Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of our financial condition and results of operations as of, and for, the periods presented. You should read the following discussion and analysis of our financial condition and results of operations together with the sections entitled Item 1A. “Risk Factors,” “—Cautionary Note Regarding Forward-Looking Statements,” and our consolidated financial statements and related notes thereto included elsewhere in this Form 10-K. This section and other parts of the Form 10-K contain forward-looking statements regarding the industry outlook, estimates and assumptions concerning events and financial and industry trends that may affect our future results of operations or financial condition and other non-historical statements. These forward-looking statements are subject to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in “—Cautionary Note Regarding Forward-Looking Statements” and Item 1A. “Risk Factors.” Our actual results may differ materially from those contained in or implied by these forward-looking statements.
Overview and Outlook
We are a leading provider of highly engineered products and support services that facilitate the optimization of oil and natural gas well construction, well completions and field development strategies. We provide our products and services primarily to E&P companies for use in onshore and offshore wells, predominantly wells that have been drilled with horizontal laterals in both unconventional and conventional oil and natural gas formations. Our products and services are utilized in oil and natural gas basins throughout North America and in selected international markets, including the North Sea, the Middle East, Argentina and China. We provided our products and services to over 225 customers in 2023, including leading large independent oil and natural gas companies and major oil companies.
Our primary offering is our fracturing systems products and services, which enable efficient pinpoint stimulation: the process of individually stimulating each entry point into a formation targeted by an oil or natural gas well. Our fracturing systems products and services can be used in both cemented and open-hole wellbores and enable our customers to precisely place stimulation treatments in a more controlled and repeatable manner as compared with traditional completion techniques. Our fracturing systems products and services are utilized in conjunction with third-party providers of pressure pumping, coiled tubing and other services. As an extension of fracturing systems, we offer enhanced recovery systems, which enable our customers to inject water, other fluids, or gases in a controlled manner with the objective of increasing the amount of hydrocarbons produced from their assets.
We own a 50% interest in Repeat Precision, which sells composite frac plugs, perforating guns and related products. We provide tracer diagnostics services for well completion and reservoir characterization that utilize downhole chemical and radioactive tracers. We sell products for well construction, including casing buoyancy systems, liner hanger systems and toe initiation sleeves. We operate in one reportable segment that has been identified based on how our chief operating decision maker manages our business.
Our products and services are primarily sold to North American E&P companies and our ability to generate revenues from our products and services depends upon oil and natural gas drilling and completion activity in North America. Oil and natural gas drilling and completion activity is directly influenced by oil and natural gas prices.
Based on E&P company announced capital budgets and industry reports for 2024, we believe that annual average drilling and completion industry activity in Canada will be flat to slightly lower compared to 2023. Certain regions in Canada may ration the use of fresh water due to last summer’s drought, which could in turn lead to a reduction in completions activity. We expect activity in the United States will decline on average by 5% to 10% compared to 2023, although we expect U.S. activity to increase compared to December 2023 levels as the year progresses. We expect international industry activity to improve on average between 5% to 10% in 2024 as compared to 2023.
Oil and natural gas prices were volatile in 2022, and this volatility continued into 2023. The war between Russia and Ukraine has played a significant role in this volatility and led to increased oil and natural gas commodity prices in 2022 before moderating in late 2022 and throughout 2023. The impact of the war on pricing was somewhat mitigated by heightened uncertainty in demand and growing concerns about a global recession. Certain countries have agreed and continue to extend voluntary crude oil output cuts to mitigate the impact of uncertain economic conditions on the oil market. In addition, Hamas attacked Israel in October 2023 and the resulting Israeli-Hamas conflict and recent tensions in the Red Sea could add to commodity price volatility if the war continues and escalates or if general unrest continues in the Middle East. See further discussion below on oil and natural gas pricing.
We continue to face intense competitive pressure across all of our product and services offerings, which has and may continue to have a negative impact on market share and operating margins for certain product lines. Furthermore, this competitive pressure constrains our ability to raise prices in an inflationary environment, which was more pronounced in 2022 and early to mid-2023 but has since partially improved. The competitive pressure for our fracturing systems product line in Canada may significantly increase as a result of the recent court decision which held certain of our Canadian patents to be invalid, however we do not believe we have yet experienced such an impact.
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For the past two years, we have experienced modest disruptions to our supply chain, and higher prices for certain raw materials, including steel and chemicals, and purchased components and outsourced services. This cost inflation persisted throughout 2022 and continued into 2023, though prices for steel have begun to moderate. While we have endeavored to increase customer prices to defray our higher raw material and component costs, these price increases have not always fully offset our higher input costs and there has been a delay in our ability to do so. We also experienced tight labor conditions throughout 2022 and in 2023, which led to increased employee turnover, delays in filling open positions and labor cost inflation, which impacted both our cost of sales and selling, general and administrative (“SG&A”) expenses and resulted in higher salaries, hourly pay rates and benefit costs. However, labor cost inflation while still elevated, began to decrease during the latter part of 2023.
To counter inflationary pressures on the economy, central banks, including the U.S. Federal Reserve, increased reference interest rates several times between March 2022 and July 2023, an action which typically had the effect of increasing borrowing costs and restraining economic activity. There were also several noted regional bank failures in the United States during 2023 although we had no direct exposure to these banks. In January 2024, the U.S. Federal Reserve continued to leave the benchmark interest rate unchanged amid signs of steadily cooling inflation and solid economic growth. While the U.S. Federal Reserve continues to keep the benchmark interest rate consistent, it is expected to begin rate cuts during 2024.
Market Conditions
Oil and Natural Gas Drilling and Completion Activity
Oil and natural gas prices remain volatile, with WTI crude oil pricing decreasing to an average of $77.58/BBL during 2023 compared to an average of $94.90/BBL during 2022. This decrease reflects a rise in supply from non-OPEC+ members combined with a softer macroeconomic environment, which lowers demand growth. Since 2022 and continuing into 2023, to address the uncertain outlook for the global economy and, specifically the oil markets, and to reduce the potential of an oil and gas inventory build, members of OPEC and certain other countries, including Russia (informally known as “OPEC+”) agreed to several collective voluntary oil production reductions beginning in November 2022 through December 2024.
Natural gas pricing continues to be volatile and decreased in 2023 to an average level of $2.53 per MMBtu compared to an average level of $6.45 per MMBtu during 2022. Realized natural gas prices for Canadian E&P customers are typically at a discount to U.S. Henry Hub pricing. In the second and third quarters of 2022, natural gas pricing in the United States was supported by increased demand for exports of liquified natural gas (“LNG”), especially for power generation in Europe and Asia, reflecting European demand for LNG sourced from the United States and other regions to offset supply historically provided by Russia, in response to the Russian-Ukraine conflict. However, natural gas pricing declined in 2023 due to the overall warm winter weather conditions and extended downtime at an LNG export facility, which decreased near-term demand and led to robust levels of natural gas in storage, which negatively impacted drilling and completion activity in certain regions, particularly in the United States.
Sustained meaningful declines in commodity prices from current levels, or sustained periods when the local pricing received in regional markets is below benchmark pricing, known in the industry as high differentials, would be expected to lead North American E&P companies to reduce drilling and completion activity, which could negatively impact our business.
Listed and depicted below are recent crude oil and natural gas pricing trends, as provided by the Energy Information Administration (“EIA”) of the U.S. Department of Energy:
Average Price
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Listed and depicted below are the average number of operating onshore rigs in the United States and in Canada per quarter since the first quarter of 2022, as provided by Baker Hughes. The quarterly changes, particularly for the second quarter Canadian land rig count, can be partially attributed to seasonality of activity in that market:
Average Drilling Rig Count
Quarter Ended U.S. Land Canada Land North America Land
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Over the past several years, North American E&P companies have been able to reduce their cost structures and have also utilized technologies, including ours, to increase efficiency and improve well performance. The average U.S. land rig count and completion activity continued to increase from lows reached in late 2020 until the fourth quarter of 2022. However, the average U.S. land rig count has declined by 21%, to 601, in the fourth quarter of 2023 as compared to the fourth quarter of 2022. The average land rig count in Canada for the fourth quarter of 2023 was lower by 4% compared to the same period in 2022. We currently expect U.S. rig counts and completion activity in 2024 to decline from the 2023 annual average level, but to increase from year-end 2023 levels as we progress through the year while the Canadian activity is expected to remain flat to slightly lower.
A substantial portion of our business is subject to seasonality, which results in quarterly variability. In Canada, we typically experience higher activity levels in the first quarter of each year, as our customers take advantage of the winter freeze to gain access to remote drilling and production areas. In the past, our revenue in Canada has declined during the second quarter due to warming weather conditions that result in thawing, softer ground, difficulty accessing well sites and road bans that curtail drilling and completion activity. Access to well sites typically improves throughout the third and fourth quarters in Canada, leading to activity levels that are higher than in the second quarter, but usually lower than activity in the first quarter. During the second quarter of 2023, access to well sites was further impacted by Canadian wildfires, a seasonal phenomenon, but more extensive in 2023 relative to prior years. These wildfires resulted in selected shut-ins of oil and natural gas production, which negatively impacted certain of our customers’ cash flows and drilling and completion activity in the second half of 2023. Our business can be impacted by a reduction in customer activity during the winter holidays in late December and early January. In some years, customers in the United States and Canada may exhaust their capital budgets prior to the end of the year, resulting in lower drilling and completion activity during the fourth quarter.
How We Generate Revenues
We derive our revenues from the sale of our fracturing systems and enhanced recovery systems products and the provision of related services, the sale of composite frac plugs, perforating guns and related products through Repeat Precision, and from sales of our tracer diagnostics services, casing buoyancy systems, liner hanger systems and toe initiation sleeves products.
Product sales represented 71% and 68% of our revenues for the years ended December 31, 2023 and 2022, respectively. Most of our sales are on a just-in-time basis, as specified in individual purchase orders, with a fixed price for our products. We occasionally supply our customers with large orders that may be filled on negotiated terms. Services represented 29% and 32% of our revenues for the years ended December 31, 2023 and 2022, respectively. Services include tool charges and associated personnel services related to fracturing systems and tracer diagnostics services. Our services are provided at agreed upon rates to customers for the provision of our downhole frac isolation assembly, which may include our personnel, and for the provision of tracer diagnostics services.
During periods of low drilling and well completion activity or as may be needed to compete in certain markets, we may, in some instances, lower the prices of our products and services. Our revenues are also impacted by well complexity, since wells with more stages typically result in longer jobs, which may increase revenue attributable to the use of more sliding sleeves or increase composite frac plug sales, and increase the volume of services we provide.
The percentages of our revenues derived from sales in Canada and denominated in Canadian dollars were approximately 69% and 65% for the years ended December 31, 2023 and 2022, respectively. Our Canadian contracts are typically invoiced in Canadian dollars; therefore, the effects of foreign currency fluctuations impact our revenues and are regularly monitored. Strengthening of the U.S. dollar, our reporting currency, relative to the Canadian dollar, would result in lower reported revenues, partially offset by lower reported cost of sales and SG&A expenses.
Although most of our sales are to North American E&P companies, we also have sales to customers outside of North America, and we expect sales to international customers to increase over time. These international sales are made through local NCS entities or to our local operating partners typically on a free on board or free carrier basis with a point of sale in the United States. Some of the locations in which we have operating partners or sales representatives include the Middle East and China. Our operating partners and representatives do not have authority to contractually bind NCS but market our products in their respective territories as part of their product or services offering.
Costs of Conducting our Business
Our cost of sales is comprised of expenses relating to the manufacture of our products in addition to the costs of our support services. Manufacturing cost of sales includes payments made to our suppliers for raw materials and payments made to machine shops for the manufacture of product components and finished assemblies and costs related to our employees that perform quality control analysis, assemble and test our products. In addition, Repeat Precision operates a manufacturing facility with supporting personnel in Mexico, which has allowed us to reduce our costs for certain product categories. We review forecasted activity levels in our business and either directly procure or support our vendors in procuring the required raw materials with sufficient lead time to meet our
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business requirements. We obtain certain chemicals utilized in our tracer diagnostics services business from suppliers in China, which are subject to tariffs that increase our costs, although these tariffs have recently declined. Prices for certain raw materials, including steel and chemicals and for purchased components and outsourced services, have increased in recent years due to inflation, exacerbated by the impacts resulting from Russia’s continuing invasion of Ukraine, though prices for steel have begun to moderate. Cost of sales for support services includes compensation and benefit-related expenses for employees who provide direct revenue generating services to customers in addition to the costs incurred by these employees for travel and subsistence while on site. Cost of sales includes other variable manufacturing costs, such as shrinkage, obsolescence, revaluation and scrap related to our existing inventory and costs related to the chemicals used and laboratory analysis associated with our tracer diagnostics services.
Our SG&A expenses are comprised of compensation expense, which includes compensation and benefit-related expenses for our employees who are not directly involved in revenue generating activities, including those involved in our research and development activities, as well as our general operating costs. These general operating costs include, but are not limited to: rent and occupancy for our facilities, information technology infrastructure services, software licensing, advertising and marketing, third party research and development, risk insurance and professional service fees for audit, legal and other consulting services. Our SG&A expenses also include litigation expenses, severance expenses and expected credit losses.
During the second half of 2023, in an effort to streamline operations and gain efficiencies, we implemented several cost reduction initiatives, including consolidation of our Tracer Diagnostics operations, consolidation of Repeat’s manufacturing footprint in Mexico, restructuring of certain U.S. and international operations, and the elimination of various support positions. As a result of these efforts, we expect to realize annualized cost savings of approximately $4.0 million, which we began to realize a majority of these benefits starting in the fourth quarter of 2023.
The percentage of our operating costs denominated in Canadian dollars (including cost of sales and SG&A expenses but excluding depreciation and amortization expense) approximated 28% and 27%, for the years ended December 31, 2023 and 2022, respectively.
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Results of Operations
The following tables summarize our results of operations and gross margins for the years ended December 31, 2023 and 2022, and present revenue by geographic area for the years then ended.
Year Ended December 31, Variance
Revenues
Cost of sales
Other income (expense)
Provision for litigation, net of recoveries (1,802) — (1,802) (100.0) %
Net income attributable to non-controlling interest 42 150 (108) (72.0) %
Year Ended December 31, Variance
Gross Margin and Gross Margin Percentage:
Product sales gross margin 34.4% 34.0%
Services gross margin 44.8% 45.0%
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Year Ended December 31, Variance
Revenues by Geographic Area:
United States
Canada
Other Countries
Total
Year Ended December 31, 2023 compared to Year Ended December 31, 2022
Revenues
Revenues were $142.5 million for the year ended December 31, 2023 as compared to $155.6 million for the year ended December 31, 2022. This decrease reflected lower U.S. product sales as well as a decrease in U.S., Canadian and international services activity, partially offset by increases in Canadian and international product sales. The overall decline was primarily related to reductions in sales volume and while we experienced favorable pricing for some of our products, our overall average pricing remained consistent between the periods. The overall decrease in revenues largely resulted from declining industry drilling and completion activity throughout 2023 as compared to 2022, particularly in the United States, for which lower natural gas pricing was a contributing factor. Canadian sales during 2023 were tempered by the effect of the Canadian wildfires which primarily impacted activity for the second quarter of 2023, but also had continuing effects for the remainder of 2023 as some operators delayed or decided to forgo projects. International revenues were lower due to a decline in North Sea services activity. Product sales for the year ended December 31, 2023 were $100.4 million as compared to $105.9 million for the year ended December 31, 2022. Services revenue was $42.0 million for the year ended December 31, 2023 as compared to $49.8 million for the year ended December 31, 2022.
Cost of sales
Cost of sales was $89.1 million, or 62.5% of revenues, for the year ended December 31, 2023 as compared to $97.2 million, or 62.5% of revenues, for the year ended December 31, 2022. Cost of sales as a percentage of revenue was consistent at 62.5% for each of the periods due in part to our actions taken to consolidate manufacturing and operational facilities and reduce field service personnel throughout the year in response to lower activity levels.However, this improvement was offset by ongoing inflationary pressures, leading to increased operating costs, and certain nonrecurring expenses associated with consolidations undertaken in June 2023 of our tracer diagnostics business and Repeat Precision’s manufacturing operations in Mexico, as discussed in “Note 9. Accrued Expenses” in the accompanying consolidated financial statements. Cost of product sales was $65.9 million or 65.6% of product sales revenue and cost of services was $23.2 million or 55.2% of services revenue for the year ended December 31, 2023. For the year ended December 31, 2022, cost of product sales was $69.8 million or 66.0% of product sales revenue and cost of services was $27.4 million or 55.0% of services revenue.
Selling, general and administrative expenses
Selling, general and administrative expenses were $56.5 million for the year ended December 31, 2023 as compared to $58.3 million for the year ended December 31, 2022. This decrease in expense reflects lower professional fees and share-based compensation expenses of $4.3 million and $0.7 million, respectively, in addition to a decrease in the annual incentive bonus accrual of $0.8 million as compared to the prior year. The lower expense was partially offset by higher compensation and benefit costs of $2.1 million primarily associated with salary increases implemented during the first quarter of 2023. In addition, research and development expenses were higher by $0.9 million and we recorded severance costs of $1.2 million associated with several cost saving initiatives, including the tracer diagnostics business consolidation effort, further restructuring changes associated with our U.S. and international operational management and support functions, and the departure of a former executive officer, as discussed in “Note 9. Accrued Expenses” in the accompanying consolidated financial statements.
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Interest expense, net
Interest expense, net was $0.6 million and $1.0 million for the years ended December 31, 2023 and 2022, respectively. The decrease in interest expense, net reflects a higher yield on excess cash generating incremental interest income of $0.3 million in 2023 and lower deferred loan costs in 2023, as the 2022 results include a $0.2 million write-off associated with the termination of the prior senior secured credit facility, which was replaced by our ABL Facility in May 2022.
Provision for litigation, net of recoveries
The provision for litigation, net of recoveries totaled $1.8 million for the year ended December 31, 2023. In October 2023, the Federal Court of Canada ordered us to pay $1.8 million ($2.5 million in Canadian dollars) of legal fees associated with a patent infringement case. See Note 11. “Commitments and Contingencies” to the accompanying consolidated financial statements for further discussion.
Other income, net
Other income, net was $4.1 million for the year ended December 31, 2023 compared to $3.0 million for the year ended December 31, 2022. A portion of this increase was attributable to the recovery of $0.6 million of unpaid invoices associated with the legal matter in Wyoming, as discussed in “Note 11. Commitments and Contingencies” in the accompanying consolidated financial statements. In addition, in 2023, we recorded incremental royalty income and profit share associated with a technical services and assistance agreement, and a benefit associated with the reversal of a contingent legal fee which was not realized, partially offset by the write-off of a constructed asset totaling $0.7 million.
Foreigncurrencyexchange gain (loss)
Foreign currency exchange gain was $0.5 million for the year ended December 31, 2023 as compared to a loss of $(0.3) million for the year ended December 31, 2022. The change was due to the movement in the foreign currency exchange rates between the periods, primarily the Canadian dollar relative to the U.S. dollar.
Income tax (benefit) expense
We recorded a tax benefit of $0.2 million and a tax expense of $0.4 million for the years ended December 31, 2023 and 2022, respectively. The income tax benefit and expense for both 2023 and 2022 primarily relates to results generated by our non-U.S. and Canadian businesses and U.S. state taxes. Tax expense for 2023 and 2022 has not been offset by the tax benefits related to losses within the United States, Canada, and other jurisdictions, from which we cannot currently benefit. In addition, for both 2023 and 2022 the income tax provision includes effects of changes in valuation allowances established against our previously recognized deferred tax assets in the United States, Canada, and other jurisdictions. Due to the impact of the valuation allowances on tax expense, our effective tax rates are not meaningful for all periods presented. See further discussion of establishment of the deferred tax valuation allowance at Note 2. “Summary of Significant Accounting Policies - Income Taxes” to the accompanying consolidated financial statements.
Liquidity and Capital Resources
Our primary sources of liquidity are our existing cash and cash equivalents, cash flows from operations and potential borrowings under our ABL Facility and the Repeat Precision Promissory Note (as defined below). As of December 31, 2023, we had cash and cash equivalents of $16.7 million, and total outstanding indebtedness of $8.2 million related to finance lease obligations, of which $1.8 million is due within 12 months. Our ABL Facility consists of an asset-based revolving credit facility in an aggregate principal amount of $35.0 million. Total borrowings are limited to a borrowing base calculated on the sum of cash in a specified pledged account, eligible accounts receivable and eligible inventory, provided it does not include credit for the assets of Repeat Precision. At December 31, 2023, our available borrowing base under the ABL Facility was $16.4 million, with no outstanding borrowings. The amount available to be drawn under the ABL Facility may decline from current levels due to reductions in our borrowing base or a springing financial covenant if our business were to be adversely impacted by a decline in market conditions. We were in compliance with our debt covenants at December 31, 2023.
In addition, Repeat Precision’s promissory note with Security State Bank & Trust, Fredericksburg (the “Repeat Precision Promissory Note”) has total aggregate borrowing capacity of $4.3 million. As of December 31, 2023, Repeat Precision had no outstanding indebtedness under the promissory note.
We believe that our cash on hand, cash flows from operations and potential borrowings under our ABL Facility and the Repeat Precision Promissory Note will be sufficient to fund our capital expenditure and liquidity requirements for the next twelve months and after. Our principal liquidity needs have been, and are expected to continue to be, capital expenditures, working capital, debt service and potential mergers and acquisitions.
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We plan to incur approximately $2 million to $3 million in capital expenditures during 2024, which includes (i) upgrades to our tracer diagnostics deployment, sampling and laboratory equipment, (ii) upgrades to our manufacturing and field service equipment to support North American fracturing systems and well construction businesses, (iii) new computers and engineering workstations and (iv) software development and implementation. Our capital expenditures, including the purchase and development of software and technology, for the years ended December 31, 2023 and 2022 were $2.2 million and $1.1 million, respectively.
To the extent we require additional liquidity to fund our capital requirements, including our finance lease obligations, or repay existing indebtedness, we would expect to obtain it through the incurrence of additional indebtedness, the proceeds of equity issuances, or a combination thereof. We cannot provide assurance that we will be able to obtain this additional liquidity on reasonable terms, or at all. Our liquidity and ability to meet our obligations and fund capital requirements also depend on our future financial performance including the ability to manage costs, which is subject to general economic, financial and other factors that are beyond our control. Accordingly, we cannot provide assurance that our business will generate sufficient cash flow from operations or that funds will be available from additional indebtedness, the capital markets or otherwise to meet our liquidity needs. If we decide to pursue one or more significant acquisitions, we may incur additional debt or sell equity to finance such acquisitions, which could result in incremental expenses or dilution.
Cash Flows
The following table provides a summary of cash flows from operating, investing and financing activities for the periods presented (in thousands):
Year Ended December 31,
Net cash provided by (used in) operating activities $ 4,774 $ (1,423)
Net cash used in investing activities (1,683) (698)
Net cash used in financing activities (2,441) (2,742)
Effect of exchange rate changes on cash and cash equivalents (164) (1,071)
Net change in cash and cash equivalents $ 486 $ (5,934)
Operating Activities
Net cash provided by (used in) operating activities was $4.8 million compared to $(1.4) million for the years ended December 31, 2023 and 2022, respectively. The improvement in operating cash flow reflects relatively higher sales in the fourth quarter of the prior year, generating a higher level of trade receivables at December 31, 2022, when combined with favorable collection efforts in 2023, resulted in an increase in cash in 2023. Partially offsetting these items was the use of cash for additional investment in inventory during the first half of 2023, as well as the impact of the timing and relative amounts of cash-settled share-based compensation.
Investing Activities
Net cash used in investing activities was $1.7 million and $0.7 million for the years ended December 31, 2023 and 2022, respectively, reflecting increases in investment in property and equipment and software and technology.
Financing Activities
Net cash used in financing activities for the years ended December 31, 2023 and 2022 was $2.4 million and $2.7 million, respectively. Our primary uses of funds during the years ended December 31, 2023 and 2022 were principal payments of $1.6 million and $1.5 million, respectively, related to our finance leases, payments of $0.3 million and $0.4 million, respectively, for treasury shares withheld to settle withholding tax requirements for equity-settled share-based compensation, a distribution of $0.5 million to Repeat Precision’s other joint venture partner for the year ended December 31, 2023, and payments of $1.0 million for the year ended December 31, 2022 for deferred costs related to our ABL Facility.
Material Cash Requirements
Our material cash requirements include the following contractual and other obligations.
Financing Arrangements
Our ABL Facility consists of a revolving credit facility in an aggregate principal amount of $35.0 million. Total borrowings available to us under the ABL Facility may be limited subject to a borrowing base calculated on the sum of cash in a specified pledged account, eligible accounts receivables and eligible inventory, provided it does not include the assets of Repeat Precision. At
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December 31, 2023, our available borrowing base under the ABL Facility was $16.4 million and we had no outstanding indebtedness under the ABL Facility.
Repeat Precision also has an outstanding promissory note with an aggregate borrowing capacity of up to $4.3 million as of December 31, 2023, subject to a borrowing base. As of December 31, 2023, Repeat Precision had no outstanding indebtedness under the promissory note.
See “Note 10. Debt” to our consolidated financial statements for additional details regarding our credit agreement and the promissory note.
Leases
We have operating and finance leases for facilities, vehicles, equipment, and software. As of December 31, 2023, we had lease payment obligations, including interest payments for finance leases of $15.2 million, with $4.1 million payable within 12 months, which does not include the facility lease we extended in January 2024. See “Note 2. Summary of Significant Accounting Policies” and “Note 15. Leases” to our consolidated financial statements for additional information on lease obligations and maturities.
Purchase Obligations
Our purchase obligations in the amount of $5.6 million primarily represent commitments to purchase goods or services to be utilized in the normal course of business, of which $3.9 million is expected to be incurred within 12 months and is not reflected in the accompanying consolidated balance sheets.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations is derived from the review of our consolidated financial statements prepared in accordance with GAAP, which includes our interpretation of accounting guidance and application through accounting policies. See “Note 2. Summary of Significant Accounting Policies.” The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our actual results may differ from these estimates. The accounting estimates that we believe to be the most critical to an understanding of our financial condition and results of operations and that require the most complex and subjective management judgments are discussed below.
Allowance for Credit Losses
We maintain an allowance for credit losses related to estimated losses that may result from the inability of our customers to make required payments. We evaluate collectability of customer accounts based upon credit approval practices, industry and customer historical experience as well as the current and projected financial condition of the specific customer. Amounts deemed to be uncollectible are applied against the allowance for credit losses. Our business has seasonality, and the balance of our outstanding receivables fluctuates during the fiscal year based upon activity levels, sales volume, and general industry conditions. We periodically record a provision for credit losses or recoveries, which totaled a provision of $0.2 million and a recovery of $0.1 million for the years ended December 31, 2023 and 2022, respectively. Further, to the extent deemed necessary by management, and depending on the circumstances, we may issue customer credits or concessions which reduce our revenues, but do not impact our expected credit losses. The nature of these concessions may be to maintain a customer relationship. Historically, these concessions have not been significant to our financial condition or results of operations and would likely not be significant should there be a 10% change in the level of concessions within a fiscal year.
Inventories
Inventories of raw material, work in progress and finished goods are maintained and valued at the lower of cost or estimated net realizable value, with cost determined at standard costs which approximates the first-in, first-out or average cost basis. Periodically, we evaluate our inventory to determine items that may be obsolete, slow-moving or in excess based upon historical sales experience and projected sales forecasts. Our estimates involve subjectivity and an evaluation of customer preferences over time which may impact our ability to recover the cost of inventory and generate a profitable return. Although we believe our estimates to be reasonable, we cannot assure that our reserves will be adequate to cover potential losses, or that we will have recoveries, if there are significant changes in market preferences or technological advancements by our competitors that render a portion of our current inventory as obsolete. We have incurred charges to cost of sales related to obsolescence of $1.2 million and $2.5 million for the years ended December 31, 2023 and 2022, respectively. An increase of obsolescence expense by 10%, or $0.1 million, would not be deemed material to our financial statements.
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Impairments
We evaluate our property and equipment and identifiable intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable or if there are potential indicators of impairment. We also perform an annual impairment analysis of goodwill as of December 31, or whenever there is a triggering event that indicates an impairment loss may have been incurred. Estimating future net cash flows requires us to make judgments regarding long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about our revenue growth, operating margins, capital expenditures, future market conditions and technological developments. In addition, if we are required to determine the fair value of our reporting units to test goodwill for impairment, we must apply estimates, assumptions, and judgment regarding revenue growth, operating margins, capital expenditures, future market conditions, weighted average costs of capital and terminal growth rate, and we must evaluate the metrics of a deemed set of comparable companies and market earnings multiples. Actual results may not align with these assumptions, and our expectations regarding future net cash flows may change such that a material impairment could result. Historically, we have recorded impairments associated with property and equipment, identifiable intangible assets and goodwill. We believe that the estimates and assumptions used in our impairment assessments are reasonable. However, if market conditions change dramatically, the impact on our forecasts and projections may be significant which could result in future impairments for our reportable units with long-term assets including goodwill.
Income Taxes
We are taxed as a corporation as defined under the Internal Revenue Code. The liability method is used in accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when these differences are expected to reverse. The realizability of deferred tax assets is evaluated annually and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some portion or all the deferred tax assets will not be realized.
We have incurred operating losses during each of the years ended December 31, 2023 and 2022. We have applied valuation allowances to reduce our deferred tax assets as of December 31, 2023 and 2022, based upon our forecasts of future taxable income in the jurisdictions in which these deferred tax assets are recorded. Our financial statements could be materially affected if: (i) our actual results differ significantly from our forecast estimates; (ii) there are future changes in enacted tax laws with retroactive application; or (iii) tax authorities do not agree with our application of the tax law to our circumstances and the matter is not ultimately resolved in our favor.
Litigation
In the ordinary course of business, from time to time, we have various claims, lawsuits and administrative proceedings that are pending or threatened with respect to commercial, intellectual property and employee matters. We accrue for contingencies where the occurrence of a material loss is probable and can be reasonably estimated, based on our estimate of the expected liability. Our assessment of the likely outcome of litigation matters is based on our judgment of several factors, including experience with similar matters, prior history, precedents, relevant financial information and other evidence and facts specific to the matter. Although the outcome of any legal proceeding cannot be predicted with any certainty, if a settlement is deemed to be probable and estimable, management would consider relevant facts and circumstances to determine the potential range of loss exposure or gain on settlement, if any. Future settlements which result in loss or awards could be material to our financial statements and cannot be predicted with certainty. See “Note 11. Commitments and Contingencies” of our consolidated financial statements for further information regarding our legal proceedings.
Recently Issued Accounting Pronouncements
See “Note 2. Summary of Significant Accounting Policies” to our consolidated financial statements for discussion of the accounting pronouncements we recently adopted and the accounting pronouncements recently issued by the Financial Accounting Standards Board (“FASB”).
Smaller Reporting Company Status
We are a “smaller reporting company” as defined by Section 12b-2 of the Exchange Act, meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and have a public float of less than $250 million. As a smaller reporting company, we may take advantage of specified reduced reporting
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and other burdens that are otherwise applicable generally to public companies that do not qualify for the classification, including among other things, providing only two years of audited financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our financial position is exposed to a variety of risks, including commodity price risk, foreign currency exchange rate risk, interest rate risk and credit risk.
Commodity Price Risk
The market for our products and services is indirectly exposed to fluctuations in the prices of crude oil and natural gas to the extent such fluctuations impact drilling and completion activity levels and thus impact the activity levels of our customers in the E&P industry. Additionally, because we do not sell our products under long-term contracts, we believe we are particularly exposed to short-term fluctuations in the prices of crude oil and natural gas. We do not currently intend to hedge our indirect exposure to commodity price risk.
Foreign Currency Exchange Rate Risk
A substantial amount of our revenues is derived in Canada and, accordingly, our competitiveness and financial results are subject to foreign currency fluctuations where revenues and costs are denominated in Canadian dollars rather than USD. During the years ended December 31, 2023 and 2022, approximately 69% and 65%, respectively, of our revenues were attributable to our operations in Canada. We also derive revenue from several jurisdictions outside of North America, including countries that occasionally experience periods of significant inflation, which occurred in Argentina in 2023 and 2022. We do not currently intend to hedge our future exposure to the Argentine Peso or other foreign currencies.
Interest Rate Risk
We were primarily exposed to interest rate risk through our ABL Facility. At December 31, 2023, we had no outstanding indebtedness under our ABL Facility. Borrowings under the ABL Facility may be made in U.S. dollars with interest calculated using either the “ABR”, the “Adjusted Daily Simple SOFR” or the “Adjusted Term SOFR Rate”, and in Canadian dollars with interest calculated using the “Canadian Prime Rate” or the “CDOR Rate” (each as defined in the Credit Agreement). Borrowings bear interest plus a margin that varies depending on our leverage ratio as follows: (i) for ABR based loans, between 1.40% and 2.40%, and (ii) for Adjusted Daily Simple SOFR, Adjusted Term SOFR Rate, Canadian Prime Rate, and CDOR Rate, between 2.40% and 3.40%. We must also pay a monthly commitment fee of 0.25% to 0.50% per year, based on unused commitments. The applicable interest rate at December 31, 2023 was 7.9%.
We are also subject to interest rate risk through our Repeat Precision Promissory Note. At December 31, 2023, we had no outstanding indebtedness under the Repeat Precision Promissory Note. Borrowings under the Repeat Precision Promissory Note are made in U.S. dollars with interest calculated using the prime rate plus a 1.0% margin over the index. The applicable interest rate at December 31, 2023 was 9.5%.
Credit Risk
Our customers are E&P companies and other oilfield services companies. This concentration of counterparties operating in a single industry may increase our overall exposure to credit risk, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions. We manage credit risk by analyzing the counterparties’ financial condition prior to accepting new customers and prior to adjusting existing credit limits.
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Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2023 and 2022 51
Notes to Consolidated Financial Statements 56
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
NCS Multistage Holdings, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of NCS Multistage Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Companyas of December 31, 2023 and 2022, and the results of itsoperations and itscash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2021.
Houston, Texas
March 8, 2024
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NCS MULTISTAGE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
Assets
Current assets
Prepaid expenses and other current assets 1,862 2,815
Insurance receivable 15,000 —
Noncurrent assets
Identifiable intangibles, net 4,407 5,076
Deferred income taxes, net 66 46
Liabilities and Stockholders’ Equity
Current liabilities
Accrual for legal contingencies 15,000 —
Current maturities of long-term debt 1,812 1,489
Noncurrent liabilities
Long-term debt, less current maturities 6,344 6,437
Operating lease liabilities, long-term 3,775 3,680
Other long-term liabilities 213 1,328
Deferred income taxes, net 249 199
Commitments and contingencies (Note 11)
Stockholders’ equity
Accumulated other comprehensive loss (85,752) (85,617)
Total liabilities and stockholders' equity $ 152,032 $ 138,599
The accompanying notes are an integral part of these consolidated financial statements.
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NCS MULTISTAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
Revenues
Cost of sales
Selling, general and administrative expenses 56,518 58,338
Other income (expense)
Provision for litigation, net of recoveries (1,802) —
Foreign currency exchange gain (loss) 462 (283)
Loss before income tax (3,343) (601)
Income tax (benefit) expense (232) 351
Net income attributable to non-controlling interest 42 150
Net loss attributable to NCS Multistage Holdings, Inc. $ (3,153) $ (1,102)
Loss per common share
Weighted average common shares outstanding
The accompanying notes are an integral part of these consolidated financial statements.
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NCS MULTISTAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Year Ended December 31,
Foreign currency translation adjustments, net of tax of $0 (135) (3,523)
Comprehensive income attributable to non-controlling interest 42 150
The accompanying notes are an integral part of these consolidated financial statements.
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NCS MULTISTAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)
Shares Amount Shares Amount Capital Loss Deficit Shares Amount Interest Equity
Share-based compensation — — — — 3,453 — — — — — 3,453
Net (loss) income — — — — — — (1,102) — — 150 (952)
Vesting of restricted stock — — 37,043 — — — — — — — —
Shares withheld — — — — — — — (8,943) (383) — (383)
Currency translation adjustment — — — — — (3,523) — — — — (3,523)
Share-based compensation — — — — 4,164 — — — — — 4,164
Net (loss) income — — — — — — (3,153) — — 42 (3,111)
Distribution to noncontrolling interest — — — — — — — — — (500) (500)
Vesting of restricted stock — — 47,987 1 (1) — — — — — —
Currency translation adjustment — — — — — (135) — — — — (135)
The accompanying notes are an integral part of these consolidated financial statements.
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NCS MULTISTAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
Cash flows from operating activities
Depreciation and amortization 4,616 4,319
Amortization of deferred loan cost 204 231
Write-off of deferred loan costs — 196
Provision for inventory obsolescence 1,235 2,542
Deferred income tax expense 152 266
Loss (gain) on sale of property and equipment 258 (361)
Provision for (recovery of) credit losses 162 (61)
Proceeds from note receivable 546 590
Changes in operating assets and liabilities:
Prepaid expenses and other assets 2,563 1,347
Income taxes receivable/payable (209) 364
Net cash provided by (used in) operating activities 4,774 (1,423)
Cash flows from investing activities
Purchases of property and equipment (1,882) (1,035)
Purchase and development of software and technology (310) (96)
Proceeds from sales of property and equipment 509 433
Net cash used in investing activities (1,683) (698)
Cash flows from financing activities
Payments on finance leases (1,598) (1,463)
Payments of line of credit borrowings (11,758) (11,724)
Treasury shares withheld (287) (383)
Distribution to non-controlling interest (500) —
Payment of deferred loan cost related to ABL facility — (952)
Net cash used in financing activities (2,441) (2,742)
Effect of exchange rate changes on cash and cash equivalents (164) (1,071)
Net change in cash and cash equivalents 486 (5,934)
Cash and cash equivalents beginning of period 16,234 22,168
Cash and cash equivalents end of period $ 16,720 $ 16,234
Supplemental cash flow information
Cash paid for income taxes (net of refunds) (144) (303)
Noncash investing and financing activities
Assets obtained in exchange for new finance lease liabilities 1,972 1,788
Assets obtained in exchange for new operating lease liabilities 1,780 1,450
The accompanying notes are an integral part of these consolidated financial statements.
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NCS MULTISTAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Organization
NCS Multistage Holdings, Inc., a Delaware corporation, through its wholly owned subsidiaries and subsidiaries for which it has a controlling voting interest (collectively referred to as the “Company,” “NCS,” “we,” “our” and “us”), is primarily engaged in providing engineered products and support services for oil and natural gas well construction, well completions and field development strategies. We offer our products and services primarily to exploration and production companies for use both in onshore and offshore wells. We operate through service facilities principally located in Houston and Odessa, Texas; Tulsa, Oklahoma; Calgary, Red Deer, Grande Prairie and Estevan, Canada; Neuquén, Argentina and Stavanger, Norway.
Basis of Presentation
Our accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All intercompany accounts and transactions have been eliminated in consolidation. We consolidate Repeat Precision, LLC and its subsidiary (“Repeat Precision”), a 50% owned entity, with operations in the United States and Mexico, because NCS has a controlling voting interest. The other party’s ownership is presented separately as a non-controlling interest. As a smaller reporting company (“SRC”), we have availed ourselves to certain reduced reporting requirements permitted by the Securities and Exchange Commission (“SEC”). This includes, among other things, presenting only two years of audited financial statements.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and to disclose contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include but are not limited to estimated losses on accounts receivables, estimated realizable value on excess and obsolete inventories, estimates related to fair value of reporting units for purposes of assessing possible goodwill impairment, expected future cash flows from long lived assets to support impairment tests, share based compensation, estimates related to legal contingencies, amounts of deferred taxes and income tax contingencies. Actual results could materially differ from those estimates.
Foreign Currency
Our reporting currency, and our functional currency in the United States, is the United States dollar (“USD”). The financial position and results of operations of our significant foreign subsidiaries are generally measured using the local currency as the functional currency. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters, revenues and expenses of our significant foreign subsidiaries have been translated into USD at average exchange rates prevailing during the period. Assets and liabilities have been translated at the exchange rates on the balance sheet date. The resulting translation gain and loss adjustments have been recorded directly as a separate component of other comprehensive loss in the accompanying consolidated statements of comprehensive loss, and changes in stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included as incurred in the consolidated statements of operations.
Revenue Recognition
We derive our revenues primarily from highly engineered products and support services. Revenues are based upon a purchase order, contract or other persuasive evidence of an arrangement with the customer that includes a fixed or determinable price, provided that collectability is reasonably assured, but such arrangements do not generally include right of return or other similar provisions or other significant post-delivery obligations. Sales and value added taxes that we collect concurrent with revenue-producing activities are excluded from revenue. We recognize revenue through the following steps: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price and (v) satisfy the performance obligation.
On occasion, we issue credits to our customers that are related specifically to the performance of our products or the services we provide, with such credits reducing the amount of revenue for the completed sales. These credits are infrequent, situation specific and cannot be individually estimated in advance.
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NCS MULTISTAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The payment terms and conditions in our customer contracts vary. We do not have contracts that contain a financing component and generally do not accept noncash consideration from customers.
NCS has elected to recognize shipping and handling costs when control of the product transfers to the customer. These costs, net of any customer paid freight, are included in cost of sales in our consolidated statements of operations.
Product Sales Revenues
For product sale arrangements that are standard inventory products or modified inventory products with an alternative use, revenue is recognized at a point in time when control transfers. Control generally transfers upon shipment or delivery, and delivery is based on the customer instructions. Customers may also request bill and hold arrangements in writing. Once we have completed the bill and hold order, the products are segregated from the rest of inventory in the warehouse. The transaction price for product sales having a performance obligation is the price per unit times the unit quantity ordered and shipped to the customer or consumed at the well site.
Services Revenues
For service arrangements that do not have a contract provision with a right to a payment for services up to the date of termination, revenue is recognized when the job has been completed, which usually includes a customer signature or acknowledgement and when there are no additional services or future obligations required by us. The transaction price is determined by the contract unit day rate times the cumulative number of days of service provided upon the completion of the service and upon customer acceptance.
For service arrangements that do have a contract provision with a right to payment for services up to the date of termination, revenue is recognized over time using a unit rate (labor and materials) output method that corresponds to the value we would receive upon termination of the contract at the reporting period. The transaction price for the period end is determined by the contract unit rate times the cumulative number of units earned up to the reporting period less any revenue recognized in prior periods.
Cash and Cash Equivalents
We consider all highly liquid instruments purchased with an original maturity date of three months or less to be cash equivalents. These items are carried at cost, which approximates fair value.
In accordance with ASC 230, Statements of Cash Flow, cash flows from our significant foreign subsidiaries are calculated based on our functional currency. As a result, amounts related to changes in assets and liabilities reported in the consolidated statements of cash flows will not necessarily agree to changes in the corresponding balances on the consolidated balance sheets.
Concentration of Credit Risk
Financial instruments that potentially subject us to credit risk are cash and cash equivalents and trade accounts receivable. Cash balances are maintained in financial institutions which, at times, exceed federally insured limits. We monitor the financial condition of the financial institutions in which the accounts are maintained and have not experienced any losses in such accounts.
Substantially all of our sales are to customers whose activities are directly or indirectly related to the oil and gas industry. We generally extend short-term credit to these customers and, therefore, collectability of receivables is affected by market conditions in the oil and gas industry. We perform ongoing credit evaluations as to the financial condition of our customers with respect to trade accounts receivables. Generally, no collateral is required as a condition of sale.
No single customer individually accounted for 10% or more of our consolidated revenue during 2023 or 2022, or comprised 10% or more of our trade accounts receivable balance as of December 31, 2023 and 2022.
Accounts Receivable, Trade and Allowance for Credit Losses
Trade accounts receivable are recorded at their invoiced amounts and do not bear interest. We maintain an allowance for credit losses related to estimated losses that may result from the inability of our customers to make required payments. Earnings are charged with a provision for credit losses based on a current review of the collectability of customer accounts by management. Such provisions are based upon several factors including, but not limited to credit approval practices, industry and customer historical experience as
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NCS MULTISTAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
well as the current and projected financial condition of the specific customer. Accounts deemed uncollectible are applied against the allowance for credit losses. We had no amounts in our allowance for credit losses as of December 31, 2022. The following table presents the changes in the allowance for credit losses for the year ended December 31, 2023 (in thousands):
Allowance for credit losses at December 31, 2022 $ —
Charges and additions during 2023 165
Adjustments and recoveries —
Allowance for credit losses at December 31, 2023 $ 165
Inventories
Inventories consist primarily of raw material, product components, assembled products, certain components used to internally construct our frac isolation assemblies, and chemicals used in our tracer diagnostics services in raw materials or finished goods. Inventories are stated at the lower of cost or estimated net realizable value. Cost is determined at standard costs approximating the first-in, first-out or average cost basis. We continuously evaluate inventories, based on an analysis of inventory levels, historical sales experience and future sales forecasts, to determine obsolete, slow-moving and excess inventory. We utilize an excess and obsolete reserve to adjust such inventory to its estimated recoverable value, with an offset to cost of sales in the current period.
Impairments
We evaluate our property and equipment and identifiable intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Should the review indicate that the carrying value is not fully recoverable, the amount of the impairment loss is determined by comparing the carrying value to the estimated fair value. We assess recoverability based on undiscounted future net cash flows. Estimating future net cash flows requires us to make judgments regarding long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about our revenue growth, operating margins, capital expenditures, future market conditions and technological developments. If changes in these assumptions occur, our expectations regarding future net cash flows may change such that a material impairment could result. There was no impairment of property and equipment and identifiable intangible assets during the years ended December 31, 2023 and 2022. See “Note 7. Property and Equipment” and “Note 8. Goodwill and Identifiable Intangibles” included herewith for further information.
An assessment of potential goodwill impairment indicators is performed annually or whenever there is a triggering event that indicates an impairment loss may have been incurred. If required, we typically perform an annual impairment test for goodwill using an assessment date in the fourth quarter of the fiscal year. Under GAAP, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one or more of our reporting units exceeds the related carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit exceeds the related carrying amount, there is no need to perform any further testing. However, if we conclude otherwise, then we are required to perform a quantitative impairment test by calculating the fair value of the reporting unit and comparing this value with the carrying value of the reporting unit. Alternatively, we could bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. The fair value of the reporting unit is determined using a combination of a market multiple and a discounted cash flow approach. Determining the fair value of a reporting unit requires the use of estimates, assumptions and judgment. The principal estimates and assumptions that we use include revenue growth, operating margins, capital expenditures, future market conditions, weighted average costs of capital, a terminal growth rate, the set of comparable companies utilized, and the earnings metrics and multiples utilized. We believe that the estimates and assumptions used in our impairment assessments are reasonable. If the fair value of the reporting unit is less than the carrying amount, an impairment charge is recorded in the amount of the difference. No impairment charge was recorded for the years ended December 31, 2023 and 2022. For additional information, see “Note 8. Goodwill and Identifiable Intangibles.”
Property and Equipment
Property and equipment are stated at historical cost adjusted for impairment, less accumulated depreciation. Equipment held under finance leases is stated at fair value which is typically the present value of the future minimum lease payments at the inception of the lease, less accumulated depreciation. Expenditures are capitalized at cost for property and equipment, and for items that substantially increase the useful lives of existing assets, and depreciated over the estimated useful lives of these assets utilizing the straight-line method. Costs associated with constructed assets are capitalized as incurred, but do not begin to depreciate until placed into service, with depreciation applied over the useful lives of the assets utilizing the straight-line method. We typically do not
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NCS MULTISTAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
capitalize interest associated with constructed assets unless the construction period extends for more than twelve months. Routine expenditures for repairs and maintenance are expensed as incurred. Depreciation is calculated over the estimated useful lives of the related assets using the straight-line method. Leasehold improvements and property under finance leases are amortized over the shorter of the remaining lease term or useful life of the related asset. Depreciation expense includes amortization of assets under finance leases. The cost and related accumulated depreciation of assets retired or otherwise disposed of are eliminated from the accounts, and any resulting gains or losses are recognized in the year of disposal as a component of other income, net, which, for the year ended December 31, 2023, includes a loss of $0.7 million associated with the write-off of a constructed asset which was deemed to have no further service potential in December 2023.
Depreciation on property and equipment, including assets held under finance leases, is calculated using the straight-line method over the following useful service lives or lease term (which includes reasonably assured renewal periods):
Years
Buildings 30
Building equipment and leasehold improvements 1 - 15
Machinery and equipment and service equipment 5 - 12
Computers and software 3 - 5
Furniture and fixtures 3 - 5
Vehicles 2 - 4
Right of use assets - finance leases (Lease term) 2 - 10
Business Combinations, Goodwill and Identifiable Intangible Assets
Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the total consideration transferred in connection with the acquisition is allocated to the tangible and intangible assets acquired, liabilities assumed, and any non-controlling interest in the acquiree based on their fair values. Goodwill acquired in connection with business combinations represents the excess of consideration transferred over the net tangible and identifiable intangible assets acquired. Certain assumptions and estimates are employed in evaluating the fair value of assets acquired and liabilities assumed. These estimates may be affected by factors such as changing market conditions, technological advances in the oil and natural gas industry or changes in regulations governing that industry. The most significant assumptions requiring judgment involve identifying and estimating the fair value of intangible assets and the associated useful lives for establishing amortization periods. To finalize purchase accounting for significant acquisitions, we utilize the services of independent valuation specialists to assist in the determination of the fair value of acquired intangible assets.
Costs incurred related to an acquisition or business combination, other than those associated with the issuance of debt or equity securities, are expensed as incurred. Any contingent consideration payable is recognized at fair value at the acquisition date. Liability-classified contingent consideration is remeasured each reporting period with changes in fair value recognized in earnings until the contingent consideration is settled.
All identifiable intangibles with definite lives are amortized on a straight-line basis over the estimated useful life or term of related agreements. Certain costs incurred in the development of internal-use software applications are capitalized, while costs incurred outside of the software application development stage are expensed as incurred. The amounts capitalized are included in intangible assets, categorized as internally developed software, and are amortized on a straight-line basis over the estimated useful life of the software when ready for the intended use. These assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
Leases
We determine if a contract contains a lease at the inception of an arrangement. If so, we record a right of use (“ROU”) asset representing the right to use an underlying asset for the lease term and a lease liability representing an obligation to make lease payments arising from the lease on the consolidated balance sheet.
We have operating and finance leases for facilities, vehicles, equipment, and software. Some leases include one or more options to renew, with renewal terms that can extend the lease term from five to ten years with exercise of lease renewal options being at the sole discretion of NCS as lessee. Some leases may include an option to terminate the contract with notice. ROU assets and lease liabilities recorded pursuant to a lease agreement with a term exceeding 12 months are recognized at the lease commencement date based on the present value of lease payments over the lease term. To the extent our lease agreements do not provide an implicit interest rate or the implicit interest rate is not readily determinable, we apply the current interest rate pursuant to our secured asset-
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NCS MULTISTAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
based revolving credit facility (“ABL Facility”), adjusted on a monthly annual basis, as the incremental borrowing rate to calculate the present value at the lease commencement date. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
Our lease agreements are from a lessee perspective and do not contain (i) any leases with variable lease payments (e.g., payments that depend on a percentage of sales of a lessee or payments that increase based upon an index such as a consumer price index), (ii) residual value guarantees probable of being paid, except leased fleet vehicles, or (iii) material restrictive covenants. Lease agreements with lease and non-lease components are generally accounted for separately when practical. For leases where the lease and non-lease component are comingled and the non-lease component is determined to be insignificant when compared to the lease component, the lease and non-lease components are treated as a single lease component for all asset classes.
As of December 31, 2023, we have no significant leases where we are the lessor. In January 2024, we extended a facility lease through 2030 for a total lease commitment of $0.6 million. We have no additional significant operating or finance leases that have not yet commenced which create significant rights or obligations for NCS. For additional information, see “Note 10. Debt” and “Note 15. Leases.”
Income Taxes
We are taxed as a corporation as defined under the Internal Revenue Code. The liability method is used in accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when these differences are expected to reverse. The realizability of deferred tax assets is evaluated annually and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits. We follow guidance in ASC 740, Income Taxes, for uncertainty in income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the consolidated financial statements. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some portion or all the deferred tax assets will not be realized. We recognize accrued interest and penalties related to uncertain tax positions in other income, net on the consolidated statements of operations.
Share-Based Compensation
We account for our stock-based compensation awards in accordance with ASC 718, Compensation—Stock Compensation. To measure the grant-date fair value of share-based compensation, we use the market price of our common stock for equity-classified restricted stock units (“RSUs”) and equivalent stock units, or cash-settled, liability-classified RSUs (“ESUs”), the Black-Scholes model for options and a Monte Carlo simulation for the performance stock unit awards (“PSUs”). We measure all share-based compensation awards at fair value on the date they are granted and recognize the compensation expense in the financial statements over the requisite period and record forfeitures as they occur. As the ESUs will be settled in cash, we record a liability, which is remeasured each reporting period at fair value based upon the closing stock price of our common stock until the awards are settled.
Fair Value
The carrying amounts for financial instruments classified as current assets and current liabilities approximate fair value due to the short maturity of such instruments. The book values of other financial instruments approximates fair value because interest rates charged are comparable to other financial instruments with similar terms and maturities and the rates vary in accordance with a market index consistent with ASC 820, Fair Value Measurements.
For the financial assets and liabilities disclosed at fair value, fair value is determined as the exit price, or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The established fair value hierarchy divides fair value measurement into three broad levels:
Level 1—inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
Level 2—inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly or indirectly; and
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Level 3—inputs are unobservable for the asset or liability, which reflect the best judgment of management.
The financial assets and liabilities that are disclosed at fair value for disclosure purposes are categorized in one of the above three levels based on the lowest level input that is significant to the fair value measurement in its entirety. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
Severance and Other Termination Benefits
We accrue one-time severance costs pursuant to an approved workforce reduction plan at the communication date, when affected employees have been notified of the potential severance and sufficient information has been provided for the employees to calculate severance benefits, in the event the employee is involuntarily terminated. During 2023, we recorded $1.4 million of severance expenses associated with one-time severance costs, of which a liability of $0.4 million remained as of December 31, 2023. We did not incur any significant severance or termination benefits related to workforce reductions during the year ended December31, 2022. See “Note 9. Accrued Expenses” included herewith for further information.
Earnings Per Share
Basic income (loss) per share is calculated by dividing net income (loss) attributable to NCS Multistage Holdings, Inc. by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share computation is calculated by dividing net income (loss) attributable to NCS Multistage Holdings, Inc. by the weighted-average number of common shares outstanding during the period, taking into effect, if any, shares that would be issuable upon the exercise of outstanding stock options and unvested RSUs and PSUs calculated using the treasury stock method, a method that determines how many incremental shares would result if all dilutive shares were exercised at the reporting date, less the number of shares that could be purchased at cost using the assumed proceeds from the exercise.
Research and Development
Research and development costs are incurred both through the utilization of our employees to create and develop new ideas and products as well as through engaging third parties to perform development activities under our coordination and management. We incurred approximately $2.5 million and $2.7 million in research and development costs for the years ended December 31, 2023 and 2022, respectively. These costs are recorded in selling, general and administrative (“SG&A”) expenses on the consolidated statements of operations. Occasionally a customer may contract us to provide research and development of a product, for which we are compensated. We recognize the revenue when the project is completed and accepted by the customer and record the corresponding research and development costs as cost of goods sold. Alternatively, outside parties may agree to fund certain research and development activities for which we retain the rights to intellectual property. Proceeds we receive under these arrangements are treated as a reduction of research and development costs included in SG&A expense. We received such reimbursable amounts of $2.6 million and $1.7 million during the years ended December 31, 2023 and 2022, respectively.
Recent Accounting Pronouncements
Pronouncement Adopted in 2023
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU introduces a new impairment model that is based on expected credit losses rather than incurred credit losses for financial instruments, including trade accounts receivable. It requires an entity to measure expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The new standard was to become effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In November 2019, the FASB issued ASU No. 2019-10, which deferred the effective dates for certain accounting guidance. The effective date of ASU No. 2016-13 remained the same for public business entities that are SEC filers, except for entities who are deemed SRCs. The effective date for SRCs began during the first interim period of fiscal years after December 15, 2022. We adopted ASU No. 2016-13 on January 1, 2023, with no material impact on our consolidated financial statements.
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Pronouncement Not Yet Effective
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU improves income tax disclosure requirements and requires specific categories in the effective tax rate reconciliation as well as additional information for reconciling items that meet a quantitative threshold. Further, the ASU requires certain disclosures pertaining to income taxes paid (net of refunds received) and amends other disclosure requirements. The new standard is effective for fiscal years beginning after December 15, 2024 and should be applied prospectively although retrospective application is permitted. Early adoption is also permitted for financial statements that have not yet been issued. We are currently evaluating the impact of the adoption of this guidance.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU improves reportable segment disclosure requirements on an annual and interim basis and includes requirements for entities with a single reportable segment. The improvements include disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), the title and position of the CODM and explanation of how the CODM uses the reported measure of segment profit or loss in assessing performance and allocating resources along with other disclosure requirements. The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and should be applied retrospectively. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance.
Note 3. Segment and Geographic Information
We have determined that we operate in one reportable segment that has been identified based on how our CODM manages our business.
We aggregate revenue for presentation based on qualitative factors including the nature of the products and services, the nature and commonality of production processes, a shared customer base primarily in North America, the scope of geographic operations and a common industry and regulatory environment. However, we present revenue on a geographic basis, segregated between product sale and service revenues.
The following table summarizes revenue by geographic area attributed based on the current billing address of the customer (in thousands):
Year Ended December 31,
United States
Canada
Other Countries
Total
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The following table summarizes long-lived assets (defined as property and equipment, net and operating lease assets) by geographic area (in thousands):
December 31, December 31,
Note 4. Revenues
Disaggregation of Revenue
We sell our products and services primarily in North America and in selected international markets. See above “Note 3. Segment and Geographic Information” for our disaggregated revenue by geographic area.
Contract Balances
If the timing of the delivery of products and provision of services is different from the timing of the customer payments, we recognize either a contract asset (performance precedes contractual due date in connection with estimates of variable consideration) or a contract liability (customer payment precedes performance) on our consolidated balance sheet.
The following table presents the current contract liabilities for the periods indicated (in thousands):
Revenue recognized (1,983)
Revenue recognized (23)
We currently do not have any contract assets or non-current contract liabilities. Our contract liability as of December 31, 2023 and 2022 is included in other current liabilities on our consolidated balance sheets. Our performance obligations for our product and services revenues are typically satisfied before the customer’s payment; however, prepayments may occasionally be required.
Contracts with Multiple Performance Obligations
Substantially all of our product and services revenues are considered a single performance obligation. Our tracer self-service product line, which is a small percentage of our revenue for the years ended December 31, 2023 and 2022 is comprised of two performance obligations: (i) the delivery of tracer materials to a customer well site and (ii) the creation of diagnostic reports ordered by customers when we do not perform an integrated service. For these contracts, we do not allocate the transaction price as the individual performance obligations are sold at standalone prices in the customer order. The transaction prices for our self-service product line are determined as (i) the price per unit times the quantity of tracer materials and (ii) prices charged for diagnostic reports ordered by and delivered to the customer.
Practical Expedients
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within SG&A expenses on the consolidated statements of operations.
We do not disclose the value of unsatisfied performance obligations when the related contract has a duration of one year or less. We recognize revenue equal to what we have the right to invoice when that amount corresponds directly with the value to the customer of our performance to date.
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Note 5. Inventories, net
Inventories consist of the following as of December 31, 2023 and 2022 (in thousands):
December 31, December 31,
Note 6. Other Current Receivables
Other current receivables consist of the following as of December 31, 2023 and 2022 (in thousands):
December 31, December 31,
Current income tax receivables $ 1,418 $ 1,868
Total other current receivables $ 4,042 $ 3,726
Employee receivables primarily consist of amounts paid by us for foreign withholding tax paid on behalf of employees working on international assignments, which is expected to be reimbursed to us by the employees when refunded as foreign tax credits on their home-country tax returns. As of December 31, 2023, a primary component of the other receivables balance is $1.2 million related to a company-owned life insurance policy associated with a non-qualified deferred compensation plan which was terminated in late 2023. We expect to utilize the proceeds from the liquidation of the insurance policy to fund the disbursements to settle liabilities under the terminated plan within the next twelve months. The associated liability of $1.2 million is included in other current liabilities on the accompanying balance sheet as of December 31, 2023. The other receivables balance at December 31, 2022 includes amounts associated with U.S. employee retention credit (“ERC”) claims totaling $0.9 million, of which $0.7 million was collected in September 2023, along with $0.1 million of interest, with a remaining receivable of $0.1 million at December 31, 2023.
Other receivables also includes $0.9 million and $0.7 million for the years ended December 31, 2023 and 2022 associated with our technical services and assistance agreement with our local partner in Oman. This agreement is effective until the expiration of a specified contract between our partner and a national oil and gas company or the expiration of other contracts entered into subsequent to the specified contract. Pursuant to the agreement, we provide chemical and radioactive tracers at stated contract prices with revenue recognized on the delivery of these materials when performance obligations are met. In addition, we provide technical support, training, literature and further technical assistance to our local partner. In consideration of these technical services, our local partner shares their net profit or loss, excluding certain non-cash items, arising out of the specified contractual arrangement equally with us at the end of each year. Quarterly, we record a receivable related to this profit-sharing provision, as the amount is probable and reasonably estimable. A portion of our profit-sharing income is allocated to tracer diagnostics services based upon the ratio of the standalone fair market value of the tracer chemicals and profit-sharing elements of the contractual arrangement. For the years ended December 31, 2023 and 2022, we have recorded tracer diagnostics services revenue of $1.4 million and $1.2 million, respectively, and other income, net totaling $0.8 million and $0.7 million, respectively, in the consolidated statements of operations.
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Note 7. Property and Equipment
Property and equipment by major asset class consist of the following as of December 31, 2023 and 2022 (in thousands):
December 31, December 31,
Service equipment 57 57
Less: Accumulated depreciation and amortization (21,912) (18,844)
Construction in progress 337 545
The following table presents the depreciation expense associated with the respective income statement line items for the years ended December 31, 2023 and 2022 (in thousands):
Year Ended December 31,
Cost of sales
Selling, general and administrative expenses 1,742 1,678
The table above includes depreciation expense associated with finance leases for buildings, equipment and software, as well as vehicles for our transportation fleet. See “Note 15. Leases.”
We evaluate our property and equipment for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. As of December 31, 2023, we evaluated potential triggering events, including the decline in the quoted price of our common stock. However, we determined there were no triggering events that indicated potential impairment of our property and equipment for the years ended December 31, 2023 and 2022, respectively, and accordingly no impairment loss has been recorded.
Note 8. Goodwill and Identifiable Intangibles
The carrying amount of goodwill is summarized as follows (in thousands):
December 31, December 31,
We perform an annual impairment analysis of goodwill as of December 31, or whenever there is a triggering event that indicates an impairment loss may have been incurred. If an impairment loss occurs, we separately disclose it in the consolidated statements of operations, as applicable. See “Note 2. Summary of Significant Accounting Policies - Impairments” for additional information.
As of December 31, 2023 and 2022, we elected to perform a qualitative assessment for Repeat Precision, our only reportable unit with goodwill, and determined it is more likely than not that the goodwill totaling $15.2 million has a fair value that exceeds its net carrying value. Therefore, no goodwill impairment has been recorded for the years ended December 31, 2023 and 2022, respectively.
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Identifiable intangibles by major asset class consist of the following (in thousands):
Estimated Gross
Useful Carrying Accumulated Net
Lives (Years) Amount Amortization Balance
Total amortizable intangible assets $ 8,058 $ (3,699) $ 4,359
Technology - not subject to amortization Indefinite 48 — 48
Estimated Gross
Useful Carrying Accumulated Net
Lives (Years) Amount Amortization Balance
Total amortizable intangible assets $ 8,058 $ (3,030) $ 5,028
Technology - not subject to amortization Indefinite 48 — 48
We did not incur costs to renew or extend the term of acquired intangible assets during the years ended December 31, 2023 and 2022, respectively. Substantially all identifiable intangibles as of December 31, 2023 and 2022 are related to our Repeat Precision asset group.
Identifiable intangibles are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. See “Note 2. Summary of Significant Accounting Policies - Impairments” for additional information. As of December 31, 2023, we evaluated potential triggering events, including the decline in the quoted price of our common stock. However, we determined there were no triggering events that indicated potential impairment of our intangibles. Therefore, we did not record any impairment charges related to our identifiable intangibles for the years ended December 31, 2023 or 2022, respectively.
Total amortization expense, which is associated with SG&A expenses on the consolidated statements of operations, was $0.7 million for each of the years ended December 31, 2023 and 2022, respectively.
The total weighted average amortization period for intangible assets is 14 years and estimated future amortization expense by year is as follows (in thousands):
Note 9. Accrued Expenses
Accrued expenses consist of the following as of December 31, 2023 and 2022 (in thousands):
December 31, December 31,
Accrued payroll and bonus $ 2,255 $ 3,227
Property and franchise taxes accrual 251 340
Severance and other termination benefits 436 —
Accrued other miscellaneous liabilities 760 824
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In June 2023, we implemented efforts to streamline our tracer diagnostics operations, which involved employee terminations or relocations, as well as the consolidation of certain leased facilities. Similarly, Repeat Precision consolidated its two manufacturing facilities in Mexico. In November 2023, we made further restructuring changes of certain U.S. and international operations management and support functions. In connection with these efforts, we recognized severance and moving costs totaling $0.9 million for the year ended December 31, 2023, of which we paid $0.8 million during the year. The remaining $0.1 million of severance was paid in January 2024. As of December 31, 2023, we have not recognized any lease termination costs associated with these efforts, but we may incur such costs in the future if we decide to terminate the operating leases or cannot sublet the facilities. Repeat Precision began to sublet the former facility in Mexico in October 2023.
In July 2023, an executive officer and NCS agreed that he would leave his position. In connection therewith and pursuant to an employment agreement, we incurred severance and other charges of $1.0 million in July 2023. Of these charges, $0.4 million represents the acceleration of expense recognition under stock-based compensation arrangements because these long-term incentive awards will continue to vest in accordance with the underlying agreements, but there is no further service requirement. The cash payments to the former executive of $0.6 million commenced in July 2023 and we paid $0.3 million for the year ended December 31, 2023, resulting in a remaining severance and other termination benefits accrual of $0.3 million associated with this matter as of December 31, 2023. We expect this severance and other termination benefits liability to be fully paid by July 2024.
Note 10. Debt
Our long-term debt consists of the following as of December 31, 2023 and 2022 (in thousands):
December 31, December 31,
ABL Facility $ — $ —
Repeat Precision Promissory Note — 56
The estimated fair value of total debt for the years ended December 31, 2023 and 2022 was $7.1 million and $6.8 million, respectively. At December 31, 2022, the fair value of the Repeat Precision Promissory Note (as defined below) approximated the carrying value due to a variable interest rate and the ability to repay the note at any time. The fair value of the finance leases was estimated using Level 2 inputs by calculating the sum of the discounted future interest and principal payments at our incremental borrowing rate through the date of maturity.
Below is a description of our financing arrangements.
ABL Facility
On May 3, 2022, we entered into an ABL Facility under which credit availability is subject to a borrowing base calculation. The ABL Facility is governed by the Credit Agreement dated as of May 3, 2022, by and between NCS Multistage Holdings, Inc. (“NCSH”), Pioneer Investment, Inc. (“Pioneer”), NCS Multistage, LLC, NCS Multistage Inc. (“NCS Canada”), the other loan parties thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent and as a lender under the facility provided therein (the “Credit Agreement”). Concurrent with the entry into our Credit Agreement on May 3, 2022, our prior ABL facility was terminated.
The ABL Facility consists of a revolving credit facility in an aggregate principal amount of $35.0 million made available to borrowers, of which up to $10.0 million may be made in Canadian dollars and $7.5 million may be made available for letters of credit. Total borrowings available to the borrowers under the ABL Facility may be limited subject to a borrowing base calculated on the sum of cash in a specified pledged account, eligible accounts receivables and eligible inventory, provided it does not include the assets of Repeat Precision. Our available borrowing base under the ABL Facility at December 31, 2023 was $16.4 million. The ABL Facility will mature on May 3, 2027. As of December 31, 2023 and 2022, we had no outstanding indebtedness under the ABL Facility.
Borrowings under the ABL Facility may be made in U.S. dollars with interest calculated using either the “ABR”, the “Adjusted Daily Simple SOFR” or the “Adjusted Term SOFR Rate”, and in Canadian dollars with interest calculated using the “Canadian Prime Rate” or the “CDOR Rate” (each as defined in the Credit Agreement). Borrowings bear interest plus a margin that varies depending on
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our leverage ratio as follows: (i) for ABR based loans, between 1.40% and 2.40%, and (ii) for Adjusted Daily Simple SOFR, Adjusted Term SOFR Rate, Canadian Prime Rate, and CDOR Rate, between 2.40% and 3.40%. We must also pay a monthly commitment fee of 0.25% to 0.50% per year, based on unused commitments. The applicable interest rate at December 31, 2023 was 7.9%. We incurred interest expense related to the ABL Facility, including commitment fees, of $0.2 million and $0.1 million for the years ended December 31, 2023 and 2022, respectively.
The obligations of the borrowers under the ABL Facility are guaranteed by NCSH and each of our U.S. and Canadian subsidiaries (other than Repeat Precision), as well as each of our future direct and indirect subsidiaries organized under the laws of the United States or Canada (subject to certain exceptions), and are secured by substantially all of the assets of NCSH and its subsidiaries, in each case, subject to certain exceptions and permitted liens.
The Credit Agreement requires, as a condition to borrowing, that available cash on hand after borrowings does not exceed $10.0 million. The Credit Agreement also requires us to (i) maintain, for quarters during which liquidity is less than 20% of the aggregate revolving commitments, a fixed charge coverage ratio of at least 1.0 to 1.0 and (ii) to prepay advances to the extent that the outstanding loans and letter of credit amounts exceed the most recently calculated borrowing base. As of December 31, 2023, we were in compliance with these financial covenants. The Credit Agreement also contains customary affirmative and negative covenants, including, among other things, restrictions on the creation of liens, the incurrence of indebtedness, investments, dividends and other restricted payments, dispositions and transactions with affiliates.
The Credit Agreement includes customary events of default for facilities of this type (with customary materiality thresholds and grace periods, as applicable). If an event of default occurs, the lenders party to the Credit Agreement may elect (after the expiration of any applicable notice or grace periods) to declare all outstanding borrowings under such facility, together with accrued and unpaid interest and other amounts payable thereunder, to be immediately due and payable. The lenders party to the Credit Agreement also have the right upon an event of default thereunder to terminate any commitments to provide further borrowings, or to provide additional financing in excess of the borrowing base limit, or to proceed against the collateral securing the ABL Facility.
We capitalized direct costs of $1.0 million in connection with the Credit Agreement, which are being amortized over the term of the ABL Facility using the straight-line method. Amortization of the deferred financing charges of $0.2 million and $0.1 million was included in interest expense, net for the years ended December 31, 2023 and 2022, respectively.
Repeat Precision Promissory Note
On February 16, 2018, Repeat Precision entered into a promissory note for an aggregate borrowing capacity of $4.3 million with Security State Bank & Trust, Fredericksburg (the “Repeat Precision Promissory Note”). The Repeat Precision Promissory Note has been renewed several times and is scheduled to mature on August 10, 2024. The note bears interest at a variable interest rate based on prime plus 1.00%. The applicable interest rate at December 31, 2023 was 9.5%. The Repeat Precision Promissory Note is collateralized by certain equipment, inventory and receivables of Repeat Precision. Total borrowings may be limited subject to a borrowing base calculation, which includes a portion of Repeat Precision’s eligible receivables, inventory and equipment. As of December 31, 2023, there was no outstanding indebtedness under the promissory note. As of December 31, 2022, Repeat Precision had $0.1 million of outstanding indebtedness under the promissory note. Repeat Precision’s indebtedness is guaranteed by Repeat Precision and its subsidiary and is not guaranteed by any other NCS entity.
Finance Leases
We lease assets under finance lease arrangements including an office and laboratory in Tulsa, Oklahoma, as well as facilities in Odessa, Texas, and certain operating equipment and software. We also maintain a vehicle leasing arrangement with a fleet management company through which we lease light vehicles and trucks that meet the finance lease criteria. See “Note 15. Leases” for additional information.
Note 11. Commitments and Contingencies
Litigation
In the ordinary course of our business, from time to time, we have various claims, lawsuits and administrative proceedings that are pending or threatened with respect to commercial, intellectual property and employee matters.
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Texas Matter
NCS was a defendant in a lawsuit in the District Court of Winkler County, Texas (the “Texas Matter”) that was settled in December 2023, where the insurance carrier agreed to pay the mutually-agreed settlement amounts to the plaintiff in settlement of all liabilities, resulting in no cash payments by NCS. The lawsuit was filed in September 2019 by plaintiffs Boyd & McWilliams Energy Group, Inc. et. al. claiming damage to their wells in 2018 resulting from an alleged product defect related to components provided by a third-party supplier. In May 2023, a judgment was rendered awarding the plaintiff total damages of $42.5 million. We accrued $40.8 million which included this judgment amount and estimated court costs, less $2.0 million previously paid to the plaintiff by our insurance carrier. During the fourth quarter of 2023, in connection with the settlement, we reversed the accrual for this legal contingency of $40.8 million. As of December 31, 2023, we recorded an insurance receivable for expected but unpaid insurance recoveries and a provision for legal contingencies of $15.0 million. The settlement was fully paid by the insurance carrier in January 2024.
Wyoming Matter
NCS was the defendant in a lawsuit in a state district court in Wyoming, which settled in August 2023 (the “Wyoming Matter”). The claim related to an alleged service issue by our personnel during completion operations. The parties agreed to a settlement that included a payment to the plaintiff of $2.0 million, which was paid on NCS’s behalf under a policy of insurance and NCS received $0.6 million as reimbursement of unpaid invoices from the plaintiff. During the year ended December 31, 2023, we recorded the benefit from payment of the aged invoices as other income in the accompanying consolidated statement of operations.
Canada Patent Matters
On July 24, 2018, we filed a patent infringement lawsuit seeking unspecified damages against Kobold Corporation, Kobold Completions Inc. and 2039974 Alberta Ltd. (“Kobold”) in the Federal Court of Canada (“Canada Court”), alleging that Kobold’s fracturing tools and methods infringe on several of our Canadian patents. On July 12, 2019, Kobold filed a counterclaim seeking unspecified damages alleging that our fracturing tools and methods infringe on their patent. The patent infringement litigation against Kobold and their counterclaim was heard in early 2022.
On October 10, 2023, the judge rendered a decision against us holding that our asserted patents are invalid and that we are infringing the Kobold asserted patent. The Canada Court ordered us to pay Kobold approximately $1.8 million ($2.5 million in Canadian dollars) in costs and disbursements, including taxes payable thereon, and granted an injunction prohibiting us from any further infringement of their patent. This amount is included in provision for litigation, net of recoveries in the accompanying consolidated statement of operations for the year ended December 31, 2023 and was paid to Kobold in November 2023.
We believe that applicable law supports strong grounds to appeal the decision by the Canada Court as well as to reduce the costs award significantly. We intend to appeal the judgment and believe we have strong arguments that may lead to a reversal of substantial portions of the decision. In addition, we do not know what damages, if any, the Canada Court will award to Kobold as the damages portion was bifurcated and will likely be heard by the Canada Court only after we complete our appeal of the liability phase. We expect the appeal to be heard by late 2024, and a decision granted by early to mid-2025. If we do not prevail in the appeal phase, we would expect any damages awarded to be more modest because of the relative ease and minimal cost in implementing changes to our product to comply with the injunction, with such changes having resulted to date in insignificant commercial impact.
The parties attended a mediation meeting in late February 2024. While no agreement has yet been reached, the parties have expressed interest in continuing with the settlement discussions. If we are unable to reach a settlement with Kobold, the appeals process could take over a year and could result in a new trial or further appeals, which may not conclude for several years thereafter.
On April 6, 2020, Kobold filed a separate patent infringement lawsuit seeking unspecified damages against us in Canadian Court, alleging that our fracturing tools infringe on their Canadian patents. In the summary judgment phase, we have successfully dismissed some of the asserted products. However, we were not able to dismiss all of the claims because there remained factual determinations that were not possible in a summary judgment proceeding for our other products. We believe we have strong arguments of invalidity and non-infringement in this matter. This patent infringement litigation has not yet been assigned a trial date.
Other Patent Matters
In connection with our patent infringement jury verdict against Nine Energy Services, Inc. (“Nine”), the Western District of Texas, Waco Division (“Waco District Court”) entered final judgment in June 2022 and awarded NCS approximately $0.5 million in damages for Nine’s infringement of U.S. Patent No. 10,465,445 (“the ’445 Patent”). At a hearing in December 2022, the Waco
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District Court announced it would be awarding hundreds of thousands of dollars in supplemental damages, interest, and costs and ordered Nine to pay an ongoing royalty for the sale of infringing casing flotation devices for the life of the ’445 Patent. In addition, in August 2022 in connection with our patent infringement jury verdict against TCO AS, the jury awarded NCS approximately $1.9 million in damages for TCO AS’s infringement of the ’445 Patent. The Waco District Court has entered the final judgment in that case, and we are seeking an award of ongoing royalties for TCO AS’s continued post-judgment infringement, supplemental damages, interest, and cost. Both cases remain subject to appeal. Therefore, we have not recorded any potential gain contingencies associated with these matters in the accompanying consolidated statements of operations.
In accordance with GAAP, we accrue for contingencies where the occurrence of a material loss is probable and can be reasonably estimated. Our legal contingencies may increase or decrease, on a matter-by-matter basis, to account for future developments. Although the outcome of any legal proceeding cannot be predicted with any certainty, our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to each matter.
Note 12. Stockholders’ Equity
Authorized and Outstanding Shares
As of December 31, 2023 and 2022, we had 11,250,000 shares of common stock authorized to be issued. As of December 31, 2023 and 2022, 2,443,744 and 2,408,474 shares of common stock were outstanding, respectively. As of December 31, 2023 and 2022, the number of our authorized shares of preferred stock included 10,000,000 shares, with none outstanding.
Voting
The holders of common stock are entitled to one vote for each share of common stock held.
Dividends
The holders of common stock are entitled to receive dividends as declared from time-to-time by our Board, to the extent permitted under the ABL Facility. No dividends were declared during the years ended December 31, 2023 and 2022.
Note 13. Share-Based Compensation
Equity Incentive Plan
We maintain an equity incentive plan for the benefit of our employees, directors and other service providers, the 2017 Equity Incentive Plan (the “2017 Plan”).Our previous equity incentive plan, the 2012 Equity Incentive Plan (the “2012 Plan”), terminated on December 20, 2022, provided that any outstanding awards remain outstanding in accordance with the terms of the applicable award agreement. As of December 31, 2023, there remain 3,610 options outstanding, all of which are exercisable pursuant to the 2012 Plan.
The 2017 Plan provides for awards of stock options, stock appreciation rights, restricted stock awards, RSUs, stock awards and performance awards. Awards under the 2017 Plan may be granted to any employee, non-employee director, consultant or other personal service provider of NCS. The 2017 Plan is administered by a plan administrator, which is the Compensation, Nominating and Governance Committee or such other committee of the Board or the Board as a whole, in each case as determined by the Board. The 2017 Plan was initially established with the authorization for grants of up to 226,626 shares of authorized but unissued shares of common stock. NCS has since increased the number of authorized shares by 400,000 shares, which increased the maximum aggregate number of shares available to be issued under the 2017 Plan to 626,626 shares. As of December 31, 2023, the total number of shares available for future issuance under the 2017 Plan is 247,524 shares.
Restricted Stock Units
We account for RSUs granted to employees at fair value, which we measure as the closing price of our common stock on the date of grant, and we recognize the compensation expense in the financial statements over the requisite service period. The RSUs granted to our employees generally vest over a period of three equal annual installments beginning on or around the anniversary of the date of grant. The RSUs granted to the members of our Board generally vest on the one year anniversary of the grant date and either settle at vesting or, if the director has elected to defer the RSUs, within thirty days following the earlier of the termination of the director’s service for any reason or a change of control.
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The following table summarizes RSU activity during the year ended December 31, 2023:
Number ofAwards WeightedAverageGrant DateFair Value
Vested (including 13,259 shares that have not been released) (59,367) 39.55
The total value of RSUs that vested and released was $1.1 million and $1.6 million during the years ended December 31, 2023 and 2022. For 2023 and 2022, the income tax benefit recognized for RSUs was $0.2 million and $0.3 million, respectively. As of December 31, 2023, there was $2.0 million of total unrecognized compensation cost related to RSUs, which we expect to recognize over a weighted average period of one year.
Equivalent Stock Unit Awards
When ESUs are granted to employees, they are valued at fair value, which we measure at the closing price of our common stock on the date of grant. Since the ESUs are settled in cash, we record a liability which is remeasured each reporting period at fair value based upon the closing price of our common stock until the awards are settled. The ESUs generally vest and settle over a period of three equal annual installments beginning on or around the anniversary of the date of grant. The cash settled for any ESU will not exceed the maximum payout established by our Compensation, Nominating and Governance Committee of the Board.
The following table summarizes ESU activity during the year ended December 31, 2023:
Number ofAwards WeightedAverageGrant DateFair Value
During the years ended December 31, 2023 and 2022, we paid $1.7 million and $2.6 million, respectively, upon settlement of the ESUs. As of December 31, 2023, the total liability for ESUs was $0.9 million.
Performance Stock Unit Awards
PSUs are granted to certain executives and provide for the recipients to receive a grant of shares of common stock based upon the achievement of certain performance goals over a specified period established by the Compensation, Nominating, and Corporate Governance Committee. The number of PSUs ultimately issued is dependent upon our total shareholder return relative to our performance peer group (“relative TSR”) over a three-year performance period. Each PSU will settle for between zero and two shares of our common stock. The threshold performance level (25th percentile relative TSR) starts to earn PSUs, the mid-point performance level (50th percentile relative TSR) earns 100% of the target PSUs and the maximum performance level (90th percentile relative TSR) or greater earns 200% of the target PSUs.
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The PSUs grant date fair values in 2023 and 2022 were measured using a Monte Carlo simulation with the following assumptions and the resulting weighted-average grant date fair value per share:
Risk-free interest rate 4.6 % 4.4 % 1.6 %
Expected dividends — % — % — %
Weighted-average fair value per share $ 36.02 $ 49.52 $ 71.28
The following table summarizes PSU activity during the year ended December 31, 2023:
Number ofAwards WeightedAverageGrant DateFair Value
Vested — —
As of December 31, 2023, there was $1.4 million of total unrecognized compensation cost related to PSUs, which we expect to recognize over a weighted average period of two years.
Stock Options
Stock options were previously granted to our officers, key employees, and Board. Stock options generally vested annually in equal increments over three or five years and have a 10-year term. We estimated the fair value of each option grant using the Black-Scholes option-pricing model. The Black-Scholes option pricing model required estimates of key assumptions based on both historical information and management judgment regarding market factors and trends. Determining the appropriate fair value model and calculating the fair value of options required 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 involved inherent uncertainties and the application of management’s judgment. If factors changed and different assumptions were used, our share-based compensation expense could have been materially different. Stock options have not been granted since 2017.
The following table summarizes stock option activity during the year ended December 31, 2023:
Aggregate intrinsic value represents the difference between our estimated fair value of common stock and the exercise price of outstanding in the money options. As of December 31, 2023, we had no outstanding in the money options and no outstanding and exercisable aggregate intrinsic values. No options were exercised during the years ended December 31, 2023 and 2022.
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Total Share Based Compensation Expense
The following table summarizes share-based compensation expense recognized in SG&A expense in our consolidated statements of operations and our related tax benefit for the years ended December 31, 2023 and 2022, respectively (in thousands):
Year Ended December 31,