >90% | | Repeat Precision | ~15% | N/A | | Well Construction | ~10% | Remainder | | Tracer Diagnostics | ~10% | N/A | Products and Services NCS offers a range of highly engineered products and support services for oil and natural gas wells, including fracturing systems, enhanced recovery systems, Repeat Precision products, tracer diagnostics, and well construction products - Fracturing Systems: Enable efficient pinpoint stimulation, selective stage isolation, and re-stimulation, with products including casing-installed sliding sleeves (Innovus, Ratek) and downhole frac isolation assemblies, along with advisory services on completion designs[23][24] - Enhanced Recovery: Injection control devices and valve systems (Innovus Convertible, Terrus System) extend well life by converting production wells to injection wells for waterflood or gas injection[29] - Repeat Precision: Sells Purple Seal composite frac plugs, bridge plugs, RP single-use disposable setting tools, and PurpleFire perforating guns, also providing machining services for NCS products[29] - Tracer Diagnostics: Chemical and radioactive tracer services (FFIs, WSTs, OSTs, RGTs) assess wellbore clearance, completion performance, production, and well-to-well communication[29] - Well Construction: Products like AirLock casing buoyancy systems, Vecturon and Vectraset liner hanger systems, and toe initiation sleeves facilitate safe and efficient casing installation, cementing, and initial formation access[29] Business History NCS Multistage Holdings, Inc. was incorporated in Delaware on November 28, 2012, as Pioneer Super Holdings, Inc., changing its name in December 2016 and completing its initial public offering on May 3, 2017 - Incorporated in Delaware on November 28, 2012, as Pioneer Super Holdings, Inc[26] - Changed name to NCS Multistage Holdings, Inc. on December 13, 2016[26] - Completed initial public offering of common stock on May 3, 2017[26] Intellectual Property and Patent Protection The company invests in R&D to develop new technologies, protected by 59 U.S. utility patents and 50 international utility patents, and relies on trade secrets and licensed IP, actively enforcing its rights - Holds 59 U.S. utility patents (expiring 2030-2040) and 50 related international utility patents (expiring 2028-2037) across its product lines[28] - Also has pending U.S. and international patent applications and relies on trade secrets and licensed intellectual property[30][31] - Actively enforces intellectual property rights and has been involved in litigation to determine enforceability, scope, and validity of patent rights[31] Customers NCS primarily serves oil and natural gas producers in North America and international markets, as well as oilfield service companies, with its customer base growing to over 245 in 2022 - Customer base primarily consists of oil and natural gas producers and oilfield service companies in North America and international markets[32] Customer Base and Concentration | Metric | 2022 | 2021 | | :----- | :--- | :--- | | Total Customers | >245 | >225 | | Top 5 Customers Revenue Share | ~24% | ~30% | | Single Largest Customer Revenue Share | <10% | <10% | Sales and Marketing Sales and marketing are conducted by a technically-trained sales force that educates customers on the benefits of NCS's technologies, with direct sales in North America and international sales through local entities or operating partners - Sales and marketing activities are performed by a technically-trained sales force, advising customers on pinpoint stimulation, sliding sleeves, enhanced recovery, well construction, and tracer diagnostics[33] - In the U.S. and Canada, sales are direct to E&P companies, with casing buoyancy systems also sold through distributors, and Repeat Precision having a separate sales force[34] - International sales are made through local NCS entities or operating partners in locations like China and the Middle East, who market products but do not contractually bind the company[35] Seasonality The company's business is subject to quarterly variability, particularly in Canada, where activity is higher in Q1 due to winter freeze access and declines in Q2 due to thawing and road bans - Canada experiences higher activity in Q1 due to winter freeze access to remote drilling areas[37] - Canadian revenue declines in Q2 due to warming weather, softer ground, and road bans[37] - Activity improves in Q3 and Q4 in Canada, but usually remains below Q1 levels[37] - Business can be impacted by reduced customer activity during winter holidays (late December/early January) and year-end capital budget exhaustion in the U.S. and Canada[37] Suppliers and Raw Materials NCS sources components, raw materials, and parts from multiple suppliers and machine shops to avoid dependency, with prices influenced by commodity prices, tariffs, and exchange rates - Sources components, raw materials (steel, electronic components, chemicals, elastomers) from multiple suppliers and machine shops to avoid dependency[39][40] - Prices are affected by energy, steel, other commodity prices, tariffs, and foreign currency exchange rates[39] - COVID-19 continues to cause supply chain disruptions (especially in China) and cost inflation (including labor), leading the company to qualify additional vendors[41] Operating Risks and Insurance The company maintains various insurance coverages for its operations, believing them to be adequate for current risks, but acknowledges the potential for uncovered or insufficient losses - Maintains various insurance coverages for operations, but acknowledges the risk that coverage may not be sufficient for all losses[42] Competition NCS operates in highly competitive markets, competing with large national and multinational companies, as well as smaller regional players, with key competitive factors being technology, service quality, safety record, and price - Operates in highly competitive markets, competing with large national/multi-national companies and smaller regional competitors[43][45] - Principal competitive factors: technology, service quality, safety track record, and price[44] - Major competitors include Baker Hughes Company, Core Laboratories N.V., DMC Global Inc., Forum Energy Technologies, Inc., Halliburton Company, Innovex Downhole Solutions, Nine Energy Service, Inc., NOV Inc., Oil States International, Inc., Packers Plus Energy Services Inc., SLB, Schoeller-Bleckmann Oilfield Equipment AG, and Weatherford International[45][46] - Customers select products/services based on technical attributes, technical and operational service, and extensive operational track record, in addition to competitive pricing[46] Government Regulations NCS is subject to stringent federal, state, provincial, and local environmental, health, and safety laws, including those governing air emissions, water discharges, climate change, waste management, and occupational safety - Subject to stringent federal, state, provincial, and local laws and regulations governing environmental protection, worker health, and safety[47] - Climate Change: Regulations restricting GHG emissions (e.g., Paris Agreement, EPA's NSPS for methane, Inflation Reduction Act of 2022) could increase compliance costs for customers and reduce demand for oil and natural gas[51][52] - Hydraulic Fracturing: State and local regulations, potential bans (e.g., New York, California), and federal oversight could increase costs, restrict operations, and decrease demand for related products/services[55] - Radioactive Materials: Use of radioactive tracers requires compliance with NRC licenses, including training, record-keeping, safety monitoring, and proper disposal[56] - Failure to comply with regulations can result in penalties, remedial obligations, and injunctive relief, potentially impacting business, financial condition, and results of operations[47][54] Employees As of December 31, 2022, NCS had 262 employees (228 full-time), with 145 in the U.S., 107 in Canada, and 10 internationally, while its joint venture, Repeat Precision, had 208 employees Employee Count and Location (as of Dec 31, 2022) | Category | Count | Location | | :------- | :---- | :------- | | Total Employees (NCS) | 262 | 145 U.S., 107 Canada, 10 International | | Full-time Employees (NCS) | 228 | N/A | | Repeat Precision Employees | 208 | 23 U.S., 185 Mexico | - NCS is not a party to any collective bargaining agreements in North America and maintains good relations with its employees[59] Item 1A. Risk Factors This section details various risks that could adversely affect NCS Multistage Holdings, Inc.'s business, financial condition, results of operations, cash flows, liquidity, or stock value - The section outlines potential events, trends, or circumstances that could adversely affect the company's business, financial condition, results of operations, cash flows, liquidity, or market value of common stock[60] - Business and Industry Risks: Dependence on oil/natural gas E&P activity, industry cyclicality, intense competition, inability to develop new technologies, customer concentration, operational hazards (explosives, personal injury), credit risk from customers, acquisition/partnership risks, inflation, supply chain disruptions, reliance on key personnel, joint venture risks, currency fluctuations, severe weather, water availability for hydraulic fracturing, climate change legislation, and government regulations[63][64][66][67][68] - Indebtedness Risks: Reliance on subsidiary distributions, impact of outstanding indebtedness on financial condition and operations, and restrictive covenants in debt agreements[63][64][66][67][68] - Common Stock Ownership Risks: Stock price volatility, control by Advent International Corporation, potential for future stock sales, 'controlled company' exemption, anti-takeover protections, and 'smaller reporting company' status[63][64][66][67][68] RISK FACTORS SUMMARY This summary provides a high-level overview of the material risks associated with investing in NCS Multistage Holdings, Inc.'s securities, categorized into risks related to the business and oil/natural gas industry, indebtedness, and common stock ownership - Summary of material risks for investors, categorized into risks related to business and the oil and natural gas industry, indebtedness, and common stock ownership[62][63][67][68] Risks Related to Our Business and the Oil and Natural Gas Industry The company's business is highly dependent on the volatile oil and natural gas industry, facing risks from fluctuating commodity prices, intense competition, and the need for continuous technological innovation - Business depends on oil and natural gas E&P activity, which is sensitive to commodity prices and customer capital spending[64] - Industry cyclicality causes operating results to fluctuate; WTI oil prices ranged from $(36.98)/Bbl to $123.64/Bbl (2018-2022), Henry Hub natural gas from $1.33/MMBtu to $23.86/MMBtu (2018-2022)[66] - Highly competitive market with larger competitors, leading to pricing pressures and difficulty commercializing new products[67] - Success relies on developing new technologies and protecting intellectual property; failure to do so or infringement by competitors could harm business[69] - Operations involve inherent hazards (explosions, equipment failure) leading to potential liabilities for personal injury, property damage, and environmental harm[71] - Exposure to credit risk from E&P customers, especially during low commodity price environments, potentially leading to nonpayment or bankruptcy[72] - Growth through acquisitions/partnerships carries risks like integration challenges, failure to realize benefits, and diversion of management attention[73] - Adverse effects from inflation (wages, materials, interest rates) and supply chain disruptions (e.g., COVID-19, tariffs on Chinese commodities)[74] - Dependence on key personnel and ability to attract/retain skilled employees; labor shortages or increased turnover could impact operations[75] - Joint venture operations (e.g., Repeat Precision) introduce risks like limited control over decisions, disputes, and potential liabilities[76] - Significant revenue in CAD (65% in 2022) exposes the company to currency fluctuations[77] - Operations in North America and the North Sea are vulnerable to severe weather conditions, causing disruptions and increased costs[78] - Hydraulic fracturing's dependence on water and potential restrictions on water use could impact customer demand[79] - Climate change legislation (GHG emissions, carbon taxes) and hydraulic fracturing regulations (bans, increased costs) could reduce demand for oil and natural gas and increase compliance costs[80][81][82][83][84][85][86][87][88][89][90][91][92][93][94][95][96][97][98][99][100][101][103][104][105][106][107][108][109][110][111][112][113][114][115][116][117][118][119][120][121][122][123][124][125][126][127][128][129][130][131][132][133][134][135][136][137][138][139][140][141][142][143][144][145][146][147][148][149] - Cybersecurity risks and ERP system complications could lead to information theft, operational disruption, and financial loss[103] - Impairment in the carrying value of long-lived assets (including goodwill) could negatively affect operating results[104] - International operations are subject to U.S. and non-U.S. laws like FCPA and trade sanctions, and local laws/customs, increasing compliance risks[105] Risks Relating to Our Indebtedness NCS, as a holding company, relies on its subsidiaries for cash flow, which can be restricted by debt agreements, and its outstanding indebtedness exposes it to financial risks - As a holding company, NCS relies on dividends and distributions from subsidiaries, which are restricted by debt agreements[150] - Outstanding indebtedness ($7.9 million as of Dec 31, 2022) could adversely affect financial condition and operations, requiring substantial cash flow for debt service[151] - ABL Facility (up to $35.0 million) borrowing base is limited by eligible accounts receivable and inventory, excluding Repeat Precision assets, with a borrowing base of $18.6 million and no outstanding borrowings as of Dec 31, 2022[152][153] - Indebtedness increases vulnerability to economic downturns, limits additional financing, and exposes to variable interest rate risks (SOFR)[154][155] - Restrictive covenants in ABL Facility and Repeat Precision Promissory Note limit actions like incurring additional debt, granting liens, making investments, or paying dividends[156] - Breach of covenants could lead to acceleration of debt and termination of borrowing commitments, potentially forcing asset sales or refinancing on unfavorable terms[158][159] Risks Relating to Ownership of Our Common Stock The market price of NCS's common stock can be highly volatile, and the company is controlled by Advent International Corporation, whose interests may differ from public stockholders - Stock Price Volatility: Market price can fluctuate significantly due to financial results, industry developments, analyst reports, investor perceptions (including ESG), sales by insiders, regulatory changes, and economic conditions[160][161][162][163][164][165][166][167][168][169][170][171][172][173][174][175][176][177][178][179][180][181][182][183] - Control by Advent Funds: Advent International Corporation controls 61.4% of voting power, influencing major corporate decisions and potentially pursuing interests differing from public stockholders[160][161][162][163][164][165][166][167][168][169][170][171][172][173][174][175][176][177][178][179][180][181][182][183] - Future Sales: Additional sales of common stock or the perception of such sales could cause the market price to decline[160][161][162][163][164][165][166][167][168][169][170][171][172][173][174][175][176][177][178][179][180][181][182][183] - Controlled Company Exemption: As a 'controlled company,' NCS is exempt from certain Nasdaq corporate governance rules (e.g., independent board majority, compensation/nominating committees), potentially making stock less attractive[160][161][162][163][164][165][166][167][168][169][170][171][172][173][174][175][176][177][178][179][180][181][182][183] - Anti-takeover Protections: Provisions in corporate documents and debt agreements (e.g., preferred stock issuance, change of control clauses) could discourage or prevent takeovers[160][161][162][163][164][165][166][167][168][169][170][171][172][173][174][175][176][177][178][179][180][181][182][183] - Smaller Reporting Company Status: Reduced reporting requirements may make it harder for investors to analyze financial prospects[160][161][162][163][164][165][166][167][168][169][170][171][172][173][174][175][176][177][178][179][180][181][182][183] - Internal Control Weaknesses: Failure to maintain effective internal controls could lead to material misstatements, reporting failures, or fraud, negatively impacting stock price[160][161][162][163][164][165][166][167][168][169][170][171][172][173][174][175][176][177][178][179][180][181][182][183] - ESG Sentiment: Public and investor sentiment towards climate change, fossil fuels, and ESG matters could adversely affect cost of capital, availability of capital, and stock price[160][161][162][163][164][165][166][167][168][169][170][171][172][173][174][175][176][177][178][179][180][181][182][183] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC - No unresolved staff comments[185] Item 2. Properties NCS Multistage Holdings, Inc.'s corporate headquarters is in Houston, Texas, and the company owns one property in Calgary, Alberta, and leases 19 other properties for various operations - Corporate headquarters located in Houston, Texas[185] - Owns one property in Calgary, Alberta, for engineering and R&D[185] - Leases 19 properties with terms greater than 12 months for corporate headquarters, sales offices, manufacturing, engineering, district operations, laboratory, warehousing, and storage yards[185] - Facilities are deemed adequate for current operations, and no individual lease is considered material[185] Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 10 of the consolidated financial statements - Refer to 'Note 10. Commitments and Contingencies' in the consolidated financial statements for information on legal proceedings[186] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[187] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NCS Multistage Holdings, Inc.'s common stock trades on the Nasdaq Capital Market under the symbol "NCSM," with 2,438,877 shares outstanding held by approximately 17 record holders as of March 3, 2023 - Common stock trades on the Nasdaq Capital Market under the symbol "NCSM"[190] Common Stock Information (as of March 3, 2023) | Metric | Value | | :----- | :---- | | Shares Outstanding | 2,438,877 | | Record Holders | ~17 | - The company does not intend to pay cash dividends on common stock in the foreseeable future, with any future decision at the Board's discretion, considering debt restrictions and financial conditions[192] - No unregistered sales of equity securities or issuer purchases of equity securities occurred[194][195] Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of NCS Multistage Holdings, Inc.'s financial condition and operational results, highlighting its role as a provider of engineered products and services to the oil and natural gas E&P industry - NCS is a leading provider of highly engineered products and support services for oil and natural gas well construction, completions, and field development strategies, primarily serving E&P companies in North America and selected international markets[197] - The company's primary offering is fracturing systems for efficient pinpoint stimulation, along with enhanced recovery systems, Repeat Precision products (composite frac plugs, perforating guns), tracer diagnostics, and well construction products[198][199] - Outlook for 2023: Annual average industry drilling and completion activity in the U.S. and Canada expected to be equal to or up to 10% higher than 2022, with international activity improving by over 10%[202] - Continuing challenges include intense competitive pressure, higher raw material and outsourced service costs (exacerbated by Russia-Ukraine conflict), labor cost inflation, and negative impacts from a stronger U.S. dollar on Canadian revenue[204][205][206] Overview NCS Multistage Holdings, Inc. is a key provider of engineered products and support services for optimizing oil and natural gas well construction, completions, and field development - NCS provides highly engineered products and support services for oil and natural gas well construction, completions, and field development strategies[197] - Primary offerings include fracturing systems for pinpoint stimulation, enhanced recovery systems, composite frac plugs and perforating guns (via Repeat Precision), tracer diagnostics, and well construction products[198][199] - Serves over 245 E&P companies in North America and selected international markets[197] Outlook The company anticipates increased drilling and completion activity in North America and internationally in 2023, despite potential moderation in U.S. activity due to natural gas price declines - U.S. and Canadian drilling and completion activity has steadily increased since late 2020, with Q4 2022 rig counts up 39% and 18% YoY, respectively[201] - 2023 outlook: Annual average industry drilling and completion activity in the U.S. and Canada expected to be equal to 2022 levels or higher by up to 10%[202] - International industry activity expected to improve by over 10% in 2023[204] - Challenges: Intense competitive pressure, higher raw material (steel, chemicals) and outsourced service prices, labor cost inflation, and negative impact from a stronger U.S. dollar on Canadian revenue (over 60% of revenue from Canada)[205][206] - Central bank interest rate increases to combat inflation could lead to a recessionary environment, moderating or declining demand for oil and natural gas[206] COVID-19 Impacts on the Oil & Natural Gas Market and NCS Multistage The COVID-19 pandemic caused significant declines in economic activity, energy demand, and oil/natural gas prices in 2020, leading to reduced E&P capital spending and industry consolidation - COVID-19 caused unprecedented declines in economic activity, energy demand, and oil/natural gas prices in 2020, leading to reduced E&P capital spending and industry consolidation[207] - Demand for crude oil has recovered but remains below 2019 levels, not expected to reach pre-COVID levels until 2023[207] - NCS implemented cost reduction initiatives in 2020 (reductions in force, temporary compensation cuts), substantially restoring or increasing employee compensation and benefits in early 2022[208] - Continuing impacts include occasional supply chain disruptions (especially from China) and persistent cost inflation (including labor), addressed by qualifying additional suppliers[209] Market Conditions Oil and natural gas prices remained volatile in 2022, with WTI crude peaking over $100/BBL after Russia's invasion of Ukraine, then declining to $83/BBL by Q4 due to economic concerns Average Crude Oil and Natural Gas Prices (Q1 2020 - Q4 2022) | Quarter Ended | WTI Crude (per Bbl) | Brent Crude (per Bbl) | Henry Hub Natural Gas (per MMBtu) | | :------------ | :------------------ | :-------------------- | :-------------------------------- | | 3/31/2020 | $45.54 | $50.45 | $1.90 | | 6/30/2020 | $27.96 | $29.70 | $1.70 | | 9/30/2020 | $40.89 | $42.91 | $2.00 | | 12/31/2020 | $42.52 | $44.32 | $2.52 | | 3/31/2021 | $58.09 | $61.04 | $3.50 | | 6/30/2021 | $66.19 | $68.98 | $2.95 | | 9/30/2021 | $70.58 | $73.51 | $4.35 | | 12/31/2021 | $77.33 | $79.61 | $4.75 | | 3/31/2022 | $95.18 | $100.87 | $4.67 | | 6/30/2022 | $108.83 | $113.84 | $7.50 | | 9/30/2022 | $93.06 | $100.71 | $8.03 | | 12/31/2022 | $82.79 | $88.72 | $5.55 | Average Drilling Rig Count (Q1 2020 - Q4 2022) | Quarter Ended | U.S. Land | Canada Land | North America Land | | :------------ | :-------- | :---------- | :----------------- | | 3/31/2020 | 764 | 194 | 958 | | 6/30/2020 | 378 | 23 | 401 | | 9/30/2020 | 241 | 46 | 287 | | 12/31/2020 | 297 | 88 | 385 | | 3/31/2021 | 378 | 144 | 522 | | 6/30/2021 | 437 | 71 | 508 | | 9/30/2021 | 484 | 150 | 634 | | 12/31/2021 | 545 | 159 | 704 | | 3/31/2022 | 618 | 198 | 816 | | 6/30/2022 | 698 | 112 | 810 | | 9/30/2022 | 744 | 198 | 942 | | 12/31/2022 | 760 | 187 | 947 | - U.S. land rig count averaged 760 in Q4 2022, a 39% increase from Q4 2021[218] - Canadian land rig count averaged 187 in Q4 2022, an 18% increase from Q4 2021[218] - Expect Canadian rig counts and completion activity to continue to rise in 2023 compared to prior year levels[218] - Expect average annual drilling and completion activity in the United States to exceed prior year levels, but to be below Q4 2022 levels due to natural gas price declines[218] - Pinpoint stimulation adoption and increasing well complexity (longer wells, more fracturing stages) offer opportunities for increased sales and tracer diagnostics services[220][222] - E&P companies' focus on operational efficiencies and cost reduction leads to increased competition and limits pricing power[222] How We Generate Revenues NCS generates revenue from product sales (fracturing systems, enhanced recovery, well construction, composite plugs, perforating guns) and services (downhole frac isolation assembly, tracer diagnostics) - Revenues are derived from sales of fracturing systems, enhanced recovery systems, well construction, composite plug and perforating gun products, and services (downhole frac isolation assembly, tracer diagnostics)[223] Revenue Mix (2021-2022) | Revenue Type | 2022 Share | 2021 Share | | :----------- | :--------- | :--------- | | Product Sales | 68% | 70% | | Services | 32% | 30% | - Approximately 65% of 2022 revenue (62% in 2021) was generated in Canada and denominated in Canadian dollars, making revenues susceptible to foreign currency fluctuations[226] - International sales outside North America are expected to increase over time, made through local NCS entities or operating partners[227] Costs of Conducting our Business Cost of sales includes expenses for manufacturing products and support services, while SG&A expenses cover non-revenue generating employee compensation and general operating costs, both impacted by inflation - Cost of Sales: Includes raw materials, payments to machine shops for components/assemblies, quality control, assembly, testing, and support services (employee compensation, travel)[228] - Repeat Precision's manufacturing facilities in Mexico help reduce costs for certain product categories[229] - Raw material prices (steel, chemicals) and outsourced services have increased due to inflation and the Russia-Ukraine conflict; a 25% tariff applies to certain Chinese chemicals for tracer diagnostics[230] - SG&A Expenses: Comprise compensation for non-revenue generating employees (including R&D), general operating costs (rent, IT, marketing, professional fees), and provisions for doubtful accounts[231] - Labor cost inflation (increased turnover, delays in filling positions, higher salaries/pay rates/benefits) impacts both cost of sales and SG&A expenses[232] - Approximately 27% of operating costs (excluding depreciation/amortization) were denominated in Canadian dollars in 2022 (25% in 2021)[233] Results of Operations NCS Multistage Holdings, Inc. reported a net loss of $(1.1) million in 2022, a significant improvement from $(4.7) million in 2021, driven by a 31.3% increase in total revenues to $155.6 million Consolidated Statements of Operations (2021-2022, in thousands) | Metric | 2022 | 2021 | Variance ($) | Variance (%) | | :----------------------------------------- | :-------- | :-------- | :----------- | :----------- | | Revenues | | | | | | Product sales | $105,859 | $83,223 | $22,636 | 27.2% | | Services | $49,773 | $35,279 | $14,494 | 41.1% | | Total revenues | $155,632 | $118,502 | $37,130 | 31.3% | | Cost of sales (exclusive of D&A) | $95,228 | $70,027 | $25,201 | 36.0% | | Selling, general and administrative expenses | $58,338 | $49,094 | $9,244 | 18.8% | | Depreciation | $3,650 | $3,832 | $(182) | (4.7)% | | Amortization | $669 | $669 | $— | —% | | Loss from operations | $(2,253) | $(5,120) | $2,867 | 56.0% | | Interest expense, net | $(1,015) | $(733) | $(282) | (38.5)% | | Other income, net | $2,950 | $2,054 | $896 | 43.6% | | Foreign currency exchange (loss) gain | $(283) | $283 | $(566) | (200.0)% | | Total other income | $1,652 | $1,604 | $48 | 3.0% | | Loss before income tax | $(601) | $(3,516) | $2,915 | 82.9% | | Income tax expense | $351 | $263 | $88 | 33.5% | | Net loss | $(952) | $(3,779) | $2,827 | 74.8% | | Net income attributable to non-controlling interest | $150 | $955 | $(805) | (84.3)% | | Net loss attributable to NCS Multistage Holdings, Inc. | $(1,102) | $(4,734) | $3,632 | 76.7% | - Revenues: Increased by $37.1 million (31.3%) to $155.6 million in 2022, driven by higher product sales and services volumes in Canada and the U.S., and higher international services volumes[236] - Cost of Sales: Increased to 61.2% of revenues in 2022 (from 59.1% in 2021) due to higher supply chain costs (raw materials, purchased materials, labor, outsourced services) and the non-recurrence of the U.S. employee retention credit (ERC) benefit from 2021[237] - SG&A Expenses: Increased by $9.2 million (18.8%) to $58.3 million in 2022, primarily due to higher compensation and benefits ($6.4 million), increased professional fees ($1.7 million), and higher travel/entertainment ($0.8 million), partially offset by lower share-based compensation[238][239] - Interest Expense, net: Increased to $1.0 million in 2022 (from $0.7 million in 2021) due to a $0.2 million write-off of deferred loan costs[240] - Other Income, net: Increased to $3.0 million in 2022 (from $2.1 million in 2021) mainly from royalties and profit share from the technical services agreement with SOS[241] - Foreign Currency Exchange (loss) gain: Shifted from a $0.3 million gain in 2021 to a $(0.3) million loss in 2022, primarily due to Canadian dollar movement relative to the U.S. dollar[242] - Income Tax Expense: Increased to $0.4 million in 2022 (from $0.3 million in 2021), including a $(4.1) million benefit from changes in valuation allowance on deferred tax assets[243][244] How We Evaluate our Results of Operations Management assesses performance using revenues, Adjusted EBITDA, Adjusted EBITDA Less Share-Based Compensation, Free Cash Flow, and Free Cash Flow Less Distributions to Non-Controlling Interest - Revenues: Evaluated monthly, quarterly, and annually against budgets, estimates, and market metrics[246] - Adjusted EBITDA: Net (loss) income adjusted for interest, taxes, depreciation, amortization, share-based compensation, professional fees, ERC benefits, foreign currency, and other charges/credits, used to assess core business performance[247] - Adjusted EBITDA Less Share-Based Compensation: Adjusted EBITDA excluding non-cash share-based compensation expense, for comparability with peers[252] - Free Cash Flow: Net cash from operating activities less purchases of property/equipment and software development, plus proceeds from asset sales, indicating cash available beyond capital expenditures[252] - Free Cash Flow Less Distributions to Non-Controlling Interest: Free Cash Flow minus distributions to joint venture partners, showing cash available after all investment and partner distribution needs[252] Adjusted EBITDA and Adjusted EBITDA Less Share-Based Compensation (2021-2022, in thousands) | Metric | 2022 | 2021 | | :-------------------------------------- | :------ | :------ | | Net loss | $(952) | $(3,779) | | Income tax expense | 351 | 263 | | Interest expense, net | 1,015 | 733 | | Depreciation | 3,650 | 3,832 | | Amortization | 669 | 669 | | EBITDA | 4,733 | 1,718 | | Share-based compensation | 3,453 | 4,221 | | Professional fees | 5,665 | 4,885 | | Net benefit of ERC | — | (1,908) | | Foreign currency loss (gain) | 283 | (283) | | Other | 976 | 461 | | Adjusted EBITDA | $15,110 | $9,094 | | Adjusted EBITDA Less Share-Based Compensation | $11,657 | $4,873 | Free Cash Flow and Free Cash Flow Less Distributions to Non-Controlling Interest (2021-2022, in thousands) | Metric | 2022 | 2021 | | :-------------------------------------------- | :-------- | :-------- | | Net cash (used in) provided by operating activities | $(1,423) | $11,583 | | Purchases of property and equipment | (1,035) | (495) | | Purchase and development of software and technology | (96) | (338) | | Proceeds from sales of property and equipment | 433 | 389 | | Free cash flow | $(2,121) | $11,139 | | Distributions to non-controlling interest | — | (2,750) | | Free cash flow less distributions to non-controlling interest | $(2,121) | $8,389 | Liquidity and Capital Resources NCS's liquidity primarily comes from cash, cash flows from operations, and potential borrowings under its $35.0 million ABL Facility and Repeat Precision's $4.3 million promissory note - Primary liquidity sources: existing cash and cash equivalents, cash flows from operations, and potential borrowings under ABL Facility and Repeat Precision Promissory Note[254] - As of December 31, 2022: $16.2 million cash and cash equivalents, $7.9 million total outstanding indebtedness (primarily capital lease obligations)[255] - ABL Facility: $35.0 million aggregate principal, borrowing base of $18.6 million at Dec 31, 2022, with no outstanding borrowings, and the company was in compliance with debt covenants[256] - Repeat Precision Promissory Note: $4.3 million aggregate borrowing capacity, $56 thousand outstanding at Dec 31, 2022[256] - Planned 2023 capital expenditures: $4 million to $5 million, for tracer diagnostics, perforating gun manufacturing (Repeat Precision), North American fracturing systems, computers, and software development[256] - Management believes current liquidity is sufficient for the next twelve months, but significant acquisitions may require additional debt or equity[256] Cash Flows Net cash used in operating activities was $(1.4) million in 2022, a decrease from $11.6 million provided in 2021, primarily due to increased investments in inventory and accounts receivable Summary of Cash Flows (2021-2022, in thousands) | Cash Flow Activity | 2022 | 2021 | | :----------------- | :-------- | :-------- | | Operating Activities | $(1,423) | $11,583 | | Investing Activities | $(698) | $(444) | | Financing Activities | $(2,742) | $(4,265) | | Effect of exchange rate changes | $(1,071) | $(251) | | Net change in cash and cash equivalents | $(5,934) | $6,623 | - Operating Activities: Decrease in cash flow from $11.6 million provided in 2021 to $(1.4) million used in 2022, reflecting investments in inventory, higher accounts receivable, and payment of 2021 annual incentive bonus ($3.2 million)[259] - Investing Activities: Net cash used increased to $0.7 million in 2022 (from $0.4 million in 2021) due to higher purchases of property and equipment[260] - Financing Activities: Net cash used decreased to $2.7 million in 2022 (from $4.3 million in 2021), primarily due to no distributions to non-controlling interest in 2022 compared to $2.8 million in 2021[261] Material Cash Requirements NCS's material cash requirements include obligations under its ABL Facility, Repeat Precision's promissory note, lease payment obligations, purchase obligations, and tax obligations - Financing Arrangements: ABL Facility with $35.0 million aggregate principal, $18.6 million borrowing base at Dec 31, 2022 (no outstanding debt); Repeat Precision Promissory Note with $4.3 million capacity, $56 thousand outstanding[262][263] - Leases: Total lease payment obligations of $14.6 million, with $3.3 million due within 12 months (as of Dec 31, 2022)[264] - Purchase Obligations: $12.6 million in commitments, with $9.8 million expected within 12 months[267] - Tax Obligations: $0.3 million total, with $0.1 million due within 12 months, related to the 2017 Tax Act on accumulated foreign earnings[268][269] Critical Accounting Estimates The company's financial statements rely on critical accounting estimates requiring significant management judgment, including the allowance for doubtful accounts, inventory valuation, impairment assessments, income taxes, and litigation accruals - Allowance for Doubtful Accounts: Estimates losses from uncollectible customer payments based on credit practices, historical experience, and customer financial condition, with a recovery of $0.1 million recorded in both 2022 and 2021[270] - Inventories: Valued at the lower of cost or net realizable value, periodically evaluated for obsolescence, slow-moving, or excess items, resulting in charges to cost of sales ($2.5 million in 2022, $1.8 million in 2021)[271] - Impairments: Evaluates property, equipment, and identifiable intangible assets for impairment when circumstances change, and performs annual goodwill impairment analysis, requiring judgments on future cash flows, revenue growth, operating margins, and market conditions[272] - Income Taxes: Uses the liability method for deferred income taxes, with a valuation allowance applied if deferred tax assets are unlikely to be realized, incurring operating losses in 2021 and 2022 leading to valuation allowances against U.S. and Canadian deferred tax assets[274][275] - Litigation: Accrues for contingencies when a material loss is probable and estimable, based on judgment of factors like experience, precedents, and financial information, with outcomes being uncertain and potentially material[276][277] Recently Issued Accounting Pronouncements NCS adopted ASU No. 2021-10 (Government Assistance disclosures) on January 1, 2022, with no material impact, and expects no material impact from adopting ASU No. 2016-13 (Credit Losses) on January 1, 2023 - Adopted ASU No. 2021-10 (Government Assistance disclosures) on January 1, 2022, with no material impact[278] - As a Smaller Reporting Company (SRC), will adopt ASU No. 2016-13 (Credit Losses) on January 1, 2023, with no material impact expected[279][359][360] Smaller Reporting Company Status NCS Multistage Holdings, Inc. qualifies as a "smaller reporting company" under SEC rules, allowing it to take advantage of reduced reporting and disclosure burdens - Qualifies as a "smaller reporting company" (public float less than $250 million), allowing reduced reporting and disclosure burdens, including providing only two years of audited financial statements[279][280] Item 7A. Quantitative and Qualitative Disclosures About Market Risk NCS Multistage Holdings, Inc. is exposed to commodity price risk, foreign currency exchange rate risk, interest rate risk, and credit risk - The company is exposed to commodity price risk, foreign currency exchange rate risk, interest rate risk, and credit risk[281] - Commodity Price Risk: Indirectly exposed to crude oil and natural gas price fluctuations, which impact customer drilling and completion activity, and does not currently hedge this risk[282] - Foreign Currency Exchange Rate Risk: Substantial revenue (65% in 2022) derived in Canada and denominated in CAD exposes the company to currency fluctuations, and it does not currently hedge exposure to CAD or other foreign currencies[283][284] - Interest Rate Risk: Primarily from variable-rate borrowings under the ABL Facility (no outstanding debt at Dec 31, 2022, applicable rate 6.8%) and Repeat Precision Promissory Note ($56 thousand outstanding at Dec 31, 2022, applicable rate 8.5%)[285][286] - Credit Risk: Concentration of counterparties in the oil and gas industry increases credit risk, managed by analyzing customer financial condition and monitoring collections[287] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements of NCS Multistage Holdings, Inc. for the years ended December 31, 2022 and 2021, along with comprehensive Notes to Consolidated Financial Statements - Includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Loss, Changes in Stockholders' Equity, and Cash Flows for the years ended December 31, 2022 and 2021[290][293] - Notes to Consolidated Financial Statements provide detailed information on organization, significant accounting policies, revenue disaggregation, inventories, other current receivables, property and equipment, goodwill and identifiable intangibles, accrued expenses, debt, commitments and contingencies, stockholders' equity, share-based compensation, employee benefit plan, leases, income taxes, and segment/geographic information[290][312][313][314][315][316][317][318][319][320][321][322][323][324][325][326][327][328][329][330][331][332][333][334][335][336][337][338][339][340][341][342][343][344][345][346][347][348][349][350][351][352][353][354][355][356][357][358][359][360][361][362][363][364][365][366][367][368][369][370][371][372][373][374][375][376][377][378][379][380][381][382][383][384][385][386][387][388][389][390][391][392][393][394][395][396][397][398][399][400][401][402][403][404][405][406][407][408][409][410][411][412][413][414][415][416][417][418][419][420][421][422][423][424][425][426][427][428][429][430][431][432][433][434][435][436][437][438][439][440][441][442][443][444][445][446][447][448][449][450][451][452][453] [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=77&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and